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UPDATE 1-Berkshire seeks independent examiner in ResCap case
June 5, 2012 / 4:16 PM / 5 years ago

UPDATE 1-Berkshire seeks independent examiner in ResCap case

* Berkshire says ResCap’s pre-bankruptcy deals with Ally are “potentially improper”

* Creditor committee had asked for permission to investigate transactions (Adds details, background)

By Tanya Agrawal

June 5 (Reuters) - Warren Buffett’s Berkshire Hathaway Inc has asked a U.S. court to appoint an independent examiner in the Residential Capital LLC (ResCap) bankruptcy case to investigate some transactions between the company and its parent.

Berkshire, a major ResCap creditor which tried to buy the company before it filed for bankruptcy, termed the transactions with Ally Financial Inc “potentially improper” and said the examiner should evaluate potential claims arising from them.

ResCap, which is Ally Financial’s mortgage unit, filed for bankruptcy protection last month. Ally, the former in-house financing arm for General Motors Co, had said it would sell some international operations to help repay $12 billion in U.S. government bailout money.

As part of the bankruptcy filing, ResCap reached a $750 million settlement with Ally that would release the parent company from mortgage-backed securities lawsuits.

Last week, a committee of the company’s unsecured creditors had asked for permission to investigate transactions that ResCap entered into with Ally before it filed for bankruptcy protection.

However, Berkshire said the committee’s members have potentially conflicting interests over matters that require investigation and that an examiner could access communications between ResCap and its counsel.

In a bankruptcy case, an examiner investigates allegations such as dishonesty, fraud, incompetence and mismanagement.

Berkshire holds more than $500 million or 50 percent of total outstanding unsecured bonds and $900 million or 40 percent of total outstanding junior secured bonds issued by ResCap, according to a declaration filed by Ted Weschler, an investment manager at Berkshire, late on Monday.

Berkshire said ResCap had engaged in several deals with Ally worth billions of dollars whose net effect was to transfer a significant share of ResCap’s operating assets to its parent.

ResCap now seeks to release Ally from any claims arising from these transactions even while the mortgage lender admits that it possess valid claims against Ally for “fraudulent transfer”, Berkshire said.

“ResCap’s plan fits neatly into Ally’s publicly-stated goal of separating itself, once and for all, from ResCap. Whether Ally’s agenda also happens to be in the best interest of ResCap and its creditors is another question,” Berkshire said in its petition.

Reports by court-appointed independent examiners have been given importance by courts in recent bankruptcy cases.

In the Lehman bankruptcy case, the court-appointed examiner found that the failed bank’s use of so-called Repo 105 transactions, in which assets were moved on and off the balance sheet, let it obscure its leverage and health. The report was cited in a securities fraud lawsuit against the company and its top executives.

More recently, power producer Dynegy Inc was forced to settle with creditors who had complained that Dynegy shielded assets from them before putting a unit into bankruptcy. A bankruptcy examiner had issued a scathing report that bolstered their position.

Ally has been besieged in the past few years by losses at ResCap, once a major subprime lender and its profit engine. The company had considered bankruptcy for ResCap and other ways to shed the unit in the past.

Ally did not return calls seeking comment.

The case is In re: Residential Capital LLC, U.S. Bankruptcy Court, Southern District of New York, No: 12-12020. (Reporting by Tanya Agrawal in Bangalore; Editing by Saumyadeb Chakrabarty)

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