Section 363 Does Not Apply to Chapter 11 Plan Sales

In In re Ditech Holding Corp., 2019 WL 4073378 (Bankr. S.D.N.Y. Aug. 28, 2019), the U.S. Bankruptcy Court for the Southern District of New York addressed several objections to confirmation of a chapter 11 plan that proposed to sell home mortgage loans "free and clear" of certain claims and defenses of the homeowner creditors, contrary to a provision of the Bankruptcy Code—section 363(o)—which was enacted in 2005 to prevent free and clear sales of certain claims and defenses relating to consumer credit agreements. The court ultimately ruled that section 363 of the Bankruptcy Code does not apply to sales in a chapter 11 plan and that the debtors proposed their plan in good faith.

Importantly, however, the court initially denied confirmation of the plan and refused to approve a related global settlement because the debtors were unable to satisfy the "best interests" test, which requires that creditors (the homeowners in this instance) receive more under a plan than they would in a chapter 7 liquidation. The debtors obtained the court's approval of the plan after amending it to increase the funds available to satisfy consumer creditor claims and to provide that such creditors' recoupment claims and defenses would remain intact.

Bankruptcy Sales

Assets can be sold in a bankruptcy case under either section 363 or section 1123 of the Bankruptcy Code. See In re New 118th Inc., 398 B.R. 791, 794 (Bankr. S.D.N.Y. 2009) ("A trustee may sell property prior to confirmation, 11 U.S.C. § 363, or through a plan."). With certain exceptions, section 363 and the remaining provisions of chapter 3 of the Bankruptcy Code apply to cases filed under chapters 7, 11, 12, and 13 of the Bankruptcy Code (11 U.S.C. § 103(a)), and apply in a chapter 15 case upon recognition of a foreign proceeding by a U.S. bankruptcy court (11 U.S.C. § 1520(a)(2)).

Section 363(b) authorizes a bankruptcy trustee or chapter 11 debtor-in-possession ("DIP") to use, sell, or lease estate property other than in the ordinary course of business only after court approval. To obtain such approval, a trustee or DIP must first provide notice to stakeholders and an opportunity for a hearing. The court will generally approve a sale of estate property under section 363(b) if the trustee or DIP offers a "good business reason" for the sale. See In re Lionel Corp., 722 F.2d 1063, 1071 (2d Cir. 1983); accord Matter of VCR I, L.L.C., 922 F.3d 323, 326 (5th Cir. 2019); In re Nine W. Holdings, Inc., 588 B.R. 678, 686 (Bankr. S.D.N.Y. 2018).

A sale of substantially all of a chapter 11 debtor's assets or business may be approved under section 363(b). See, e.g., In re Advanced Contracting Sols., LLC, 582 B.R. 285 (Bankr. S.D.N.Y. 2018); In re 9 Houston LLC, 578 B.R. 600 (Bankr. S.D. Tex. 2017). Courts are sometimes wary of approving such sales, however, because they represent a court-sanctioned liquidation without the substantive and procedural safeguards of the chapter 11 plan confirmation process, including the disclosure of adequate information to stakeholders, an opportunity for impaired creditors and interest holders to vote, and other requirements that must be satisfied to confirm a plan. See Motorola v. Comm. of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452, 466 (2d Cir. 2007) ("The reason sub rosa plans are prohibited is based on a fear that a debtor-in-possession will enter into transactions that will, in effect, 'short circuit the requirements of [C]hapter 11 for confirmation of a reorganization plan.'") (quoting Pension Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983)).

In addition to the sale of assets under section 363(b), a DIP or trustee may sell estate assets as part of a chapter 11 plan. Section 1123(a)(5) of the Bankruptcy Code states that a chapter 11 plan shall provide for adequate means of its implementation, such as the "sale of all or any part of the property of the estate, either subject to or free of any lien" (emphasis added). Similarly, section 1123(b)(4) provides that a plan may "provide for the sale of all or substantially all of the property of the estate, and the distribution of the proceeds of such sale among holders of claims or interests." Finally, section 1141(c) of the Bankruptcy Code provides that, with certain exceptions, "after confirmation of a plan, the property dealt with by the plan is free and clear of all claims and interests of creditors, equity security holders, and of general partners in the debtor."

Sales Free and Clear

Section 363(f) of the Bankruptcy Code authorizes a trustee or DIP to sell property "free and clear of any interest in such property of an entity other than the estate" under any one of five specified conditions. These conditions include, among other things, if applicable nonbankruptcy law permits such a free-and-clear sale, if the sale price exceeds the aggregate value of all liens encumbering the property, or if the interest is in bona fide dispute.

