By Joseph Checkler
An insurer of some of Residential Capital LLC's residential
mortgage-backed securities says ResCap's reorganization plan could
stop it from going after the trustees that oversee the securities
trusts.
In a Monday filing with U.S. Bankruptcy Court in Manhattan,
Syncora Guarantee Inc. said it should have a legal right to go
after the RMBS trustees' claims but won't because of wording in the
reorganization plan.
"The provisions of the plan that propose to impair or eliminate
such rights should not be approved, and as a condition of
confirmation the plan should be modified to delete exculpation of
the trustees of the Syncora trusts," Syncora said in the filing.
Without the "exculpation," Syncora argues, it would be free to go
after the claims on behalf of the RMBS trusts.
As part of ResCap's larger reorganization plan, the company
allowed a $7.3 billion claim for the trusts representing more than
one million original mortgages. Syncora, which insures $2.5 billion
worth of the RMBS, said wording in the reorganization plan suggests
that insurers--including itself--will be shut out of collecting
money from the trusts, even if the trusts get payments from
ResCap.
The plan says insurance companies "do not have any reciprocal
contractual rights to receive distribution for claims" on behalf of
the investments they're insuring, Syncora said. ResCap lawyers
didn't immediately respond to a request for comment.
ResCap's reorganization and eventual liquidation plan, which
Judge Martin Glenn will consider approving at a hearing set for
next month, is based on a settlement among the company,
government-controlled parent Ally Financial Inc. and ResCap's
creditors. Ally will pay $2.1 billion to settle creditor claims but
is off the hook from further liabilities. After the sales of two
huge chunks of assets earlier this year, that settlement loomed as
one of the largest issues in ResCap's 14-month-old bankruptcy.
When ResCap first filed for Chapter 11, the Ally payment was set
at $750 million, but it became clear very early that creditors
wanted more. 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 charged, the
$750 million settlement would have been too low.
If the plan is approved by Judge Glenn, creditors will receive
different amounts of recovery based on which ResCap-related entity
owes them money, but most unsecured creditors will receive the 36.3
cents on the dollar.
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 can
focus on repaying the bailout it received during the financial
crisis.
During its bankruptcy, ResCap struck deals to sell
mortgage-servicing platforms and loan portfolios as a part of
bankruptcy auctions that generated $4.5 billion in proceeds. The
ResCap estate has also racked up nearly more than $400 million in
fees for the professionals working on its case, including Mr.
Gonzalez's costly examination.
(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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