First Guaranty disclosure statement lacks information, trustee says

By Sarah Lizee

Olympia, Wash., Sept. 27 – First Guaranty Mortgage Corp.’s disclosure statement for its Chapter 11 plan drew an objection on Monday from Regions 3 and 9 U.S. trustee Andrew R. Vara, according to court documents filed with the U.S. Bankruptcy Court for the District of Delaware.

Vara said the disclosure statement doesn’t give enough information about what assets the debtors have left to liquidate.

It also doesn’t tell general unsecured creditors what recovery percentage they can expect to receive, and when they can expect to receive it, the U.S. trustee added.

The disclosure statement doesn’t describe the WARN Act adversary proceeding that was filed against the debtors on the petition date, or the risks it poses, Vara said.

The debtors terminated about 471 of their 600 employees shortly before filing bankruptcy. If termination-related claims of those former employees are allowed under bankruptcy code, that could add $7 million to the estimated $1.5 million in priority non-tax claims in class 1, the U.S. trustee said.

“Priority claims totaling $7 million would be massively consequential in cases that recently had about $23.1 million cash on hand, and where the insider cash-flow DIP lender is expected to receive a 10%-35% recovery,” Vara said.

“Put differently, if the combined plan depends on the debtors’ successful future defense of the WARN Act adversary proceeding, then the combined plan is not feasible because its success is only possible, not reasonably likely.”

Vara added that the plan contains non-consensual third-party releases. Unimpaired creditors, creditors who don’t vote, and creditors who vote to reject but don’t opt out of the third-party releases would be deemed to give third-party releases.

The U.S. trustee said the releases should be addressed now, as they may affect the forms of ballot.

A hearing on interim approval of the disclosure statement is scheduled for Sept. 28.

The Plano, Tex.-based mortgage lender filed Chapter 11 bankruptcy on June 30 under case number 22-10584.

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