A recent opinion, In re Ditech Holding Corp., 606 B.R. 544 (Bankr. SDNY 2019), gives guidance on the difference between (1) sales under a confirmed plan of reorganization that provide for the sale of a debtor’s property free and clear of liens and claims under 11 U.S.C. § 1123 and 11 U.S.C. § 1141(c), and (2) sales free and clear of interests by motion pursuant to 11 U.S.C § 363(f), where 11 U.S.C. § 363(o) applies. And Ditech provides a reminder of the importance of 11 U.S.C. § 1129(a)(7), the “best interest of creditors test” where there is a non‑accepting class
Ditech Holding Corp, a Chapter 11 debtor-in-possession, together with various other related debtors (collectively, the “Debtors”) and certain non-debtors, was party to approximately 1,000,000 consumer contracts involving home mortgages issued and/or serviced by Ditech. These consumer contracts are “consumer credit transactions” as described in 11 U.S.C. § 363(o). Prepetition, the Debtors were subject to thousands of formal and informal proceedings in which certain consumer creditors were asserting claims and defenses of the types described in section 363(o). These consumer creditors were represented by the Official Committee of Consumer Creditors (the “CCC”).
Ditech’s second amended plan of reorganization provided for selling the consumer credit contracts. The CCC objected to the plan because it did not preserve the rights of the consumer creditors to recoup their damage claims against the mortgage obligations.
The CCC argued, in part, that although the proposed sale would be pursuant to a confirmed plan of reorganization, the sale also had to satisfy the requirements of 11 U.S.C. § 363(f), which provides for sale of property free and clear of interests. And if the sale was pursuant to 11 U.S.C. § 363(f), then 11 U.S.C. § 363(o) applied. Section 363(o) would in turn preserve the claims and defenses of the parties to the consumer credit contracts. Section 363(o) provides that, notwithstanding the “free and clear” language of section 363(f), consumers retain claims and defenses against the purchaser of the consumer credit contracts to the same extent it would be liable under applicable non-bankruptcy law.
The Debtors asserted that because they were selling their consumer credit contracts through the plan under 11 U.S.C. §§ 1123 and 1141(c), and not pursuant to 11 U.S.C. § 363(f), and because section 363(o) applies only to “free and clear” sales under section 363(f), the Debtors could transfer the consumer credit contracts to the buyers, free and clear of consumer claims and consumer defenses pursuant to the plan.
The court found that 11 U.S.C. § 363(f), and thus 11 U.S.C. § 363(o), did not apply to the proposed sale of the consumer credit contracts under the plan, because a sale pursuant to a confirmed plan under 11 U.S.C. §§ 1123 and 1141(c) is a procedure separate from the section 363(f) motion process and stands on its own as a method to transfer property, in this case free and clear of defenses and claims.
But the court denied confirmation of the second amended plan of reorganization. The Debtors failed to satisfy 11 U.S.C. §§ 1129(a)(1) through (3) to the extent that the plan purported to limit the consumer creditors’ ability to assert rights of recoupment against the buyers. For example, section 1129(a)(2) requires that “[t]he proponent of the plan complies with the applicable provisions of this title.” One of those provisions is 11 U.S.C. § 1129(a)(7), the “best interests of creditors” test. Section 1129(a)(7) requires that the members of a non-consenting class must receive not less that they would have received if the case were a Chapter 7 liquidation. In a Chapter 7 liquidation, the consumer creditors’ state law recoupment remedies would survive, so the consumer creditors would have received more in Chapter 7 than they would have received under the second amended plan of reorganization. Because the Debtors failed to show that the proposed plan met the requirement of section 1129(a)(7), as well as section 1129(a)(1) through (3), the second amended plan could not be confirmed.