Most ResCap Suits Against Originators Go to Minnesota

Residential Capital LLC for the most part must pursue lawsuits in federal court in Minnesota against lenders who sold it allegedly defective home mortgages.

The former mortgage-servicing unit of Ally Financial Inc., which filed for Chapter 11 protection in May 2012, won approval of a reorganization plan in December and started more than 80 lawsuits against so-called mortgage originators for breach of contract and other claims alleging that ResCap-purchased mortgages didn’t comply with advertised underwriting standards.

More than 10 of those suits ended up before U.S. district judges in Manhattan. The remainder were in Minnesota.

As a result of a series of decisions by different Manhattan judges beginning in July, it appears that most of the New York suits will be transferred to Minnesota, except where ResCap and the mortgage originator had agreed that suits could be filed in New York.

The latest ruling was handed down on Oct. 10 by U.S. District Judge John G. Koeltl in New York in a case involving PHH Mortgage Corp., which sold ResCap almost $1 billion of mortgages. The mortgage-purchase agreements called for disputes to be litigated in courts in Minnesota.

Constitutional Considerations

In his ruling last week, Koeltl said constitutional considerations required removing the PHH suit from bankruptcy court even though it was described by ResCap as a counterclaim against the mortgage originator’s $168,000 claim in the bankruptcy.

After taking the suit away from the bankruptcy judge, Koeltl sent the case to Minnesota to comply with the parties’ so-called forum-selection clause.

In a decision on Sept. 24 involving Greenpoint Mortgage Funding Inc., U.S. District Judge Kevin Castel allowed the suit to remain in bankruptcy court because the parties designated New York as the location for lawsuits. Castel is allowing the bankruptcy judge to make proposed final rulings in the Greenpoint suit.

In a decision on Oct. 1, a district judge in Minnesota, for the most part, declined to dismiss ResCap’s suits. To read about that case, click here for the Oct. 6 Bloomberg bankruptcy report.

ResCap’s Chapter 11 plan was based in part on a $2.1 billion settlement contribution from Ally. The disclosure statement explaining the plan told holders of ResCap’s $2.15 billion in general unsecured claims they should have a 36.3 percent recovery. Unsecured creditors with $2 billion in claims against the so-called GMACM companies were expected to receive 30.1 percent.

The suit in Koeltl’s court is ResCap Liquidating Trust v. PHH Mortgage Corp., 14-cv-05315, U.S. District Court, Southern District of New York (Manhattan).

A Minnesota lawsuit is Residential Funding Co. LLC v. Mortgage Outlet Inc., 13-3447, U.S. District Court, District of Minnesota (Minneapolis).

The Chapter 11 case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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