Section 363(f) has been applied to a wide range of interests. See generally Collier on Bankruptcy ("Collier") ¶ 363.06 (16th ed. 2019). Courts, however, have sometimes struggled to identify the outer limits of the term "interest," which is not defined in the Bankruptcy Code or its accompanying legislative history. Most courts reject the narrow approach under which the reach of section 363(f) is limited to in rem property interests or only those claims that have already been asserted at the time the property is sold. Instead, the majority of courts have construed the term broadly to encompass other obligations that may flow from ownership of property, including, for example, successor liability claims (see, e.g., Ind. State Police Pension Trust v. Chrysler LLC (In re Chrysler LLC), 576 F.3d 108 (2d Cir. 2009), cert. granted and judgment vacated on other grounds, 558 U.S. 1087 (2009); In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir. 2003)) and even leasehold interests. See, e.g., Pinnacle Rest. at Big Sky, LLC v. CH SP Acquisitions, LLC (In re Spanish Peaks Holding II, LLC), 872 F.3d 892 (9th Cir. 2017) (notwithstanding the tenant protections set forth in section 365(h)(1), real property can be sold by a debtor-lessor free and clear of a leasehold interest under section 363(f)).

Exception for Consumer Credit Transaction Interests

In 2005, Congress amended section 363 of the Bankruptcy Code to add what is now

section 363(o). That subsection provides as follows:

Notwithstanding subsection (f), if a person purchases any interest in a consumer credit transaction that is subject to the Truth in Lending Act or any interest in a consumer credit contract (as defined in section 433.1 of title 16 of the Code of Federal Regulations (January 1, 2004), as amended from time to time), and if such interest is purchased through a sale under this section, then such person shall remain subject to all claims and defenses that are related to such consumer credit transaction or such consumer credit contract, to the same extent as such person would be subject to such claims and defenses of the consumer had such interest been purchased at a sale not under this section.

Thus, in a bankruptcy sale involving an interest in a qualifying "consumer credit transaction" or a "consumer credit contract," the sale does not "cleanse" the assets of certain successor liability claims.

Section 363(o) was added to the Bankruptcy Code in 2005 in an effort to address problems with "predatory lenders," which were described in 2001 as follows:

We have a new problem with these predatory lenders…. In recent months, several large subprime lenders have obtained orders from bankruptcy courts, providing for the sale of their loans or the servicing rights associated with them under section 363 of the bankruptcy code. Consumers who have attempted to challenge these loans or their servicing obligations based on violations of fair lending laws have been told by the purchasers of these loans they were sold free and clear of any consumer claims and defenses. The fact that innocent borrowers can be left in the lurch is flat out wrong.

147 Cong. Rec. 2018, at *2032 (Mar. 8, 2001) (remarks of Sen. Schumer).

Setoff and Recoupment

Section 553(a) of the Bankruptcy Code provides, subject to certain exceptions, that the Bankruptcy Code "does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case." Section 553 does not create setoff rights—it merely preserves certain setoff rights that otherwise would exist under contract or applicable nonbankruptcy law. See Collier at ¶ 553.04 (citing Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995)).

The related common law remedy of "recoupment" allows a setoff of mutual obligations that arise under the same contract or transaction. See In re Thomas, 529 B.R. 628 (Bankr. W.D. Pa. 2015).

A creditor is precluded by the automatic stay from exercising its setoff rights with respect to a prepetition claim without bankruptcy court approval. See 11 U.S.C. § 362(a)(7). Upon application by the creditor, however, the court will generally permit a setoff if the requirements under applicable law are met, except under circumstances where it would be inequitable to do so. See In re Ealy, 392 B.R. 408 (Bankr. E.D. Ark. 2008). By contrast, the exercise of a right of recoupment does not require court authority, and the automatic stay does not apply. See In re McMahon, 129 F.3d 93, 96 (2d Cir. 1997) ("While a 'setoff' is subject to the automatic stay provision of 11 U.S.C. § 362, a recoupment is not."); In re Thigpen, 590 B.R. 810, 812 (N.D. Ill. 2018) (property subject to recoupment is exempt from the automatic stay).

Chapter 11 Plan Confirmation Requirements: Compliance With Bankruptcy Code, Good Faith, and Best Interests of Creditors

Section 1129 of the Bankruptcy Code sets forth the requirements for consensual and cram-down confirmation of a chapter 11 plan. Sections 1129(a)(1) and (a)(2) mandate that the plan and the plan proponent, respectively, comply with the applicable provisions of the Bankruptcy Code.

