ResCap investors seek ruling on fraud, trust claim classifications

By Caroline Salls

Pittsburgh, Nov. 28 - A group of Residential Capital, LLC investors asked the U.S. Bankruptcy Court for the Southern District of New York to classify RMBS fraud claims in the same plan of reorganization class as securitization trust claims and to rule that misrepresentation claims cannot be placed in a subordinated plan class, according to a Tuesday court filing.

The investors include AIG Asset Management (U.S.), LLC and affiliated entities; Allstate Insurance Co. and affiliated entities; Massachusetts Mutual Life Insurance Co.; and Prudential Insurance Co. of America and affiliated entities.

The investors, which are general unsecured creditors, said they hold residential mortgage-back securities that were marketed by the ResCap debtors and issued by remote bankruptcy trusts established by the debtors.

The investors said the motion "seeks to ensure that equal treatment is given to all creditors that were harmed by misrepresentations made by the debtors relating to the RMBS certificates."

R&W claims

According to the motion, two types of claims are at issue, including "R&W claims," which are contract-based claims that arise under the transactional documents entered into as part of the securitization process between the debtors and the trusts.

The creditors said the ResCap debtors made false representations about the quality of the mortgage loans in these transactions.

Under the RMBS certificates, the trusts have the right to rescind the sale of defective mortgage loans and the funds they recover through that putback process are passed through to the trusts' current RMBS certificate holders.

The investors said these contractual R&W claims are the subject of the company's pending RMBS trust settlement request.

Misrepresentation claims

The second variety of claims at issue arise from the same misrepresentations, but are based on violations of federal securities laws and state blue sky laws, common law fraud and other similar theories, the motion said.

The investors said the debtors repeated the misrepresentations made to the trusts in the transaction documents in the offering materials used to market the resulting RMBS certificates.

"The debtors‟ misrepresentations gave rise to the approximately $1.785 billion in fraudulent-inducement and similar claims by the investors," the investors said in their motion.

Equal treatment sought

In addition, the investors said the motion was filed to ensure that the misrepresentation claims are given equal treatment with the R&W claims because both sets of claims arise out of the same conduct and are for the benefit of "similarly situated claimants."

"There is no reason why one [set of claims] should be given preferential treatment over the other," the motion said.

"This is particularly so in light of the fact that numerous investors, including those who no longer hold the RMBS certificates, will recover nothing on account of the R&W claims or the settlement thereof.

"Classifying these sets of claims differently thus threatens unfairly to disadvantage those investors whose prospects for recover are primarily premised upon the misrepresentation claims."

Residential Capital, a New York-based mortgage originator and servicer, filed for bankruptcy on May 14, 2012. Its case number is 12-12020.

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