Bonuses Denied for 17 ResCap Executives

Residential Capital (ResCap) was denied approval from a federal bankruptcy judge to pay its executives bonuses, ""Reuters"":http://in.reuters.com/article/2012/08/28/us-ally-rescap-bonuses-idINBRE87R19520120828 reported Wednesday.

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The key employee incentive plan (KEIP) plan was for bonuses between $4.1 million and $7 million to be distributed to 17 of the top 20 employees from ResCap.

The written ""court opinion"":http://www.nysb.uscourts.gov/ stated the debtors, or ResCap, argued the bonuses would serve to “motivat[e] . . . key talent” during a sales process that has required ResCap employees to assume “responsibilities above their normal duties,” and subject them to “extraordinary stress, pressure, and uncertainty as to the security of their jobs.”

The opinion, which was written by U.S. bankruptcy judge Martin Glenn, also stated that ResCap’s “plan provides that 63% of the KEIP Awards may vest upon the closing of the two sales of the Debtors’ principal assets.”

While the opinion acknowledged that the Chapter 11 bankruptcy and ""proposed asset sale for ResCap"":http://www.themreport.com/articles/rescap-files-chapter-11-with-nationstar-to-acquire-2012-05-14 will increase the work requirements for the executives, the court decision stated that “section 503c requires more than increased responsibilities to justify increased pay for insiders.”

The opinion also stated that the incentive plan is mostly retentive in nature and not incentivizing, and thus is subject to more rigid requirements of section 503c(1).

The opinion stated that under section 503c(1), some aspects of the plan may be permissible, but as a whole, the plan does not pass under the specific section.

In the opinion, the U.S. Trustee further argued that the “Debtors have failed to show that the KEIP is a sound exercise of the Debtors’ business judgment.”

ResCap, which filed for Chapter 11 bankruptcy in May, serves as Ally Financial's mortgage unit.

Recently, ""Reuters"":http://www.reuters.com/article/2012/08/28/us-allyfinancial-sec-idUSBRE87R0L120120828 also reported that Securities and Exchange Commission (SEC) is investigating ResCap for possible mortgage fraud.