Judge rules against ResCap noteholders, knocks legal tactics

Residential Capital LLC, a bankrupt mortgage lender, won a court ruling on Friday that it does not owe approximately $340 million in interest claimed by junior secured noteholders.

The ruling sets the stage for hearings next week on ResCap's plan to exit bankruptcy. U.S. Bankruptcy Judge Martin Glenn also criticized the legal tactics of the noteholders, who are virtually alone in opposing that plan.

Glenn ruled that the holders of the junior secured notes are undersecured, which prevents them from collecting interest that accumulated since ResCap filed for bankruptcy in May 2012.

Glenn, in New York, described his 119-page opinion, which covered a range of disputes, as a split decision. He ended it by saying that the noteholders have chosen to "contest everything and concede nothing (even when the court has questioned whether they were acting in good faith)."

He said their conduct led to drawn-out proceedings that have reduced the money available for other creditors.

"This is unfortunate!" Glenn wrote.

Aurelius Capital Management and Marathon Asset Management, two of the largest holders of the notes, did not immediately respond to requests for comment. Another investment firm holding a large amount of the notes, Davidson Kempner Capital Management, declined to comment.

Lewis Kruger, the chief restructuring officer for ResCap, declined to comment.

ResCap sought court protection on May 14, 2012, to address soaring mortgage liabilities. It had serviced about $374 billion of U.S. residential mortgage loans before its bankruptcy.

The dispute stems from a proposal to repay creditors that was backed by ResCap and its committee of unsecured creditors and funded with a $2.1 billion payment by parent Ally Financial Inc.

The proposed plan would pay junior secured noteholders $2.2 billion, which is their entire principal and the interest that was due prior to the bankruptcy.

However, the investment funds disputed that their notes were undersecured, and a trial on the issue began in October.

In his ruling on Friday, Glenn found the noteholders' collateral is worth $1.9 billion, less than the value of the securities and therefore leaving the notes undersecured.

Glenn wrote that he expected the noteholders to continue their give-no-ground approach in a hearing on ResCap's plan of reorganization, which is scheduled to begin on Tuesday.

U.S. taxpayers own roughly three-quarters of Ally, which was once part of General Motors Corp and which did not file for bankruptcy protection. Ally is focusing on auto lending, and trying to repay billions of dollars it still owes the government.

The case is In re Residential Capital LLC, U.S. Bankruptcy Court for the Southern District of New York, No. 12-12020.

(Reporting by Tom Hals in Wilmington, Delaware; additional reporting by Karen Freifeld in New York; Editing by Alden Bentley)