Residential Capital to pay Citibank default rate interest, legal fees

By Kali Hays

New York, April 28 - Residential Capital, LLC oversecured creditor Citibank was awarded post-bankruptcy interest at the contractual default rate and unpaid attorney's fees by the U.S. Bankruptcy Court for the Southern District of New York, according to a release from Citibank counsel Shearman & Sterling.

Citibank claimed to be owed $5.04 million in default rate interest and $357,168 in attorney fees.

Sherman & Sterling said the Citibank award was ordered even though unsecured creditors of Residential Capital are not receiving full payment on their claims.

Specifically, the court concluded Citibank can recover default rate interest for the period after the loan facility matured and when it was paid. The parties are set to discuss and agree on a figure 21 days after the entry of the order.

In January 2013, Citibank was repaid its $152 million principle and non-default interest when Residential Capital sold Citibank's collateral as part of the sale of substantially all company assets.

After the payments, the company reorganization trust asserted that Citibank was not entitled to be repaid for default interest as it would be harmful to unsecured creditors which were already set to receive only 9% to 36% on allowed claims.

"While it is easy to conclude that every dollar paid to Citibank is a dollar less for unsecured creditors, what is more difficult to say is that the result is inequitable," the court order stated..

The order further said, "Refusing to enforce bargained for default interest for oversecured creditors' raises the risk that lenders will demand higher interest rates from all high risk borrowers to compensate for the potentially higher costs of collection and greater risk of loss once bankruptcy begins."

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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