Court Grants ResCap Extension to File Reorganization Plan

Court Grants ResCap Extension to File Reorganization Plan

A U.S. Bankruptcy Court has granted Residential Capital’s request for a 30-day extension in filing its reorganization plan. During this period, the company will be unencumbered by the risk of rival proposals.

In a U.S. Bankruptcy Court in Manhattan, Judge Martin Glenn addressed the progress that’s already been made in the contentious and ongoing bankruptcy dispute, and agreed with ResCap’s representatives that an extension may give the firm more time to settle disputes with creditors and its parent company, Ally Financial.

“The ongoing mediation is the single most important factor in supporting the extension of exclusivity,” said Glenn. “All of the effort needs to be concentrated on negotiations between the parties, with or without the mediator.”

In addition to granting the company more time to develop a plan, Judge Glenn also overruled objections from junior bondholders seeking $2 million in claims and more control over ResCap’s bankruptcy proceedings, according to Dow Jones Newswires. ResCap, Ally and creditors are expected to either agree to a global settlement or walk away with a deal in place by the end of the week. If Ally and a committee of creditors fail to reach an accord with ResCap and drop lawsuits, the distressed mortgage firm will use the 30-day extension to develop a reorganization plan that attempts to resolve as many issues as possible.

The mediation among ResCap, Ally and the creditors also aims to determine Ally’s financial responsibilities toward ResCap for actions it took prior to the latter filing for bankruptcy. Creditors claim that Ally and ResCap acted as a “single economic entity” prior to bankruptcy law proceedings, and therefore Ally should be required to pay a portion of ResCap’s debt. Originally, Ally proposed a $750 million payment to avoid potential lawsuits, but creditors dismissed the figure as too low.

If the negotiations fail, the three parties must find another path to determine how to manage $40 billion in claims relating to sour mortgage-backed securities, according to American Banker.