A federal bankruptcy judge Friday approved Residential Capital
LLC's $596.5 million mortgage-backed securities settlement with
bond insurer Financial Guaranty Insurance Co.
Judge Martin Glenn of the U.S. Bankruptcy Court in New York said
ResCap's settlement with the monoline insurer was "fair and
equitable" and in the best interest of ResCap's creditors.
"It will resolve significant claims against the estates for far
less than the amounts asserted and it imposes a cap on FGIC's
claims in case the contemplated plan is not confirmed," wrote Judge
Glenn in a 53-page opinion.
ResCap struck a deal with the FGIC in June that cuts the bond
insurer's $5.55 billion claim against its estate to $596.5 million.
The agreement also resolved another $1.3 billon in claims related
to trusts insured by FGIC, the former bond insurance unit of FGIC
Corp.
A group of ResCap's junior bondholders had challenged the deal
on the grounds that it wasn't in the best interests of the estate.
The bondholders argued that if ResCap's creditor payback plan
wasn't approved, FGIC would be free to go after claims worth much
more than the $596.5 million. A group of hedge funds with
investments secured by FGIC had also challenged the deal, but it
withdrew its objection earlier this week.
FGIC's parent company, FGIC Corp., filed for bankruptcy in 2010
and two years later the bond insurer was placed into rehabilitation
under the control of the state of New York.
The trustees, which include the Bank of New York Mellon, Wells
Fargo and U.S. Bank, had asked Judge Glenn for a ruling that they
acted in the best interests of the investors in negotiating the
settlement.
Judge Glenn's approval of the deal removes another hurdle to
ResCap's plan to exit bankruptcy protection. That plan is based on
ResCap parent Ally Financial Inc., which isn't under Chapter 11
protection, paying $2.1 billion to its mortgage subsidiary and its
creditors in return for protection from litigation over its
subsidiary's mortgage business.
ResCap filed its plan to reorganize--and ultimately
liquidate--in early July. A hearing on the plan is scheduled for
Nov. 19.
The company, 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 to sever itself from those
issues so it can focus on repaying the bailout it received during
the financial crisis.
Ally, formerly General Motors' main financing arm and once known
as GMAC, is now 74% owned by the U.S. government after receiving a
bailout during the financial crisis that topped $17 billion.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
-Joseph Checkler and Andrew Johnson in New York contributed to
this article.
Write to Patrick Fitzgerald at patrick.fitzgerald@wsj.com
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