HONORABLE JAMES L. GARRITY, JR., UNITED STATES BANKRUPTCY JUDGE:
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
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").
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").
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.
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.
The Debtors bear the burden of establishing by a preponderance of the evidence that the Second Amended Plan satisfies the confirmation standards in section 1129(a) of the Bankruptcy Code. As set forth below, the Court holds that the Debtors have failed to satisfy sections 1129(a)(1)-(3) to the extent that the Second Amended Plan purports to limit the Consumer Creditors' ability to assert rights of recoupment against the Buyers. The Court also holds that the Debtors have not demonstrated that the Second Amended Plan satisfies the best interests of the holders of allowed Class 6 claims and as such, they have failed to satisfy section 1129(a)(7) of the Bankruptcy Code. Finally, the Court holds that the Debtors have failed to demonstrate that the Global Settlement is fair and equitable to the holders of allowed Class 6 claims and as such, the Debtors' request to enter into the agreement is denied. For those reasons, the Debtors' request to confirm the Second Amended Plan is denied.
This Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Standing Order of Reference M-431, dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (L).
The Company operates as an independent servicer and originator of mortgage loans and servicer of reverse mortgage loans. For more than 50 years, it has offered a wide array of loans across the credit spectrum for its own portfolio and for government-sponsored enterprises (each a "GSE"), government agencies, third-party securitization trusts, and other credit owners. The Company originates and purchases residential loans through consumer, correspondent and wholesale lending channels that are predominantly sold to GSEs and government entities. See Declaration of Gerald A. Lombardo Pursuant to Rule 1007-2 of Local Bankruptcy Rules for the Southern District of New York [ECF No. 2] (the "Rule 1007 Decl.") ¶ 6. The Company's businesses are comprised of three primary segments: (i) forward mortgage origination; (ii) forward mortgage servicing; and (iii) reverse mortgage servicing. Id. ¶ 24. Ditech Financial LLC ("Ditech Financial") primarily carries out the Company's forward mortgage origination and servicing operations (the "Forward Business"), and Reverse Mortgage Solutions, Inc. ("RMS") primarily carries out the Company's reverse mortgage servicing operations (the "Reverse Business"). Id. ¶¶ 25, 40. More specifically:
In recent years, the Debtors' business has been impacted by significant operational challenges and industry trends that have severely constrained their liquidity and ability to implement much needed operational initiatives. See Rule 1007 Decl. ¶ 7. In November 2017, in an effort to address the burden of the Debtors' overleveraged capital structure, Ditech Holding (then known as "Walter Investment Management Corp.") commenced a prepackaged chapter 11 case in this Court. See In re Walter Investment Management Corp., Case No. 17-13446 (JLG) (Bankr. S.D.N.Y. Nov. 30, 2017) (the "WIMC Chapter 11 Case"). The Company's goal in commencing that case was to deleverage its capital structure sufficiently to enable the reorganized debtor to implement a newly-developed and revamped business plan that called for cost reductions, operational enhancements and the streamlining of its business. Within two months of filing
The Walter Plan provided for (reorganized) Ditech Holding to act as guarantor of certain exit warehouse and servicing advance facilities (collectively, the "Warehouse Facilities") entered into by Ditech Holding's operating subsidiaries as obligors, which facilities funded the Company's forward and reverse mortgage and servicing businesses. See Walter Plan § 5.4. In addition, on the effective date, (i) Ditech Holding, as borrower, entered into an Amended and Restated Credit Facility Agreement (as amended, the "Term Credit Agreement," and the loans thereunder, the "Term Loans"), with certain non-debtor affiliate guarantors named therein, and Credit Suisse AG, Cayman Islands Branch, as administrative agent, and the lender parties thereto (the "Term Lenders"), and (ii) new second lien notes (the "Second Lien Notes," and the holders thereunder, the "Second Lien Noteholders") were issued pursuant to that certain Second Lien Notes Indenture with Ditech Holding as issuer, the subsidiary guarantors named therein, and Wilmington Savings Fund Society, FSB, a national banking association, as trustee and collateral agent. See id. §§ 5.5, 5.6.
Although the Company succeeded in deleveraging its capital structure through the WIMC Chapter 11 Case, the Debtors continued to face liquidity and performance challenges that were more persistent and widespread than they had anticipated. Consequently, the Debtors were not able to implement their new business plan. See Rule 1007 Decl. ¶¶ 55-57. The Debtors' liquidity suffered from, among other things, a decrease in industry-wide mortgage originations, a rise in interest rates, and implementation of new HUD regulations. It also suffered from burdensome interest and amortization obligations on its corporate debt and tightening of rates from its lending counterparties. To address their liquidity issues, the Debtors entered into various new agreements and transactions to generate cash. Id. ¶ 60. Notwithstanding those initiatives, the Debtors faced scheduled amortization payments of approximately $110 million in 2019, leaving them at a significant risk of receiving a going-concern qualification from their auditors, which would have triggered a domino effect of defaults and terminations throughout their corporate debt and working capital facilities. Id. ¶ 61.
In June of 2018, the Company initiated a process to evaluate strategic alternatives to enhance value and engaged Houlihan and Weil, Gotshal & Manges LLP ("Weil") to assist in such process. See id. ¶ 62. The Debtors' efforts were overseen by the board of directors of Ditech Holding (the
In furtherance of that process, the Debtors, with the assistance of their advisors
See Snellenbarger Decl. ¶ 7. Ultimately, ten potential investors executed confidentiality agreements and were granted access to an electronic data room. Id. ¶ 8. The Debtors fixed July 17, 2018, as the deadline for interested investors to submit initial bids for the assets. They received four indications of interest ("IOIs") from certain strategic and financial investors. The Debtors vetted the IOIs with the Special Committee and selected three investors to attend onsite management presentations, which were held during the last week in July of 2018. Id. ¶ 9. In making that selection, the Debtors, with Houlihan's assistance, analyzed, among other things: (a) the structure of the proposed transaction; (b) the form and amounts of consideration offered; and (c) the assets to be acquired. Id. ¶ 8. Throughout August of 2018, the Debtors and their advisors actively engaged with each of the potential investors to clarify and advance their bids, and, on or about August 21, 2018, the Debtor received three second-round IOIs. Id. ¶ 10. Two of those bids were for the sale of certain servicing and reverse assets with subservicing retained by the Debtors (the "Alternative Bids") and one of which was a bid for substantially all of the Debtors' net assets as a going concern (the "All-Company Bid"). Id. In October of 2018, following a month-long evaluation of the IOIs, including discussions with the Special Committee, the Debtors and their advisors concluded that: (i) the Alternative Bids would require additional capital and liquidity to fund the restructured business plan; and (ii) the proposed valuation levels of the All-Company Bid would not exceed the outstanding amount of the Second Lien Notes.
As a result, the Company elected to engage with an ad hoc group of the Second Lien Noteholders (the "Second Lien Ad Hoc Group") to explore the Company's strategic alternatives and solicit input with respect to the sale process. See Rule 1007 Decl. ¶ 66. In December of 2018, the Debtors engaged in parallel discussions with an ad hoc group of the Term Lenders (the "Term Loan Ad Hoc Group") to discuss the Pre-Petition Marketing Process and available options for the Company. Id. ¶ 68. In late December of 2018, the bidder rescinded the All Company Bid. Id. ¶ 69. Shortly thereafter, the Term Loan Ad Hoc Group submitted a proposal for a recapitalization transaction, pursuant to which a portion of the Term Loans would be equitized and incremental liquidity would be provided through, among other things, a new revolving credit facility and a reduction in scheduled amortization payments. Id. ¶ 70.
Pursuant to the Forbearance Agreements, subject to certain terms and conditions, the Notes Forbearing Parties, Credit Agreement Forbearing Parties, and Warehouse Lenders Forbearing Parties agreed to temporarily forbear from the exercise of any rights or remedies they potentially had in respect of the aforementioned events of default or other defaults or events of default arising out of or in connection therewith. See Rule 1007 Decl. ¶ 77. The expiration of the Forbearance Agreements was tied to the maturity date of certain of the Debtors' repurchase loan agreements with the Warehouse Lenders Forbearing Parties. Without a viable recapitalization of the Debtors in hand, the Warehouse Lenders Forbearing Parties were not in a position to commit to a significant extension of their facilities with the Debtors. Since those facilities were critical to the Debtors' ordinary course of business operations, the Debtors focused instead on refinancing those obligations through debtor-in-possession financing in a chapter 11 filing. Id. ¶ 78.
On February 8, 2019, the Company entered into that certain Restructuring Support Agreement (the "RSA") with members of the Term Loan Ad Hoc Group. See ECF No. 146, Ex. B. In substance, in that agreement, those Term Lenders agreed to support the consummation of a reorganization transaction, including one pursuant to which over $800 million in funded debt would be extinguished, leaving a significantly deleveraged reorganized Company wholly owned by the Term Lenders, with $400 million of term loan debt and an appropriately-sized exit working capital facility (the "Reorganization Transaction"). As a toggle to the Reorganization Transaction, the RSA also provided for the continuation of the Company's Pre-Petition Marketing Process whereby any and all bids for the Company or its assets would be evaluated as a precursor to confirmation of any chapter 11 plan of reorganization. Under the RSA, within five business days following the conclusion of the Company's post-bankruptcy marketing and sale process, holders of at least 66 ½% in aggregate principal amount outstanding of the Term Loans could elect to pursue a sale transaction (the "RSA Sale Transaction"), a Reorganization Transaction, or a hybrid of those transactions. The RSA Sale Transaction contemplated that the Debtors would distribute proceeds of such a transaction in accordance with the priority scheme under the Bankruptcy Code. See Rule 1007 Decl. ¶ 15. In contrast, the Reorganization Transaction contemplated the following treatment of creditors and interest holders:
Id. ¶ 14.
On February 11, 2019, each of the Debtors filed a voluntary petition under chapter 11 of the Bankruptcy Code (the "Chapter 11 Cases") to implement a restructuring with the support of the Term Loan Ad Hoc Group. As of the Petition Date, the Debtors' capital structure included:
See id. ¶¶ 48-51.
On February 27, 2019, the U.S. Trustee appointed the Unsecured Creditors Committee pursuant to section 1102 of the Bankruptcy Code to represent the interests of unsecured creditors in the Chapter 11 Cases. See Notice of Appointment of Official Committee of Unsecured Creditors [ECF No. 127]. At present, the members include a consumer creditor (holding a judgment against the Debtors), trade creditors, trustees for mortgage backed securities, and "out of the money" secured creditors.
The Term Lenders and lenders under the DIP Facilities (the "DIP Lenders") conditioned access to the DIP Facilities and use of cash collateral on the Debtors' adherence to certain case milestones contained in the RSA. In entering the Final DIP Order, the Court also approved certain milestones, including that:
Final DIP Order ¶ 28(d). In accordance with that order, and as contemplated in the RSA, the Debtors initiated a marketing and sale process for their businesses, pursuant to section 363 of the Bankruptcy Code (the "Post-Petition Sale Process"). To promote the sale of their businesses, on March 5, 2019, the Debtors filed a motion (the "Sale Procedures Motion") seeking approval of, among other things, certain bidding and auction procedures (the "Bidding Procedures"). See ECF No. 147. Through the proposed Bidding Procedures, the Debtors sought to dictate the process by which interested parties could submit bids to purchase the Debtors' assets and to establish the criteria that the Debtors would apply in determining the highest and best bid, if any, including through the operation of an auction. See Sales Procedures Motion ¶¶ 97-98. To help facilitate the Post-Petition Sale Process, the Debtors sought Court authorization to designate a stalking horse bidder and offer any such bidder a break-up fee and certain other bid protections (collectively, the "Stalking Horse Bid Protections"). See id. ¶ 88. The Debtors relied on section 363 of the Bankruptcy Code in support of that request. Id. ¶ 100 ("Bidding incentives such as these Stalking Horse Bid Protections have become commonplace in connection with sales of assets under section 363 of the Bankruptcy Code."); see also id. ¶ 11 (listing section 363 as one of the statutory bases for the motion). The Debtors also invoked the Amended Sale Guidelines for the Conduct of Asset Sales Established and Adopted by the United States Bankruptcy Court for the Southern District of New York (the "Sale Guidelines") as authority for approval of the Bidding Procedures. See Sale Procedures Motion at ¶ 11. The Sale Guidelines govern "the conduct of asset sales under section 363(b)" and "are intended to supplement the requirements of section 363(b)." Sale Guidelines at 1. The Sale Guidelines specifically reference section 363(o) and provide that
On April 23, 2019, the Court entered an order approving the Bidding Procedures pursuant to, inter alia, section 363 of the Bankruptcy Code [ECF No. 456] (the "Sale Procedures Order"). Among other things, the order set an objection deadline to the sale of the Debtors' assets "free and clear of liens, claims, encumbrances, and other interests pursuant to section 363(f) of the Bankruptcy Code." Id. ¶ 18. Thereafter, over the course of the following months, the Debtors and their advisors engaged in a post-petition marketing process.
On March 5, 2019, in accordance with the milestones in the Final DIP Order, the Debtors filed a chapter 11 plan (the "Initial Plan"),
See Initial Plan, Article V.
Under the Initial Plan, general unsecured creditors were viewed as being "out of the money" and were not projected to receive any recovery on account of their claims.
The Unsecured Creditors Committee also objected to the Disclosure Statement on the grounds that it failed to disclose that section 363(o) of the Bankruptcy Code would apply to any sale transaction under the plan. Id. ¶ 58. The U.S. Trustee made a similar objection. See Objection of the United States Trustee to the Approval of the Disclosure Statement for Joint Chapter 11 Plan for Ditech Holding Corporation and Its Affiliated Debtors [ECF No. 348] ("UST Disclosure Statement Objection") ¶¶ 40-41. The Unsecured Creditors Committee argued that the Initial Plan and "any purchase agreement entered into with a Successful Bidder[ ] must incorporate. . . Section 363(o)." See UCC Disclosure Statement Objection ¶ 58. The U.S. Trustee argued that the plan must "explicitly provide that, in the event of a sale of the Debtors' assets under section 363 of the Bankruptcy Code, the successor in interest to the Debtors must be liable for consumer claims" and that if the plan is implemented through a reorganization the Debtors should incorporate analogous language.
In their reply to these objections, the Debtors announced, in substance, that: (i) any sale of Consumer Creditor Agreements would be conducted under the plan, and not pursuant to section 363 of the Bankruptcy Code; (ii) section 363(o) of the Bankruptcy Code only applies to a sale pursuant to section 363; and, accordingly, (iii) section 363(o) does not apply to the sale of the Consumer Creditors Agreements under the plan. See Debtors' Omnibus Reply to Objections to Debtors' Disclosure Statement [ECF No. 424], Ex. A. The subtext was that the sale of those agreements would be "free and clear" of all Consumer Claims and Consumer Defenses. The Debtors agreed to amend the plan to provide, in substance, that Consumer Claims and Consumer Defenses that: (1) do not result in an award of money damages against the Debtors or Reorganized Debtors; or (2) do not result in attorney's fees, are unaffected by a Reorganization Transaction. See id. ¶¶ 7, 27-28; see also Notice of Filing of Amended Joint Chapter 11 Plan of Ditech Holding Corporation and Its Affiliated Debtors [ECF No. 469] § 4.7.