Section 1129(a)(3) provides that every chapter 11 plan must be "proposed in good faith and not by any means forbidden by law." This provision has been construed to require that a plan be proposed with honesty and good intentions and with a basis for expecting that a reorganization or liquidation, as the case may be, can be effected. See In re Breitburn Energy Partners LP, 582 B.R. 321, 352 (Bankr. S.D.N.Y. 2018) (citing cases). In keeping with that mantra, bankruptcy courts are required to determine whether a chapter 11 plan, viewed in light of the totality of the circumstances, fairly "achieve[s] a result consistent with the objectives and purposes of the Bankruptcy Code." Matter of Madison Hotel Assocs., 749 F.2d 410, 425 (7th Cir. 1984) (citations omitted); accord Breitburn, 582 B.R. at 352; see generally Collier at ¶ 1129.02[3].

Section 1129(a)(7) requires that "each creditor in an impaired class "(i) has accepted the plan; or (ii) will receive or retain under the plan on account of such claim . . . property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date." Sometimes referred to as the "best interests of creditors test," section 1129(a)(7) is designed to protect rejecting and non-voting members of an impaired class by establishing the minimum that they must receive or retain under the plan. See Kane v. Johns–Manville Corp., 843 F.2d 636, 649 (2d Cir. 1988) ("Subsection 1129(a)(7) incorporates the former 'best interest[] of creditors' test and requires a finding that each holder of a claim or interest either has accepted the plan or has received no less under the plan than what he would have received in a Chapter 7 liquidation."); accord In re Ultra Petroleum Corp., 913 F.3d 533, 545 (5th Cir. 2019).

In a chapter 7 case, the order of distribution of unencumbered bankruptcy estate assets is determined by section 726 of the Bankruptcy Code. This order ranges from payments on priority claims specified in section 507(a), which have the highest ranking, to payment of any residual assets to the debtor, which have the lowest. Distributions are to be made pro rata to claimants of equal ranking within each of the six categories of claims specified in section 726. If claimants in a higher category of distribution receive less than full payment of their claims, lower-category claimants are to receive no distributions.

Bankruptcy Settlements

Rule 9019 of the Federal Rules of Bankruptcy Procedure gives a bankruptcy court the power to approve a proposed compromise or settlement. A court may approve a settlement if it finds that the settlement is fair and equitable, and in the best interests of the estate. See In re Drexel Burnham Lambert Grp., Inc., 134 B.R. 493, 496 (Bankr. S.D.N.Y. 1991) (citing Protective Comm. for Indep. Stockholders of TMT Trailers Ferry, Inc. v. Anderson, 390 U.S. 414, 424 (1968)); accord In re Chemtura Corp., 439 B.R. 561, 593-94 (Bankr. S.D.N.Y. 2010). Such a determination is committed to the discretion of the court. See In re Purofied Down Prods. Corp., 150 B.R. 519, 522 (S.D.N.Y. 1993).

In addition, section 1123(b)(3)(A) of the Bankruptcy Code states that a chapter 11 plan may "provide for . . . the settlement or adjustment of any claim or interest belonging to the debtor or the estate." Even if a settlement does not concern a claim or interest belonging to the debtor or its estate, section 1123(b)(6) provides that a plan may "include any other appropriate provision not inconsistent with the applicable provisions of this title." Therefore, although section 1123(b)(3)(A) expressly permits settlements only of claims and interests belonging to the debtor and its estate, courts consider plan settlements of non-debtor claims under the same standards applied to Rule 9019 settlements. See In re Texaco Inc., 84 B.R. 893, 901 (Bankr. S.D.N.Y. 1988); accord In re Woodbridge Grp. of Cos., 592 B.R. 761 (Bankr. D. Del. 2018); In re NII Holdings, Inc., 536 B.R. 61 (Bankr. S.D.N.Y. 2015).

Ditech Holding

Ditech Holding Corporation (f/k/a Walter Investment Management Corp.) and its affiliates (collectively, "Ditech") operate as a servicer and originator of home mortgage loans and reverse mortgage loans. Ditech is party to approximately one million consumer credit agreements that fall within the scope of section 363(o).

