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FHFA can sue Ally despite ResCap bankruptcy, judge rules
August 12, 2013 / 9:45 PM / 4 years ago

FHFA can sue Ally despite ResCap bankruptcy, judge rules

* Automatic stay in bankruptcy cannot be invoked

* FHFA sued Ally over $6 bln securities sold to Freddie Mac

Aug 12 (Reuters) - The Federal Housing Finance Agency may pursue a fraud lawsuit against Ally Financial Inc even though Ally’s Residential Capital LLC mortgage unit is in bankruptcy, a federal judge said on Monday.

Judge Denise Cote, of U.S. District Court in Manhattan, said the lawsuit is unlikely to have an “immediate adverse economic consequence” for ResCap’s estate, such that it would be subject to an automatic stay under the U.S. Bankruptcy Code.

Bankrupt debtors typically invoke the automatic stay to halt litigation, which could interfere with their reorganizations.

Lawyers for ResCap did not immediately respond to requests for comment.

Ally is among 18 defendants that the FHFA sued in 2011 for allegedly making false or misleading statements in documents relating to residential mortgage-backed securities bought by Fannie Mae, Freddie Mac or both.

FHFA, the conservator for both Fannie and Freddie, sued Ally to recoup losses on the sale of more than $6 billion of securities to Freddie Mac between September 2005 and May 2007.

Fourteen of the 15 pending FHFA lawsuits are before Cote. Three others ended in settlements, including a $885 million accord last month with Swiss bank UBS AG.

ResCap had argued to halt the lawsuit against Ally because it shares an insurance policy with Ally; it would be required to indemnify Ally for liabilities; and because claims against ResCap and Ally were “inextricably intertwined.”

Cote noted that ResCap expects to emerge from Chapter 11 protection in October, 15 months before a scheduled January 2015 trial in the FHFA case against Ally.

“The court concludes that ResCap is not suffering ‘immediate adverse economic consequences’ as a result of the Ally action,” she concluded.

Cote’s ruling came three weeks after the 2nd U.S. Circuit Court of Appeals ordered her to make further factual findings.

The case is Residential Capital LLC et al v. Federal Housing Finance Agency, U.S. District Court, Southern District of New York, No. 12-05116.

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