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ResCap Execs Denied Incentives

A bankruptcy judge has denied more than two dozen executives of Residential Capital LLC millions of dollars in incentive plan payments. The ruling came one day after a government disclosure indicated that ResCap is being investigated over potential violations of federal securities laws in the issuance of residential mortgage-backed securities.

ResCap filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court for the Southern District of New York on May 14.

A motion was made by ResCap and its affiliated debtors for authorization to implement a key employee incentive plan, according to a copy of the decision by U.S. Bankruptcy Judge Martin Glenn. Awards were sought for 17 ResCap insiders.

The debtors’ plan provides for an award of between $4.1 million and $7.0 million based on the achievement of certain enumerated bankruptcy-related targets. The debtors’ plan provides that 63 percent of the incentive awards may vest upon the closing of the two sales of the debtors’ principal assets.

But the motion was opposed by the U.S. Trustee, which argued that section 503(c)(1) of the U.S. Bankruptcy Code applies to the incentive plan because it is primarily retentive. The trustee said the proposal should not be approved because it does not meet the requirements of that section.

The debtors, however, argued that the primary purpose of the plan is incentivizing.

Judge Glenn disagreed with ResCap and denied the motion.

“The court concludes that, as designed, the key employee incentive plan is primarily retentive in nature and accordingly subject to the more rigid requirements of section 503(c)(1),” the Aug. 28 decision stated. “While other aspects of the key employee incentive plan may be permissible, the plan as a whole does not pass muster under section 503(c)(1). Consequently, the motion is denied without prejudice.”

Other recent activity in the ResCap bankruptcy include an Aug. 23 request by ResCap for more time to file its bankruptcy plan and a July 24 hearing that pitted creditors against ResCap over a proposed $8.7 billion settlement with MBS investors.

In addition, a motion by ResCap creditor Berkshire Hathaway Inc. to appoint an independent examiner to review pre-bankruptcy transactions between ResCap and former parent Ally Financial Inc. was approved on June 20. A July 3 court filing indicated that a former chief bankruptcy judge for the Southern District of Manhattan was named as the examiner.

In an Aug. 27 court filing for separate civil case, the Securities and Exchange Commission disclosed that it issued a formal order of private investigation of ResCap on Feb. 22.

“Pursuant to the formal order, the commission directed that an investigation be conducted to determine, among other things, whether ResCap, its officers, directors, employees, partners, subsidiaries, and/or affiliates, engaged in, or are about to engage in, the offer and sale of securities to investors in violation of the antifraud provisions of the federal securities laws,” according to the filing made in a Los Angeles federal court.

The SEC hopes to determine whether ResCap violated federal securities rules when it originated and underwrote home loans that were subsequently securitized. The securities regulator is examining the credit quality of loans underlying RMBS.

The filing seeks to force R.R. Donnelley & Sons Co. to provide due diligence reports prepared on behalf of investment banks involved in the issuance of the RMBS. Among other things, the reports analyzed whether the securitized mortgages complied with ResCap’s own underwriting standards.

An administrative subpoena was issued by the SEC on June 5 to Donnelly, but the due diligence firm refused to provide some of the requested documents and comply with the subpoena’s requirement to provide requested data in Microsoft Excel format. In a telephone call with the SEC, Donnelly’s counsel indicated that the documents would only be provided in response to a court order.

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