In re Ditech Holding Corp., Case No. 19-10412 (JLG) (Jointly Administered)

• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York
• Citation: 606 B.R. 544
• Docket Number: Case No. 19-10412 (JLG) (Jointly Administered)
• Parties: IN RE DITECH HOLDING CORPORATION, et al., Debtors.
• Decision Date: 28 August 2019

606 B.R. 544

IN RE DITECH HOLDING CORPORATION, et al., Debtors.¹

Case No. 19-10412 (JLG) (Jointly Administered)

United States Bankruptcy Court, S.D. New York.

Signed August 28, 2019

606 B.R. 550

WEIL, GOTSHAL & MANGES LLP, 767 Fifth Avenue, New York, New York 10153, By: Ray C. Schrock, P.C., Sunny Singh, Attorneys for the Debtors

QUINN EMANUEL URQUHART & SULLIVAN LLP, 51 Madison Avenue, 22nd Floor, New York, New York 10010, By: Susheel Kirpalani, Benjamin I. Finestone, Deborah J. Newman, Victor Noskov, Counsel to the Official Committee of Consumer Creditors

WILLIAM K. HARRINGTON, UNITED STATES TRUSTEE, REGION 2, U.S. Federal Office Building, 201 Varick Street, Suite 1006, New York, NY 10014, By: Greg M. Zipes, Benjamin J. Higgins, Trial Attorneys, Office of the United States Trustee

PACHULSKI STANG ZIEHL & JONES LLP, 780 Third Avenue, 34th Floor, New York, NY 10017, By: Robert J. Feinstein, Bradford J. Sandler, Robert B. Orgel, Counsel to the Official Committee of Unsecured Creditors

MEMORANDUM DECISION ON CONFIRMATION OF THE SECOND AMENDED JOINT CHAPTER 11 PLAN OF DITECH HOLDING CORPORATION AND ITS AFFILIATED DEBTORS

HONORABLE JAMES L. GARRITY, JR., UNITED STATES BANKRUPTCY JUDGE:

INTRODUCTION

In 2005, Congress amended section 363 of the Bankruptcy Code to add what is now section 363(o). Under that section, (a) if a person purchases (i) any interest in a consumer credit transaction that is subject to the Truth in Lending Act or (ii) any interest in a consumer credit contract (as defined in section 433.1 of title 16 of the Code of Federal Regulations (January 1, 2004), as amended from time to time), and

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(b) if that interest is purchased through a sale under section 363 of the Bankruptcy Code, then, notwithstanding the "free and clear" language in section 363(f), such person remains subject to all claims and defenses assertible by the consumer that are related to such consumer credit contracts and transactions to the same extent as such person would be subject to such claims and defenses had the person acquired the interest pursuant to a sale not under section 363. In other words, in such a sale transaction, the purchaser does not take the agreements "free and clear" of claims and defenses assertible by the consumer creditors that are parties to those agreements. Instead, the purchaser will be accountable for those claims and defenses to the same extent it would be accountable under applicable nonbankruptcy law. The sale will not "cleanse" the assets of successor liability claims.

Ditech Holding Corporation (f/k/a Walter Investment Management Corp., "Ditech Holding") is the ultimate parent of twenty-six direct and indirect subsidiaries and trust companies, thirteen of which, with Ditech Holding, are chapter 11 debtors herein (collectively, the "Debtors"). The Debtors, together with their non-Debtor subsidiaries (collectively, the "Company"), operate as an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. The Debtors are party to approximately one million agreements with individual consumer creditors (the "Consumer Creditors") that fall within the scope of section 363(o) (hereinafter, the Court will refer to those agreements as the "Consumer Creditor Agreements"). As of the February 27, 2019 (the "Petition Date"), the Debtors were subject to thousands of formal and informal proceedings pending in and out of court in which Consumer Creditors are asserting claims and defenses of types described in section 363(o) (hereinafter, the "Consumer Claims" and "Consumer Defenses," respectfully) in connection with their respective Consumer Creditor Agreements.

