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September 26, 2022 – The U.S. Trustee assigned to the Debtors’ cases filed an objection to the Debtors’ Disclosure Statement arguing that it suffers from informational deficiencies that render it inadequate [Docket No. 477] including:
- failure to specify assets to be liquidated;
- failure to specify the expected recovery for general unsecured creditors or when that recovery would be received;
- failure to describe the Debtors' WARN Act adversary case; and
- unacceptable non-consensual third-party releases.
It is lack of disclosure as to the WARN Act proceeding that most concerns the U.S. Trustee.
Six days prior to filing for bankruptcy, the Debtors terminated more than three quarters of their workforce with an ensuing WARN Act challenge possibly giving rise to $7.0mn in additional priority non-tax claims in the Debtors' Class 1. The U.S. Trustee states as to the impact of that $7.0mn and the Disclosure Statement's failure to account for a successful WARN Act challenge on the feasibility of the Debtors' Plan: "…if the Combined Plan depends on the Debtors’ successful future defense of the WARN Act adversary proceeding, then the Combined Plan is not feasible because its success is only possible, not reasonably likely."
On June 30, 2022, First Guaranty Mortgage Corporation and one affiliated Debtors (“FGMC” or the “Debtors”) filed for Chapter 11 protection noting estimated assets between $500.0mn and $1.0bn; and estimated liabilities between $500.0mn and $1.0bn. At filing, FGMC, which operated as a full-service, non-bank mortgage lender, noted that bankruptcy shelter “was necessitated by significant operating losses and cash flow challenges experienced by the Company due to unforeseen historical adverse market conditions for the mortgage lending industry, including unanticipated market volatility.”
On August 4th, the Court hearing the FGMC cases issued final orders in respect of two debtor-in-possession ("DIP") financing facilities: (i) a $22.0mn "Cash Flow DIP Facility" from LVS II SPE XXXIV LLC, (the “Cash Flow DIP Lender”) [Docket No. 292] and (ii) a $125.0mn "DIP Repo Facility" with Barclays Bank PLC as agent [Docket No. 288].
On September 6th, the Debtors filed a first iteration of a Combined Plan of Liquidation and Disclosure Statement (the “Combined Document”) [Docket No. 405]; and further filed a motion requesting Court approval of: (i) the Disclosure Statement portion of the Combined Document (on an interim basis), (ii) proposed Plan solicitation and voting procedures and (iii) a timetable culminating in an October 31st combined hearing [Docket No. 407].
In recent weeks, the Debtors have also received Court approval for the sale of mortgages and mortgage servicing rights, including: (i) a $4.8mn private sale of certain mortgage servicing rights (“MSRs”)* to BSI Financial Services, Inc [Docket No. 390], (ii) the private sale of $25.0mn in mortgages to Freddie Mac [Docket No. 386] and (iii) the private sale of $15.0mn in mortgages to Fannie Mae [Docket No. 394].
U.S. Trustee’s Objection [Docket No. 477]
The U.S. Trustee's objection states, “The Combined Disclosure Statement and Chapter 11 Plan of First Guaranty Mortgage Corporation and Debtor Affiliate (the ‘Combined Plan’) does not contain adequate information. It does not describe with specificity what assets the Debtors have left to liquidate. It does not tell general unsecured creditors what recovery percentage they can expect to receive, and when they can expect to receive it. It does not describe the WARN Act adversary proceeding that was filed against the Debtors on the petition date, or the risks it poses. The Debtors terminated about 471 of their 600 employees shortly before the petitions initiating the above-captioned cases were filed. If the termination-related claims of those former employees are allowed under Section 507(a)(4)/(5), that could add $7 million to the estimated $1.5 million in priority non-tax claims in class 1.
The WARN Act adversary proceeding may render the Combined Plan not feasible under Section 1129(a)(11). Priority claims totaling $7 million would be massively consequential in cases that recently had about $23.1 million cash on hand, and where the insider cash-flow DIP lender is expected to receive a 10%-35% recovery. Put differently, if the Combined Plan depends on the Debtors’ successful future defense of the WARN Act adversary proceeding, then the Combined Plan is not feasible because its success is only possible, not reasonably likely.
Finally, the Combined Plan has non-consensual third-party releases. Unimpaired creditors, creditors who abstain from voting, and creditors who vote to reject but do not opt out of the third-party releases would be deemed to give third-party releases. Those releases are nonconsensual and should be denied. They should be addressed now, because they may affect the forms of ballot.”
About the Debtors
According to the Debtors: “Prior to the Petition Date, the Debtors operated as a full service, non-bank mortgage lender offering a full suite of residential mortgage loan options tailored to borrowers’ different financial situations. The Debtors were one of the leading independent mortgage companies in the United States that originated residential mortgages through a national platform… [t]he Debtors’ business included the origination, purchase, service, sale and/or securitization of residential real estate mortgage loans….
FGMC’s corporate headquarters are located in Plano, Texas. The Debtors have regional offices in Texas, Virginia, Utah, Hawaii, Maryland, Missouri, Nevada, New Jersey and North Carolina. FGMC is licensed to operate in all fifty states and the District of Columbia and is a national Ginnie Mae and Fannie Mae direct lender and approved Freddie Mac seller and servicer, with licenses and/or approvals from the Federal Housing Administration ('FHA'), the United States Department of Veterans Affairs ('VA') Ginnie Mae, and the United States Department of Agriculture."
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