Ditech filed for chapter 11 protection on February 27, 2019, in the Southern District of New York, barely 11 months after the bankruptcy court confirmed a prepackaged chapter 11 plan for its predecessor that eliminated $806 million in debt and turned ownership of most of the company over to bondholders. At the time of the filing, Ditech was subject to thousands of formal and informal proceedings in which consumer creditors asserted claims and defenses of the types described in section 363(o). Those claims covered a "wide range of alleged misconduct" by Ditech relating to the ownership, origination, and/or servicing of mortgages.

In May 2019, the U.S. Trustee appointed an additional official committee ("consumers' committee") to represent homeowners with mortgages that Ditech originated or serviced ("consumer creditors"). The consumers' committee was formed after Ditech's official unsecured creditors' committee agreed to the terms of a global settlement that did not preserve consumer creditors' claims and defenses regarding their mortgages.

The global settlement was the foundation for Ditech's chapter 11 plan, which contemplated an auction sale of Ditech's assets for $1.8 billion to two purchasers. The sale agreements required Ditech to sell the assets in a chapter 11 plan free and clear of consumer creditor claims, including those covered by section 363(o). However, one of the purchasers was willing to consummate the sale at a reduced price if the sale did not "strip" off the claims. Although the plan would have barred consumer creditors from suing the purchasers, it created a "creditor recovery trust" to cover consumer creditor claims that was to be funded by a $5 million carve-out from the collateral of Ditech's term loan lenders.

The only class of creditors entitled to vote, the term loan lenders, accepted the plan. The term loan lenders, the purchasers, and the unsecured creditors' committee supported confirmation of the plan as well as approval of the sale transactions and the global settlement. According to Ditech, because it would be selling the consumer credit agreements under the chapter 11 plan, rather than pursuant to section 363, section 363(o) did not apply, and it could sell the agreements free and clear of the consumer creditor claims and defenses.

The consumers' committee, the U.S. Trustee, and numerous other parties objected to plan confirmation and approval of the related transactions. They argued that, among other things:

• Ditech could not transfer the consumer credit agreements "free and clear" of claims and defenses under the plan without complying with section 363(f) and the limitations set forth in section 363(o);
• Because the plan did not provide for the sale of those assets pursuant to section 363, subject to the limitations set forth in section 363(o), it violated sections 1129(a)(1)-(3);
• Ditech was improperly trying to sell the consumer credit agreements free and clear of rights that cannot be expunged through bankruptcy, including the consumer creditors' common law rights of setoff and recoupment;
• The plan did not satisfy the "best interests" test under section 1129(a)(7) because Ditech's liquidation analysis failed to account for the fact that, in a chapter 7 liquidation, the consumer credit agreements could be transferred only pursuant to a section 363 sale in which section 363(o) would apply; and
• The global settlement was not "fair and equitable" because the $5 million fund did not adequately account for the consumer credit claims.

The Bankruptcy Court's Ruling

Bankruptcy Judge James L. Garrity, Jr. initially denied confirmation of the plan and refused to approve the global settlement.

Section 363 Is Inapplicable to Chapter 11 Plan Asset Sales. Judge Garrity rejected the argument that section 363(o) applies to sales under a chapter 11 plan. First, the judge examined the interplay between sections 363 and 1123, both of which, as noted, authorize the sale of assets in a bankruptcy case. However, he explained, "the 'free and clear' relief available to a debtor under section 363(f) is narrower than that afforded to a debtor under a confirmed plan because the relief is limited to 'interests' in property and only to the extent provided for under section 363(f)(1)-(5)."

Judge Garrity analyzed the legislative history of section 363(o) and concluded that "Congress intended to limit Section 363(o)'s effect to pre-plan sales, not chapter 11 reorganizations, including those effectuated through plan sales." In particular, he noted, as originally proposed in 2001, the amendment that ultimately became section 363(o) would have made "the sale by a trustee or transfer under a plan of reorganization of any interest in a consumer credit transaction" subject to "all claims and defenses which the consumer could assert against the debtor" (emphasis added) (citing 147 Cong. Rec. 2018, at *2031 (Mar. 8, 2001)). However, prior to being finalized in its current form, the language of the proposed provision was altered to remove "under a plan of reorganization," to narrow the scope of section 363(o) to a sale under section 363, and to limit potential successor liability to such claims and defenses available to the consumer had the sale taken place other than under the Bankruptcy Code (citing 147 Cong. Rec. 2184, at *2189-90 (Mar. 13, 2001)). According to Judge Garrity, "there is nothing in the legislative history that suggests that Congress's last change to the amendment that would become section 363(o) was intended to undo the initial compromise which limited the amendment's application to section 363 sales, as opposed to section 363 and plan sales."

