By Joseph Checkler
Residential Capital LLC's junior bondholders, one of the only
major creditor groups not supporting the mortgage servicer's
bankruptcy plan, want additional mediation over their bid to
collect interest that has accrued on their bonds since ResCap's May
2012 bankruptcy filing.
In filings made Thursday with U.S. Bankruptcy Court in
Manhattan, the bondholders also said they're worried lawyers for
both ResCap and its official committee of unsecured creditors won't
remain neutral in the mediation, and therefore should be reminded
by the bankruptcy judge that not staying neutral could result in
being disqualified from participating.
The bondholders' main issue is potential conflicts of interest
over intercompany claims held by bankrupt ResCap entities against
one another.
Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan will
consider the request at a hearing next month. The junior
bondholders say they're owed $2.2 billion in principal and
interest, including interest from after ResCap's 2012 bankruptcy
filing that they say is accruing at about $250 million a year.
Bankruptcy law gives so-called oversecured creditors the right
to such post-petition interest. However, ResCap lawyers say that
because the value of the collateral securing the bonds in question
is only $1.5 billion -- and thus the junior bondholders are
undersecured and not entitled to the payments. In May, the mortgage
servicer sued over the claims.
Judge James Peck has been praised by all sides as a mediator in
the ResCap case, helping broker the deal that has gotten the
company to the precipice of exiting Chapter 11. The
bondholders--who have been a constant objector throughout the case
and have often drawn ire in the courtroom from Judge Glenn--are
requesting Judge Peck as the mediator. A spokesman representing
ResCap's law firm declined to comment.
ResCap filed its Chapter 11 reorganization plan earlier this
month. The proposal is based on a crucial settlement among the
company, government-controlled parent Ally Financial Inc. and the
creditors committee, that calls for Ally to pay $2.1 billion to
settle creditor claims. In return, Ally is off the hook from
further liabilities. After the sales of two huge chunks of assets
earlier this year, that settlement loomed as one of the largest
issues in ResCap's 14-month old bankruptcy.
Creditors will vote on the proposal, which calls for unsecured
claims to be paid 36 cents on the dollar, if Judge Glenn approves
the plain language version of the plan at an Aug. 21 hearing.
ResCap, once the country's fifth-largest mortgage servicer and
10th-largest mortgage lender, filed for Chapter 11 protection in
May 2012 as litigation over soured mortgage securities mounted and
bond payments loomed. The move was intended to help Ally, which
isn't part of the bankruptcy, to sever itself from those issues so
it can focus on repaying the bailout it received during the
financial crisis.
During its bankruptcy, ResCap struck deals to sell
mortgage-servicing platforms and loan portfolios as a part of
bankruptcy auctions that generated $4.5 billion in proceeds.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@dowjones.com
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