In an attempt to resolve its objections to the Initial Plan, the Unsecured Creditors Committee entered into negotiations with the Term Loan Ad Hoc Group and the Debtors. According to counsel for the Unsecured Creditors Committee, those negotiations "really focused on economics, not on borrower issues like 363(o)." See Hr'g Tr. at 25:11-13, May 10, 2019 [ECF No. 1080]. Through those negotiations, the parties reached an agreement that resolved the Unencumbered Asset Dispute
See First Amended Plan §§ 4.3-4.6 (describing distributions), 5.2(b) (describing settlement), 10.6 (describing release); see also Unsecured Creditors Committee Response ¶ 3. In all instances, the source of the cash to be paid to Class 4, 5, and 6 creditors was a carve-out from the Term Lenders' collateral. Additionally, by the Global Settlement, the Unsecured Creditors Committee agreed not to object to confirmation of the plan, and to comply with a $300,000 per month cap on their advisors' fees and expenses. See First Amended Plan §§ 5.2(b)(vi), (viii), and (x). The First Amended Plan provides that the GUC Trust is to be administered by a person selected by the Unsecured Creditors Committee (the "GUC Trustee") who—together with the Debtors, the Reorganized Debtors, and Plan Administrator—would have the exclusive authority to object to claims. See First Amended Plan § 7.1.
The Consumer Creditors comprise the most numerous creditor constituency in these cases. As a group, they currently have (and may in the future, assert) claims and defenses against the Debtors arising out of a wide range of alleged misconduct relating to the Debtors' ownership, origination, and/or servicing of mortgages, including, among other things, overstating and failing to correct borrower accounts, improperly servicing borrower accounts in contravention of applicable regulations and statutes, demanding payments barred by confirmed plans or the discharge injunction in consumer borrowers' chapter 13
On May 2, 2019, as the Unsecured Creditors Committee was finalizing the terms of the Global Settlement with the Debtors and Term Lenders, and before the Debtors filed their First Amended Plan, the U.S. Trustee appointed the Consumer Creditors Committee pursuant to section 1102(a) of the Bankruptcy Code to represent the interests of Consumer Creditors in the Chapter 11 Cases. See Notice of Appointment of Official Committee of Consumer Creditors [ECF No. 498].
During this period, the Debtors pressed forward with the Post-Petition Sale Process under the Sale Procedures Order. The Debtors and their advisors solicited eighty-seven potentially interested parties including strategic and financial buyers. To that end: (i) forty-eight parties received copies of non-disclosure agreements ("NDAs"); (ii) thirty-seven executed NDAs and received access to the Debtors' data room; and (iii) thirteen parties submitted proposals. See Snellenbarger Decl. ¶¶ 19, 20. When that process concluded, the only offers for substantially all of the Debtors' Forward and Reverse Businesses were the Forward and Reverse Buyers, respectively.
The Forward Buyer's offer generally contemplates an acquisition of substantially all of the assets of Ditech Holding and Ditech Financial pursuant to an asset purchase agreement (the "Forward APA"). See Notice of Forward Business Stalking Horse Bidder, Ex. A. at 4-7. Under the Forward APA, NRZ has a right to terminate the agreement if the Court does not enter a confirmation order that provides, among other things, that the Forward Sale will be "free and clear" of claims, including claims that are the subject of section 363(o) of the Bankruptcy Code, "to the maximum extent permitted by the Bankruptcy Code." See Forward APA § 8.1(c)(vi).
The Debtors attempted to engage NRZ on a bid that would include NRZ assuming the liabilities associated with the Consumer Creditor Agreements, but NRZ flatly refused to engage in such discussions at any level of consideration. See Snellenbarger Decl. ¶ 24. NRZ unequivocally ended the negotiations, and stated that it was going "pencils down" when the Debtors attempted to solicit a bid that included an assumption of the liabilities associated with the Debtors' consumer claims. Id. NRZ also refused to engage in any discussion regarding a purchase price reduction in exchange for assuming such claims, or establishing an escrow arrangement to provide for the payment of the liabilities associated with those agreements. Id. NRZ agreed to reengage in negotiations only
The Reverse Buyer's offer is for the purchase of RMS's reverse mortgage servicing business pursuant to a stock and asset purchase agreement. See Notice of Reverse Business Stalking Horse Bidder, Ex. C (the "Reverse SAPA"). The Reverse SAPA contemplates a multi-step sale process for the Reverse Sale. In general terms, mortgage loans owned by RMS and related servicing rights will be sold to SHAP (the "Reverse Loan Sale"), and other acquired assets will be sold to MAM (the "Reverse Platform Sale"). Subsequent to those sales, equity in RMS will be transferred to MAM and MAM will re-transfer the assets it acquired in the Reverse Platform Sale back to RMS. See Reverse SAPA § 2.1.
The Reverse Buyer's offer is slightly different from the Forward Buyer's offer with respect to the treatment of the claims of Consumer Creditors. Under the Reverse SAPA, the Reverse Buyer agreed to assume certain claims and defenses relating to servicing errors.
As with NRZ, the Debtors requested that MAM make a bid that included an assumption of the liabilities associated with the Consumer Creditor Agreements. See Snellenbarger Decl. ¶ 28. Unlike NRZ, MAM agreed to engage in such discussions, and after substantial arm's length negotiations, MAM agreed to a $10,000,000 purchase price reduction for potential liabilities arising under those agreements not otherwise discharged by the Court. See id. The Debtors are, however, obligated to pursue in earnest an order of the Court declaring that the transfer of assets to MAM would be free and clear of consumer claims. See id. If, prior to MAM's purchase of substantially all of the reverse business, the Debtors reach a settlement with the Consumer Creditors Committee concerning how potential liabilities arising from consumer claims not otherwise discharged by the Court will be addressed, MAM's purchase price will increase with the number of claims settled, and, in the event that the Debtors settle all consumer claims prior to Mortgage Assets Management's purchase, the purchase price will increase by $750,000. See id.
On July 3, 2019, the Court entered orders which approved the Stalking Horse Bid Protections for the Forward and Reverse Buyers' bids in accordance with the Sale Procedures Order. See ECF Nos. 808, 809. Additionally, on July 10, 2019, the Debtors filed the Notice of (I) Cancellation of Auction, (II) Sale and Confirmation Objection Deadline, and (III)
The Stalking Horse Bidder Notices set July 18, 2019 as the deadline for objections to a proposed Plan Sale Transaction including any objections to the sale of the Debtors' assets free and clear of liens, claims, interests, and encumbrances "pursuant to section 363(f) of the Bankruptcy Code and/or entry of a sale order." See Notice of Forward Stalking Horse Bidder at 4; Notice of Reverse Stalking Horse Bidder at 3. The July 18 deadline corresponds to the objection deadline for plan confirmation objections (the "Objection Deadline"). See Notice of Sale and Confirmation Deadlines [ECF No. 748].
Numerous interested parties timely filed objections to the First Amended Plan and the Sale Transactions. On or about July 30, 2019, the Debtors, the Term Loan Ad Hoc Group, and the Unsecured Creditors Committee modified the Global Settlement to provide for the $5,000,000 Fund for the exclusive benefit of holders of Allowed Consumer Creditor Claims. The modified settlement is reflected in the Second Amended Plan. It calls for the establishment of a "Creditor Recovery Trust" in place of the GUC Trust under the First Amended Plan, and a "Creditor Recovery Trustee" in place of the GUC Trustee. See Second Amended Plan Notice, Ex. B (Incremental Blackline).
In the proposed form of order confirming the Second Amended Plan [ECF No. 1124] (the "Proposed Confirmation Order"), the Debtors address the scope of the "free and clear" aspect of the sales under the Plan Sale Transactions. First, it provides that certain consumer defenses sounding in recoupment or setoff will be preserved and unaffected by the Plan Sale Transactions, provided that they satisfy the following criteria (the "Recoupment Criteria"):
Proposed Confirmation Order, Schedule 1 ¶ 8; id., Schedule 2 ¶ 14. Second, the Proposed Confirmation Order states that neither the Forward Buyer nor the Reverse Buyer will be deemed a "successor" of any of the Debtors for purposes of successor liability pursuant to section 1141(c) of the Bankruptcy Code. Finally, the Proposed Confirmation Order purports to enjoin third parties from asserting "Claims, Interests, Liens, and other encumbrances"
Additionally, under the Second Amended Plan, there is a change in the structure of the Reverse Sale. Specifically, the Second Amended Plan provides that the Reverse Sale will occur in the following sequence: (1) the reorganization of RMS and discharge of all liabilities that are not "Assumed Liabilities," (2) the Reverse Loan Sale to SHAP; and (3) the issuance of 100% of Reorganized RMS's
See Debtors' Memorandum ¶ 3. As noted above, confirmation of the Second Amended Plan, and approval of the Plan Sale Transactions and Global Settlement is supported by the lenders, the Buyers, and the Unsecured Creditors Committee. The Unsecured Creditors Committee recently explained its rationale behind the Global Settlement, as follows:
Unsecured Creditors Committee Response ¶ 2. By contrast, the Consumer Creditors Committee, which did not participate in the negotiations leading to the Global Settlement (as it was appointed after the settlement was reached), and did not agree to the establishment of the $5,000,000 Fund, does not support the Global Settlement.
To confirm the Second Amended Plan, the Debtors must demonstrate, by a preponderance of the evidence, that it satisfies section 1129(a) of the Bankruptcy Code. See In re Breitburn Energy Partners LP, 582 B.R. 321, 349 (Bankr. S.D.N.Y. 2018) ("The proponent of confirmation of a plan must prove by a preponderance of the evidence that it satisfies the relevant requirements of 11 U.S.C.
There are other and additional plan objections which, while significant, do not warrant extensive discussion.
To address the confirmation objections, the Court first will briefly review the confirmation requirements under section 1129(a). In doing so, it will address and resolve certain of the plan objections, although it will reserve discussion of the principal objections until after its brief overview of the confirmation requirements. There is no dispute that the Debtors have satisfied many of those requirements. Before addressing the relevant portions of section 1129(a) the Court finds, as a preliminary matter, that section 1129(a)(6) and sections 1129(a)(14)-(16) are not applicable to the Second Amended Plan. As such, they are not relevant to the Court's analysis.
Under sections 1129(a)(1) and (a)(2), both the plan and the plan proponents must comply with all applicable provisions of the Bankruptcy Code. See 11 U.S.C. § 1129(a)(1), (a)(2). Section 1129(a)(3) requires that a plan be "proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1129(a)(3).
The Consumer Creditors Committee and the "Bartholow Consumers"
Second, the Geary Class Action Plaintiffs (the "GCAPs") have filed an objection to the confirmation of the plan [ECF No. 905] (the "GCAP Plan Objection"). Their objections as they relate to section 1129(a)(1) of the Bankruptcy Code are as follows. First, they argue that Ditech Financial is not entitled to a discharge under section 727 of the Bankruptcy Code. See GCAP Plan Objection at 4-5. This objection is overruled because under the Second Amended Plan Ditech Financial is not receiving a discharge. Next, the GCAPs argue that the Second Amended Plan cannot be confirmed because it does not incorporate the effects of section 363(o). Id. at 4. Matters relating to the application of section 363(o) are separately discussed below. Third, the GCAPs argue that the Second Amended Plan provides for disparate, unfair, and unreasonable classification, in violate of sections 1129(a)(1) and 1122 of the Bankruptcy Code because certain general
Third, several pro se Consumer Creditors filed objections, styled as objections to confirmation, which generally raised issues concerning the payment or status of their respective mortgage claims. See, e.g., Objection of Marsha Chambers [ECF Nos. 264, 518, 628] (contending, inter alia, that the Debtors did not properly schedule her claim); Objection of Darryl Keith Browder [ECF No. 738] (contending that the automatic stay should be lifted to allow his litigation in Iowa against the Debtors to proceed); and Objection of Artist and Elaine Thornton [ECF Nos. 817, 988] (contending that their property may not be sold because it is the subject of ongoing state court litigation). No pro se consumer borrower appeared at the Hearing in support of any objections to confirmation of the Second Amended Plan. In response to these objections, the Debtors say: (i) they are not plan confirmation objections, (ii) these objections/concerns should be addressed through other procedural means (such as a motion for relief from the stay), and/or (iii) the objecting creditors have misunderstood the Sale Transactions and Second Amended Plan and its impact on their individual mortgage loans. The Court agrees and for these reasons, respectfully overrules these objections.
Remaining outstanding objections that relate to sections 1129(a)(1)-(3), specifically as they relate to the Consumer Creditors' recoupment rights, the application of section 363(o) to the Plan Sale Transactions, and the Debtors' good faith in proposing the plan, are discussed below.
Section 1129(a)(4) of the Bankruptcy Code requires that "any payment made or to be made by the proponent ... for services or for costs and expenses in or in connection with the case, or in connection with the plan and incident to the case, has been approved by, or is subject to the approval of, the court as reasonable." 11 U.S.C. § 1129(a)(4). Pursuant to this section, first there must be disclosure of the proposed payment, second the court must approve the reasonableness of payments. See In re Journal Register Co., 407 B.R. 520, 537 (Bankr. S.D.N.Y. 2009) (internal citation omitted); see also In re Resorts Int'l, Inc., 145 B.R. 412, 475-76 (Bankr. D.N.J. 1990) (holding "procedures for the Court's review and ultimate determination of the fees and expenses paid by the Debtors satisfies Section 1129(a)(4)" (internal citation omitted)); In re Texaco Inc., 84 B.R. 893, 907-08 (Bankr. S.D.N.Y. 1988) (same), appeal dismissed, 92 B.R. 38 (S.D.N.Y. 1988). The Second Amended Plan provides that professional fee claims must be approved by this Court pursuant to final fee applications. See Second Amended Plan § 2.2. As such, the Second Amended Plan complies with section 1129(a)(4) of the Bankruptcy Code.
Section 1129(a)(5) of the Bankruptcy Code requires that the plan proponent disclose the identity and affiliations of any individual proposed to serve, after confirmation of the plan, as director, officer, or voting trustee of the debtor, an affiliate of the debtor participating in a joint plan
Section 1129(a)(7) contains the so-called "best interests" test. Whether the Second Amended Plan meets that standard is hotly contested. The Court considers that matter below.
