Ditech Objects to Borrower Damages as Bankruptcy Lingers

Pending a judge’s decision on whether the company will move forward with bankruptcy plans, Ditech is objecting to paying borrower damages in the interim. 

Plaintiffs in the case against Ditech, which is currently trying to sell Reverse Mortgage Solutions (RMS) as part of a bankruptcy plan, are pushing for the company to pay damages to a class of borrowers and debtors who have allegedly been impacted by the company. Ditech responded Sunday saying it objects to the claims.

Ahead of the appointed judge’s expected ruling on the company’s bankruptcy plan – on which the fate of the attempted sale of RMS depends – Ditech should be able to remain focused on fulfilling bankruptcy obligations without the additional scrutiny provided by this additional legal obstacle, the company says.

This is according to a court filing made by Ditech’s counsel in the Bankruptcy Court for the Southern District of New York, obtained by RMD.

Ditech on sticking to the proposed bankruptcy plan

Counsel for the plaintiffs previously argued that Ditech’s attempted sale of both its forward and reverse mortgage businesses cannot and should not be made “free and clear” of any outstanding legal cases stemming from individual borrowers and companies seeking monetary damages related to alleged mishandling of foreclosures on the part of Ditech.

To that end, the plaintiffs are seeking monetary damages on a class-action basis that rests outside the purview of the proposed bankruptcy plan, which Ditech’s counsel alleges is improper.

“Plaintiffs here are demanding money damages for pre-petition conduct, purportedly on a class basis,” Ditech’s counsel says in the filing. “They have not, and cannot, cite any legitimate basis in the Bankruptcy Code or relevant case law that would entitle them to proceed with their adversary proceedings, rather than requiring them to proceed through the Court approved proof of claim process.”

Any new decision relating to the plaintiffs’ claims should wait until after the judge makes his ruling on whether or not Ditech can proceed with the currently-proposed bankruptcy plan, Ditech’s counsel says.

Counsel for Ditech also alleges that the plaintiffs are attempting to seek monetary damages even though a part of the bankruptcy plan, if approved, will include a $5 million fund that will be disbursed to claimants. Counsel for plaintiffs previously argued that the $5 million figure was inadequate.

Next steps

Much of what happens next will be determined when the presiding judge either approves or rejects the bankruptcy plan proposal. The hearing in which the judge is expected to announce that decision was originally scheduled to take place in early August, but has been delayed a total of six times and is now scheduled for August 28.

This follows a continually unfolding odyssey of legal and financial issues that have afflicted Ditech, and by extension, RMS. Most recently, creditors and individual borrowers mounted an effort in court earlier this month in an attempt to halt the sale of Ditech’s forward and reverse mortgage business “free and clear” of existing legal obligations.

New Residential, the approved buyer of Ditech’s forward mortgage business, related that Ditech’s legal complications had the possibility of delaying the timetable of its planned purchase, though its CEO related confidence that the sale would go through as planned.

Ditech’s planned sale of RMS has also invited scrutiny from Bank of America over concerns that some elderly borrowers would not have their pre-existing mortgages serviced, and by the New York State Attorney General who contends that Ditech is attempting to circumvent statutory protections for homeowners by selling its mortgage businesses.

In April, it was revealed that a loophole in Ditech’s bankruptcy proceedings invited scrutiny from both consumer advocacy groups and the Department of Justice. In the midst of the financial difficulties that Ditech is embroiled in, RMS seems to be relatively insulated from the larger problems of its parent company, at least from an operational perspective.

In 2018, Ditech emerged from its first bankruptcy filing after having previously done business under the name Walter Investment Management Corporation. Walter acquired RMS in 2012 and Security One Lending in 2013, and in 2017, Walter decided to stop originating Home Equity Conversion Mortgages (HECMs). RMS then turned to servicing only and closed its retail channel.

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