Judge OKs Deal Cutting FGIC’s Claims Against ResCap By as Much as $4.61 Billion

 NEW YORK — (Mealey’s) The federal bankruptcy judge presiding over the Chapter 11 proceeding of Residential Capital LLC (ResCap) on Sept. 13 approved a deal between ResCap and the Federal Guaranty Insurance Co. (FGIC) reducing FGIC’s claims to between $934 million and $1.8 billion, depending on whether the reorganization plan is confirmed (In Re:  Residential Capital LLC, No. 12-12020, Chapter 11, S.D. N.Y. Bkcy.) [an enhanced version of this opinion is available to lexis.com subscribers].

ResCap filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York on May 14, 2012.

$5.55 Billion In Claims

FGIC originally asserted claims of $5.55 billion against ResCap’s bankruptcy estate.  The deal resolves FGIC’s claims and resolves the majority of unsecured claims asserted by the FGIC’s trustees.

FGIC, a monoline financial guaranty insurance company, issued irrevocable insurance policies for certain securities issued by certain of the residential mortgage-backed securities trusts.  By “wrapping” the securities, FGIC guaranteed the payment of principal and interest due on the securities.

Additionally, FGIC entered into an insurance and indemnity agreement with ResCap in connection with each of the trusts “wrapped” by FGIC.  Pursuant to the insurance agreements, ResCap agreed, among other things, to reimburse FGIC for certain payments FGIC made under the policies that resulted from ResCap’s failure to repurchase or substitute mortgage loans that breached one or more representations or warranties contained in the applicable governing agreements.

Breach Alleged

Before ResCap’s bankruptcy petition, FGIC filed 12 civil suits in the U.S. District Court for the Southern District of New York, asserting a variety of claims against ResCap and its affiliates, GMAC Mortgage and Residential Funding Co. LLC.

The FGIC claims that RFC and GMAC Mortgage breached various representations, warranties and/or covenants; that FGIC was fraudulently induced to issue the policies in connection with most of these FGIC insured trusts; and that ResCap is liable for the alleged breaches and fraud of GMAC Mortgage and RFC under alter ego and aiding and abetting theories of liability.

Against each of the three defendants, FGIC filed proofs of claim valued at $1.85 billion, for a total aggregate claim of $5.55 billion.

Maximum. Minimum

Bankruptcy Judge Martin Glenn said that under the deal reached between ResCap and FGIC, the parties agreed to a maximum amount for FGIC’s claim and a minimum.  Specifically, if ResCap’s reorganization plan becomes effective, the total claims FGIC is allowed to assert against the bankruptcy estate will be $934 million.

The allowed claims against ResCap will be $337.5 million; against GMAC Mortgage the claim will be $181.5 million; and against RFC the claim will be $415 million.

However, if ResCap’s Chapter 11 reorganization plan is not confirmed, under the settlement, FGIC will have the right to assert $1.8 billion in claims and will reserve the right to assert additional claims, which are unspecified at this time, Bankruptcy Judge Glenn said.

ResCap is represented by Donald H. Cram of Severson & Werson in San Francisco, Stefan W. Englehardt, Todd M. Goren, Joel C. Haims, Gary S. Lee, Lorenzo Marinuzzi, Larren M. Nashelsky and Anthony Princi of Morrison & Foerster in New York and Steven J. Reisman of Curtis Mallet-Prevost Colt & Mosle in New York.  FGIC is represented by Andrew K. Glenn of Kasowitz Benson Torres & Friedman in New York

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