Section 1129(a)(8) of the Bankruptcy Code provides that: "[w]ith respect to each class of claims or interests—
11 U.S.C. § 1129(a)(8). The holders of Claims in Class 1 (Priority Non-Tax Claims), Class 2 (Other Secured Claims), Class 7 (Intercompany Claims), and Class 8 (Intercompany Interests) are not impaired under the Second Amended Plan and are, therefore, conclusively presumed to have accepted the Second Amended Plan. See 11 U.S.C. § 1126(f). Class 3 (Term Loan Claims) is impaired but have voted to accept the plan by holders of more than one-half in number and with claims in excess of two-thirds in amount. See id. § 1126(c). Accordingly, section 1129(a)(8) is met as to those classes. However, Class 4 (Second Lien Notes Claims), Class 5 (General Unsecured Claims), Class 6 (Consumer Creditor Claims), Class 9 (Parent Equity Interests), and Class 10 (Subordinated Securities Claims) are also impaired classes (with estimated recoveries of 0%), and they are deemed to have rejected the Second Amended Plan, and their votes were not solicited. See id. § 1126(g). Therefore, the Second Amended Plan fails to satisfy section 1129(a)(8) of the Bankruptcy Code.
Notwithstanding the failure to meet subsection (a)(8), the Court may still confirm the Second Amended Plan under the "cram down" provisions of section 1129(b) if "all of the applicable requirements of subsection (a) are met," and the Second Amended Plan "does not discriminate unfairly, and is fair and equitable[.]" See 11 U.S.C. § 1129(b)(1)-(2). The cram down requirements of section 1129(b) are discussed below.
Section 1129(a)(9) of the Bankruptcy Code
Under section 1129(a)(10) "[i]f a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan [must] accept[] the plan," (excluding any acceptance of the plan by any insider). See 11 U.S.C. § 1129(a)(10). Class 3 (Term Loan Claims) is the only impaired class entitled to vote on the Second Amended Plan. The class voted to accept the plan. Accordingly, section 1129(a)(10) is satisfied.
Section 1129(a)(11) of the Bankruptcy Code contains the "feasibility test." It requires that confirmation is not likely to be followed by liquidation of the debtor, unless such liquidation is proposed in the plan. 11 U.S.C. § 1129(a)(11). Thus, in applying the test in these cases, the Court must determine whether the Second Amended Plan may be implemented and whether it has a reasonable likelihood of success. See United States v. Energy Res. Co., 495 U.S. 545, 549, 110 S.Ct. 2139, 109 L.Ed.2d 580 (1990); Kane v. Johns-Manville Corp. (In re Johns-Manville Corp.), 843 F.2d 636, 649 (2d Cir. 1988). The Bartholow Consumers contend that the plan is not feasible because it is unlikely that the Debtors will be able to make the distributions
Section 1129(a)(12) of the Bankruptcy Code requires the payment of "[a]ll fees payable under section 1930 of title 28, as determined by the court at the hearing on confirmation of the plan[.]" 11 U.S.C. § 1129(a)(12). Under section 507, such fees are afforded priority as administrative expenses. See 11 U.S.C. § 507(a)(2). The Second Amended Plan provides for the payment of such fees, together with interest (if any), pursuant to section 31 U.S.C. § 3717, on the effective date and thereafter as may be required. See Second Amended Plan § 12.1. As such, the Second Amended Plan complies with section 1129(a)(12).
Section 1129(a)(13) requires that a plan, provides for the continuation after its effective date of payment of all retiree benefits ... at the level established pursuant to subsection (e)(1)(B) or (g) of section 1114 of this title, at any time prior to confirmation of the plan, for the duration of the period the debtor has obligated itself to provide such benefits.
11 U.S.C. § 1129(a)(13). The Second Amended Plan provides for the continuation of all existing retiree benefits after the effective date. See Second Amended Plan § 5.9(e). Accordingly, it satisfies the requirements of section 1129(a)(13) of the Bankruptcy Code.
To summarize, the Debtors have met their burden of establishing that the plan satisfies (or need not satisfy) the confirmation requirements of sections 1129(a)(4)-(6) and (a)(9)-(16). The Court now focuses on its discussion on the balance of the plan objections and, in doing so, whether the Second Amended Plan satisfies the confirmation requirements in sections 1129(a)(1)-(3), and (7).
Sections 1129(a)(1), (2), and (3) of the Bankruptcy Code provide in substance, respectively, that for a chapter 11 plan to be confirmed, (i) the plan must comply with the applicable provisions title 11, (ii) the proponent must comply with the applicable provisions of title 11, and (iii) the plan must be proposed by means not forbidden by law. 11 U.S.C. § 1129(a)(1)-(3). Under section 1129(a)(1) of the Bankruptcy Code, a plan must comply with the applicable provisions of the Bankruptcy Code. The legislative history of section 1129(a)(1) explains that this provision encompasses the requirements of sections 1122 and 1123 of the Bankruptcy Code governing classification of claims and contents of the plan, respectively. See H.R. Rep. No. 95-595, at 412 (1977); S. Rep. No. 95-989, at 126 (1978); see also In re Johns-Manville Corp., 843 F.2d at 648-49;
Courts have denied confirmation pursuant to sections 1129(a)(1)-(2), where the plan, or plan proponent's conduct, is contrary to provisions of title 11 not found in chapter 11. See e.g., Resorts Int'l v. Lowenschuss (In re Lowenschuss), 67 F.3d 1394, 1401-02 (9th Cir. 1995) (finding that section 1129(a)(1) requires that plan comply with section 524(e) of Bankruptcy Code); In re Beyond.com Corp., 289 B.R. 138, 143 (Bankr. N.D. Cal. 2003) (finding proposed plan that dramatically reduced notice to creditors otherwise applicable under other provisions of the Bankruptcy Code did not comply with section 1129(a)(1)); In re Wermelskirchen, 163 B.R. 793, 796 (Bankr. N. D. Ohio 1994) (finding section 521 of Bankruptcy Code applicable provision for purposes of 1129(a)(2)). For purposes of this Memorandum Decision and Order, the Court will assume that section 1129(a)(1)-(2) requires compliance with all "applicable provisions" of the Bankruptcy Code, regardless of whether they appear in chapter 11 or elsewhere in the Bankruptcy Code.
The plan proponent bears the burden of establishing "good faith" under section 1129(a)(3). See In re TCI 2 Holdings, LLC, 428 B.R. 117, 142 (Bankr. D. N.J. 2010) (citation omitted). "Good faith" is not defined in the Bankruptcy Code. In evaluating whether a plan is proposed in "good faith" under section 1129(a)(3), courts consider whether "there is a likelihood that the plan will achieve a result consistent with the standards prescribed under the Code." In re Best Products Co., Inc., 168 B.R. 35, 72 (Bankr. S.D.N.Y. 1994) (quoting In re Texaco, Inc., 84 B.R. at 907); see also In re Combustion Engineering, Inc., 391 F.3d 190, 247 (3d Cir. 2004) ("`[F]or purposes of determining good faith under section 1129(a)(3) ... the important point of inquiry is the plan itself and whether such a plan will fairly achieve a result consistent with the objectives and purposes of the Bankruptcy Code.'") (citations omitted). Chapter 11 policies, or objectives, include, "preserving going concerns and maximizing property available to satisfy creditors .... [G]iving debtors a fresh start in life, discourag[ing] debtor misconduct, the expeditious liquidation and distribution of the bankruptcy estate to its creditors, and achieving fundamental fairness and justice." See In re American Capital Equip., LLC, 688 F.3d 145, 156-57 (3d Cir. 2012) (citations and quotation marks omitted).
If a plan is proposed with "honesty and good intentions" and with "a basis for expecting that a reorganization can be effected" the plan will satisfy section 1129(a)(3). See In re Johns-Manville Corp., 843 F.2d at 649 (citations omitted). By contrast, a plan that, for instance, is proposed for ulterior motives not aligned with the Bankruptcy Code, will fail to satisfy section 1129(a)(3). See In re Koelbl, 751 F.2d 137, 139 (2d Cir. 1984) (citing,
With these standards established, the Court will consider the following objections concerning section 1129(a)(1)-(3):
It will address the objections in this order.
The Consumer Creditors Committee and others assert that neither the Second Amended Plan nor the Debtors have complied with the "applicable provisions" of title 11, and the Second Amended Plan is being "proposed by means ... forbidden by law," because it fails to comply with section 363(o)'s proscription against the stripping of Consumer Claims from the Consumer Creditor Agreements subject to the Plan Sale Transactions. The Debtors deny that there is merit to the objection because they are free to sell the Consumer Creditor Agreements free and clear of Consumer Claims, Consumer Defenses and any other claims or interests not expressly assumed by the Forward and Reverse Buyers pursuant to sections 1123(b)(4) and 1141(c) of the Bankruptcy Code. The Court considers those matters below.
Sections 1123 and 363 are the two provisions of the Bankruptcy Code that address the sale of assets during a bankruptcy case. See In re New 118th Inc., 398 B.R. 791, 794 (Bankr. S.D.N.Y. 2009) ("A trustee may sell property prior to confirmation, 11 U.S.C. § 363, or through a plan.") (citing 11 U.S.C. §§ 1123(a)(5)(D), 1123(b)(4)). Section 1123 applies only in chapter 11 cases. See 11 U.S.C. § 103(g) ("[S]ubchapters I, II and III of chapter 11 of this title apply only in a case under such chapter."). It regulates the "contents" of a plan of reorganization. See 11 U.S.C. § 1123; see also In re Federal-Mogul, Global, Inc., 684 F.3d 355, 367 (3d Cir. 2012) ("Section 1123 of the Bankruptcy Code establishes the contents of a plan of reorganization under Chapter 11."). To that end, it identifies both mandatory and permissive plan provisions. Section 1123(a) contains the Bankruptcy Code's mandatory plan provisions. See 11 U.S.C. § 1123(a) (a plan "shall"). As relevant, section 1123(a)(5) directs that a plan "provide adequate means for the plan's implementation."
Because, by definition, sales under section 1123 can only be effectuated under a chapter 11 plan, a debtor seeking to sell assets pursuant to section 1123 cannot obtain approval of the sale without confirming the plan. To do so, the debtor must satisfy broad noticing requirements, obtain approval of the disclosure statement, and prove that the plan meets the detailed "confirmation requirements" set forth in section 1129 of the Bankruptcy Code. See 11 U.S.C. §§ 1123 (specifying required contents and permissive contents of a plan), 1125 (setting forth requirements for disclosure of the plan and solicitation thereof), 1128 (requiring the court hold a hearing on confirmation of plan and providing parties in interest may object), 1129 (setting forth requirements for confirmation). If the debtor satisfies all of the conditions to confirmation and the court confirms the plan, section 1141 states, in relevant part, that "except as otherwise provided in the plan or in the order confirming the plan, after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor." See 11 U.S.C. § 1141(c).
Section 363(b) of the Bankruptcy Code is the other section of the Bankruptcy Code which authorizes a debtor to sell its property. It authorizes a trustee or debtor in possession, "after notice and a hearing," to "use, sell or lease, other than in the ordinary course of business, property of the estate[.]" 11 U.S.C. § 363(b)(1). Section 363 applies in cases under chapters 7, 11, 12 and 13 of the Bankruptcy Code. See 11 U.S.C. § 103(a). To obtain court approval of such a sale, the debtor or trustee must prove that the sale is an exercise of its sound business judgment. Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983). See also In re Advanced Contracting Solutions, LLC, 582 B.R. 285, 310 (Bankr. S.D.N.Y. 2018). A sale pursuant to section 363(b) may be made "free and clear of any interest in such property" if the trustee or debtor satisfies any of the conditions set forth in section 363(f).
Id. at 156. Other courts have similarly recognized that claims arising from property can constitute "interests" for purposes of section 363(f). See, e.g., In re Trans World Airlines, Inc., 322 F.3d 283, 290 (3d Cir. 2003) (finding employment discrimination and travel voucher claims were "interests" because they were connected to or arose from the assets sold); In re Leckie Smokeless Coal Co., 99 F.3d 573, 582 (4th Cir. 1996) (concluding that claim-holders' rights to collect premiums from a purchaser of coal assets under the Coal Industry Retiree Health Benefit Act of 1992 were "interests" under section 363(f) because the claims were "grounded, at least in part, in the fact that those very assets have been employed for coal mining purposes"); In re Old Carco, LLC, 538 B.R. 674, 684-85 (Bankr. S.D.N.Y. 2015) (holding that manufacturer's experience rating was an "interest" because it arose from the assets and continuation of the business); In re Mundy Ranch, Inc., 484 B.R. 416, 421-23 (Bankr. D. N.M. 2012) (finding that a partition claim was an "interest" under section 363(f)).
Section 363(o) of the Bankruptcy Code applies in asset sales under section 363. It provides an exception to the application of section 363(f), and states that:
See 11 U.S.C. § 363(o). It was enacted in 2005 in an effort to address what Senator Schumer described in 2001 as "a new problem" with predatory lenders. 147 CONG. REC. 2018, at *2032 (March 8, 2001). He described the problem as follows:
Pursuant to the Plan Sale Transactions under the Second Amended Plan, the Debtors seek to sell interests in Consumer Creditor Agreements free and clear of Consumer Claims.
The parties dispute whether section 363(o) applies to an asset sale under section 1123 of the Bankruptcy Code. One aspect of that dispute centers on the interpretation of the language of the statute and, specifically, clauses
11 U.S.C. § 363(o) (emphasis added). The Debtors interpret the triggering clause "and if such interest is purchased through a sale under this section," to mean: "and if such interest is purchased through a sale under section [363]." Debtors Memorandum ¶ 178; see also Debtors Presentation for Confirmation of the Second Amended Chapter 11 Plan of Ditech Holding Corporation and its Affiliated Debtors at 14.
to mean:
See Hr'g Tr. at 32:1-9, August 8, 2019 [ECF No. 1155] (the "Aug. 8 Tr."). At bottom, the Debtors read section 363(o) to apply only to a pre-plan sale under section 363. See id. They submit that section 363(o) limits the scope of section 363(f)'s "free and clear" relief so that the purchaser takes an interest in a Consumer Creditor Agreement as if section 363(f) had no effect to cleanse the Consumer Creditor Agreement of Consumer Claims and Consumer Defenses, leaving the purchaser open to potential future litigation to the same extent as if the sale was an ordinary course, non-bankruptcy sale. See id. The Debtors concede that this reading of the statute provides Consumer Creditors with different rights in a pre-plan section 363 sale and a plan sale but argue that the legislative history of section 363(o) and the absence of cross-references elsewhere in the Bankruptcy Code evidences Congress's
The Consumer Creditors Committee, the U.S. Trustee and others offer a different construction of the statute. First, they argue that section 363(o)'s triggering phrase
Second, the Consumer Creditors Committee interprets the section 363(o) effect clause:
to mean:
See Aug. 8 Tr. at 79:11-80:3. The committee argues that this clause demonstrates Congress's understanding that section 363(f) is the only provision that may authorize free and clear sales in bankruptcy. See Sur-Reply ¶¶ 4-5. It reasons that if a plan sale could provide for free and clear treatment of Consumer Claims without invoking section 363(f), the purchaser in a pre-plan section 363(f) sale could take assets subject to Consumer Claims "to the same extent" as the free and clear plan sale. The committee therefore argues the Debtors' interpretation, that plan sales can be effectuated free and clear without implicating section 363(f), cannot be correct because it would have the effect of rendering section 363(o)'s effect a nullity in pre-plan section 363(f) sales. Id. ¶ 5. Like the Debtors, the committee argues that the legislative history of section 363(o) supports their interpretation.
