RMS Sale in Sight as Creditors Approve New Ditech Bankruptcy Plan

After a federal bankruptcy judge blocked a bankruptcy plan that would’ve allowed Ditech Holding Corporation’s forward and reverse mortgage servicing businesses to be sold free and clear of legal complaints against them, a Consumer Creditors’ Committee that acted as primary opposition to that plan has filed a statement in court approving a newly-amended plan that appears to answer and address many of their original concerns.

This is according to a statement filed with the Federal Bankruptcy Court in the Southern District of New York obtained by RMD.

Filed last week, the written statement by the legal counsel for the Official Committee of Consumer Creditors described the reasons that it did not find the rejected plan satisfactory, rooted primarily in the potential for free and clear sales of the servicing businesses to expunge rights of recoupment for consumers who were negatively impacted by those servicing businesses, including Reverse Mortgage Solutions (RMS), in addition to violating sections of the United States Bankruptcy Code.

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How the new plan satisfies consumer concerns

“As an initial matter, and as a non-negotiable predicate to any settlement, the Consumer Creditors’ Committee demanded that the Plan explicitly protect consumer rights to bring claims to correct, if misstated, any accounts transferred to the Buyers as part of the Sale,” the statement reads. “This protection was essential and was supported by the Bankruptcy Court’s ruling that the Debtors cannot sell assets they do not own and that nothing in the Plan may affect consumer borrowers’ recoupment rights and other defenses.”

The new plan includes a provision that the committee says, “explicitly protects consumer borrowers’ rights to raise issues associated with their accounts and to pursue remedies to correct those accounts if they are misstated or invalid.”

In addition to that provision which will give affected consumers the opportunity to redress a number of borrower concerns after the sales close, the committee also negotiated for Ditech to provide a cash reserve which would maximize the likelihood that any additional claim brought by consumers would be protected under the bankruptcy code. This was present in the previous bankruptcy plan as well, but committee lawyers argued that the amount being proposed by Ditech, $5 million, was not substantial enough.

After more direct collaboration between Ditech and the committee, that amount was increased to $10 million, which was arrived at through a consensus between the parties.

“The Consumer Creditors’ Committee believes that this amount is reasonable and, together with the protective language in the Third Amended Plan, as well as consumer borrowers’ continuing rights to assert recoupment and other defenses, ensures that allowed claims that could be asserted against a purchaser after a non-bankruptcy sale (and are therefore protected under […] the Bankruptcy Code) are satisfied under the Third Amended Plan,” the statement reads.

Negotiated additional consumer protections

Several additional provisions have also been determined more favorable for consumers. Under the newly-amended plan, Ditech has agreed to “reasonably investigate” and correct any alleged errors related to accounts transferred to the buyers of the servicing businesses, while the plan also “explicitly provides” that any pre-existing consumer borrower claims against any third parties or the buyers of the servicing businesses are preserved.

The plan will also provide for the appointment of a special consumer representative, who will be charged with administering the $10 million reserve fund to correct affected borrower accounts.

Overall, the Consumer Creditors’ Committee stands in approval of the newly-amended plan, which their counsel also describes as having the potential to set an important precedent concerning the ways in which a restructuring company must observe the rights of consumers.

“[This amended plan is] the best path forward for consumer borrowers in these cases,” the Committee’s statement says. “The Consumer Creditors’ Committee thus supports the Third Amended Plan and believes that it, along with the principles established in the Memorandum Opinion, set an important precedent that consumer borrower rights must be respected in any restructuring of a consumer-facing company and that these rights are protected under the Bankruptcy Code.”

A hearing on the newly-proposed plan is expected to take place on September 25.

Recent history

This follows a continually unfolding odyssey of legal and financial issues that have afflicted Ditech, and by extension, RMS. Most recently, Ditech stated its intent to create the newly-amended bankruptcy plan after the previous proposal was denied by a federal bankruptcy judge.

Creditors and individual borrowers mounted an effort in court previously in an attempt to halt the sale of Ditech’s forward and reverse mortgage business “free and clear” of existing legal obligations. New Residential, the proposed buyer of forward mortgage servicer Ditech Financial, previously related that Ditech’s legal complications had the possibility of delaying the timetable of the purchase of its forward business, though New Residential’s CEO related confidence that the sale would go through as planned.

The proposed buyer for RMS is Mortgage Assets Management, LLC (MAM). While MAM filed a pleading in support of the previous “free and clear” proposal, presiding bankruptcy Judge James Garrity Jr. wrote in his denial of the plan that the purchase price for RMS will be reduced by $10 million if MAM assumes some of the legal complaints levied against RMS while under Ditech’s ownership.

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