Residential Capital may enter into a $2.1 billion settlement and plan-support agreement with its parent, Ally Financial, U.S. Bankruptcy Court Judge Martin Glenn ruled this morning, establishing a framework for working toward confirmation of a reorganization plan.
Judge Glenn also said he will unseal the 2,235-page report filed by former Bankruptcy Court Judge Arthur Gonzalez, who was appointed as an examiner in the case last July to investigate, among other things, “all material pre-petition transactions” involving ResCap, Ally, and equity sponsor Cerberus Capital Management. The report specifically evaluates potential claims and causes of action related to fraudulent conveyance, equitable subordination, alter ego and veil piercing, fiduciary duty, debt recharacterization, unjust enrichment, and securities law violations.
Approval of the PSA paves the way for ResCap to file its proposed reorganization plan by July 3, Morrison & Foerster partner Gary Lee told a packed courtroom (Lawyers spilled over into two overflow rooms, an unusually large turnout for the bankruptcy court). “I think the PSA is a signal accomplishment in this case,” Judge Glenn said. But, he warned, the PSA is not a disclosure statement or a reorganization plan – “those are important steps to come.”
“Without the PSA, however, this case would return to Square One,” Glenn said.
Separately, Lee said this morning that ResCap had also reached an agreement with the Federal Reserve to establish a $230 million escrow fund to repay home-mortgage borrowers, ending an investigation into the company’s foreclosure practices.
ResCap first announced the settlement and plan-support agreement with Ally in May. The deal tops Ally’s initial pre-petition settlement offer by $1.35 billion. The agreement settles all existing and potential claims between ResCap and Ally, and potential claims held by third parties in relation to ResCap. Certain securities claims by the Federal Housing Finance Agency and the Federal Deposit Insurance Corporation, as receiver for certain failed banks, are exempted from the settlement.
Ally will contribute $1.95 billion in cash to the ResCap estate on the effective date of its eventual plan, as well as the first $150 million from insurance proceeds it expects to receive related to releases in connection with the plan. The agreement also requires that Ally receive full repayment of its secured claims, including $1.13 billion owed under existing credit facilities.
The settlement was reached as part of the mediation in the case being led by Bankruptcy Court Judge James Peck. Ally’s potential liability to ResCap and, derivatively, its creditors, is a central issue in the proceedings. The crux of the dispute is whether Ally, using its corporate control over ResCap and its management, wrongfully engineered certain transactions beginning in 2006 that transferred key ResCap assets out of the reach of creditors in the wake of the housing-market meltdown, leaving ResCap insolvent and leading to its bankruptcy.
At the time it filed Chapter 11, ResCap and Ally had agreed to a purported $750 million settlement of the potential claims. Key ResCap creditors, however, balked, with the creditors’ committee beginning its own investigation into the transactions and the bankruptcy court appointing Gonzalez to look into the transactions.
Subsequently, the creditors’ committee sought derivative standing – supported by the company – to file suit arising out of the transactions, arguing that Ally’s liability could potentially cover all claims in the case, from $20-25 billion. The settlement approved today brings an end to that suit, but does not prevent the creditors’ committee from objecting to ResCap’s eventual disclosure statement or plan. Judge Glenn and a parade of lawyers making appearances in court today repeatedly hinted at what is expected to be a lengthy and heavily contested confirmation hearing.
Besides ResCap and Ally, other key stakeholders that are parties to the settlement include the official unsecured-creditors’ committee, Wilmington Trust (which is the indenture trustee for nearly $1 billion in ResCap notes), AIG Asset Management, Allstate Insurance Co., FGIC, representatives of litigants in various class action suits pending against ResCap, certain RMBS investors related to securitizations backed by the company, and certain trustees or indenture trustee for certain mortgage-backed-securities trusts. – John Bringardner