In Part 1 (February 2, 2005) and Part 2 (February 10, 2005) of this series, we described a litigation in Bankruptcy Court between Radian Asset Assurance Inc. ("Radian"), which insures a class of bonds secured by a pool of securitized mortgage loans, and American Business Credit, Inc. ("ABC"), a chapter 11 debtor that originated and serviced the loans before filing for bankruptcy. Radian commenced the litigation seeking, among other relief, an injunction to compel ABC to complete the transfer of servicing to a back-up servicer. As noted in Part 2, a second insurer, MBIA Insurance Corporation ("MBIA"), and the securitization trustee, JPMorgan Chase Bank, NA ("JPMorgan Chase"), intervened in support of Radian’s motion for an injunction. The parties have now reached a settlement and are seeking Bankruptcy Court approval to finally dispose of the matter.

The Settlement

On February 18, 2005, ABC and its affiliated debtors filed a motion seeking approval of a Settlement Agreement with Radian based upon the following principal terms:

  • ABC will complete the transfer of servicing rights and all related mortgage files to the back-up servicer by March 31, 2005;
  • Radian or the back-up servicer will pay ABC $700,000 to acquire the servicing rights including reimbursement of servicer advances;
  • Radian will withdraw its motion for injunctive relief, without prejudice to the rights of MBIA and JPMorgan Chase; and
  • The parties will exchange mutual general releases on behalf of, and for the benefit of, each other and their respective officers, directors, attorneys, successors and assigns, from all claims under the Pooling and Servicing Agreement and related transactions.

According to pleadings filed in connection with the Settlement Agreement, the parties were prompted to reach a settlement after the Bankruptcy Judge indicated at a hearing on February 7, 2005 that Radian was likely to succeed on the merits of its argument that ABC’s servicing rights expired prior to filing bankruptcy.

A hearing date of March 9, 2005, originally set by the Bankruptcy Court to determine Radian’s motion for an injunction, will now be used to determine ABC’s motion to approve the settlement. The parties anticipate that the Bankruptcy Court will approve the settlement.

Sale of Other Servicing Rights

Separately, on March 1, 2005, ABC’s parent company, American Business Financial Services, Inc. ("ABFS") filed pleadings in the chapter 11 case to sell servicing rights for several other securitized mortgage loan pools through an auction process. ABFS has asked the Bankruptcy Court to approve biddding procedures that would require interested parties to submit offers by March 18, 2005, and participate in an auction on March 23, 2005.

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