605 B.R. 10
Bankr. S.D.N.Y.2019Background
- Debtors Ditech Holding Corp. and affiliates operate mortgage origination and servicing; they maintain a centralized cash-management system with ~1,200 accounts, including five primary Citibank operating accounts holding an average aggregate daily balance of ~$95 million.
- Citibank is an Authorized Depository under U.S. Trustee guidelines but had not collateralized the Debtors’ Citibank Accounts as required by 11 U.S.C. § 345(b).
- Debtors sought a waiver under §§ 105(a) and 345(b) to avoid collateralization, arguing (1) moving accounts would be costly, time-consuming, and operationally risky, (2) Citibank is highly rated and risk of loss is minimal, and (3) migration would divert scarce treasury/IT resources during chapter 11.
- After the waiver motion was filed, Citibank offered to collateralize the accounts if Debtors paid the bank’s costs (estimated ~$80,000/month); Debtors nonetheless persisted in seeking waiver.
- The U.S. Trustee objected that Debtors had not shown cause to waive § 345(b); an evidentiary hearing followed and the Treasurer testified for Debtors.
- The Court denied the waiver motion and ordered Debtors to bring the Citibank Accounts into compliance within five business days.
Issues
| Issue | Debtors’ Argument | U.S. Trustee’s Argument | Held |
|---|---|---|---|
| Whether “cause” exists to waive § 345(b) collateralization for Citibank accounts | Waiver needed because migrating accounts would be costly, risky, time-consuming, and divert scarce restructuring resources; Citibank’s strong credit rating minimizes risk | Waiver unsupported: statutory protection exists to safeguard estate funds; Debtors offered insufficient proof of cause and seek to avoid a reasonable cost to secure estate funds | Denied — no cause established; Debtors must collateralize or comply with § 345(b) within five business days |
| Whether Debtors’ size, sophistication, and complex cash-management system justify waiver | Sophistication and complexity favor waiver under a totality-of-the-circumstances test to avoid needlessly handcuffing reorganization | Those factors do not overcome statutory protection when substantial funds are concentrated at one bank and disruption would risk the estate; feasible alternative (bank collateralization) exists | Court recognized sophistication but found concentrated funds and disruption risk weigh toward requiring compliance |
| Whether Citibank’s willingness to collateralize (at cost) affects outcome | Argued fee is burdensome and waiver preferable to incurring administrative expense | Existence of an available collateralization arrangement undercuts Debtors’ claim of impossibility or undue burden | Court held Citibank’s offer to collateralize for a fee counseled against waiver; cost was reasonable relative to interest earned and funds at risk |
| Appropriate standard to determine "cause" under § 345(b) | Apply totality of circumstances factors (as in Service Merchandise) | Same standard; require evidence to show waiver is reasonable and not harmful to estate | Court applied totality-of-circumstances and found Debtors did not meet burden to justify waiver |
Key Cases Cited
- In re Service Merchandise Co., Inc., 240 B.R. 894 (Bankr. M.D. Tenn. 1999) (articulates a totality-of-the-circumstances test for finding “cause” to waive § 345(b) requirements)