Residential Capital junior noteholders oppose exclusivity extension

By Caroline Salls

Pittsburgh, April 29 - An informal group of Residential Capital, LLC's junior secured noteholders objected to the company's proposed exclusivity extension and said it is prepared to prosecute a plan of reorganization if the extension is denied, according to a Monday filing with the U.S. Bankruptcy Court for the Southern District of New York.

The noteholders said only three major parties currently hold allowed significant claims across the ResCap debtors' capital structure, including Ally Financial Inc., the junior secured noteholders and senior unsecured noteholders.

The noteholder group said Ally's claims and recoveries are subject to an examiner's investigation and the prospect of significant litigation, while the senior noteholders assert general unsecured claims against only the holding company.

Absent significant litigation, the junior noteholders said it is unclear whether the senior noteholders will receive any material distribution.

"Rather than settle their claims on the timetable mandated by the Chapter 11 plan process, however, this category of contingent claimants is obviously incentivized to opt to preserve its litigation claims against the debtors until such time as they can maximize both the size of their claims and their recoveries in these cases," the noteholder group said.

"Their tactical delay in these cases is toxic, as the debtors' administrative expenses balloon and the debtors' assets, which are largely cash, are static.

"Thus, delay in the prosecution of the Chapter 11 plan process directly erodes the likely recoveries for general unsecured creditors and even thereafter the recoveries of secured and administrative claimants.

"Confronted with the lack of any meaningful plan alternative, the disparate unsecured creditor groups simply lack any incentive to abandon their hardened negotiating positions, choosing instead to maintain optionality even at the expense of administrative claimants and secured creditors."

Based on information provided by the company, the noteholder group said it believes that there may be little time remaining to hold negotiations before the filing of any Chapter 11 plan that can be confirmed.

A hearing is scheduled for May 7.

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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