April 23, 2019 − WMC Mortgage LLC ("WMC" or the "Debtor") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10879. The Company, an indirectly held subsidiary of General Electric Company ("GE") historically involved in the origination of home mortgage loans, is represented by Russell C. Silberglied of Richards, Layton & Finger. Further board-authorized engagements include (i) Jenner & Block as special litigation counsel, (ii) Alvarez & Marsal Disputes and Investigations as financial advisor and (iii) Epiq Corporate Restructuring as claims agent.
The Company’s petition notes between 1 and 50 creditors; estimated assets between $1mn and $10mn; and estimated liabilities between $100mn and $500mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) TMI Trust Company, as Trustee of SABR 2006-WM2 (Undetermined Value, Pending Litigation, discussed further below), (ii) Barclays Bank PLC (Undetermined Value, Indemnification Notice) and (iii) DB Structured Products (Undetermined Value, Indemnification Notice). In addition to the potential indemnification claims of Barclays Bank and DB Structured Products, the Debtor notes similar potential contingent/unliquidated/disputed claims of HSBC Securities (USA) Inc., Merrill Lynch Mortgage Investors, Inc., Morgan Stanley ABS Capital I Inc., RBS Securities Inc. and U.S. Bank National Association (as Trustee). These are collectively discussed further below
Goals of the Chapter 11
Over the last decade, WMC paid over $1.5bn in settlements of numerous claims with approximately 85% of these settlements funded through capital contributions made by GE Capital US Holdings, Inc. ("GECUSH," the sole member of the Debtor) and, prior to December 2015, its predecessor, General Electric Capital Corporation (“GECC” and together with GECUSH, “GE Capital”). Just prior to the Debtor’s Chapter 11 filing, the Debtor also settled with the DOJ as to potential Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") claims stemming from its mortgage operations (see below). That settlement, also coming at a cost of $1.5bn, was 100% covered by GE.
With $3.0bn of liabilities settled, GE is now looking to wind up this painful chapter in its corporate history (and evidently WMC). There are essentially only two groupings of claims left and GE feels comfortable that they are sufficiently determinable that they can ask a bankruptcy Court to dispositively resolve them. The first is a $980.0mn claim being pursued by TMI Trust Company (as trustee for the Securitized Asset Backed Receivables LLC Trust 2006-WM2, the “SABR-WM2 Trust”) which now seems close to resolution at a reported cost of $198.0mn (the “TMI Settlement”). The second is a group of indemnification claims/notices in respect of which WMC believes it has strong defences.
From GE's perspective, the most critical aspect of WMC's filing will be the Court's blessing of a proposed settlement between WMC and GE further to which GE would get a blanket release in return for a cash payment (presumably something in excess of the proposed $198.0mn settlement with TMI Trust Company (discussed below) and borrowings under the Debtor's $25.0mn DIP facility). In documents filed with the Court the Debtor states, "WMC and GE…have reached an agreement in principle to resolve all of the Potential Claims, subject to definitive documentation (the 'Definitive Documentation') and approval by this Court, that provides for, among other things, a release of GE in exchange for a cash payment (the 'GE Settlement'). Once finalized, the Debtor intends to seek approval of the GE Settlement as part of the chapter 11 plan confirmation process, and, if approved, the proceeds of such settlement will be used to fund distributions to creditors pursuant to a chapter 11 plan, consistent with the Definitive Documentation."
In a declaration in support of the Chapter 11 filing (the “Asdourian Declaration”), Mark V. Asdourian, WMC’s Chief Executive Officer, stated: "Since the discontinuation of its mortgage origination business approximately 12 years ago, WMC has made good faith efforts to resolve all of its liabilities. Despite exhaustive efforts to resolve its liabilities, it has become clear that there may be a number of disputed, contingent and unliquidated claims that parties might yet assert. In addition, the proposed settlement of the TMI Litigation is a key aspect of this chapter 11 case. Given WMC’s limited cash on hand and its inability to receive ongoing financial support from GECUSH to resolve these claims outside the confines of chapter 11 and the protections and finality it affords, WMC has determined that it is in its best interest to commence this chapter 11 case. During the course of this chapter 11 case and with access to the DIP Facility, WMC expects, subject to this Court’s oversight and approval, to resolve any disputed claims that may be filed, consummate the proposed settlement of the TMI Litigation and consummate the GE Settlement which will, among other things, provide for a distribution to WMC’s creditors pursuant to a chapter 11 plan."
