Judge Rules Against ResCap Noteholders, Denounces Legal Tactics

Judge Rules Against ResCap Noteholders, Denounces Legal Tactics

A U.S. bankruptcy judge ruled this week that a group of ResCap noteholders are not entitled to interest that has accrued on their claims since the mortgage servicer filed for bankruptcy protection last year.

U.S. Bankruptcy Judge Martin Glenn denied claims made by junior secured noteholders for at least $350 million in post-petition interest. Glenn ruled that the collateral backing $2.2 billion in debt held by the junior secured noteholders was only worth $1.9 billion. Therefore, since their claims are undersecured, the noteholders aren’t entitled to post-petition interest, Bloomberg reported.

The court’s ruling comes ahead of next week’s hearing on ResCap’s plan to exit bankruptcy. Under the company’s proposed plan, it would pay the noteholders all of their principal and normal interest that accrued before the case was filed last year. In his 119-page ruling, Judge Glenn denounced the noteholders’ legal tactics as “unfortunate,” as they were essentially the only creditors opposing ResCap’s plan to exit bankruptcy proceedings. He also added that during the entire course of bankruptcy proceedings, the noteholders have pursued a “strategy where they contest everything and concede nothing (even when the court has questioned whether they are acting in good faith).”

“It should not be lost on anyone that the [noteholders] stand virtually alone in this case in failing to reach a consensual agreement to resolve their issues,” Judge Glenn wrote, according to Dow Jones Business News. “The result has been protracted proceedings that have burdened the estate and reduced funds available to satisfy creditor claims. That is unfortunate.”

ResCap, a subsidiary of Ally Financial, filed for protection under Chapter 11 of the bankruptcy law in May 2012 as litigation over bad mortgage securities grew. Over the course of the proceedings, the company reached agreements to sell mortgage-servicing platforms and loan portfolios through a series of bankruptcy auctions that generated $4.5 billion in proceeds.