UPDATE 2-ResCap exec bonus plan rejected by US judge

Tue Aug 28, 2012 10:28pm EDT

* Judge says payout plan primarily to keep people in jobs

* Execs not incentivized for payouts, judge says

* SEC probing ResCap over underwriting, securities sales

By Jonathan Stempel and Rick Rothacker

Aug 28 (Reuters) - A federal bankruptcy judge on Tuesday rejected Residential Capital LLC's proposal to pay as much as $7 million worth of in centive b onuses to 17 senior executives, saying the payout was primarily retentive -- a reward for staying in their jobs.

U.S. Bankruptcy Judge Martin Glenn said the "key employee incentive plan" proposed by Residential Capital, the mortgage unit of Ally Financial Inc, did not link the bonus payout of $4.1 million to $7 million closely enough to meeting the "challenging financial and operational goals" meant by an incentive plan.

The Manhattan judge also found that 63 percent of the payout could vest upon the sale of major assets, which ResCap believes are worth nearly $4 billion.

ResCap's plan "is primarily retentive in nature," and "appears to attempt an end-run" around federal bankruptcy laws, Glenn concluded.

The judge gave ResCap permission to draft a new plan to address his objections, as well as objections previously voiced by the federal government.

U.S. Trustee Tracy Hope Davis, whose office is a component of the Department of Justice, said in a court filing ResCap's proposed plan "sets a low performance bar" and "does not provide real incentives for the employees to improve their performance, work harder, and achieve results greater than in the past."

ResCap plans to resubmit an incentive plan consistent with the court's decision, after consulting with the U.S. Trustee and other parties, company spokeswoman Susan Fitzpatrick said.

"ResCap believes the plan is necessary to help our company maintain operational stability, transition the business as a going concern, and successfully emerge from the Chapter 11 process having preserved its value for all stakeholders," she said.

The 17 people who would have been eligible for payouts did not include ResCap Chief Executive Thomas Marano.

Glenn's decision reflects the closer scrutiny bankruptcy judges are giving to incentive payouts that critics say have little to do with maximizing the value of bankrupt companies.

Earlier this month, Glenn approved a separate plan to award $10.8 million of incentive payments to 174 other ResCap employees, including people who work in finance, legal, origination, technology and other operations.

ResCap filed for Chapter 11 bankruptcy protection on May 14 to address mortgage-related liabilities. U.S. taxpayers own roughly 74 percent of Ally, which was once part of General Motors Corp. Ally did not file for court protection.

In a separate matter, the U.S. Securities and Exchange Commission said it is formally investigating ResCap for possible misconduct in loan originations and underwriting, and possible fraud in the sale of mortgage-backed securities.

It disclosed that probe in a court filing seeking to force printing company R.R. Donnelley & Sons Co to turn over records it prepared for investment banks that underwrote those securities. Ally and ResCap declined to comment on that matter.

The case is in re: Residential Capital LLC, U.S. Bankruptcy Court, Southern District of New York, No. 12-12020.

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