The bankruptcy plan administrator for Reverse Mortgage Investment Trust (RMIT), the parent company of former industry lender Reverse Mortgage Funding (RMF), has filed a court petition to convert from Chapter 11 bankruptcy to Chapter 7 bankruptcy. The RMIT/RMF estate has run “out of money” to continue under Chapter 11, according to court filings reviewed by RMD.

If approved by the presiding judge, the move would allow the RMIT estate to sell off remaining assets to satisfy creditor claims, can provide an additional mechanism for resolving disputes and could also reduce administrative costs the estate must continue to pay under Chapter 11.

TCB and Ginnie Mae dispute

RMIT filed for Chapter 11 bankruptcy in November 2022. Texas Capital Bank (TCB) alleges that its ongoing dispute with Ginnie Mae stems from loans made to RMF that were requested by Ginnie Mae, and the dispute is central to the conversion petition.

The RMIT bankruptcy plan administrator’s petition states that TCB financed RMF’s tail advances, encompassing draw disbursements, mortgage insurance premiums, fees, or charges. TCB received first-priority liens on RMIT’s collateral, including proceeds from the tail advances, in exchange for the loans.

But when Ginnie Mae seized RMF’s servicing portfolio in December 2022, the government-owned corporation “contended that such seizure also extinguished TCB’s rights to the DIP liens on the DIP tail advances, and further asserted that its seizure of [RMF’s mortgage servicing rights (MSRs)] meant that TCB had no rights to any proceeds from the collateral securing TCB’s loans,” the filing said.

Hopes under Chapter 7 bankruptcy

That dispute is playing out in a direct, separate court case between TCB and Ginnie Mae, with the government recently filing its initial response to TCB’s complaint. A March 2023 agreement also stipulated that if TCB would be unable to recover the money it lent to RMF, the bankrupt entity would “bear a material risk that the Chapter 11 Cases may be converted to cases under Chapter 7 of the Bankruptcy Code,” the filing reads.

The plan administrator seeks conversion to Chapter 7 to preserve the value of the estate’s remaining assets and ease the liquidation process.

“The Plan Administrator hopes that by converting this case, instead of seeking dismissal or simply resigning, that the estate will be able to preserve value of any potential recovery from the TCB dispute or other litigation for the benefit of all unsecured creditors,” the filing reads. “Absent conversion and the installation of a chapter 7 trustee, this value could be significantly eroded, if not entirely eliminated.”

‘Nominal funds’ remain without resolution of TCB dispute

Without this conversion, the bankruptcy proceeding cannot be resolved, the administrator contends.

“[T]here are nominal funds in [RMIT’s] estates that remain after the transfer of the TCB DIP collateral to TCB and such funds are inadequate to fund ongoing administrative expense obligations necessary to liquidate and recover proceeds for distribution,” the filing reads.

“Moreover, any proceeds [that] would be recovered will be directed to TCB ahead of any other holders of allowed claims. The Plan Administrator has no ability to continue pursuing recovery of the assets in [RMIT’s] estates for either TCB or all older holders of allowed claims because of its lack of resources.”

However, the court also must determine if another potential remedy — including dismissal of the case — would be “in the best interests of the creditors and the estate,” the filing said. But a conversion to Chapter 7 would be in the best interest of all stakeholders, according to the administrator.

“While it is unclear at this juncture how the TCB dispute will conclude, there remains the possibility of future distributions being available to creditors. If the Chapter 11 Cases were to be dismissed, all creditors, including TCB, could lose the opportunity to receive funds from the estate.”

The creditors themselves would also “be in a better position if the Chapter 11 case converted to one under Chapter 7 which would remain and be preserved as a vessel that can resolve any remaining disputed unsecured claims, and distribute funds to all creditors, if TCB is successful in the TCB dispute and thereafter returns funds to the estate.”

The differences between Chapters 7 and 11

Chapter 11 bankruptcy is largely considered a “reorganization” bankruptcy, while Chapter 7 is understood to be a “liquidation” bankruptcy.

Typically speaking, Chapter 11 bankruptcy is used by companies that seek to continue operating, but must reorganize their assets and finances to continue operating. A company seeking Chapter 7 does not typically have aspirations to continue operating.

The bankrupt entity typically has less control over asset value negotiations with creditors if under Chapter 7. Chapter 11 is also more typically used by companies with complex balance sheets, according to an overview of the differences by the Texas-based Lane Law Firm.