By Joseph Checkler
NEW YORK--A judge on Thursday granted broad subpoena power to
the independent examiner investigating Residential Capital LLC's
relationship with parent Ally Financial Inc., though he agreed with
private equity firm Cerberus Capital Management LP to limit the
number of parties with access to the examiner's data.
Judge Martin Glenn of the U.S. Bankruptcy Court in Manhattan
said he didn't want to impede the investigation by examiner Arthur
J. Gonzalez, who was appointed in June to examine both the pre- and
post-bankruptcy dealings between government-controlled Ally and
ResCap. Judge Glenn did tell lawyers for the examiner to pare the
list of parties who could have access to the data.
The approval ensures Mr. Gonzalez won't have to keep coming back
to the court for approvals every time he wants to issue a
subpoena.
Chadbourne & Park LLP's Howard Seife, a lawyer for Mr.
Gonzalez, said that while no party has yet refused to give
documents to the examiner, "It is an important arrow in the quiver
of the examiner to have that ability to issue subpoenas."
Schulte Roth & Zabel LLP's Marguerite Gardiner, a Cerberus
lawyer, said the firm had no problem with the wide scope of Mr.
Gonzalez's subpoena requests but wanted assurance from the court
that the documents uncovered don't end up in the hands of its
competitors.
"Cerberus has concerns about the confidentiality of the
materials collected," Ms. Gardiner said. Ms. Gardiner said the
"special service" list of entities that would have access to the
information included several parties without interest in the case.
Cerberus owns a stake in Ally.
The question of who would have access to Mr. Gonzalez's database
became a big issue in court, with several lawyers mentioning as
case precedent the bankruptcy of Enron Corp. Mr. Gonzalez, who
retired last year, presided over the case as a New York bankruptcy
judge. Judge Glenn agreed the list should be narrowed.
Ally lawyers said in court they reserve the right to object to
ResCap creditors who want specific documents in the case. The
creditors are conducting their own investigation into ResCap and
Ally.
ResCap filed for Chapter 11 bankruptcy in May, with bond-related
payments looming and litigation over sour mortgage securities
mounting. Ally is trying to sever itself from issues related to the
mortgage servicer.
As part of its bankruptcy, ResCap is proposing to sell its
various mortgage assets to Berkshire Hathaway Inc. (BRKA, BRKB) and
Nationstar Mortgage Holdings Inc. (NSM), which have been named lead
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.
Berkshire in June argued--successfully--that an examiner should
be appointed to look at, among other things, provisions in Ally and
ResCap's documents that release Ally and its officers and directors
from claims in the bankruptcy case. Ally was originally named as
the first bidder for one of the loan portfolios, though it was
eventually beat out by Berkshire.
Earlier this week, Judge Glenn approved ResCap's bid to pay
$10.8 million in retention bonuses to 174 non-insider employees.
The judge is still pondering a $7 million incentive plan for 17 top
executives.
At Thursday's hearing, a ResCap lawyer said the company is still
negotiating with creditors over a key mortgage-servicing deal the
company made with Ally before ResCap filed for bankruptcy, a deal
creditors worry could force ResCap to buy back shoddy mortgages.
ResCap said it would update Judge Glenn on that matter during an
Aug. 23 telephone call.
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@dowjones.com.
Follow him on Twitter at @JoeCheckler
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