The objecting parties also advance several independent arguments as to why section 363(o) should apply here:
The Court considers those matters below.
A chapter 11 plan is a contract between the debtor and its creditors. See Lawski v. Frontier Ins. Grp., LLC (In re Frontier Insurance Group, Inc.), 585 B.R. 685, 693 (Bankr. S.D.N.Y. 2018) ("It is often stated that a chapter 11 plan is a new contract between the debtor and its creditors[.]"). Through a chapter 11 plan, a debtor can resolve disputed claims and rights to property. See id. (noting that "the chapter 11 plan is the crucible by which the parties' claims and rights in property dealt with under the plan are transformed and governed post-confirmation[.]"). That is one way that a plan sale differs from an asset sale under section 363 because the former can provide for the distribution of sale proceeds among creditors, while, as a general rule, the latter cannot. See Clyde Bergemann, Inc. v. The Babcock & Wilcox Co. (In re The Babcock & Wilcox Co.), 250 F.3d 955, 960 (5th Cir. 2001) ("[T]he provisions of § 363 ... do not allow a debtor to gut the bankruptcy estate before reorganization or to change the fundamental nature of the estate's assets in such a way that limits a future reorganization plan." (citing In re Braniff Airways, Inc., 700 F.2d 935, 940 (5th Cir. 1983)); In re Gulf Coast Oil Corp., 404 B.R. 407, 414 (Bankr. S.D. Tex. 2009). Given the breadth of relief available to a debtor under a chapter 11 plan, the Bankruptcy Code mandates, among other things, that a debtor satisfy broad noticing requirements, obtain approval of disclosure statement, and propose a plan that complies with the many provisions in section 1129 of the Bankruptcy Code before it is confirmed. As the Gulf Coast Oil Corp. court observed, this process is more fulsome than that involved in obtaining leave to conduct an asset sale under section 363:
Id. at 415 (citations omitted). As such, a sale effectuated pursuant to a plan can provide benefits such as the sale free and clear of successor liability and the authority to transfer free and clear of a lien. Id. (citing 11 U.S.C. § 1123(a)(5)(D); George W. Kuney, Misinterpreting Bankruptcy Code 363(f) and Undermining the Chapter 11 Process, 76 Am. Bankr. L.J. 235 (2002).
While the Consumer Creditors Committee submits that section 1123(a)(5)(D) arguably only provides that a plan may transfer assets free and clear of liens, not claims arising from property,
George W. Kuney, Misinterpreting Bankruptcy Code Section 363(f) and Undermining the Chapter 11 Process, 76 Am. Bankr. L.J. 235, 236-37 (2002). See also In re Gen. Motors Corp., 407 B.R. 463, 486-87 (Bankr. S.D.N.Y. 2009) ("[S]ection 1123 of the Code ... provides, as one of the things that a plan may do: provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests.... But neither section 363 nor section 1123(b)(4) provides that resort to 1123(b)(4) is the only way by which all or substantially all of the assets can be sold in a chapter 11 case.") enforcement denied, In re Motors Liquidation Co., 529 B.R. 510 (Bankr. S.D.N.Y. 2015) aff'd in part and rev'd in part on other grounds, In re Motors Liquidation Co., 829 F.3d 135, 152 (2d Cir. 2016) ("The Code permits a debtor to sell substantially all of its assets to a successor corporation through a section 363 sale, outside of the normal reorganization process.").
Accordingly, while the Second Amended Plan will need to withstand scrutiny under the standards of section 1129 before it is confirmed and the free and clear sales are effectuated, it does not follow that section 1141(c) cannot be invoked to provide that the property dealt with by the plan upon confirmation will be free and clear of claims. As such, and as further discussed below, complying with section 363(f) is not necessary to confirm a plan that provides for a sale free and clear of claims upon confirmation.
The Court next considers whether section 363(o) mandates that it apply to sales of Consumer Creditor Agreements not under section 363(f). It is well established that, "when the statute's language is plain, the sole function of the courts—at least where the disposition required
The legislative history supports that reading of the statute. On March 8, 2001, Senator Schumer proposed the following amendment to section 363 (proposed as subsection (p)), as part of the Bankruptcy Reform Act of 2001:
147 CONG. REC. 2018, at *2031 (March 8, 2001). Thus, as proposed, the legislation applied to the transfer "of any interest in a consumer credit transaction that is subject to the Truth in Lending Act (15 U.S.C. 1601 et seq.), or a consumer credit transaction as defined by the Federal Trade Commission Preservation of Claims Trade Regulation" inside and outside of a plan of reorganization, and made the asset transfer "subject to all claims and defenses that the consumer could have asserted against the debtor." In support of the proposed amendment, Senator Schumer stated:
Id. Five days later the Senate took the provision up for further debate. Senator Hatch sought unanimous consent to call up this proposed provision and stated that "there is expected to be an amendment to his amendment by Senator [Phil] GRAMM." 147 CONG. REC. 2184, at *2189-90 (March 13, 2001). Senator Gramm's proposed amendment (i) removed the language "under a plan of reorganization," (ii) narrowed the scope of section 363(o) to a sale under section 363, and (iii) limited potential successor liability to such claims and defenses available to the consumer
Id. at *2191. Senator Gramm's modification therefore represents a significant scaling back of Senator Schumer's amendment by ensuring section 363(o) does not apply to a transfer pursuant to a plan and does not automatically subject purchasers to all claims that could otherwise be asserted against the debtor. Still, Senator Gramm opposed the amendment. He argued the broad original language would make mortgage assets unmarketable in bankruptcy to the prejudice of the debtor's creditor body. See id. ("Here is the problem in a nutshell: This will destroy the secondary market for the assets of bankruptcy companies .... The people who are going to suffer are the creditors who won't be able to sell the assets of the company because there will be a potential cloud against those assets."); see also id. at *2192 ("What we would do if this amendment passed is we would literally cloud the title and the marketability of every financial asset of every financial company in America"). He also voiced a concern that "people who may have .... imagined or made-up grievances against the company" would be encouraged to sue a purchaser of section 363(o) assets. See id. Following Senator Gramm's remarks, Senator Schumer again rose to defend the amendment as modified. He explained his understanding of the amendment as follows:
See id. Before passage, the proposed legislation was slightly modified from Senator Gramm's version of section 363(o) as follows. The below prior language:
changed to the current version:
The Consumer Creditors Committee argues that this change is clear evidence of Congress's understanding that section 363(f) is the only authority pursuant to which a debtor can conduct a free and clear bankruptcy sale—whether pre-plan or pursuant to a plan. See Sur-Reply ¶¶ 4-5. It argues that if a free and clear sale
It is sensible to interpret section 363(o)'s triggering and effect clauses together in this way. If a purchaser acquires an interest in a Consumer Creditor Agreement under a section 363 sale, it takes the agreement subject to Consumer Claims and Consumer Defenses to the same extent as if section 363(f) did not take effect in the section 363 sale. If a purchaser acquires an interest in a Consumer Creditor Agreement not under a section 363 sale, section 363(o) does not apply. In this way, the Court avoids interpreting section 363(o) in a way that would lead to the bizarre result that the Consumer Creditors Committee contends must follow if plan sales can be free and clear without being authorized under section 363. See In re Federal-Mogul, Global, Inc., 402 B.R. 625, 642 (Bankr. D. Del. 2009) (noting "`[a] basic tenet of statutory construction is that courts should interpret a law to avoid bizarre or absurd results'" (quoting In re Kaiser Aluminum Corp., 456 F.3d 328, 338 (3d Cir. 2006))). Bolstering the Court's interpretation of section 363(o) is the fact that neither section 363(f) nor section 363(o) appear anywhere else in the Bankruptcy Code. Section 363 does not appear, as section 365 does, in section 1123. See 11 U.S.C. § 1123(b)(2) ("subject to section 365"). Nor does it appear, as does section 363(k), in the Bankruptcy Code's "cram-down" provisions, which provide substantive rights to impaired creditors. See 11 U.S.C. § 1129(b)(2); id. § 1129(b)(2)(A)(ii) ("subject to section 363(k)"). Finally, section 1141 does not limit the free and clear effect that a confirmed plan has on property dealt with under the plan by the limitations of section 363(o). This all suggests that Congress intended to limit section 363(o)'s effect to pre-plan sales, not chapter 11 reorganizations, including those effectuated through plan sales. See Lorillard v. Pons, 434 U.S. 575, 580-81, 98 S.Ct. 866, 55 L.Ed.2d 40 (1978) ("Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change"); see also Cervantes-Ascencio v. U.S. I.N.S., 326 F.3d 83 (2d. Cir. 2003) (finding no authority, "absent
While it is true that chapter 3 of the Bankruptcy Code applies in chapter 11 cases—see 11 U.S.C. § 103(a)—it does not follow that all such provisions are applicable in every chapter 11 case. Here, where a debtor proposes a sale pursuant to a plan, the sale is not under section 363 and, by its plain terms, section 363(f) is inapplicable.
The Court disagrees that, in this case, section 363(f) and section 363(o) are "applicable provisions" of title 11. The Consumer Creditors Committee cites a number of cases and court orders in support of its contention that section 363(f) is applicable to plan sales. The Court accords little weight to them, as they are distinguishable.
It is not inconsistent with the Bankruptcy Code that the Debtors have broader powers to reorganize and affect consumer creditor rights pursuant to a plan sale than under a section 363 sale. Such an outcome is consistent with the notion that the plan sale process provides a more fulsome process than section 363 sales. See In re Smurfit-Stone, 2010 WL 2403793 at *26 ("A sale pursuant to a plan of reorganization frankly provides greater protections for affected parties than a sale pursuant to section 363 of the Bankruptcy Code .... An asset sale pursuant to a plan of reorganization provides for a heightened degree of notice and disclosure surrounding all aspects of the sale, and allows the affected creditors to vote to accept or reject the plan, including the asset sale."). It is also consistent with the fact that confirmed plans, as opposed to section 363 sales, allow debtors to reorganize and affect claims in a multitude of ways that a section 363 sale cannot. See, e.g., 11 U.S.C. § 1123(a)(5)(B), (C), (J) (generally providing for consolidation, merger, and recapitalization transactions); id. § 1146(a) (exempting chapter 11 plan sales from transfer taxes); 1141(c)-(d) (providing for discharge of claims against the debtor and free and clear treatment of property dealt with under the plan). In any case, the Court believes its job is to interpret the Bankruptcy Code as Congress wrote it; not to substitute its policy views for Congress's. See Florida Dep't of
In this regard, the NYAG and U.S. Government's assertions that if section 363(o) does not apply it will interfere with government enforcement power or state law programs designed to protect consumers are unavailing. Moreover, state law programs designed to assist consumer borrowers and fight predatory lending will still exist despite this Court's ruling on section 363(o). This determination is not intended to interfere with or abridge the rights of governmental units to pursue enforcement actions in furtherance of their policy and regulatory powers.
The U.S. Trustee and others argue that because the Debtors invoked section 363 of the Bankruptcy Code in connection with running the Post-Petition Sale Process, they cannot contend now that section 363(o) does not apply to the plan sales. See U.S. Trustee Objection at 17-18; see also NYAG Objection ¶ 19. In support thereof, they say that the Debtors, "asked the Court to approve a milestone setting a section 363 process in motion," which the Court approved, and then relied on section 363 to seek approval of the Bidding Procedures that set a deadline for objecting to a sale of the Debtors' assets free and clear of claims under section 363(f) of the Bankruptcy Code. See U.S. Trustee Objection at 17-18. Moreover, they note that: (i) the Debtors cited section 363 as the sole basis for the approval of the Stalking Horse Bid Protections; (ii) the plan provides for credit bidding rights under section 363(k) of the Bankruptcy Code; and (iii) prior versions of the plan referenced section 363 as a basis for finding that the Plan constitutes a good faith compromise of claims and compromises. Id. The U.S. Trustee asserts that "[t]he Debtors cannot cherry-pick the subsections of section 363 that suit their purposes and argue that the rest do not apply because they are pursuing a plan sale. The Court should not permit the Debtors to sidestep Congressional intent to protect consumers after having already conducted a section 363 marketing and bidding process." See id. at 18. The Consumer Creditors Committee similarly observes that the Debtors have invoked section 363 at various times in connection with running the Post-petition Sale Process. See Consumer Creditor Committee Objection ¶¶ 26-36. Moreover, the committee points out that in other cases, including cases in which Weil has acted as debtor's counsel, plan sale orders have incorporated certain provisions of section 363, including section 363(f). Id. ¶¶ 43-45. Accordingly, the committee contends that "even [the Debtors] know that the sale must be subject
The Court is not persuaded by these arguments. First, under the facts of the case, the Court does not find that the Debtors so embraced section 363 during the Post-Petition Sale Process that they have agreed that the assets must be sold pursuant to a section 363 sale. To be sure, the Debtors utilized section 363 in the early stage of the case, but firmly embraced the plan sale process when they filed the First Amended Plan. Moreover, the Court attaches no weight to the fact that Debtors' counsel has invoked section 363 in other plan sale transactions. Second, the U.S. Trustee effectively abandoned any argument that the Debtors should be estopped from arguing that the Plan Sale Transactions are not sales under section 363 of the Bankruptcy Code at the Hearing. See Aug. 8 Tr. at 130:21-132:10. More specifically, counsel clarified that the U.S. Trustee's position is that because "debtors have increasingly used section 363 to do things that used to only be done under Chapter 11 plans .... [W]e think it makes sense to interpret Section 363 and Section 1141 in a way that's consistent to ... the extent the statute allows that." Id. at 132:4-10. The Court reads section 363(o) of the Bankruptcy Code to mean that if an interest in a Consumer Creditor Agreement is purchased in a sale under section 363, section 363(o) takes effect. See 11 U.S.C. § 363(o) ("and if such interest is purchased through a sale under this section"). It does not take effect when the interest is purchased through a sale under section 1123 pursuant to a plan. The Debtors' reliance on section 363 in these cases as it relates to the Post-Petition Sale Process is irrelevant to the resolution of the issues relating to application of section 363(o) to the Plan Sale Transactions.
