By Joseph Checkler
NEW YORK--A judge on Tuesday said he wouldn't consider
disqualifying lawyers for Residential Capital LLC and its creditors
from their fight with a group of junior bondholders who say those
lawyers have conflicts of interest.
Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan said
because the lawyers don't have adverse interests or bias against
the ResCap estate, he must reject the bid to order them to remain
neutral and, if necessary, disqualify them.
White & Case LLP's J. Christopher Shore, a lawyer for the
bondholders, said ResCap and its creditors are conflicted because
they're treating certain claims--ones that certain bankrupt ResCap
entities have against other bankrupt ResCap entities--as worthless.
They're treated that way to avoid the possibility of years of
litigation, the company said.
But those claims, if they had value, may be collateral for the
junior bonds, which would help the group in its argument that it
deserves to be paid for interest accrued since ResCap's May 2012
bankruptcy filing.
Lawyers for ResCap and its creditors argued that Mr. Shore's
filings, on behalf of a group that's being treated well under
ResCap's creditors payback plan, are just an attempt to derail the
case. Judge Glenn agreed.
"Mr. Shore, how many times do I have to tell you that we are not
waiting," Judge Glenn said, referring to delaing ResCap's
bankruptcy exit proposal to deal with the bondholders' issues. "You
have repeatedly tried to derail the process in this case."
Later, when a lawyer mentioned he worked on the Adelphia
Communications Corp. bankruptcy case that saw years of litigation
over intercompany disputes, the judge interrupted him.
"This is not going to be six or seven years of litigation,"
Judge Glenn said. "Full stop." The judge did use precedents set in
the Adelphia case as reasons for his ruling.
The bondholders, mostly hedge funds, say they are owed a total
of $2.2 billion in principal and interest, including post-filing
interest they say is accruing at about $250 million a year.
Bankruptcy law gives so-called oversecured creditors the right
to such postpetition interest. However, ResCap lawyers say 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. A trial looms, as mediation under the purview of U.S.
Bankruptcy Court Judge James Peck continues.
ResCap filed its plan to reorganize--and ultimately
liquidate--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.
If the plan is ultimately approved, the junior bondholders would
get 100 cents on the dollar for claims related to before the
bankruptcy and would receive interest payments for the
post-bankruptcy period if they are found to be oversecured.
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@wsj.com
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