By Nick Brown
NEW YORK (Reuters) - A lawyer for bankrupt Residential Capital on Tuesday asked a judge to confirm the mortgage lender's plan to end its Chapter 11 case and pay back creditors, criticizing "scorched-earth" opposition by bondholders in the opening of what figures to be a marathon hearing.
ResCap lawyer Gary Lee told an overflowing courtroom that the plan, founded on a $2.1 billion settlement with former parent Ally Financial, lacks "a single legal infirmity" and should be approved by Judge Martin Glenn in U.S. Bankruptcy Court in Manhattan.
While most creditors support the plan, it is opposed by a key group of secured bondholders who demand about $340 million in interest payments on top of the roughly $2 billion in principal and pre-bankruptcy interest they are already set to receive.
Approval of the plan would mean the end of ResCap's bankruptcy and the beginning of payouts to creditors, which include thousands of residential mortgage-backed securities claimants hurt during the 2008 mortgage crisis.
It would also allow Ally, which is owned in part by U.S. taxpayers, to focus on repaying the federal government for a $17 billion bailout during the financial crisis.
The hearing is expected to last six days, which is long by bankruptcy standards.
Lee criticized the bondholder group in opening statements, blaming their "holy grail" quest for interest payments on "deep pockets and an appetite for litigation."
"The best analogy I can think of, they're like a dog chasing a car," he said. "I'm not even sure why they'd want to catch it in this case."
A lawyer for the bondholders said the group is entitled to interest because it has liens on intercompany claims, or bankruptcy claims asserted between entities within the ResCap corporate structure. "They can either discharge my lien, or turn my collateral over to me," lawyer Gerard Uzzi said.
But it is unclear whether the intercompany claims will have any value.
THOUSANDS OF CLAIMS
ResCap's bankruptcy exit plan resolves thousands of existing and potential claims over the roles of ResCap and Ally in the mortgage crisis. In May, Ally agreed to contribute $2.1 billion to the payout pot.
The bondholder group, which includes Aurelius Capital Management and Marathon Asset Management, claims its collateral is worth more than it is owed. In a trial in October, Judge Glenn rejected that argument and deemed the group undersecured, meaning it cannot collect interest. The group continues to assert its demand, arguing that it may become oversecured later, through the potential lien on the intercompany claims, and depending on whether it is found to have a lien on part of Ally's contribution.
Glenn has been critical of the group for causing ResCap's estate to expend resources on heavy litigation. The group has "raised more issues than I think I've seen in my whole career," the judge told Uzzi on Tuesday.
Among the first experts expected to testify is Jonathan Lipps, a lawyer who represented ResCap in widespread litigation related to residential mortgage-backed securities (RMBS). Lipps is expected to testify that, absent the settlement, ResCap would incur huge litigation costs. Under the settlement, about 1,100 RMBS trusts are afforded a $7.3 billion claim, though it remains to be seen how much of that figure they will recover.
Indeed, failure to resolve the liabilities through settlement would likely lead to significant litigation, which Judge Glenn earlier in the case compared to nuclear war.
Lee, in his opening statements, quipped that he had planned to show a slide in his Powerpoint presentation of a nuclear bomb, "but we didn't think that was appropriate."
ResCap had serviced more than $374 billion in U.S. residential mortgage loans before it declared bankruptcy in May 2012 to address soaring mortgage liabilities.
Last year, the company sold its mortgage servicing business in a $3 billion deal to Ocwen Financial Corp
(Editing by Matthew Lewis)