A U.S. Bankruptcy Court judge on Wednesday approved a $2.1 billion deal between Residential Capital LLC and its parent company Ally Financial Inc. that could pave the way for the former mortgage company to repay creditors.
Ally agreed last month to pay $2.1 billion as part of a settlement plan to resolve potential financial claims stemming from ResCap, its mortgage division which is in bankruptcy proceedings.
ResCap filed for bankruptcy protection in May 2012 under the weight of toxic mortgages. ResCap has been a drain on Ally's finances because it has struggled to make payments on its debt ever since the U.S. housing market collapsed.
The agreement, reached as part of mediation with ResCap and its creditors, releases Ally from any claims that could be brought by ResCap, and all claims held by third parties related to ResCap. The only exceptions: securities claims by the Federal Housing Finance Agency and the Federal Deposit Insurance Corp. in its role as receiver for certain failed banks.
Ally agreed to pay $1.95 billion to the ResCap bankruptcy estate and $150 million in insurance proceeds. The agreement also ensures that Ally will be fully repaid $1.13 billion that it says ResCap owes it. The deal needed court approval to move forward, which it has now gained.
Ally said in a statement Wednesday that it is "highly encouraged by this pivotal court approval."
ResCap is now able to move on to other bankruptcy proceeding issues, such as determining how it will repay creditors.
In February, ResCap completed the sale of a portfolio of mortgage loans to Berkshire Hathaway Inc. Warren Buffett's company won the bankruptcy auction for ResCap's loan portfolio with a $1.5 billion bid last year. ResCap has also sold some assets to Ocwen Loan Servicing LLC and Walter Management Investment Corp. The company said that proceeds from the asset sales totaled more than $4 billion.
The approval of the settlement also allows Ally, formerly known as GMAC, the financial arm of General Motors Co., to return its focus to auto lending.