The U.S. Trustee, Consumer Creditors Committee, and Bartholow Consumers, among others, contend that the Second Amended Plan fails to satisfy sections 1129(a)(1), (2) and (3) of the Bankruptcy Code because it is silent as to the treatment of consumer borrower defenses including setoff and recoupment. To that end, they maintain that the Debtors are improperly trying to sell the assets free and clear of Consumer Creditors' rights that cannot be expunged through bankruptcy, such as defenses and affirmative defenses, including their rights to setoff
They rely on two legal principles in support of those contentions. First, to the extent that a consumer borrower's mortgage loan account is overstated, the misstated
Second, defenses to enforcement, such as recoupment, cannot be extinguished in bankruptcy—whether through a sale or discharged under a plan—because they are neither "claims" nor "debts," nor "interests." See, e.g., Folger Adam Sec., Inc. v. DeMatteis/MacGregor, JV, 209 F.3d 252, 261 (3d Cir. 2000) (holding that "a right of recoupment is a defense and not an interest and therefore is not extinguished by a § 363(f) sale"); SAIF Corp. v. Harmon (In re Harmon), 188 B.R. 421 (1995) ("Because recoupment only reduces a debt as opposed to constituting an independent basis for a debt, it is not a claim in bankruptcy, and is therefore unaffected by the debtor's discharge." (citing Brown v. General Motors Corp., 152 B.R. 935 (W.D. Wis. 1993)); Hispanic Indep. Television Sales, LLC v. Kaza Azteca Am. Inc., No. 10 Civ. 932, 2012 WL 1079959, at *5 (S.D.N.Y. Mar. 30, 2012) ("[S]ales pursuant to section 363(f) do not extinguish affirmative defenses. As recoupment is a defense, it is not extinguished by a section 363(f) sale.") (citations omitted); Daewoo Int'l (Am.) Corp. Creditor Trust v. SSTS Am. Corp., No. 02 Civ. 9629, 2003 U.S. Dist. LEXIS 9802, at *17 (S.D.N.Y. June 9, 2003) (same); Hispanic Indep. Television Sales, LLC v. Una Vez Mas, LP, 110 A.D.3d 474, 474, 973 N.Y.S.2d 60 (1st Dep't 2013) (same).
The parties resolved the objections as they relate to setoff rights. The Debtors assert, and the Consumer Creditors concede, that the Plan Sale Transactions will not extinguish rights of setoff under section 553 of the Bankruptcy Code as against the Debtors, but will extinguish them as against the Forward Buyer and Reverse Buyer. See Folger Adam Security, Inc. v. DeMatteis/MacGregor, JV, 209 F.3d at 263 (finding that in a "free and clear" sale, setoff rights against property may be extinguished as to the purchaser); In re Trans World Airlines, Inc., 275 B.R. 712, 718 (Bankr. D. Del. 2002) (holding that "to the extent MBNA had any setoff right against the account receivable sold, it has been preserved as a claim against the Debtor and the proceeds of the sale."). To resolve the objections relating to the preservation of setoffs, the Debtors have amended the Proposed Confirmation Order to clarify that confirmation of the Second Amended Plan will not preclude or otherwise affect the rights of any creditor to effectuate, subject to advanced Bankruptcy Court approval, a setoff pursuant to common law or otherwise in accordance
Proposed Confirmation Order ¶ 36. The Court understands that the proposed language is acceptable to the Consumer Creditors Committee and other objecting parties, to the extent it addresses the parties' objections and concerns as to setoff rights.
The parties have not resolved their disputes relating to the application of the doctrine of recoupment to the Consumer Creditor Agreements being transferred under the Plan Sale Transactions. Recoupment is not defined in the Bankruptcy Code, but "comes into bankruptcy law through common law[.]". In re Malinowski, 156 F.3d at 133; New York State Elec. and Gas Corp. v. McMahon (In re McMahon), 129 F.3d 93, 95 (2d Cir. 1997) ("While the Bankruptcy Code does not mention recoupment explicitly, bankruptcy law does recognize the recoupment doctrine."); Megafoods Stores, Inc. v. Flagstaff Realty Assocs. (In re Flagstaff Realty Assoc.), 60 F.3d 1031, 1035 (3d Cir. 1995) (explaining that the "common law doctrine [of recoupment] is not codified in the Bankruptcy Code, but has been established through decisional law."). Generally, the common law doctrine of recoupment refers to a "defendant's right, in the same action, to reduce or eliminate the plaintiff's claim, either because the plaintiff has not complied with some cross-obligation of the contract on which he or she sues or because the plaintiff has violated some legal duty in the making or performance of that contract." 20 Am. Jur. 2d Counterclaim, Recoupment, Etc. § 5. However, the precise scope and elements of a claim for recoupment are determined under state law, or applicable federal statute. See, e.g., In re McMahon, 129 F.3d at 96 ("Recoupment and setoff rights are determined by nonbankruptcy law, which ordinarily is state law." (quoting In re Village Craftsman, Inc., 160 B.R. 740, 746 (Bankr. D.N.J. 1993))); Kaza Azteca Am. Inc., 2012 WL 1079959, at *5 ("In determining recoupment and set off rights, we apply non-bankruptcy law." (quoting Westinghouse Credit Corp. v. D'Urso, 278 F.3d 138, 146 (2d Cir. 2002))). Cf. Orr and Hollis v. Ameriquest Mortg. Co. (In re Hollis), No. 07-22759, 2009 WL 3030125, at *3 (Bankr. D.N.J. Sept. 17, 2009) (allowing debtor's damages claim under the Truth in Lending Act (TILA) as an affirmative recoupment defense to the secured lender's claim).
The Debtors do not deny that they cannot convey assets to the Buyers that they do not own, and that the Consumer Creditors' defenses to enforcement—including rights of recoupment—cannot be extinguished through the Plan Sale Transactions. However, they argue that the Consumer Creditors Committee is trying to
To address the objections concerning the preservation of recoupment rights, the Debtors note that the Reverse Agreement already provides that the Reverse Buyer "will assume claims brought by consumer creditors related to servicing errors by the Debtors," and that the Forward Buyer has agreed to include an additional proviso in the Proposed Confirmation Order to preserve recoupment rights. The relevant language is as follows:
Proposed Confirmation Order (Schedule 2), ¶ 14.
The Consumer Creditors Committee maintains that, rather than address its objection, the Debtors' proposed "fix" severely limits recoupment rights without authority. It says that, if adopted, the proposed language will preclude consumer borrowers from bringing actions, including class actions to redress systematic overcharging, to recover refunds, or to challenge fraudulent loans. It also argues that there is no basis for restricting the definition of recoupment based upon the terms of a buyer's servicing agreements with other third parties, particularly where consumer borrowers are not parties to such agreements. See Sur-Reply ¶¶ 18-19.
In arguing that the Court should distinguish between defensive and affirmative recoupment, the Debtors ignore the fact that many courts have allowed recoupment to be brought "offensively" by, for example, the commencement of an action, or in seeking monetary damages and statutory fees and penalties. See Una Vez Mas, LP, 110 A.D.3d at 475, 973 N.Y.S.2d 60 (concluding that defendant's breach of contract claim against debtor constituted a recoupment defense against buyer of accounts receivable); In re Flagstaff Realty Assocs., 60 F.3d at 1034-35 (finding that tenant could recoup amounts owed to the debtor-landlord where tenant was on the "offensive" by commencing declaratory adversary proceeding against debtor); In re Hollis, No. 07-22759, 2009 WL 3030125, at *3 (Bankr. D.N.J. Sept. 17, 2009) (explaining that the filing of a bankruptcy petition truncates the foreclosure process and likens a creditor's proof of claim to the commencement of an action) (citations omitted); Wentz v. Saxon Mortg. (In re Wentz), 393 B.R. 545, 560 (Bankr. S.D. Ohio 2008) (finding that plaintiff's causes of action against lender based on violations of TILA, Home Ownership and Equity Protection Act (HOEPA) and Real Estate Settlement Procedures Act (RESPA), which included claims for attorneys' fees and costs, were in the nature of recoupment claims). Further, some federal statutes also specifically provide that certain claims thereunder sound in the nature of recoupment. For example, section 1640(k) of the Truth in Lending Act (i.e., Defense to Foreclosure) specifically provides that:
15 U.S.C. § 1640(k)(1).
Moreover, while it is true that some courts narrowly construe recoupment rights in bankruptcy cases, the vast majority of those types of cases address the issue of recoupment as a claim asserted against the debtor's estate during the pendency of the bankruptcy case. See, e.g., City of New York v. Matamoros and Vargas and Preuss, No. 18-11713, 605 B.R. 600, 609-12, 2019 WL 3543865, at *5-7 (Bankr. S.D.N.Y. Aug. 2, 2019) (holding, inter alia, that the city's affirmative claim for recoupment against the debtor could not be maintained because "recoupment is in the nature of a defense," and the debtor had not asserted any claims or demands against the city); In re McMahon, 129 F.3d at 96-97 (concluding, notwithstanding narrow construction of recoupment, that, in the special context of public utilities, NYSEG's post-petition application of a pre-petition deposit to debtor's pre-petition arrears was recoupment). Courts narrowly construe recoupment rights during a bankruptcy case because (i) the automatic stay does not bar the exercise of those rights, and (ii) the exercise of those rights may elevate the payment and priority of one creditor's claim over the claims of similarly situated creditors. See, e.g., In re Mirant Corp., 331 B.R. at 696 (noting that rejection claims should be treated the same as other general unsecured claims, but that "[r]ecoupment operates as an exception to the statutory priorities of claims in a bankruptcy case and, thus, is narrowly construed"); In re Public Serv. Co. of New Hampshire, 107 B.R. 441, 444 (Bankr. D.N.H. 1989) (noting that recoupment "should be narrowly construed as an exception to the general rule against preferring one creditor over another." (citing Elec. Metal Prod., Inc. v. Honeywell, Inc., 95 B.R. 768, 770 (D. Colo. 1989))). See also In re Malinowski, 156 F.3d at 133 ("The distinction between set-off and recoupment is crucial because set-off claims are subject to the automatic stay of 11 U.S.C. § 362 and are substantively limited by the Bankruptcy Code, 11 U.S.C. § 553 (1994)"). But those concerns are not relevant in this case. The Court is not being asked to authorize the consumer borrowers to take actions during these Chapter 11 Cases that could alter priority rights among similarly situated creditors. The issue is whether the Court should limit the consumer borrowers' recoupment rights post-confirmation under agreements to be transferred to the Buyers.
The doctrine of recoupment is a creature of non-bankruptcy law, and a defense — sometimes asserted affirmatively — that does not give rise to a claim or debt that is dischargeable in bankruptcy, or a right to demand payment. Recoupment varies widely under different states and non-bankruptcy law. The Debtors do business in multiple states, and no party has identified the scope of non-bankruptcy law relevant to the application of the doctrine of recoupment in these cases. The Court finds no basis for limiting application of the doctrine as requested by the Debtors in the proposed "additional proviso" to the Proposed Confirmation Order. Among other things, the Debtors purport to (i) limit recoupment to "defensive" recoupment, (ii) limit the application of the doctrine to individual customers, (iii) limit the assertion of defenses arising out of loan originations, and (iv) limit the assertion of defenses based upon the Forward Buyer's agreements with third parties. The Court sees no basis for that relief. Rather, the Court finds that the Proposed Confirmation Order should leave undisturbed
Section 1129(a)(3) of the Bankruptcy Code mandates that a plan "be proposed in good faith and not by any means forbidden by law." 11 U.S.C. § 1129(a)(3). The Bartholow Consumers and the Greenwald Consumers object to confirmation on the grounds that, among other things, the Second Amended Plan fails to meet that standard.
First, they assert that, because Black Knight Financial Solutions, LLC, who "developed and manages the servicing software which causes and/or contributes to innumerable servicing errors" is the chair of the Unsecured Creditors Committee, and the GUC Trustee will be selected by the Unsecured Creditors Committee, "the Court cannot be assured that the proposed GUC Trustee—however well-intentioned—will be willing and sufficiently independent to fully explore, evaluate, and object to trade creditors' claims." See Bartholow Objection ¶¶ 7-16. Moreover, the Bartholow Consumers allege that the structure of the GUC Trust will not address their request for declaratory and injunctive relief, which is integral to their claims and their goal of resolving servicing and accounting errors. Id. ¶¶ 20-21, 25. They argue it also could result in the GUC Trust's assets being exhausted prior to allowance of consumer claims. Id. ¶ 23.
Second, the Bartholow Consumers allege that the plan is intentionally vague and intended to confuse and overwhelm creditors because it: (i) proposes the assumption and assignment of certain executory contracts, but does not explain why such contracts are to be assumed and assigned nor why the cure costs are justified; (ii) does not disclose any details about the insurance policies maintained by the Debtors nor what claims may be covered by available insurance; and (iii) is generally overly complex. See Bartholow Objection ¶¶ 29-31.
Third, the Bartholow Consumers argue that the Second Amended Plan proposes to assume and assign contracts without establishing the executory nature of such contracts or whether the cure payments are reasonable, thereby elevating certain prepetition claims over others in a biased and unfair manner. See Bartholow Objection ¶¶ 43-48.
Finally, at the Hearing, Mr. Bartholow asserted that many of his clients had obtained chapter 13 discharge injunctions, but insinuated that the Debtors continued to attempt collection of discharged debt. See Aug. 8 Tr. at 141:18-142-24. He argued that confirming the Second Amended Plan
Mr. Greenwald argued at the Hearing that the Second Amended Plan cannot be confirmed for similar reasons. He argued:
See id. at 160:11-21.
The Court has considered each of the matters raised by the Bartholow and Greenwald Consumers and finds that they are unsupported by the record and do not bar confirmation of the Second Amended Plan on the grounds that it fails to meet the "good faith" standards under section 1129(a)(3). Rather, the Court finds that the Debtors have established "good faith" for purposes of section 1129(a)(3).
The record shows that the Debtors commenced these cases with the legitimate chapter 11 goal of effectuating a reorganization that would either: (1) preserve the Debtors' businesses as a going concern through a Reorganization Transaction, or
After the cases were filed, the Debtors engaged in dialogue with their various constituencies, which led to modifications of their plan. Of relevant note, the Debtors made the following changes which affected Consumer Creditors. First, following objections received from the U.S. Trustee and the Unsecured Creditors Committee concerning the application of section 363(o), the Debtors revised the plan to provide that "Borrower Non-Discharged Claims," which inter alia include claims and defenses subject to section 363(o) of the Bankruptcy Code, that would not be discharged in a Reorganization Transaction. See Notice of Filing of Amended Joint Chapter 11 Plan of Ditech Holding Corporation and its Affiliated Debtors [ECF No. 469] § 4.7, Schedule 1. Second, to resolve the Unencumbered Assets Dispute with the Unsecured Creditors Committee, the Debtors agreed to the Global Settlement. That settlement was incorporated in the First Amended Plan and, among other things, provides for a recovery for junior creditors in the event of a Plan Sale Transaction. See Unsecured Creditors Committee Response ¶ 3. Third, the Debtors made changes to the First Amended Plan in response to certain objections to the Plan Sale Transactions by: (1) modifying the Global Settlement to provide for a $5,000,000 Fund for the benefit of Consumer Creditor Claims (Class 6); and (2) clarifying that the Plan Sale Transactions would not be free and clear of certain defenses meeting the Recoupment Criteria, which the Debtors recognize cannot be discharged by the Bankruptcy Code. See Second Amended Plan §§ 1.36, 4.6; Proposed Confirmation Order, Schedule 1 ¶ 8; id., Schedule 2 ¶ 14.