The matter before the Court is the Debtors' request for confirmation of the Second Amended Joint Chapter 11 Plan of Ditech Holding Corporation and its Affiliated Debtors (as the same has been or may be amended, modified, supplemented, or restated, the "Second Amended Plan").² The plan is premised upon two going-concern sale transactions (collectively, the "Plan Sale Transactions" and each a "Plan Sale Transaction") of the Debtors' operations: a sale of the forward origination and servicing business (the "Forward Sale") to New Residential Investment Corp. ("NRZ" or the "Forward Buyer") and a sale of the reorganized reverse servicing business (the "Reverse Sale") to Mortgage Assets Management, LLC ("MAM") and SHAP 2018-1, LLC ("SHAP," and together with MAM, the "Reverse Buyer," and, together with the Forward Buyer, the "Buyers"). The plan also incorporates the Global Settlement (as defined below) agreed to by the Debtors, the Official Committee of Unsecured Creditors (the "Unsecured Creditors Committee") and the Consenting Term Lenders.³ The terms of that agreement are reflected in the Second Amended Plan and the Debtors seek approval of the settlement pursuant to

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Rule 9019 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). One aspect of the settlement is that if approved, the Debtors will establish a "Creditor Recovery Trust" for the benefit of unsecured creditors, including Consumer Creditors. Under the settlement, the trust assets available for the sole benefit of the Consumer Creditors consist of cash totaling $5,000,000, less certain fees and expenses (the "$5,000,000 Fund"). The trust will be funded from a carve-out from the Term Lenders' collateral.

The bulk of the assets to be transferred to the Buyers under the Plan Sale Transactions are Consumer Creditor Agreements. The plan calls for the Debtors to sell the assets to the Buyers pursuant to section 1123 of the Bankruptcy Code. The Debtors assert that because they are selling their Consumer Creditor Agreements through the plan, and not pursuant to section 363 of the Bankruptcy Code, and because section 363(o) applies only to "free and clear" sales under section 363(f), they can transfer the agreements to the Buyers "free and clear" of the Consumer Claims and Consumer Defenses. The Office of the United States Trustee (the "U.S. Trustee") appointed an Official Committee of Consumer Creditors (the "Consumer Creditors Committee") to represent the interests of Consumer Creditors herein. The Consumer Creditors Committee, the U.S. Trustee, and numerous other parties in interest filed objections to the Second Amended Plan (collectively, the "Confirmation Objections").⁴ The objecting parties uniformly argue that the Debtors cannot transfer their Consumer Creditor Agreements

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"free and clear" of the Consumer Claims and Consumer Defenses under the plan, without complying with section 363(f) of the Bankruptcy Code and subject to the limitations on "free and clear" transfers in section 363(o). They assert that because the Second Amended Plan does not provide for the sale of those assets pursuant to section 363, the plan violates sections 1129(a)(1)-(3) of the Bankruptcy Code and, as such, cannot be confirmed. Along the same lines, some of the objecting parties contend that the Second Amended Plan does not meet the "best interests" test under section 1129(a)(7), because the Debtors' liquidation analysis (the "Liquidation Analysis") fails to account for the fact that in a chapter 7 liquidation, the Debtors' Consumer Creditor Agreements can only be transferred pursuant to sale under section 363 and, as such, Consumer Creditors will be able to assert Consumer Claims and Consumer Defenses (which they say have significant value) against the purchasers of the assets. Those are not the only objections to confirmation, but they are the principal objections. Moreover, the Consumer Creditors Committee objects to the Global Settlement, on the grounds that the $5,000,000 Fund does not adequately account for the claims of the Consumer Creditors. Thus, they contend that the proposed settlement is not "fair and equitable," and should be rejected by the Court.

In support of their request for confirmation of the Second Amended Plan, and in response and opposition to the Confirmation Objections, the Debtors filed the Debtors' (I) Memorandum of Law In Support of Confirmation of Second Amended Joint Chapter 11 Plan of Ditech Holding Corporation and its Affiliated Debtors and (II) Omnibus Reply to Objections Thereto [ECF No. 1029] (the "Debtors Memorandum"). The Unsecured Creditors Committee, Forward Buyer, Reverse Buyer, and Term Loan Ad Hoc Group (defined below) filed pleadings in support of the Debtors' request that the Court confirm the Second Amended Plan.⁵

The Court conducted an evidentiary hearing on confirmation of the Second Amended Plan (the "Hearing"). At the Hearing, the Debtors offered the testimony of Gerald Lombardo, their Chief Financial Officer, Reid Snellenbarger of Houlihan Lokey Capital, Inc. ("Houlihan"), and James Nelson of Alix Partners LLP ("AlixPartners") in support of confirmation.⁶ In support of its confirmation objection,

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the Consumer Creditors Committee called Varun Wadhawan, Managing Director at Fortress Investment Group (as investment manager of NRZ), as a hostile witness. No other parties offered evidence in support of, or in opposition to, plan confirmation.

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