Residential Capital files complaint based on junior notes lien dispute

By Caroline Salls

Pittsburgh, May 6 - Residential Capital, LLC and its affiliated debtors filed an adversary proceeding Friday that seeks to determine the extent of the liens securing the 9 5/8% junior secured guaranteed notes due 2015 issued by ResCap, according to a filing with the U.S. Bankruptcy Court for the Southern District of New York.

The complaint was filed against indenture trustee UMB Bank, NA, collateral agent Wells Fargo Bank, NA and an informal group of junior secured noteholders.

"The ad hoc group is advancing a position ostensibly on behalf of a group of significantly undersecured junior secured noteholders who are aggressively vying to wrest control of these Chapter 11 cases through the plan process," the company said in the complaint.

"To accomplish this task, the ad hoc group - in pleadings filed in this court and in correspondence with the debtors' advisers - attempt to manufacture an oversecured position that allegedly entitles the [noteholders] to postpetition interest through the misguided creation of collateral value that is premised upon factual and legal fallacies."

ResCap said the noteholders claim $2.22 billion in principal and pre-bankruptcy interest.

The company said it believes the value of the collateral securing the notes is $1,511,000,000, based on the value attributed to those assets by purchasers Ocwen Loan Servicing, LLC, Walter Investment Management Corp. and Berkshire Hathaway Inc. and the value ascribed to those assets by the debtors and their financial advisers.

As a result, ResCap said the noteholders are not entitled to receive post-bankruptcy interest because they are already undersecured, even before considering an adversary proceeding filed by the company's official committee of unsecured creditors, which could potentially reduce the junior noteholders' secured claim by hundreds of millions of dollars.

Noteholder arguments

ResCap said the informal noteholders' group has publicly claimed that the notes are oversecured, arguing the following points disputed by the debtors:

• The informal group claims that the noteholders' lien on general intangibles entitles them to a lien on goodwill associated with the debtors' servicing and origination platform and that the goodwill includes any value paid for the company's assets above and beyond market value;

• The informal group claims that the noteholders are entitled to an adequate protection replacement lien in an amount equal to all of the cash collateral of the junior noteholders that the debtors have used during the Chapter 11 cases;

• The group claims that the noteholders have an equitable lien on all of the assets that secure an Ally Financial loan despite the fact that Wells Fargo expressly released the lien on all of those assets upon the debtors' instructions.

The noteholder group argues that the instructions were improper and that Wells Fargo should not have released the collateral; and

• The noteholder group claims that the noteholders' lien package includes a lien on any potential recoveries on avoidance actions successfully prosecuted by or on behalf of the debtors' estates.

In addition, ResCap said the noteholders claim that they have a lien on any recoveries deriving from veil-piercing or alter ego claims held by the debtors.

"Plaintiffs believe the adversary proceeding filed by the committee against the defendants will fully address and dispose of that issue," the complaint said.

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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