August 28, 2019 – The Debtors filed the solicitation version of their Joint Chapter 11 Plan and a related Disclosure Statement [Docket Nos. 267 and 269, respectively]. Still to be resolved is the U.S. Trustee's objection to the Debtors' use of an "opt-out" mechanic in respect of third party releases, a flaw that the U.S. Trustee contends renders the Debtors' Plan unconfirmable.
Also raised in the U.S. Trustee's objection is the apparent bifurcation of unsecured creditors into two classes receiving very different treatment: Class 4 (“Go-Forward Trade Claims”) entitled to vote and receiving a 95% recovery, with the 5% balance of their claims slipping into the unloved Class 5 (“General Unsecured Claims”) which is not entitled to vote and gets no recovery of all. If the only claims that sit in Class 5 are the rump deficiency claims of Class 4, probably no harm/no foul. The problem for the U.S. Trustee is that it is impossible to know from the Disclosure Statement whether there are any other claims in Class 5; as the Debtors' generally skimpy Disclosure Statement fails to provide details as to who and what sits in that class. If innocuous, seemingly an easy fix which the Debtors have chosen not to make; leaving the U.S. Trustee (and perhaps the Court) to wonder whether the Debtors are being generous to unsecured creditors they need going forward while leaving other, less-useful, general unsecureds fuming on the Courthouse steps. Perhaps we will know more as to classes/claims if and when the Debtors eventually file a liquidation analysis which they state will be filed after their September 9th auction, amongst parties interested in serving as Plan sponsor, (if held).
As previously reported: "On August 22nd, the Court's approved [Docket No. 255] the Debtors' August 19th filing of a revised Disclosure Statement [Docket No. 236] that addressed the August 9th objection of the U.S. Trustee challenging the Debtors’ use of an opt-out mechanic for third party releases. Following discussions with the U.S. Trustee, the Debtors modified the Disclosure Statement and the ballot sent to the single class of creditors entitled to vote on the Plan; in each case to highlight the disagreement between the Debtors and the U.S. Trustee as to the legality of the opt-out mechanic.
The revised Disclosure Statement includes the following added text: "The office of the United States Trustee takes the position that the Plan is not confirmable because it contends the “opt-out” mechanic regarding the Third-Party Release is contrary to the Bankruptcy Code. Notwithstanding the objection of the United States Trustee, the Debtors believe the Third-Party Release and the “opt-out” mechanic are consistent with the law. The United States Trustee preserves its rights to object to the Third-Party Release and the “opt-out” mechanic at the Confirmation Hearing. The Debtors intend to set forth the legal authority in support of the Third-Party Release and the “opt-out” mechanic in a memorandum in support of Confirmation of the Plan that they will file prior to the Confirmation Hearing."
Plan Overview
The Disclosure Statement provides the following brief overview: "… pursuant to the Plan, a Plan Sponsor (as defined below) will inject a new money investment into the Debtors to fund recoveries to holders of Class 2 Notes Secured Claims. The Plan provides that holders of claims in Class 1 (Priority Non-Tax Claims), Class 2 (Notes Secured Claims), and Class 3 (Other Secured Claims) will receive payment in full in cash on the effective date of the Plan or reinstatement or such other treatment that the Debtors elect that results in holders of claims in Class 3 being unimpaired. Claims in Class 7 (Intercompany Claims), Class 9 (Intercompany Interests), and Class 10 (Protos Interests) are also unimpaired, but no distributions shall be made on account of such claims. Claims in Class 5 (General Unsecured Claims), Class 6 (Artemis Note Claims), and Class 8 (Existing Stearns Holding Interests) will not receive any distributions under the Plan and are conclusively deemed to have rejected the Plan. Holders of Claims in Class 4 (Go-Forward Trade Claims) are entitled to vote on the Plan.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as in the Plan and/or Disclosure Statement):
- Class 1 (“Priority Non-Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $31,000 and the estimated recovery is 100%.
- Class 2 (“Notes Secured Claim”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is to be determined based on the results of the Auction, if it occurs and the estimated recovery is 100%.
- Class 3 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated aggregate amount of claims is $58,000 and the estimated recovery is 100%.
- Class 4 (“Go-Forward Trade Claims”) is impaired and entitled to vote on the Plan. The estimated aggregate amount of claims is $4,399,000 and the estimated recovery is 95%.
- Class 5 (“General Unsecured Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. Estimated recovery is 0%.
- Class 6 (“Artemis Note Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
- Class 7 (“Intercompany Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.
- Class 8 (“Existing Stearns Holdings Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The estimated recovery is 0%.
- Class 9 (“Intercompany Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.
- Class 10 (“Protos Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The estimated recovery is N/A.
The Disclosure statement attached the following documents:
- Exhibit A: Joint Chapter 11 Plan of Reorganization of Stearns Holdings, LLC, et al.
- Exhibit B: Liquidation Analysis (to be filed)
- Exhibit C: Financial Projections
- Exhibit D: Organizational Chart
Key Dates
- Voting Deadline: September 20, 2019
- Plan objection: September 24, 2019
- Confirmation Hearing: October 3, 2019
About the Debtors
The Debtors are a leading, private, independent mortgage company that originates residential mortgage loans through its national platform. The company is the 20th largest mortgage lender in the United States, and has maintained disciplined lending standards with a focus on high credit standards and mortgage loan quality. The Debtors employ approximately 2,700 people, including employees of their joint ventures and preferred partners. They originate loans in 50 states.
The primary source of the Debtors’ revenue is mortgage loan production, which generates income primarily through gains upon the sale of mortgage loans. The Debtors’ primary production channels are wholesale, retail, joint venture, and preferred partner. The wholesale channel consists of mortgage loans that are sourced and submitted to the Debtors by independent mortgage brokers on behalf of borrowers. The retail channel originates mortgage loans directly with borrowers through over 100 branch offices nationwide. The joint venture channel is comprised of nine joint ventures. The Debtors own 47.5% of the interests in one of them; they own 50% of the interests in all the others.
The preferred partner channel consists of two independent mortgage banks. The Debtors own 50.8% of the interests in one of the preferred partners, and 51% of the interests in the other. During the twelve months ended December 31, 2018, the wholesale, retail, joint venture and preferred partner channels represented 55%, 14%, 27% and 1% of the Debtors’ mortgage loan production, respectively.
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