By Andrew R. Johnson
A bankruptcy watchdog is objecting to a plan by bankrupt
mortgage lender Residential Capital LLC to pay nearly $18 million
in bonuses to about 200 employees.
U.S Trustee Tracy Hope Davis said in a court filing Thursday
that the proposed payments amount to a "retention plan," not an
"incentive plan." The distinction is key in bankruptcy proceedings
when debtors seek to pay bonuses to employees because the
Bankruptcy Code prohibits firms from making payments intended only
to induce executives and other "insiders" to stay.
Trustees, which are part of the U.S. Justice Department, monitor
bankruptcy proceedings to ensure laws are not being abused and
involved parties are treated fairly.
ResCap, a subsidiary of government-owned auto lender Ally
Financial Inc. (GMA.XX), last month sought Judge Martin Glenn's
approval to pay up to $17.8 million to key employees to ensure they
"remain motivated in these difficult and taxing times."
ResCap's motion included two plans, including an incentive plan
where ResCap would pay up to $7 million to 17 top executives. That
plan is tied to the sales of ResCap's mortgage-servicing portfolio
and legacy loan portfolio through a court-supervised auction
scheduled for the fall.
The plan "is a disguised retention plan, not an incentive plan,
because it sets a low performance bar for employees to earn the
proposed bonuses," the trustee's filing said. "It does not provide
real incentives for the employees to improve their performance,
work harder, and achieve results greater than in the past."
Certain top executives, including ResCap Chief Executive Officer
Thomas Marano, would not be eligible for the incentive payments
because of restrictions under the Troubled Asset Relief Program,
the U.S. government's bank-rescue plan launched during the
financial crisis. ResCap's parent Ally received more than $17
billion in rescue aid during the financial crisis; it has paid the
government $5.7 billion since then.
Separately, ResCap is seeking to pay $10.8 million for 174
noninsiders as a carrot to keep them from leaving the company
before the proposed asset sales are completed.
The trustee said ResCap has not justified why that plan is an
"actual and necessary cost of preserving" its estate or shown a
"reasonable relationship between the proposal and the results to be
obtained."
A spokeswoman for ResCap declined to comment Thursday.
A hearing on ResCap's motion is set for Aug. 8.
As part of its bankruptcy, ResCap is proposing selling its
various mortgage assets to Berkshire Hathaway Inc. (BRKA, BRKB) and
Nationstar Mortgage Holdings Inc. (NSM), which have been named the
stalking-horse bidders for ResCap's legacy loan portfolio and
mortgage-servicing portfolio, respectively. The sales, which are
subject to higher bids, could generate more than $4 billion for
ResCap's estate.
ResCap filed for Chapter 11 bankruptcy on May 14 as bond-related
payments loomed and litigation over soured mortgage-securities it
had a hand in mounted. The move is intended to help Ally, which is
not part of the bankruptcy, sever itself from those issues, which
scuttled its plans last year for an initial public offering and
prevented it from repaying the government's remaining stake in the
company.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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