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Residential Capital LLC, the bankrupt mortgage subsidiary of Ally Financial Inc., is seeking to delay mortgage-securities litigation against its parent company, several affiliated businesses and former executives.
ResCap filed a lawsuit Friday against several financial-services firms, including Allstate Corp. (ALL), Huntington Bancshares Inc. (HBAN) and Assured Guaranty Ltd. (AGO), arguing their claims against ResCap affiliates over faulty mortgage-backed securities should be put on hold during its bankruptcy.
The MBS litigation against ResCap has been automatically stayed, as is customary when a company files for bankruptcy. However, such claims are not stayed for affiliates that are not part of the bankruptcy and ResCap executives who are named in the suits.
Such a move would further Ally Financial's efforts to wall off mortgage litigation that has prevented it from paying back a government bailout it received during the financial crisis.
If the suits are allowed to proceed against ResCap's "non-debtor affiliates," it "will face burdensome discovery" and "significant indemnification claims" by officers, directors and affiliated companies for losses they incur from the MBS actions, the suit said. "Property of the debtors' estate could be depleted if the MBS actions against non-debtor affiliates are allowed to continue."
The litigation against such parties should be stayed or enjoined until ResCap's restructuring plan is effective or "further order" from the bankruptcy court, ResCap said in the suit, which it filed as an adversary proceeding in U.S. Bankruptcy Court in Manhattan.
Bankruptcy courts often will grant stays for litigation pending against company executives and affiliated businesses if such matters could distract a debtor or deplete the value of its estate, said Madlyn Gleich Primoff, a partner with the law firm Kaye Scholer LLP who is not involved in the case. However, the court is unlikely to agree to put litigation against non-debtor affiliates on hold for the duration of a bankruptcy at the beginning of a case.
Such a delay may be viewed as too "aggressive" by the plaintiffs in pending litigation, Primoff said.
A spokeswoman for Assured Guaranty declined to comment about ResCap's lawsuit Monday. Representatives from Allstate, Huntington and other firms that are suing ResCap and affiliated companies did not immediately respond to requests for comment.
Mounting litigation over shoddy underwriting and other mortgage defections prompted ResCap to file for Chapter 11 bankruptcy on May 14. The fifth-largest U.S. mortgage servicer listed assets of $15.7 billion and liabilities of $15.3 billion in its petition.
Ally Financial, which is 74% owned by the U.S. government, hopes the bankruptcy will allow it to sever itself from those issues so it can focus on its core auto-lending and online-banking businesses. The former in-house financing arm for General Motors Co. (GM) still owes $12 billion of a government bailout that topped $17 billion.
Mortgage insurers and investors have filed 27 lawsuits against one or more affiliates of ResCap that are not part of the bankruptcy, including Ally Financial, Ally Bank and Ally Securities, ResCap's suit said.
For example, insurers Financial Guaranty Insurance Co., or FGIC, and Assured Guaranty have filed 11 suits against ResCap alleging fraud and breach of representations and warranties made in connection with MBS deals they insured. Four of those suits name Ally Bank, according to ResCap.
Separately, investors in private-label mortgage securities ResCap sponsored have filed 15 lawsuits against "non-debtor affiliates." Ally Financial is named in seven of them, directors and officers of ResCap are named in six of them, Ally Securities in named in 13 and Ally Bank is named in one.
Allstate and FGIC are among the nine companies that were named last week to the committee that will represent the interests of ResCap's unsecured creditors in the lender's bankruptcy.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; firstname.lastname@example.org