U.S. Opposes ResCap Bonus Plan

The U.S. Government is objecting to a proposal by Residential Capital to pay roughly $33.4 million in annual bonuses to employees.

ResCap, the subprime mortgage unit of Ally Financial that has operated under bankruptcy protection since May, asked the court on Dec. 26 to authorize the company to pay the awards to roughly 3,000 of its 3,926 employees from funds the company has set aside.

"Providing employees with an annual discretionary payment that has historically comprised a portion of their annual compensation is a normal component of conducting business and essential to conducting the debtors' businesses, which rely heavily on consistent leadership, familiarity with complex financial assets, and regular interaction with sophisticated governmental agencies," lawyers for ResCap wrote in papers filed with the U.S. Bankruptcy Court in Manhattan.

"Like most financial services companies, a portion of the overall take-home pay for three out of four of the debtors' employees is delivered at year's end, and for certain of those employees, these year-end awards comprise a significant portion of their annual compensation (between 33% to 58%)," the lawyers added.

The government says that while there is legal support for companies to pay bonuses during a bankruptcy, ResCap's plan to pay bonuses cannot count as ordinary business because the company sought bankruptcy protection with the goal of winding down its operations. "In these cases, the debtors entered bankruptcy with the express intention of selling their servicing platform as well as a legacy portfolio of loans," U.S. Trustee Tracy Hope Davis answered in court papers filed Thursday.

In October, Ocwen Financial (OCN) and its partner, Walter Investment Management, successfully bid to buy ResCap's servicing and origination assets for $3 billion. Berkshire Hathaway (BRK) has agreed to buy ResCap's whole-loan portfolio for $1.5 billion.

A hearing on the pay dispute, which was first reported by Reuters, is scheduled for Jan. 16.