Judge Garrity accordingly ruled that "plan sales can be free and clear of claims without invoking Section 363(f)." He acknowledged that chapter 3 of the Bankruptcy Code applies in chapter 11 cases. Even so, he explained that "it does not follow that all such provisions are applicable in every chapter 11 case." Judge Garrity wrote that "where a debtor proposes a sale pursuant to a plan, the sale is not under section 363 and, by its plain terms, section 363(f) is inapplicable."

Judge Garrity held that Ditech's chapter 11 plan, which did not preserve the consumer creditors' rights under section 363(o), nonetheless complied with the "applicable provisions" of the Bankruptcy Code and was not proposed by "means forbidden by law" within the meaning of sections 1129(a)(1)-(3), because section 363 was inapplicable to the sale of assets under a chapter 11 plan.

Recoupment Rights Must Be Left Undisturbed. Ditech and the consumer creditors settled their dispute concerning setoff rights by including a provision in the proposed confirmation order to clarify that confirmation of the plan would not affect the rights of any creditor, with court approval, to exercise common-law setoff rights preserved by section 553 against Ditech or the post-confirmation creditor recovery trust.

Addressing recoupment rights, Judge Garrity explained that "[t]he doctrine of recoupment is a creature of non-bankruptcy law, and a defense—sometimes asserted affirmatively—that does not give rise to a claim or debt that is dischargeable in bankruptcy, or a right to demand payment." He concluded that there was no basis to deny or limit the consumer creditors' common law recoupment rights. Judge Garrity accordingly ruled that the proposed confirmation order should leave those rights undisturbed, provided the exercise of such rights did not require the purchasers "to pay money damages to, refund amounts paid by, or pay monies (except escrow advances) on behalf of or for the account of, the [consumer creditors]."

Ditech's Plan Was Proposed in Good Faith. Judge Garrity held that Ditech proposed its plan in good faith, as required by section 1129(a)(3). Among other things, he found that: (i) Ditech filed for bankruptcy "with the legitimate chapter 11 goal of effectuating a reorganization" that would either preserve its business as a going concern or effect a sale of its business to maximize distributions to creditors and/or allow the business to continue under new ownership; (ii) Ditech filed for chapter 11 because it was facing approximately $110 million in amortization payments due in 2019 and a possible going-concern qualification, which might have triggered defaults and terminations in its capital structure; (iii) during its chapter 11 case, Ditech engaged in meaningful and transparent dialogue with various constituencies, including the consumer creditors; and (iv) Ditech conducted a "robust marketing and sale process" for its businesses.

The Plan Failed the Best Interests of Creditors Test. However, Judge Garrity initially ruled that Ditech's plan failed the best interests test in section 1129(a)(7). Ditech argued that, because its liquidation analysis showed that consumer creditors would receive nothing in a chapter 7 case but would receive $5 million under the plan, the test was satisfied. In a chapter 7 case, Judge Garrity explained, any sale of the consumer credit agreements would be subject to section 363, including section 363(o). Because Ditech's liquidation analysis did not include amounts that might be realized by the consumer creditors from the purchasers, which would likely exceed $5 million, Judge Garrity held that the plan failed the best interests test.

The court rejected Ditech's argument that, as in chapter 13 cases, where a comparable best interests test contained in section 1325(a)(4) does not require consideration of claims against non-debtor third parties, section 1129(a)(7) should also be read to exclude such claims. In short, Judge Garrity concluded, "the best interests tests in sections 1129(a)(7) and 1325(a)(4) are different."

Judge Garrity found Judge Stuart M. Bernstein's ruling in In re Quigley Co., Inc., 437 B.R. 102, 147 (Bankr. S.D.N.Y. 2010), to be persuasive on this issue. In Quigley, Judge Bernstein ruled that a chapter 11 plan that provided the debtor's sole shareholder with a release in exchange for funding an asbestos trust did not satisfy section 1129(a)(7). This was because the debtor's liquidation analysis did not account for the fact that, in a chapter 7 liquidation, the parent would not receive a release and non-settling asbestos creditors would retain the right to pursue their substantial derivative claims against the parent. Judge Bernstein reasoned that, according to its plain terms, section 1129(a)(7) mandates that, "in conducting the best interest analysis, the court must consider both the distributions under the plan and in a hypothetical chapter 7 case, and the 'value of the property that each dissenting creditor will retain under the plan and in the hypothetical chapter 7.'" Id. at 145-46.

