--Judge Glenn to approve $2.1 billion agreement involving
ResCap, creditors and Ally
--Judge Glenn also plans to order the unsealing of examiner's
report
--Settlement could help Ally move forward on repaying its
government bailout
(Adds new details throughout.)
By Andrew R. Johnson
A bankruptcy court judge said Wednesday he will approve a $2.1
billion settlement involving mortgage lender Residential Capital
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, though, 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 also said he planned to enter an order
Wednesday to unseal an independent examiner's report reviewing
ResCap's relationship with Ally. The report, which creditor
Berkshire Hathaway Inc. (BRKA, BRKB) has been pushing for, was
filed under seal last month to encourage parties in the case to
reach a deal.
The settlement, known as a plan support agreement, is seen as a
crucial step to easing 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 is 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, argued 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, including American
International Group Inc. (AIG), Paulson & Co., MBIA Inc. (MBI)
and Allstate Corp. (ALL).
Some creditors had threatened to sue Ally to hold it responsible
for ResCap liabilities.
Gary Lee, a partner with law firm Morrison & Foerster LLP
who represents ResCap, said during the hearing that the settlement
is a "very significant milestone" in the case because of the "sheer
breadth" of parties involved. The various parties "have been at
war" with ResCap and Ally for several years.
The settlement had drawn a handful of objections from some
investors, bond insurers and other parties who criticized the legal
release it grants to Ally.
The U.S. Justice Department voiced concerns over whether the
agreement releases Ally from liability for ResCap's activities
under a nationwide, $25 billion foreclosure settlement reached with
large mortgage servicers last year.
The settlement has the backing of the committee representing
ResCap's unsecured creditors, which is party to the deal.
Uncertainty over ResCap's legal issues have cast a shadow over
Ally's efforts to repay its bailout. In March, the Federal Reserve
rejected a capital plan Ally submitted under the regulator's most
recent round of bank "stress tests," deeming the lender's capital
levels insufficient to survive a severe economic downturn.
The results factored in Ally's ongoing ties to ResCap.
Ally has said it wants to eliminate $5.9 billion of preferred
shares that the U.S. Treasury Department owns in the company this
year, but it needs the Fed's approval to do so. The company's
long-term goal is to focus exclusively on its U.S. auto-lending and
online-banking businesses.
A spokeswoman for Ally did not immediately respond to a request
for comment Wednesday.
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 by fueling creditors' arguments that Ally should
be held responsible for ResCap.
The examination of ResCap and Ally was conducted by former U.S.
Bankruptcy Judge Arthur J. Gonzalez, who was tasked with looking at
how the companies operated prior to the mortgage subsidiary's
bankruptcy filing and various transactions conducted between the
two entities.
Those transactions include those involving Ally Bank, Ally's
online-banking unit. ResCap creditors claimed Ally stripped a
valuable ownership stake the mortgage subsidiary had in Ally
Bank.
Mr. Gonzalez was appointed after Berkshire Hathaway, a ResCap
creditor, requested an examiner to be appointed in the case. Last
month Berkshire complained that keeping the report sealed deprived
creditors of the ability to determine if the settlement reached
with Ally was fair.
Judge Glenn did not specify when the examiner's report will be
made public.
-Patrick Fitzgerald contributed to this story.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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