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You can’t sell what doesn’t exist.
Plano, Texas-based FGMC abruptly shut down June 29 and filed for Chapter 11 bankruptcy protection the next day. Although Chapter 11 allows a company to continue operating while it reorganizes its finances, FGMC is closed and has told the court it intends to liquidate its assets.
In early September, the company filed a motion with the court seeking approval for bidding procedures “for one or more sales or the sale of substantially all” of its assets and to schedule an auction, among other requests. The bidding procedure request was approved by the court on Sept. 29.
That prompted a flurry of objections, including from Fannie Mae, which claims in its filing on Oct. 20 that FGMC may be attempting to auction off a “shell entity” and “licenses” with Fannie Mae that do not exist.
'Does Not Issue' Licenses
Fannie Mae’s objection notes that it and FGMC entered into a post-bankruptcy filing settlement regarding the company’s contract with the government-sponsored enterprise (GSE). The settlement, it states, “was approved by the court and specifically provided for the termination of the lender contract, broad releases, and indemnification rights.”
Fannie Mae then states, unequivocally, that it “does not issue seller/servicer ‘licenses,’ and has issued no such license” to FGMC. It adds that FGMC “cannot sell a seller/servicer license that never existed.”
It does note in its objection that while FGMC’s motion requests approval of a future sale, “it is primarily a motion for approval of bid procedures and the scheduling of a sale hearing after an auction. As a result, the motion includes scant detail regarding any proposed sale aside from a vague reference to the sale of undefined ‘assets.’”
Fannie Mae is just one of several financial organizations that once partnered with FGMC to file objections to the sale of its assets, including Freddie Mac and TIAA Bank.
In their separate objections, filed with the U.S. Bankruptcy Court for the District of Delaware, the financial organizations all claim that items to be auctioned may include assets that FGMC does not have the right to sell.
Freddie Mac Also Objects
In its objection, also filed Oct. 20, the Federal Home Loan Mortgage Corp., or Freddie Mac, notes that FGMC was an “approved Freddie Mac seller/servicer,” and at the time it shut down was servicing “approximately 899 mortgage loans that are presently owned by, were subsequently transferred to, or were otherwise acquired by Freddie Mac.”
The two organizations on Aug. 31 also entered a settlement agreement that provided for, among other things, “Freddie Mac’s purchase of up to $25 million in FGMC-originated, Freddie Mac-eligible loans” and the right to consent to any transfer of servicing contract rights and any assignment of the servicing contract between Freddie Mac and FGMC.
That agreement also stipulated that FGMC intended to transfer “all of the Debtors’ origination and sale representation and warranty liability and servicing representation and warranty liability” on its existing servicing portfolio” to Servis One Inc., doing business as BSI Financial Services.
According to the agreement, if FGMC’s contract for servicing loans on behalf of Freddie Mac is sold to BSI by Nov. 1, Freddie Mac agreed to “reduce the amount of prepetition repurchase obligations owing by (FGMC) to Freddie Mac from $2.5 million to $75,000.”
Freddie Mac’s objection results from a motion filed by FGMC on Sept. 12, in which it seeks to retain and employ Strategic Mortgage Finance Group LLC (STRATMOR) as an investment banker.
“STRATMOR has been asked to handle the sale of certain remaining assets of the business, including the ‘shell’ entity containing Fannie Mae and Freddie Mac Seller/Servicer ‘licenses’ on an ‘unencumbered’ basis.”
Subsequent filings, Freddie Mac claims, appear to undermine its settlement agreement with FGMC. As stated in its objection, “it does not appear that (FGMC) seek to assume and/or assign any investor agreement with Freddie Mac pursuant to any sale transaction, the plan or otherwise.”
Freddie Mac adds that “it is unclear which assets” FGMC will seek approval to sell” under the sale motion.
TIAA Hasn't Been Paid
In its motion objecting to the sale of assets, TIAA Bank states that FGMC services mortgage loans owned by TIAA, and holds “no less than $636,419.71” it collected as servicer of those loans.
“These serviced loans and funds are owned by TIAA Bank and are not property of the debtor’s bankruptcy estate; the estate has no right or claim to them,” the motion states.
TIAA Bank notes that FGMB “has not remitted any payments” to the bank under the servicing agreements since it filed for bankruptcy court protection on June 30. “Further, the debtor has not complied with its reporting requirements under the servicing agreements, which leaves TIAA Bank unable to determine exactly how much money the debtor is holding that is due to TIAA Bank.”
TIAA Bank said it filed its objection to the asset sale “to the extent the loans or funds are contemplated as part of the transaction.”
The sale hearing currently is set for Oct. 31, but the bankruptcy court judge is expected to rule on the motions before that date.