When Residential Capital LLC, once the fifth-largest mortgage servicer in the United States, filed a plan of reorganization Thursday that called for unsecured creditors to recover 36.3 cents per dollar owed, the company moved a giant step closer to exiting bankruptcy.
But for the dozen-plus law firms and hundreds of lawyers who have racked up hours working on the matter over the past year, ResCap's emergence from Chapter 11, which is expected to come in December, will bring a halt to what may well be the most lucrative bankruptcy assignment of the past year. Court filings show that fees paid out for work done in connection with the case in its first seven months alone totaled just under $100 million. And with six months' worth of bills yet to be tallied, that tab will climb substantially higher.
The ResCap bankruptcy filing, the largest of 2012, is as complex as the debtor's business is arcane. The company—formerly the mortgage lending unit of General Motors Acceptance Corporation (GMAC)—originated and services billions of dollars of subprime loans, and its bankruptcy has involved tens of thousands of creditors and potential creditors. The failure of the loans and securities it serviced amid the subprime market's collapse in 2007 spawned billions of dollars' worth of legal claims against both ResCap, and its parent, which is now known as Ally Financial Inc. It was those claims that ultimately compelled Ally to put ResCap into bankruptcy on May 14, 2012, with assets and liabilities both in excess of $15 billion.
Given the complexity of the case and the number of warring parties, it's not surprising that the ResCap bankruptcy has generated huge fees for the law firms involved. Lead debtor's counsel Morrison & Foerster, for instance, collected $31 million in fees through the end of 2012. The firm's top billers on the matter are partners Jeremy Jennings-Mares, a derivatives specialist ($1,195 an hour), and Thomas Humphreys, a federal tax expert ($1,125 an hour). Gary Lee, the partner leading the MoFo team, billed at $975 an hour.
Kramer Levin Naftalis & Frankel, which is serving as lead counsel to the official committee of unsecured creditors, has collected some $23 million in fees for its work on the case through the end of 2012. The Kramer Levin lawyers spent much of their time reporting, investigating, and analyzing ResCap's proposed $8.7 billion settlement with hundreds of trusts related to representation and warranty claims over residential mortgage–backed securities. The firm also billed a substantial amount of time for analyzing ResCap's sales of its mortgage origination business and loan portfolio and for scrutinizing relationships and transactions between ResCap and its corporate parent, whose majority owner is the U.S. Treasury. Kramer Levin's top billers include lead partner Kenneth Eckstein, who amassed $599,000 in fees during the last three months of 2012 at a rate of $990 an hour (Eckstein's hourly rate was the highest charged by the firm).
Rivaling the fees reaped by MoFo and Kramer Levin are those accumulated by Chadbourne & Parke, which was tapped to assist former U.S. Bankruptcy Court Judge Arthur Gonzalez in his role as court-appointed bankruptcy examiner. Chadbourne has collected roughly $21 million for its efforts on Gonzalez's behalf through the end of 2012, with much of the firm's work on the matter going into preparing a massive report completed by Gonzalez in early May and placed under seal until late June.
The anticipated release of that report—which suggests that ResCap would be likely to succeed if it pursued $3.1 billion in claims against Ally—prompted Ally and its Kirkland & Ellis lawyers to reach a settlement with ResCap creditors in late May. Under the terms of that settlement, which received court approval on June 26, Ally is to pour $2.1 billion into the ResCap estate—nearly triple the $750 million it originally agreed to contribute in May 2012. (That sum is on top of the $4.5 billion the ResCap estate has already collected in connection with the sale of the company's loan portfolio and mortgage-servicing unit.)
With the settlement in place, ResCap's major bondholders and creditors agreed to support the consensual reorganization plan filed with the court Thursday, according to participants in the matter.
U.S. Bankruptcy Court Judge Martin Glenn—who had authorized Gonzalez to spend up to $80 million on his investigation—indicated on June 26 that the money had been well spent, calling the examiner's 2,200-page opus "masterful" and saying the settlement it helped produce had allowed ResCap and Ally to avoid a "nuclear war" of litigation.
Chadbourne bankruptcy practice head Howard Seife says that unlike most examiners' reports, which offer only measured legal opinions, the document Gonzalez signed off on stakes out a firm position about how likely ResCap would be to prevail in a variety of contract and preference disputes. "Some examiners just debate issues," says Seife, who led the 100-lawyer Chadbourne team assisting Gonzalez. "We made judgment calls here on the merits. That's what Judge Gonzalez is good at—he's used to deciding things."
Gonzalez—who, as a judge, presided over the Chrysler, Enron, and WorldCom bankruptcies—was appointed examiner amid unsecured creditors' complaints about Ally's original $750 million agreement with ResCap. At the heart of those complaints was the long-standing relationship between the two parties: Ally purchased mortgage loans from ResCap via agreements under which the latter assumed certain risks and gained certain rewards related to market changes.