The record also shows that the Debtors conducted a robust marketing and sale process for their businesses. Prepetition, the Debtors and their advisors spent nine months conducting the Pre-Petition Marketing Process, which was overseen by the Special Committee. See Snellenbarger Decl. ¶ 6. Through that process, the Debtors solicited interest from potential purchasers and granted such purchasers access to an electronic data room containing significant diligence regarding the Debtors' businesses. See id. ¶ 7. The Debtors' CFO testified that the process "was one of the most extensive I've seen in my career." See Aug. 7 Tr. at 98:20-21. The Pre-Petition Marketing Process yielded the three Alternative Bids and the All-Company Bid, which the Debtors pursued before it was withdrawn. See Snellenbarger Decl. ¶¶ 11, ¶ 14.
In the third week of May, approximately one month before the Debtors' deadline to obtain approval of stalking horse agreements and a few days after the Court's decision denying the Debtors' motion to disband the Consumer Creditors Committee, the Debtors first made a request to the Forward Buyer to assume consumer claims. See Aug. 7 Tr. at 124:15-125-10; 128:4-8. Up until that point, the Forward Buyer made clear it was unwilling to enter into a transaction that would not provide for "free and clear" treatment as it relates to claims. See id. at 125:17-20; see also id. at 156:6-10 ([Mr. Wadhawan]: "[E]arlier on in the prepetition process, as early as when the first turn on the term sheet came, we had the words "free and clear" in our markup to the company and it's always been there that way.").
Id.
Given the testimony adduced at the Hearing, it is unsurprising that when the Debtors made the request that the Forward Buyer take assets subject to potential consumer claims and defenses, the Forward Buyer went "pencils down." See Aug. 7 Tr. at 130:17-131:6. Mr. Snellenbarger testified that the Debtors were "disappointed" about that, but decided to pursue the Forward Buyer's offer because it contemplated: (i) taking the Forward Business as a going concern, (ii) hiring a significant amount of the Debtors' employees, (iii) assuming various locations and leases, and (iv) the Forward Buyer being viewed favorably by the GSEs. See id. at 137:9-17. All this led the Debtors to conclude the Forward Buyer's offer added substantial value to the estate as a whole. See id.
The Debtors had better success with the Reverse Buyer as it relates to Consumer Claims. Specifically, in response to the
Against this record, the Court concludes that the Debtors have conducted these cases and proposed the Second Amended Plan with good intentions that comport with the goals of the Bankruptcy Code. The uncontroverted evidence in the record demonstrates that the Debtors, with the advice of their professionals, undertook a transparent and robust marketing and sale process, pursuant to the Sale Procedures Order. It is uncontroverted that the Debtors engaged in arms'-length negotiations with the Forward and Reverse Buyers over the terms of the Plan Sale Transactions, including the possible assumption of Consumer Creditor Claims by the respective Buyers. See Snellenbarger Decl. ¶¶ 16-31. Moreover, throughout these cases the Debtors have been transparent with all constituencies and proposed the Second Amended Plan following several modifications to address various stakeholders' concerns. That plan provides for the distribution of Net Cash Proceeds in accordance with the Bankruptcy Code's priority scheme and incorporates the Global Settlement which allows for junior stakeholders to recover as well.
While the Court does take note that, in connection with the sale process, the Debtors only raised the consumer claim issue in late May 2019, any contention that such conduct evidences bad faith is unpersuasive. The evidence shows that the Debtors sought the assumption of consumer claims, but ultimately was constrained by the Buyers' demands. The Debtors moved forward with the Plan Sale Transactions and the Second Amended Plan because they believe it provides substantial value to the estate as a whole. Thus, based on the Debtors' conduct in these cases and the application of relevant law, the Court finds that the Second Amended Plan has been proposed "in good faith and not by any means forbidden by law" for purposes of section 1129(a)(3) of the Bankruptcy Code.
The Bartholow Consumers' contentions do not support a contrary finding. First, the Court notes that the Unsecured Creditors Committee has selected META Advisors LLC, as the GUC Trustee. See Notice of Selection of Creditor Recovery Trustee [ECF No. 1085]. There is no evidence that the trustee was selected at the behest of the Debtors, or that the trustee will administer the GUC Trust with a bias against consumer creditors or in favor of trade creditors.
Second, there is no merit to the Bartholow Consumers' assertion that the plan provisions are intentionally vague in order
Finally, the Court does not agree with the Bartholow Consumers and Greenwald Consumers to the extent they argue that the Debtors have acted in bad faith by proposing a plan that strips consumers of their rights for the benefit of others. Rather, the Court finds that the Debtors are advancing what they believe to be a reasonable interpretation of the Bankruptcy Code to consummate a plan they believe is value-maximizing.
Section 1129(a)(7) "is one of the cornerstones of chapter 11 practice." 7 COLLIER ON BANKRUPTCY ¶ 1129.02[7] 1129-33 (16th ed. 2014). It states that with respect to "each impaired class of claims,"
11 U.S.C. § 1129(a)(7)(A). The Debtors bear the burden of demonstrating that the Second Amended Plan satisfies the "best interest" test. See, e.g., In re GSC, Inc., 453 B.R. 132, 179 n.66 (Bankr. S.D.N.Y. 2011) ("The proponents of a plan bear the burden of proof under section 1129(a)(7)." (citing ACC Bondholder Grp. v. Adelphia Commc'ns Corp. (In re Adelphia Commc'ns Corp.), 361 B.R. 337, 366 (S.D.N.Y. 2007))); In re Jennifer Convertibles, Inc., 447 B.R. 713, 724 (Bankr. S.D.N.Y. 2011) (noting that the burden to satisfy section 1129(a)(7) is on the debtors). That test "focuses on individual creditors rather than classes of claims . . . [and] requires that each holder of a claim or interest either accept the plan or receive or retain property having a present value, as of the effective date of the plan, not less than the amount such holder would receive or retain if the debtor were liquidated under Chapter 7." In re Drexel Burnham Lambert Grp., Inc., 138 B.R. 723, 761 (Bankr. S.D.N.Y. 1992) (internal citation omitted). See also In re Leslie Fay Cos., Inc., 207 B.R. 764, 787 (Bankr. S.D.N.Y. 1997) (stating that in applying the best interests test, the court "must find that each [dissenting] creditor will receive or retain value that is not less than the amount he [or she] would receive if the
The Consumer Creditors hold Class 6 Consumer Creditor Claims. See Second Amended Plan § 4.6. Under the Second Amended Plan, the holders of Allowed Consumer Creditor Claims are entitled to receive on account of their claims (i) their pro rata shares of the Net Cash Proceeds (as defined in the Second Amended Plan) from the Plan Sale Transactions (after senior claims are paid in full); and (ii) subject to the approval and consummation of the Global Settlement, their pro rata share of the $5,000,000 Fund, which will be made available as a carveout from the Term Lenders' collateral (the "Consumer Creditor Recovery Trust Assets"). See id. §§ 1.36, 1.37, 4.6(b)(i).
The Debtors submitted a Liquidation Analysis prepared by AlixPartners, its financial advisor, utilizing values as of a March 31, 2019 measurement date, comparing the estimated recoveries under the plan to a hypothetical chapter 7 liquidation.
The Consumer Creditors Committee disputes that assertion. It contends that in a hypothetical chapter 7 case, the trustee could sell the Consumer Creditor Agreements only pursuant to section 363(f), and as such, the Class 6 Consumer Creditor Claimants would retain the benefits of section 363(o). It asserts that those claimants necessarily will "receive or retain" more on account of their claims in a hypothetical chapter 7 liquidation than under the Second Amended Plan because they would retain their right to assert Consumer Claims (which they say have value) against the purchasers of the Consumer Creditor Agreements. The committee contends that the Liquidation Analysis is flawed because it does not account for the value of the Consumer Claims or address how those claims would be treated in a chapter 7 liquidation scenario.
The Consumer Creditors Committee is correct that section 363 provides the only mechanism to sell property free and
Still, the Debtors maintain that they have satisfied the best interest test, and that the Court should overrule the committee's objection. First, the Debtors contend that the Consumer Creditors Committee is improperly using the best interests test to bootstrap the application of section 363(o) into the Second Amended Plan. They contend that since the draftsmen intentionally removed language from section 363(o) that would have made it applicable to asset sales under a chapter 11 plan, it cannot be the case that Congress intended that section 363(o) would apply indirectly, through the best interests of creditors test, to restrict free and clear sales under chapter 11 plans. See Debtors Memorandum ¶ 219. They maintain that if, as the Consumer Creditors Committee contends, the Debtors must include the section 363(o) claims in their liquidation analysis (and presumably in full), they will tilt the best interests scale in favor of liquidation and render meaningless Congress's determination not to impute section 363(o) into chapter 11 plans. See id. ¶ 220. They say, in that light, the only way a chapter 11 plan could provide better relief to creditors than a liquidation would be if the plan accounts for section 363(o) claims—but that doing so then leaves them with no option: either the Debtors must retain section 363(o) claims or risk having their plan denied. Id.
There is no merit to that assertion. To satisfy the best interest test, the Debtors must prove that the holders of Class 6 claims will "receive or retain property having a present value, as of the effective date of the plan, not less than the amount such holder would receive or retain if the debtor were liquidated under Chapter 7." In re Drexel Burnham Lambert Grp., Inc., 138 B.R. at 761. It is undisputed that if the Debtors were liquidated under chapter 7, sections 363(f) and (o) would apply to a sale of the Consumer Creditor Agreements. The Court must apply those provisions in determining whether the Debtors have met their burden under section
437 B.R. at 144. Although the Court has determined that sections 363(f) and (o) are not applicable to the Plan Sale Transactions, those provisions plainly are applicable in a hypothetical liquidation under chapter 7, and thus, are relevant to the Court's determination of whether the Debtors have met their burden under section 1129(a)(7). That is so, even if, as the Debtors contend, application of those provisions will tilt the analysis in favor of liquidation. There is no merit to the Debtors' "boot strapping" objection.
Next, the Debtors contend that even if sections 363(f) and (o) are applicable to the best interests analysis, they are not required to account for the value of the Consumer Claims in meeting that test. The Debtors say that when considering whether a creditor will receive or retain as much on account of its claim under the plan as it would in a liquidation under
As support for these arguments, the Debtors urge the Court to look to the application of the best interest test in chapter 13 cases. That test is contained in section 1325(a)(4) of the Bankruptcy Code and provides that a court shall confirm a plan if:
11 U.S.C. § 1325(a)(4). The Debtors correctly note that in applying the best interests test in chapter 13 cases, courts do not account for claims against non-debtor third parties. Id. ¶¶ 214-215. In some of the cases cited by the Debtors, the courts held that the unliquidated value of a legal right to sue on a non-dischargeable debt should not be included in the "amount that would be paid" under chapter 7, within the meaning of section 1325(a)(4).
Without limitation, that is what Judge Bernstein found in Quigley, 437 B.R. 102, 147 (Bankr. S.D.N.Y. 2010). In that case, an ad hoc committee of tort victims and the U.S. Trustee objected to the confirmation of the debtor's reorganization plan. Id. at 124. Quigley was a manufacturer of refractory products, some of which contained asbestos. Those products gave rise to hundreds of thousands of personal injury asbestos-based claims against it, which totaled approximately 411,100 by the date Quigley commenced its chapter 11 case in 2004. See id. at 112. Approximately 280,000 of those personal injury claims were also derivatively asserted against Pfizer,
Over the years, Pfizer and Quigley tried unsuccessfully to stem the tide of the asbestos litigation, and in 2003, Pfizer devised a global strategy to do so. See id. at 113. The strategy called for Quigley to commence a chapter 11 petition, and for Pfizer to enter into settlement agreements as to its own liabilities with asbestos personal injury claimants, that were contingent on the confirmation of a Quigley chapter 11 plan, which included a section 524(g) injunction in Pfizer's favor. As of the commencement of Quigley's chapter 11 case, Pfizer was party to approximately seventy settlement agreements that resolved the claims of approximately 193,000 asbestos tort claimants (the "Settling Claimants") for the aggregate sum of approximately $500 million. See id. at 115. The United States Trustee appointed a statutory committee of unsecured creditors, which consisted of seven individual asbestos claimants, four of whom were Settling Claimants. Three groups of asbestos claimants that did not reach settlement agreements with Pfizer (the "Non-Settling Claimants"), joined together to form the ad hoc committee of tort claimants (the "AHC").
As contemplated, Quigley's chapter 11 plan called for the creation of an asbestos trust fund (the "Trust") under section 524(g), with an injunction channeling all asbestos claims to the Trust and barring asbestos claimants from seeking further recovery on account of those claims, against Quigley, Reorganized Quigley or any other protected party, including Pfizer. See Quigley, 437 B.R. at 121. In exchange for such protection, Pfizer agreed
The AHC objected to confirmation, arguing, among other things, that the liquidation analysis was flawed, and the plan did not meet the best interests test under section 1129(a)(7). See id. at 123-24. The AHC challenged that analysis on the grounds that it did not account for the fact that in a chapter 7 liquidation, Pfizer would not get a release, the Non-Settling Claimants would retain the right to pursue their derivative claims against Pfizer, and that those derivative claims had value. Judge Bernstein agreed. He reasoned that by the plain terms of the statue, in conducting the best interest analysis, the court must consider both the distributions under the plan and in a hypothetical chapter 7 case, and the "value of the property that each dissenting creditor will retain under the plan and in the hypothetical chapter 7." Id. at 145-46. The evidence showed that between 1985 and the 2004 petition date, Pfizer paid over $1.2 billion in insurance proceeds to settle asbestos claims against itself and Quigley. Overall, 23% of these settlement costs were allocated to Pfizer and 77% were allocated to Quigley. Id. at 134. Based on that analysis, the Court concluded that the estimated recovery for non-settling claimants' derivative suits against Pfizer was 23% based on Pfizer's settlement history. On that basis, the Court found that Quigley's plan did not satisfy the best interest test under section 1129(a)(7).
