Trustee objects to PMI reorganization plan, calls it 'unconfirmable'

By Jim Witters

Wilmington, Del., July 9 - PMI Group, Inc.'s first amended plan of reorganization drew an objection from the U.S. Trustee, who said the plan cannot be confirmed because it is not feasible and because the debtor is not entitled to a discharge, according to documents filed July 9 with the U.S. Bankruptcy Court for the District of Delaware.

PMI's disclosure statement, approved by the court on June 5, identifies four remaining assets: about $200 million cash held by the debtor, about $5 million in cash held by its principal regulated reinsurance subsidiaries, certain tax attributes and a potential litigation claim.

The tax attributes consist primarily of $1.2 billion in net operating losses.

In October 2011, the Arizona Department of Insurance took over the debtor's principal regulated reinsurance subsidiaries.

Roberta A. De Angelis, U.S. Trustee for Region Three, listed these specific objections:

• Liquidating non-individual Chapter 11 debtors are not entitled to a discharge.

The debtors' primary operating entities were taken over and shut down by the ADI, and "the pleadings and representations of the debtors and their counsel throughout the course of this case are that the assets of the estate were being or have been liquidated," the objection states.

Some subsidiaries have been sold or are being sold by the Arizona regulatory agency, not the bankruptcy estate.

The debtor has not engaged in any business since October 2011, according to court documents.

Corporations in such situations are not entitled to a discharge under the bankruptcy code, the trustee said.

In addition, the reorganized debtor will not be engaged in any business after confirmation of the plan.

The plan states that "the debtor is not currently carrying on any business that has the potential to generate significant income or value for the new common stock. In order for the new common stock to have significant value, the reorganized debtor must be able to identify and engage in a business, obtain additional funds to fund such business and successfully operate such business. There is no guarantee that the reorganized debtor will be able to identify and pursue a business or obtain funds necessary to operate such business."

The $5 million left behind for the principal regulated reinsurance entities is, by admission, insufficient to capitalize the unknown business, the trustee said;

• The third-party releases in the plan are improper, because they are "overbroad";

• The plan is not feasible.

"The debtor's plan to acquire an unknown business, raise investment capital and then operate this unknown business successfully is nothing more than conjecture and speculation. A Chapter 11 plan based upon speculation is not feasible, because the court cannot find that confirmation will not be followed by liquidation or the need for further financial reorganization," the trustee argued; and

• The plan is not proposed in good faith.

"Stripped to its essence, the plan distributes substantially all the debtor's cash and issues new common stock in an effort to preserve the corporate shell of the terminated business. It is against public policy to traffic in corporate shells. Exclusive of cash, the only remaining asset is the corporate shell with its tax attributes and any recovery from the potential litigation," according to the trustee.

The plan confirmation hearing is scheduled for 11 a.m. ET on July 18.

PMI is a Walnut Creek, Calif.-based provider of residential mortgage insurance and credit enhancement products. The company filed for bankruptcy on Nov. 23, 2011 under Chapter 11 case number 11-13730.

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