By Andrew R. Johnson
A bankruptcy court judge said Wednesday he will approve a $2.1
billion settlement involving mortgage lender Residential Capital
LLC and parent company, Ally Financial Inc., that could help Ally
move forward on repaying its U.S. government bailout.
Judge Martin Glenn said approval of the agreement, however, does
not guarantee that a reorganization plan spelling out how ResCap
intends to distribute funds to its creditors will be confirmed. But
without the agreement, "this case would return to square one," he
said.
Separately, Judge Glenn said he planned to enter an order to
unseal an independent examiner's report reviewing ResCap's
relationship with the Ally. The report has been kept under seal
since last month to encourage parties in the case to reach a
settlement.
The settlement, known as a plan support agreement, is seen as a
crucial step to ease ResCap out of Chapter 11 bankruptcy. Progress
in the case hit a roadblock earlier this year as the firm's
creditors, including mortgage insurers and bondholders, alleged
Ally was responsible for billions of dollars of the mortgage
subsidiary's liabilities because the parent company controlled the
subsidiary prior to its bankruptcy filing.
Ally, which is 74% owned by the U.S. government after receiving
a $17.2 billion bailout during the financial crisis, said it was
not responsible for such liabilities, claiming it and ResCap
operated as separate entities throughout their existence.
At the start of ResCap's Chapter 11 case in May 2012, Ally
proposed paying the ResCap bankruptcy estate $750 million to settle
the dispute, but the subsidiary's creditors balked at the
amount.
Last month Ally agreed to increase its offer to $2.1 billion in
exchange for a release from ResCap's legal liabilities. The money
will go toward repaying ResCap's creditors.
The pending release of the examiner's report helped nudge the
parties toward a broad deal that was struck in May through
court-sanctioned mediation. The report was slated for release last
month, but Judge Glenn agreed to keep the report under seal while
they put the finishing touches on the settlement.
Parties in the case feared that release of the report could
upend negotiations.
Judge Glenn did not specify when the examiner's report will be
made public.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires