Court Approves Post-Verdict Settlement in Favor of Akin Gump Client in Significant Bankruptcy Matter

(New York) – The United States District Court for the Southern District of New York has approved a joint chapter 11 plan that incorporates a settlement between Akin Gump client UMB Bank, NA, Successor Indenture Trustee for $2.2 Billion of Rescap’s Junior Secured Notes and the Official Committee of Unsecured Creditors in the Residential Capital LLC bankruptcy.

The settlement follows a seven-day trial in one of the most significant bankruptcy matters litigated this year, after which Judge Martin Glenn ruled in favor UMB Bank on virtually every significant matter raised in a 14-count complaint brought by the creditors committee. Judge Glenn agreed with Akin Gump’s argument that taxable “original issue discount” (OID) created as a result of a fair value, out of court, debt-for-debt exchange does not create disallowable unmatured interest for purposes of section 502(b)(2) of the Bankruptcy Code. This ruling alone preserved $386 million of UMB Bank’s recovery that had been challenged by the Committee.

The court also ruled in UMB Bank’s favor in the following areas:

  • permitting the Junior Secured Noteholders to establish they were oversecured by aggregating the value of the collateral held by all of the Debtor entities;
  • rejecting the Committee’s claim that hundreds of millions of dollars of liens existing as of the petition date were avoidable as preferential transfers; and
  • rejecting the Committee’s argument that $65 million of assets were outside the scope of our client’s collateral package.

The OID issue was closely watched by the restructuring community, and was a matter of first impression nationwide that could have materially impacted the value of billions of dollars of currently outstanding bonds and all future workout negotiations.

As part of the settlement, the junior Secured Noteholders are scheduled to receive 100 percent of their pre-petition claim and accrued interest ($2.22 billion), plus $125 million of post-petition interest and fees.

The Akin Gump team working on behalf of UMB Bank was led by partners David Zensky and Deborah Newman and counsel Brian Carney.

Founded in 1945, Akin Gump Strauss Hauer & Feld LLP, a leading international law firm, numbers more than 850 lawyers in the United States, Europe, Asia and the Middle East.

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