The TMI Settlement (Settling the Last RMBS Action)
Since 2011, WMC has been named as a defendant in fourteen lawsuits filed by trustees alleging breaches of R&Ws and seeking the repurchase of the allegedly breaching mortgage loans. Thirteen of those lawsuits have now been settled for an aggregate amount of $870.0mn, thereby resolving approximately $6.2bn of asserted liabilities. The one remaining lawsuit, filed in 2012 and seeking damages in excess of $980.0mn, is that of TMI Trust Company as trustee for SABR 2006-WM2 Trust (the “Separate Trustee”). The funding for the $870.0mn paid to settle the first 13 lawsuits was made through capital contributions to WMC from GE Capital. In addition, WMC has made other settlement payments to numerous counterparties in the aggregate amount in excess of $630.0mn. The funding for these other settlement payments and related costs was made through a combination of (i) the $117.0mn proceeds of a sale of assets to DLJ, (ii) funds borrowed by WMC under various intercompany financing agreements, and (iii) capital contributions made to WMC from GECC.
The Asdourian Declaration provides the following detail as to the TMI litigation: “The TMI Litigation arises out of the securitization of a pool of approximately 5,000 mortgage loans deposited into the SABR-WM2 Trust…The Separate Trustee has asserted damages of approximately $980.0 million in the TMI Litigation…..After several years of discovery and motion practice and multiple attempts at settlement, a bench trial began on January 16, 2018. The presentation of evidence concluded on February 5, 2018, with closing arguments held on June 12, 2018. After closing arguments, the Court took the matter under advisement.
In January 2019, while the matter remained under advisement, WMC reached tentative agreement regarding a settlement supported by certificateholders owning 42% of the outstanding certificates in the SABR-WM2 Trust. If accepted by the Separate Trustee, the settlement would resolve all of the claims in the TMI Litigation in exchange for a settlement payment of $198.0 million by WMC. In February 2019, the Separate Trustee provided notice to all certificateholders of the proposed settlement amount and joined with WMC in requesting that the Court stay the proceedings to enable the parties to proceed with finalizing the settlement. The Court entered a stay which, after having twice been extended, will last until June 4, 2019, unless further extended.
On April 4, 2019, WMC presented a proposed settlement agreement to the Separate Trustee for the Separate Trustee’s review….As set forth in the proposed settlement agreement, if the Separate Trustee accepts the proposed settlement agreement, WMC will be requesting that the Court enter certain findings concerning the settlement, which WMC intends to seek as part of the confirmation of the Debtor’s chapter 11 plan."
Indemnification Claims/Notices
The Asdourian Declaration also details the second remaining basket of potential liability, notices received from the financial institutions listed in the second paragraph above, Asdourian states, “WMC has also received indemnification notices from WMC Counterparties in connection with potential and actual lawsuits brought against such entities by RMBS investors. In general, the indemnification notices arise from litigation and claims asserting alleged securities fraud, repurchase demands, and trustee breaches of duty. The parties who have asserted (or may assert) indemnification claims against the Debtor include large financial institutions that were engaged in the securitization business and were defendants in litigation regarding mortgage loans that were acquired from mortgage originators, including WMC. WMC believes that it has strong defenses to these indemnification demands, including defenses based upon the interpretation and application of the governing contracts, the failure of the parties to comply with contractual conditions including advance notification of such claims, strong public policy arguments that do not permit indemnification of such claims, and statutes of limitations. WMC intends to aggressively defend against any such indemnification claims filed in this chapter 11 case."
The FIRREA Settlement
Over the last few years, WMC and GECC have been the subject of an investigation by the Civil Division of the United States Department of Justice (the “DOJ”) in connection with potential violations of the FIRREA arising out of WMC’s origination, purchase, or sale of residential mortgage loans (“FIRREA Claims”).
On April 11, 2019, WMC, the United States of America (acting through the DOJ), and GE executed a settlement agreement (the “FIRREA Settlement”), which provides for General Electric Company’s payment of $1.5bn (the “DOJ Payment”) in full and final satisfaction of all FIRREA Claims that may be asserted by the United States against WMC, General Electric Company, and their affiliates. The DOJ Payment was paid entirely by GE on April 18, 2019.
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