In Ditech Holding, Judge Garrity found that Ditech put misplaced reliance on In re Plant Insulation Co., 469 B.R. 843 (Bankr. N.D. Cal. 2012), aff'd, 485 B.R. 203 (N.D. Ca. 2012), rev'd on other grounds, 734 F.3d 900 (9th Cir. 2013), aff'd, 544 F. App'x 669 (9th Cir. 2013). As in Quigley, the debtor in Plant Insulation proposed a chapter 11 plan that contemplated the creation of an asbestos trust and a channeling injunction under section 524(g) of the Bankruptcy Code. The plan provided that insurers who funded the trust would be shielded from future liability for asbestos claims, including claims for equitable contribution asserted by other insurers. Non-settling insurers objected to confirmation of the plan, claiming that it failed the best interests test. They argued that, because the channeling injunction applies only in chapter 11 cases, in a hypothetical chapter 7 liquidation, they would retain their equitable contribution claims against the settling insurers. Once those claims were accounted for, the non-settling insurers contended, the liquidation analysis showed that they would receive a greater recovery in a hypothetical chapter 7 case than under the plan.

The Plant Insulation court rejected that argument. It reasoned that, because the Bankruptcy Code definition of "claim" effectively (albeit not expressly) refers to "the liability of the debtor" and the Bankruptcy Code defines "creditor" to be an "entity that has a [prepetition] claim against the debtor," construing the term "claim" in section 1129(a)(7) to refer only to a liability of the debtor, as distinguished from a third party, "is consistent with the overall content and structure of the Bankruptcy Code." Id. at 887.

Judge Garrity declined to follow Plant Insulation. "It is true that the Bankruptcy Code defines a 'claim' as liability of the debtor," he wrote, "[b]ut it does not follow that section 1129(a)(7)'s reference to 'receiving or retaining' [in] a chapter 7 [case] imports the requirement 'from the debtor' based on that claim." Guided by the express language of section 1129(a)(7) and his conclusion that Quigley was better reasoned, Judge Garrity held that the consumer credit claims were claims against Ditech in the same way that the derivative claims in Quigley were claims against the debtor in that case. He accordingly ruled that such claims must be considered in applying section 1129(a)(7).

Approval of the Global Settlement Denied. Judge Garrity also initially refused to approve the global settlement. In doing so, he noted that the consumers' committee was not party to the settlement and objected to its approval. In addition, according to Judge Garrity, although Ditech asserted that $5 million was a reasonable settlement amount, "the evidence simply does not support that assertion" because Ditech failed to analyze the consumer credit claims "or otherwise attempt to place a value on those claims." He accordingly ruled that Ditech failed to meet its burden of demonstrating that the proposed settlement was fair and equitable to the consumer creditors.

Postscript and Outlook

Shortly after Judge Garrity issued his decision, Ditech filed an amended chapter 11 plan. Under the amended plan, consumer creditors will receive their pro rata share of a $10 million cash pool created as a carve-out from the secured term lender's collateral. Consumer creditors will be enjoined from asserting claims against the purchasers. However, consumer creditors' defenses or rights of recoupment under applicable law are preserved, as long as the purchasers are not required to pay money damages to, refund amounts paid by, or pay monies (except escrow advances) on behalf of a consumer creditor. In addition, consumer creditors retain the right to correct any inaccuracies in their account statements or loan documentation. They will also share with general unsecured creditors in any net cash remaining from Ditech's operations, proceeds of the sale, and certain other amounts after all other claims have been paid in full.

By order dated September 26, 2019, Judge Garrity confirmed the amended plan and approved the related settlement, both of which were supported by the consumers' committee.

Judge Garrity's ruling in Ditech is a positive development for consumer creditors. The ruling also provides useful guidance regarding, among other things, the distinctions between bankruptcy asset sales under section 363 and sales under a chapter 11 plan. Finally, the decision illustrates the importance of establishing a solid evidentiary record supporting each of the required elements for confirmation of a chapter 11 plan—something that Ditech failed to do initially, but ultimately remedied.

Interestingly, prior to Ditech, apparently only a single bankruptcy court had addressed the scope of section 363(o) in a reported decision. SeeIn re MacNeal, 308 F. App'x 311 (11th Cir. 2009) (Truth in Lending Act ("TILA") exemption in section 363(o) did not apply to trustee's "sale" of debtor's claims under TILA to defendant lender, since lender purchased debtor's claims under TILA, not interest in underlying credit transaction).