By Joseph Checkler
NEW YORK--Residential Capital LLC on Tuesday began building its
case to exit Chapter 11 under a proposal supported by all but one
of its major creditor groups, pointing out those objecting are
being treated better than all other creditors in the case.
"We believe that the creditors have spoken," said Morrison &
Foerster LLP's Gary Lee, ResCap's lead lawyer, in his opening
argument of the multiday court hearing over whether to confirm the
plan. Last week, Mr. Lee said more than 95% of ResCap's creditors
ratified its liquidation plan, with one notable exception.
Standing in the way are hedge funds holding about half of
ResCap's $2.2 billion in junior secured bonds. They are set to be
repaid in full but say they are owed additional interest accrued
since the May 2012 Chapter-11 filing. While the hedge funds lost
the first round of a trial over whether their claims should be
treated as "oversecured," which could entitle them to hundreds of
millions of dollars in extra interest, the confirmation hearings
allow them to argue that their bonds are secured by assets of
certain ResCap affiliates in bankruptcy. If they win on those
issues, they have a chance to become recognized as oversecured and
can lay claim to post-bankruptcy interest.
"It's clear to us that the [junior bond holders] are
undersecured," said Kramer Levin Naftalis & Frankel's Kenneth
H. Eckstein, a lawyer for ResCap's official committee of unsecured
creditors, who support the plan.
A lawyer for the junior bondholders, Milbank, Tweed, Hadley
& McCloy LLP's Gerard Uzzi, said some of the bonds are secured
by claims that ResCap entities have against one another. Those
intercompany claims, Mr. Uzzi said, are being treated as unsecured
by ResCap. "We don't like what they're giving us," Mr. Uzzi added
during his opening argument Tuesday.
Judge Martin Glenn of U.S. Bankruptcy Court in Manhattan has set
aside six days for hearings on the plan, which is based largely on
a settlement among the company, most of its creditors and ResCap's
government-controlled parent Ally Financial Inc.
The plan calls for Ally to pay $2.1 billion to settle creditors'
claims but absolves it from future liabilities in the case. Most
major objections to the plan have been settled, except for the one
from the ad-hoc group made up mostly of hedge funds that include
Aurelius Capital Management LP and Davidson Kempner Capital
Management LLC.
Warren Buffett's Berkshire Hathaway Inc. (BRKA, BRKB) owns more
than $900 million of those same junior bonds but isn't a part of
the ad-hoc group's suit seeking the additional interest. But the
company could benefit if the ad-hoc group prevails.
If the plan is approved by Judge Glenn, different classes of
creditors will recover different amounts based on the
ResCap-related entity that owes them money. In general, most
unsecured creditors will receive around 35 cents on the dollar. The
junior secured bondholders would get paid in full.
Another key settlement in the case gives the holders of more
than one million ResCap mortgages a $7.3 billion claim, which in a
best-case scenario would be paid out at a reduced percentage that
may entitle them to more than $700 million in cash, according to
ResCap's latest payback plan filed with the court.
ResCap, once one of the country's largest mortgage servicers and
mortgage lenders, 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
could focus on repaying the government bailout it received during
the financial crisis.
During its bankruptcy proceedings, ResCap struck deals to sell
mortgage-servicing platforms and loan portfolios as a part of
bankruptcy auctions that generated $4.5 billion in proceeds.
When ResCap first filed under Chapter 11, the Ally payment to
creditors was set at $750 million, but it became clear early on
that creditors wanted more and the figure was raised to the $2.1
billion in June. A court-ordered examiner's report by former U.S.
Bankruptcy Court Judge Arthur J. Gonzalez concluded that while Ally
didn't set up ResCap for failure, as some creditors have charged,
the $750 million settlement would have been too low.
The hearing resumes Wednesday morning in Manhattan bankruptcy
court.
(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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