The Debtors contend that Quigley is distinguishable and not applicable in this case because it involved derivative claims against a co-obligor, which is not the case here. Instead, the Debtors urge this Court to be guided by In re Plant Insulation Co., 469 B.R. 843 (Bankr. N.D. Cal. 2012), aff'd 485 B.R. 203 (N.D. Cal. 2012), rev'd on other grounds, 734 F.3d 900 (9th Cir. 2013) and aff'd 544 F. App'x 669 (9th Cir. 2013). In that case, the debtor was in the business of selling, installing, and repairing asbestos-containing products. Facing thousands of asbestos-related lawsuits that would likely outstrip its insurance coverage, it filed a voluntary petition for relief under chapter 11. 469 B.R. at 848. Ultimately, the debtor sought to confirm a chapter 11 plan that contained, as its principal component, an injunction that channeled all asbestos injury claims to a fund established pursuant to section 524(g) of the Bankruptcy Code. The debtor's insurers were encouraged to make lump sum contributions to the trust in exchange for protection from future liability for asbestos claims, including claims for equitable contribution that could be (and in some instances were) asserted by other insurers. See id. at 853. However, not all insurers agreed to settle their claims and contribute to the 524(g) trust fund. Instead, those non-settling insurers voted to reject the plan and objected to plan confirmation on the grounds that the plan did not meet the best interest test under section 1129(a)(7) as to them. See id. at 886. They contended that because the channeling injunction under section 524(g) applies only in chapter 11 cases, in a hypothetical chapter 7 liquidation, they would retain their equitable contribution claims against the settling insurers. They argued that once those claims were accounted for, the liquidation analysis showed that they would receive a greater
The Plant Insulation court rejected that argument and held that the chapter 7 test did not apply to the non-settling insurers' equitable contribution claims because the test applies only to claims that creditors can assert against the debtor. Id. The court noted that the Bankruptcy Code defines the term "claim" to refer to liability of the debtor and section 101(10)(A) defines "creditor" to be an entity with a claim against the debtor. It reasoned that construing the term "claim" in section 1129(a)(7) to refer to only to liability of the debtor "is consistent with the overall content and structure of the Bankruptcy Code." Id. at 887 ("Except as provided in section 524(g), the Bankruptcy Code does not purport to affect the liabilities of third parties.") (footnote omitted). The court also distinguished Quigley (which the non-settling insurers had relied on in support of their argument), finding that the holding in Quigley was expressly based on the "fact that the claims to be released were claims against the debtor on which Pfizer was a co-obligor[,]" whereas the claims at issue — i.e., the equitable contribution claims by non-settling insurers against settling insurers, are claims can never be asserted against the debtor. Id.
The Court respectfully declines to follow the holding in Plant Insulation. It is true that the Bankruptcy Code defines a "claim" as liability of the debtor. But it does not follow that section 1129(a)(7)'s reference to "receiving or retaining" under a chapter 7 imports the requirement "from the debtor" based on that claim. Moreover, although the claims against Pfizer released under the Quigley plan were "derivative claims," nothing in the Quigley case suggests that the court's construction of the best interest test under section 1129(a)(7) turned on the derivative nature of those released claims. Rather, the Quigley court's analysis was based on the language of the statue ("[t]he express language of § 1129(a)(7) also requires me to consider the value of the property that each dissenting creditor will retain under the plan and in the hypothetical chapter 7"), fairness to parties ("[y]et, the best interests equation also properly mandates consideration of creditors' comparative recoveries on non-debtor claims, to the extent the plan is treating those non-debtor claims by release" (citing Ralph Brubaker, Bankruptcy Injunctions and Complex Litigation: A Critical Reappraisal of Non-Debtor Releases in Chapter 11 Reorganizations, 1997 U. ILL. L. REV. 959, 992 (1997)), and the fact that the released claims satisfied the definition of "property," had "value," and were "neither speculative nor incapable of estimation." Quigley, 437 B.R. at 145. In any event, even if the derivative nature of the claims in Quigley was important to the court's analysis, the Consumer Claims here are claims against the Debtors in the same way that the claims in Quigley were claims against the debtor there. The Consumer Claims and Consumer Defenses arise from the Debtors' alleged misconduct (e.g., account misstatements, wrongful foreclosures, unfair collection practices, etc.), and any value or recovery that can be realized from the Buyers would be derivative of those claims.
The Court is facing a situation in this case that is similar to that which the Quigley court encountered. Pursuant to the Second Amended Plan and Sale Transactions, the Debtors are transferring the acquired assets (and stock) "free and clear" of liens and claims, including the Consumer Claims. In a liquidation under chapter 7 the holders, Consumer Creditors would retain their claims and defenses pursuant to section 363(o). The Liquidation Analysis did not account for these Consumer Claims, but should have. That is because
Finally, the Debtors contend that, in any event, they need not account for the potential recoveries on the section 363(o) claims under the best interest test because those recoveries are speculative and hypothetical. It is true, as the Debtors contend, that when weighing specific claims in a liquidation analysis, the claims cannot be speculative or incapable of estimation and should exist on the date selected for valuation in a hypothetical chapter 7 case. See Quigley, 437 B.R. at 145-46. The Debtors argue that even if this Court concludes that the value or recovery, if any, from Consumer Claims (preserved under section 363(o)) must be accounted for in the liquidation analysis, the Consumers Committee's objection should be overruled because any recovery on alleged successor liability claims against the Forward and Reverse Buyers is "highly speculative and uncertain." See Debtors Memorandum ¶ 222. In support, they contend, as follows:
See id. ¶¶ 223-225. The Court does not credit those arguments. First, in assailing creditors' assumption that the assets can be sold in a chapter 7 case, the Debtors are abandoning the Liquidation Analysis they submitted at the Hearing, and in support of confirmation of the Second Amended Plan. No party challenged it, except that the Consumer Creditors Committee contends that it is flawed because it fails to account for the Consumer Claims. The Debtors bear the burden of proving that the Second Amended Plan satisfies the best interest test and they submitted the analysis "for the sole purpose of generating a reasonable and good faith estimate of the recoveries that would result if the Assets were liquidated in accordance with chapter 7 of the Bankruptcy Code[.]" Liquidation Analysis at 2. In doing so, they assume the facts that they now dispute. Specifically, in presenting the analysis, the Debtors assumed, without limitation, as follows:
Id. at 3-4. The Debtors are clear that "[t]here can be no assurance . . . that a liquidation [will] be completed in a limited time frame, nor is there any assurance that the recoveries assigned to the Assets herein [will] in fact be realized." Id. at 3. Moreover, they specifically note that:
Id. However, until now, they have never asserted that they will not be able to sell the Assets. The Court will hold the Debtors to the Liquidation Analysis. The Court attaches no weight to the Debtors' assertions that in a liquidation scenario, a chapter 7 Trustee will not be able to sell the assets.
The Debtors also assert that even if the Buyers were willing to proceed with sales in a chapter 7 without a comprehensive "free and clear" order, that does not mean that consumer creditors will definitely recover against the Forward and Reverse Buyers on theories of successor liability. See Debtors Memorandum ¶ 225. As the Debtors correctly note, section 363(o) merely protects consumer claims and defenses to the same extent as if the applicable interest had been purchased outside of section 363 of the Bankruptcy Code. 11 U.S.C. § 363(o). To that end, they correctly contend that (i) to establish a claim under section 363(o), a Consumer Creditor must establish a successor's liability under applicable non-bankruptcy law, and then litigate to judgment their asserted claims or defenses against such successor; and (ii) the law does not generally apply successor liability to asset purchasers, especially when the purchase agreement expressly disclaims any such liability. See id. To be sure, as the Debtors contend, under the "traditional common law, a corporation that purchases the assets of another corporation is generally not liable for the seller's liabilities." New York v. Nat'l Serv. Indus., Inc., 460 F.3d 201, 209 (2d Cir. 2006). Exceptions to the general rule apply such as when "(1) the purchasing corporation expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations[.]" Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 244-45, 464 N.Y.S.2d 437, 451 N.E.2d 195 (1983). As the Debtors and Forward Buyer contend, some courts find that those
Finally, the Debtors contend there is nothing in the record that suggests that these allegedly speculative claims are would yield greater recoveries than what has now been made available for Allowed Consumer Creditor Claims under the Second Amended Plan — i.e., the $5,000,000 Fund. See id. ¶ 226. The Court also finds no weight to the assertion that the Consumer Creditor Claims have, at best, speculative value, or that the $5,000,000 Fund adequately compensates Consumer Creditors for those claims, such that the Debtors have satisfied the best interest test as to the holders of Class 6 claims.
The Court understands that at various times after the Consumer Creditors Committee was formed, the Debtors reached out to the committee and its professionals in an effort to address and resolve the committee's plan objections. Those discussions were not fruitful and in late June of 2019, the Special Committee of the Board requested Mr. Nelson of AlixPartners to advise the committee whether a $5,000,000 offer to resolve consumer creditor issues was "reasonable" when one compared: (1) the historical trends of what the Debtors paid out to consumer creditors in resolving their complaints and litigation to; (2) the number and types of consumer proofs of claims filed in these cases. See Aug. 7 Tr. at 104:7-13. Mr. Nelson testified that AlixPartners
See id. ¶¶ 6-10. Mr. Nelson says that "[a]pplying this historical data provided by the Debtors to the results of AlixPartners' assessment of the proofs of claims filed in this bankruptcy under the process described above, $5,000,000 is significantly higher than the amount of the historical settlement or resolution value of claims of the Debtors' consumer creditors." Id. ¶ 11. At the Hearing, Mr. Nelson clarified that his exercise essentially involved "developing a view of historical trends, taking that," and "applying it to current circumstances in order to predict future behavior." See Aug. 7 Tr. at 113:8-12. Through the analysis, Mr. Nelson testified that he "believe[s] that $5,000,000 is a reasonable settlement amount for the Debtors' consumer creditors." Nelson Decl. ¶ 11.
The Debtors are seeking approval of the Global Settlement as fair, equitable, and in the best interest of the Debtors' estates and all parties in interest. They say that the Court should approve the settlement because it was negotiated in good faith and at arm's length and is an essential element of the Second Amended Plan. As discussed above, the Debtors, the Unsecured Creditors Committee, and the Consenting Term Lenders agreed to the Global Settlement just prior to the Disclosure Statement hearing in connection with the First Amended Plan. The settlement resolved the Unencumbered Assets Dispute and all of the committee's objections to the plan, and a key component of the agreement was the establishment and funding of the $4 million GUC Trust for the benefit of general unsecured creditors, including Consumer Creditors. However, the settlement did not resolve the Consumer Creditors Committee's objections to the plan and, in particular, the section
As described above, in late June, the Special Committee engaged AlixPartners to undertake the trend analysis to determine if $5,000,000 was a "reasonable" settlement offer. Mr. Nelson concluded that it was "reasonable" and the Consenting Term Lenders agreed to fund a settlement out of the proceeds of their collateral. The Debtors contend that the $5,000,000 represents a fair settlement of the Consumer Creditors Claims in these cases. See Aug. 7 Tr. at 42:2-11 (Debtors' Counsel: "Your Honor, in our view, this $5 million is a gift or a settlement consideration for consumer creditor claims in Class 6 . . . . [It] represents a carveout from the term loan lenders' collateral to settle all of the issues and disputes that are being raised with respect to consumer creditor claims."); see also id. at 43:13-15 ("And so, therefore, what it represents is a proposed resolution settlement of all the legal disputes brought by the Consumer Creditors Committee in these cases[.]"). The Debtors ask this Court to approve the Global Settlement, as enhanced by the $5,000,000 Fund, pursuant to Bankruptcy Rule 9019, and as an integral part of the Second Amended Plan. However, the Consumer Creditors Committee is not party to the agreement and objects to it.
Bankruptcy Rule 9019 provides courts with authority to approve a compromise or settlement on motion and after notice and a hearing. See Fed. R. Bankr. P. 9019(a). A chapter 11 plan may "provide for the settlement or adjustment of any claim or interest belonging to the debtor or the estate." See 11 U.S.C. § 1123(b)(3)(A). Even if a settlement does not relate to a claim or interest belonging to the debtor or its estate, a plan may, "include any other appropriate provision not inconsistent with the applicable provisions of this title." See 11 U.S.C. § 1123(b)(6). Accordingly, while section 1123(b)(3)(A) pertains to settlements of claims and interests belonging to the debtor and its estate, courts nonetheless consider plan settlements of non-debtor claims under the same standards that govern Bankruptcy Rule 9019 settlements. See In re Texaco Inc., 84 B.R. 893, 901 (Bankr. S.D.N.Y. 1988) (recognizing inapplicability of section 1123(b)(3)(A) as authority to settle creditor's claim in plan, but considering settlement under Bankruptcy Rule 9019 standards); see also In re NII Holdings, Inc., 536 B.R. 61, 98 (Bankr. S.D.N.Y. 2015) ("Courts analyze settlements under section 1123 by applying the same standard applied under Rule 9019 of the Bankruptcy Rules, which permits a court to `approve a compromise or settlement.'") (citation omitted); In re Woodbridge Grp. of Cos., 592 B.R. 761, 772 (Bankr. D. Del. 2018) (noting bankruptcy courts may approve settlements under Bankruptcy Rule 9019 or as part of a debtor's plan and that
Before a court may approve a settlement in a plan, it must find that it is fair and equitable, and in the best interests of the estate. See In re Drexel Burnham Lambert Grp., Inc., 134 B.R. 493, 496 (Bankr. S.D.N.Y. 1991) (citing Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968)); see also In re Chemtura Corp., 439 B.R. 561, 593-94 (Bankr. S.D.N.Y. 2010). The determination of whether a settlement meets those standards is within the discretion of the court. See In re Purofied Down Prods. Corp., 150 B.R. 519, 522 (S.D.N.Y. 1993) ("A Bankruptcy Court's decision to approve a settlement should not be overturned unless its decision is manifestly erroneous and `a clear abuse of discretion.'") (citations omitted); Kenton Cty. Bondholders Comm. v. Delta Air Lines (In re Delta Air Lines), 374 B.R. 516, 522 (S.D.N.Y. 2007) ("The bankruptcy court will have abused its discretion if `no reasonable man could agree with the decision' to approve a settlement.") (citation omitted). In exercising that discretion, courts do not conduct a mini-trial on the merits of the settlement or otherwise resolve disputed issues of law or fact underlying the settlement. Instead, courts need only to "canvass the issues and see whether the settlement `fall[s] below the lowest point in the range of reasonableness.'" Cosoff v. Rodman (In re W.T. Grant Co.), 699 F.2d 599, 608 (2d Cir. 1983) (citation omitted); see also O'Connell v. Packles (In re Hilsen), 404 B.R. 58, 70 (Bankr. E.D.N.Y. 2009) ("[T]he court must make an informed and independent judgment as to whether a proposed compromise is `fair and equitable' after apprising itself of `all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated.'" (quoting Anderson, 390 U.S. at 424, 88 S.Ct. 1157)). In doing so, the court should accord proper deference to a debtor's business judgment. See In re Stone Barn Manhattan LLC, 405 B.R. 68, 75 (Bankr. S.D.N.Y. 2009) ("Although approval of a settlement rests in the Court's sound discretion . . . the debtor's business judgment should not be ignored.") (internal citations omitted).
