Just about a month ago, Residential Capital and certain of its affiliates commenced their Chapter 11 cases with two proposals for the sale of substantially all of their assetsone being a sale to non-debtor affiliate Ally, tied to a plan proposal enjoying the support of certain ResCap secured noteholders and a group holding residential mortgage-backed securities, the issuance of which ResCap was integrally involved. Last week, during the hearing to approve bidding procedures, ResCap faced challenges to both proposed sales as to price and the terms of the stalking horse sale agreements. Concurrently, one of the competing bidders, Berkshire Hathaway, also successfully sought the appointment of an examiner to investigate ResCap’s pre-bankruptcy actions, especially regarding transactions with its affiliates.
The events of last week’s hearing serve to remind investors that while the bankruptcy process is flexible and can, if necessary, adapt to major developments early in a Chapter 11 case, debtors will be held to their proof in justifying the need for speed, demonstrating a diligent and continuing discharge of their responsibility to maximize values, and the lack of any higher or better feasible alternatives. In conformity with those principles, ResCap encountered not only procedural objections, but through the participation of a clearly qualified bidder at the sale procedure stage, “live” evidence of a viable, more valuable alternative that arguably confirmed the inadequacy of the pre-bankruptcy process, including the rejection by the bankruptcy court of a “no shop” or “no solicitation” provision in one of the proposed stalking horse agreements.
