Ditech, Reverse Mortgages, Consumer Concerns, and Section 363(o)

A couple days ago, Judge Garrity Jr. of the Bankruptcy Court for the Southern District of New York issued a 132 page opinion denying confirmation of Ditech's proposed plan. Ditech, of course, is an originator and servicer of mortgages, including reverse mortgages. Its plan contemplated sales of both its forward and reverse mortgage businesses--free and clear of customers' claims and defenses. As reported at various times since Ditech filed in February 2019, homeowners have claims that Ditech did not credit mortgage payments properly, levied improper fees, failed to recognize tax payment plans, and wrongly foreclosed on homes.

Beyond its sheer length, the opinion is noteworthy for a couple reasons. First, the sales of mortgage businesses in the context of a plan raised the question of whether § 363(o) applied. Section 363(o) deals with consumer credit transactions subject to the Truth in Lending Act and provides that if any "interest" in such a transaction is purchased through a sale, then the buyer must take all the claims and defenses related to the consumer credit transaction. Ditech, of course, wanted to sell free and clear of those claims, through the plan. In holding that § 363(o) does not apply in the plan context, Judge Garrity Jr. provides a detailed analysis of the section's legislative history. This history includes removal of language about application to reorganization plans by an amendment proposed by Senator Phil Gramm (which was approved), and Senator Gramm's continued opposition to the addition of § 363(o) in its entirety because he claimed it would, among other things, encourage people to make up grievances against mortgage originators and servicers. (As many readers likely know, Senator Gramm spearheaded the Gramm-Leach-Bliley Act.)

Second, the decision of interest because, notwithstanding finding that the § 363(o) does not apply in the plan context, Judge Garrity Jr. held that the plan and proposed settlement themselves, in essence, were not fair to homeowners. As to the plan, the judge found that it did not satisfy the best interest of creditors test as to the consumer claims. In my experience, denying confirmation of a plan because of § 1129(a)(7) is rare, and opinions with lengthy analysis of why the best interest test is not met are even rarer. There's a good chance that portions of this opinion will appear in my bankruptcy course in the future.

Perhaps more interestingly, Judge Garrity Jr. also denied approval of a settlement that included creating a $5 million fund for general unsecured creditors, which includes the consumer creditors alleging that Ditech acted improperly in servicing mortgages. The reasoning similarly focused on whether the fund was a "fair and equitable" resolution to the consumers' claims. In the days leading up to this plan confirmation hearing, consumer advocates worried that confirmation would make it harder for homeowners to fight foreclosure and other errors with crediting payments and levying fees. With this decision, homeowners' rights live another day.