In the Second Circuit, the factors that a court must weigh in determining whether a proposed settlement is "fair and equitable," are:
The Court cannot make the same finding with respect to the agreement, as sweetened by the $5,000,000 Fund. The Unsecured Creditors Committee does not speak for the consumer creditors generally or specifically on matters relating to the resolution of the Consumer Claims. By necessity, in these cases the Unsecured Creditors Committee largely focused on resolving the Unencumbered Assets Dispute to achieve a recovery for the out-of-the-money general unsecured creditors. It realized that goal through the Global Settlement. See Unsecured Creditors Committee Response ¶¶ 2-3. In negotiating the Global Settlement, the Unsecured Creditors Committee did not attempt to resolve specific issues germane to Consumer Creditors. Indeed, the committee was transparent in its view that those matters should be addressed by the Consumer Creditors Committee. As part of the Global Settlement, the Unsecured Creditors Committee agreed to support the plan. Thus, after the committee struck that deal, it could no longer take up consumer issues, and has not purported to do so. The committee supports the enhanced settlement because if approved, the recovery for general unsecured creditors (that are not Consumer Creditors) will be enhanced.
In evaluating whether to approve the enhanced settlement, the Court must consider the fact that the Consumer Creditors Committee is not party to the settlement, and that it objects to it. The Debtors do not dispute otherwise.
See In re Miami Metals I, Inc., 603 B.R. 531, 534-35 (Bankr. S.D.N.Y. 2019). Here, the Consumer Creditors are "non-settling
The Second Amended Plan provides for releases of claims held by: (i) the Debtors and their estates (the "Estate Releases")—see Second Amended Plan, § 10.6(a); and (ii) the Unsecured Creditors' Committee and the holders of Term Loan Claims, who were entitled to vote and either accepted the Amended Plan or rejected the Amended Plan or abstained from voting but did not opt out of the release (the "Third Party Releases" and, together with the Estate Releases, the "Plan Releases")—see id. § 10.6(b); in each case, against the "Released Parties."
Only the Third Party Releases are at issue. The U.S. Trustee objects to the Third Party Releases on the grounds that: (i) the Court lacks subject matter jurisdiction to grant them; (ii) they do not satisfy the standards set forth in Metromedia, 416 F.3d 136 (2d Cir. 2005); and (iii) they are overbroad. The Debtors dispute those assertions. First, they contend that this Court has subject matter jurisdiction and that they can satisfy the Metromedia standards. However, they say that the latter point is academic because the Releasing Parties have consented to the Third Party Releases. Finally, they have narrowed the releases and they contend that the Court should approved the releases, as narrowed.
In this Circuit, it is settled that a bankruptcy court has subject matter jurisdiction to enjoin "third-party non-debtor claims that directly affect the res of the bankruptcy estate." Johns-Manville, 517 F.3d 52, 66 (2d Cir. 2008); Quigley Co. v. Law Offices of Peter G. Angelos (In re Quigley Co., Inc.), 676 F.3d 45, 57 (2d Cir. 2012) (same); see also Marshall v. Picard (In re Bernard L. Madoff Inv. Sec. LLC), 740 F.3d 81, 88 (2d Cir. 2014) ("[T]he touchstone for bankruptcy jurisdiction [over a nondebtor's claim] remains whether its outcome might have any `conceivable effect' on the bankruptcy estate."). Accord, Metromedia, 416 F.3d at 141 ("We have previously held that `[i]n bankruptcy cases, a court may enjoin a creditor from suing a third party, provided the injunction plays an important part in the debtor's reorganization plan.'" (quoting SEC v. Drexel Burnham Lambert Grp., Inc. (In re Drexel Burnham Lambert Grp., Inc.), 960 F.2d 285, 293 (2d Cir. 1992))). A bankruptcy court can assert jurisdiction over a proceeding "so long as it is possible that the proceeding may affect the debtor's rights or the administration of the estate." Winstar Holdings, LLC v. Blackstone Grp. L.P., No. 07 CIV. 4634 (GEL), 2007 WL 4323003, at *1 (S.D.N.Y. Dec. 10, 2007) (internal quotation marks and citations omitted). See also SPV Osus Ltd. v. UBS AG, 882 F.3d 333, 340 (2d Cir. 2018) ("A claim need not be certain to provide a federal court with jurisdiction: "contingent outcomes can satisfy the `conceivable effects' test, so long as there is the possibility of an effect on the estate." (citing N.Y. Commercial Bank v. Pullo, No. 12-02052 (BRL), 2013 WL 494050, at *3 (Bankr. S.D.N.Y. Feb. 7, 2013))).
The claims being released under the Third Party Releases include "any derivative Claims asserted on behalf of a Debtor" that are
See Second Amended Plan § 10.6(b) (emphasis added). The claims described in the Third Party Releases could have a conceivable effect on the administration of these Chapter 11 Cases and assets, or the res, belonging to these estates. Moreover, as the Debtors have correctly pointed out, many of the Released Parties have indemnification rights against the Debtors' estates under various documents, such as the DIP financing agreements and prepetition financing agreements. The Debtors also have indemnification obligations to its directors and officers under their organizational documents (for actions taken in their capacities as such). See Debtors Memorandum ¶ 112. The U.S. Trustee does not contend otherwise. Accordingly, the Court concludes that the third-party claims that the subject of the Third Party Releases could have a conceivable effect on the property of the Debtors' estates, and as such, this Court has subject matter jurisdiction to evaluate, and if appropriate, grant, the Third Party Releases in the Second Amended Plan. See, e.g., In re Sabine Oil & Gas Corp., 555 B.R. 180, 289 (Bankr. S.D.N.Y. 2016) (concluding that the Court had jurisdiction over the challenged third-party releases and noting that "a contingent indemnification obligation can be sufficient to satisfy the `conceivable effect' test"); In re MPM Silicones, LLC, No. 14-22503 (RDD), 2014 WL 4436335, at *34 (Bankr. S.D.N.Y. Sept. 9, 2014) (stating "I firmly believe that I have jurisdiction [over the third party releases]").
Section 10.6(b) of the Second Amended Plan contains the Third Party Releases. As drafted, those releases do not apply to — and the Debtors say that there will be no attempt to impose them on — those parties not entitled to vote on the Second Amended Plan including, without limitation, the general unsecured creditors and the Consumer Creditors.
Second Amended Plan 10.6(b).
The Third Party Releases are binding on the Unsecured Creditors Committee, their members in their capacities as such, and the Consenting Term Lenders, because they have consented to the release. See, e.g., Metromedia, 416 F.3d at 142 ("Nondebtor releases may also be tolerated if the affected creditors consent." (citing In re Specialty Equip. Cos., 3 F.3d 1043, 1047 (7th Cir. 1993))). Cf. In re MPM Silicones, LLC, 2014 WL 4436335, at *32 ("[I]f [the nondebtor releases] are consensual or are not objected to after proper notice, courts generally approve them unless they are truly overreaching on their face."). The holders of Class 3 Term Loan Claims are the only creditors entitled to vote on the plan. The voting results are as follows:
The case of In re Chassix Holdings, Inc., 533 B.R. 64 (Bankr. S.D.N.Y. 2015) is instructive. There, Judge Wiles confirmed the debtor's 11 plan, but with certain modifications to the release provisions therein. The release defined the term "consenting creditors" to mean:
Id. at 75. Thus, in that case, a creditor who abstained from voting or who voted against the plan, but did not affirmatively opt out of the release, was deemed to consent to the release. The court found that it was inappropriate to treat creditors who were entitled to vote, but who chose to take no action at all, as having "consented" to the release. See id. at 80. In finding that "it would be inappropriate to treat such inaction as a `consent' to third party releases," Judge Wiles reasoned that:
Id. at 80-81. However, he noted that his holding was based on the facts and circumstances specific to that case, and that in another situation, the use of an "opt-out" election for third party releases may be appropriate. See id. at 79 ("Circumstances may justify a different approach in different cases. . . . The Court does not know what considerations were debated in those cases that approved voting procedures like the ones the Debtors proposed in this case (or, indeed, if any objections were made in those cases). In these cases, however, the Court was not persuaded that the proposed procedures were appropriate.").
It is also undisputed that each party that did not return a ballot and did not opt-out of the Third Party Releases was properly served with the ballot and related plan documents. There is no question that those parties received the ballots and actual notice of the consequences of failing to cast the allot and to opt out of the release. There is nothing in the record of these Chapter 11 Cases that suggests that the holders of the Term Loan Claims lacked the sophistication to understand the consequences of the opt out election in the ballot and of abstaining from voting. To the contrary, the Court finds it significant that the overwhelming majority of Class 3 creditors entitled to vote actually voted, and that three parties voted against the plan and opted out of the release. It seems clear that all those parties understood the consequences of not casting a ballot in these Chapter 11 Cases. Under these facts and circumstances, the Court finds that those parties have consented to the Third Party Releases.
Lastly, the U.S. Trustee take issue with the "overly broad" and "vague" definition of the "Related Parties," which is included as among the Released Parties in the Third Party Releases. The Second Amended Plan defines "Related Parties" to mean:
Second Amended Plan § 1.136 (emphasis added).
The objectors argue that such a broad and vague definition, if not more narrowly tailored, would inadvertently include individuals or entities not entitled to a release, and impermissibly protect them from improper conduct, such as, by way of example, those individuals or entities that participated in a scheme that ultimately resulted in a superseding indictment against an individual who sold reverse mortgages that may have included Ditech loans. See, e.g., U.S. Trustee Objection
The U.S. Trustee also objected to the Exculpation provision
Second Amended Plan § 1.76 (emphasis added).
The Court understands that, with the narrowed revised language highlighted above, the U.S. Trustee's objection to the Exculpation provision is now moot. See, e.g., Aug. 8 Tr. at 186:13-187:24.
Based on the foregoing, the Court holds that the Debtors have failed to satisfy sections 1129(a)(1)-(3) of the Bankruptcy Code to the extent that the Second Amended Plan purports to limit the Consumer Creditors' ability to assert rights of recoupment against the Buyers. The Court also holds that the Debtors have not demonstrated that the Second Amended Plan satisfies the best interests of the holders of allowed Class 6 claims and as such, they have failed to satisfy section 1129(a)(7) of the Bankruptcy Code. Finally, the Court holds that the Debtors have failed to demonstrate that the Global Settlement is fair and equitable to the holders of allowed Class 6 claims and as such, the Debtors' request to enter into the agreement is denied. For those reasons, the Debtors' request for confirmation of the Second Amended Plan is denied.
The Plan Sale Transactions contemplate that the Debtors will assume and assign certain executory contracts and unexpired leases to the Buyers. The Debtors received forty-four objections to the assumption, rejection, and/or assumption and rejection of those executory contracts and unexpired leases. Without limitation, those objections raise issues relating to consent rights, cure amounts, and adequate assurances of future performance under the agreements. By agreement among the Debtors and those objecting parties, the Court will defer consideration of those objections while the parties continue account reconciliations and settlement discussions.
First Amended Plan, Schedule 1.
Second Amended Plan, Sch. 1.
Proposed Confirmation Order, Schedule 1 ¶ 10 (emphasis added).
There is a similar injunctive provision in Schedule 2 of the Proposed Confirmation Order (i.e., the sale order approving the Forward APA), ¶ 3, which states, in relevant part:
Proposed Confirmation Order, Schedule 2 ¶ 3 (emphasis added).
Section 1129(a)(14) of the Bankruptcy Code requires a debtor to pay domestic support obligations as mandated by any judicial or administrative order, or by statute. See 11 U.S.C. § 1129(a)(14). The Debtors here are not subject to any domestic support obligations.
Section 1129(a)(15) is applicable where the debtor is an "individual" (as that term is defined in the Bankruptcy Code). See 11 U.S.C. § 1129(a)(15). Here, none of the Debtors are individuals.
Section 1129(a)(16) provides that property transfers by a corporation or trust that is "not a moneyed, business, or commercial corporation or trust" must be made in accordance with any applicable provisions of non-bankruptcy law. 11 U.S.C. § 1129(a)(16). Each of the Debtors here is a moneyed, business, or commercial corporation.
11 U.S.C. § 1129(a)(9).
11 U.S.C. § 363(f).
11 U.S.C. § 553(a).
The Halls are also plaintiffs in an adversary proceeding against the Debtors, among others, that they commenced in this Court, AP No. 19-01231.
See id. at 142:25, 143:1-16. It is undisputed that, at one time, NRZ was Ditech Financial's largest subservicing customer. See Rule 1007 Decl. ¶ 39. The consumers allege that NRZ has "intimate knowledge of Ditech's servicing operations" and therefore knows that "a substantial portion of Ditech's accounts contain invalid/undocumented/excessive advances that are not properly included on the loan accounts and are therefore not lawfully recoverable from the borrowers or their homes." See Bartholow Objection ¶ 5. While testimony at the Hearing did show that NRZ acquired certain performing loans from the Debtors in August of 2016, those loans are not the loans at issue here. See Aug. 7 Tr. at 172:12-15. Accordingly, the Court attaches no weight these unsubstantiated allegations.
Further, none of the chapter 13 cases cited by the Debtors addressed the issue of recovery from third party claims, but whether recovery from the debtor on a non-discharged claim should be evaluated.
Id. at 411. The Dow Corning court went on to note that [n]o case has ever discussed, let alone decided, this issue[,] [a]nd Collier's discussion of § 1129(a)(7)'s best-interests-of-creditors test applies the chapter 13 formulation, entirely disregarding the "or retain" terminology." Id. The court then concluded that the federal judgment rate is the correct rate to apply within the context of section 726(a)(5) because it is incorrect to assume that a creditor's claim, if it is repaid in full with interest, could be pursued outside of bankruptcy in a chapter 7. See id. at 412. Here, for the reasons discussed herein, it is precisely because of this difference in statutory language, and the reference to what a creditor would "retain," as noted by the Dow Corning court, that renders the chapter 13 cases inapposite to our analysis. Dow Corning thus provides no support to the Debtors' arguments.
437 B.R. at 112.
Second Amended Plan § 1.137 (emphasis added). In turn, section 1.136 of the Second Amended Plan defines "Related Parties" to mean:
Second Amended Plan § 1.136.
The Bartholow Consumers additionally contended that the definition of the "Causes of Action" are being released would "severely limit[ ] the remedies and consumer protections allowed to consumer borrowers under the law. There is simply insufficient consideration granted to the Consumer Creditors under the Plan in exchange for such an expansive release." See Bartholow Objection ¶ 36. Such concern, insofar as it is directed as an objection to the Third Party Release, is misguided. The consumer creditors are not deemed to have granted any releases by virtue of section 10.6(b) of the Second Amended Plan. As such, the Court will not further consider that objection.
Id.
Second Amended Plan § 10.7
