By Joseph Checkler
NEW YORK--Residential Capital LLC on Friday said it needs more
time to negotiate with creditors disputing a key mortgage-servicing
deal the company made with parent company Ally Financial Inc.
before ResCap filed for bankruptcy protection.
At a Friday hearing, Judge Martin Glenn of U.S. Bankruptcy Court
in Manhattan said he would clear time on his calendar in August if
ResCap and the creditors need to have a trial on the matter.
ResCap has been servicing mortgages that Ally Bank originates
under an agreement struck in 2001, according to a court filing.
Just days before ResCap's May 14 bankruptcy filing, the two amended
the agreement. When ResCap filed for bankruptcy, it said the
agreement would still be subject to Judge Glenn's approval.
But the official committee representing ResCap's unsecured
creditors is balking at provisions of that agreement, especially
one that could force ResCap to repurchase some of the mortgage
loans if the quality of the loans is deemed to be worse than
promised.
"The Debtors' potential liability under such claims could be
very substantial," the committee said in a filing last month.
Creditors often take issue with money being used to pay claims
stemming from before a bankruptcy filing, which the creditors
insist those would be. The creditors are worried that money paid
related to the mortgages is cash that could instead go to them.
Ally Financial's Ally Bank subsidiary originates loans based on
applications procured in conjunction with ResCap, which is a
licensed mortgage broker. Ally Bank also acquires loans from
correspondent lenders, with most of these loans winding up in
government-guaranteed mortgage securities. ResCap typically acts as
the servicer for the loans in those securities and as a subservicer
for loans serviced by Ally Bank.
Gary Lee, a Morrison & Foerster LLP lawyer representing
ResCap, called the agreement with Ally "one of the cornerstones of
the entire case" in court Friday.
Judge Glenn also signed off on ResCap's requests to keep paying
the teams of lawyers and professionals working on its case,
including Morrison & Foerster, its bankruptcy counsel. The U.S.
Trustee's office, the Justice Department's federal bankruptcy
watchdog, had issues with some of the costs related to other
advisers and so did Judge Glenn.
In approving the retention of a Mercer LLC subsidiary as a
compensation consultant, for instance, Glenn said, "I might well
disallow" some of the fees incurred by the estate if he determines
that some of the firm's work for other clients represents a
conflict of interest.
Looming bond payments and mounting litigation over soured
mortgage securities prompted ResCap to file for Chapter 11
protection on May 14 in a move intended to help
government-controlled Ally sever itself from legal exposure. Ally
is not in bankruptcy.
Last month, Judge Glenn handed a win to Warren Buffett's
Berkshire Hathaway Inc. (BRKA, BRKB) when he said he would appoint
an examiner to look into the relationship between ResCap and Ally
both before ResCap filed for Chapter 11 and since.
ResCap's bankruptcy is based on the sales of its
mortgage-servicing portfolio and a separate "legacy" portfolio of
mortgages that were being held for sale. Last month, Berkshire's
$1.7 billion bid made it the lead bidder in an upcoming auction of
the legacy portfolio, with Fortress Investment Group (FIG)
subsidiary Nationstar Mortgage Holdings Inc.'s (NSM) $2.5 billion
bid surpassing Berkshire to become the lead bidder for the
mortgage-servicing portfolio.
The assets are set to be auctioned this fall.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
-Andrew R. Johnson in New York contributed to this article.
Write to Joseph Checkler at joseph.checkler@dowjones.com.