449 F.3d 588 (3rd Cir. 2006), 05-2032, In re Oakwood Homes Corp.

Docket Nº:Jefferson-Pilot Life Insurance Company; Jefferson-Pilot Financial Insurance; Tyndall Partners, LP and Tyndall Institutional Partners, LP, Appellants in No. 05-2032.
Citation:449 F.3d 588
Case Date:June 09, 2006
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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449 F.3d 588 (3rd Cir. 2006)


Jefferson-Pilot Life Insurance Company; Jefferson-Pilot Financial Insurance; Tyndall Partners, LP and Tyndall Institutional Partners, LP, Appellants in No. 05-2032.

*(Amended in accordance with Clerk's Order dated 7/22/05).

In re Oakwood Homes Corporation, Debtor.

JP Morgan Chase Bank, Appellant in No. 05-2033.

Nos. 05-2032, 05-2033.

United States Court of Appeals, Third Circuit

June 9, 2006

Argued Feb. 21, 2006.

On Appeal from the United States District Court for the District of Delaware, D.C. Civil Nos. 04-cv-00835, 04-cv-00836, 04-cv-00837, 04-cv-00838 and 04-cv-00839, District Judge: Honorable Joseph J. Farnan, Jr.

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G. Eric Brunstad, Jr. (Argued), Timothy B. DeSieno, Rheba Rutkowski, Bingham McCutchen LLP, Hartford, CT, Russell C. Silberglied, Jason M. Madron, Richards, Layton & Finger, P.A., Wilmington, DE, John J. Galban, Seward & Kissel LLP, New York, NY, for Appellants in 05-2032 & 05-2033.

Robert J. Dehney, Gilbert R. Saydah, Jr., Morris, Nichols, Arsht & Tunnell, Wilmington, DE, Robert J. Stark, Brown Rudnick Berlack Israels, New York, NY, for OHC Liquidation.

Michael B. Fisco (Argued), Faegre & Benson LLP, Minneapolis, MN, Karen C. Bifferato, Connolly Bove Lodge & Hutz LLP, Wilmington, DE, for Appellee U.S. Bank National Association.

Before McKEE, SMITH, and VAN ANTWERPEN, Circuit Judges.


VAN ANTWERPEN, Circuit Judge.

Consolidated before us are two appeals by JP Morgan Chase Bank ("JP Morgan"). JP Morgan challenges the District Court's order affirming the Bankruptcy Court's decision to reduce claims filed by JP Morgan, the trustee for the holders of certain certificates, after objections were filed by the U.S. Bank National Association ("U.S. Bank"), the indenture trustee for the holders of certain more senior notes. The Bankruptcy Court's dual, but related, rulings first disallowed any part of JP Morgan's claims for unmatured interest arising under a Guarantee on the certificates, then further discounted the principal of the claims to present value. JP Morgan alleges that discounting the principal of the claims to present value is unauthorized by the Bankruptcy Code, and results in inequitable treatment of like creditors. JP Morgan does not appeal the District Court's affirmance of the Bankruptcy Court's disallowance of claims for unmatured interest. We will reverse the order of the District Court with respect to present value discounting of principal.


A. Oakwood and the Trusts

These appeals arise from the bankruptcy proceedings of Oakwood Homes Corporation ("Oakwood"), a builder and seller of prefabricated homes. Oakwood's subsidiaries frequently extended credit to home-buyers under long-term mortgage arrangements, then securitized these mortgages by selling them to trusts set up for this purpose ("the Trusts").1 The Trusts issued various certificates in order to raise

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the money to pay Oakwood for the mortgages. The certificates were serviced by the Trusts with the funds paid by customers under their mortgages. The buyers of the certificates were entitled to periodic payments of principal and interest.

At issue here are certain low-priority certificates issued by several of the Trusts over the course of three years. The certificate holders represented by JP Morgan bought approximately $100 million of these certificates, known as "B-2 Certificates," from underwriters. With such low payment priority relative to other issued certificates, the B-2 Certificates were understandably difficult to market. Oakwood therefore provided a Guarantee of payment for the B-2 Certificates, whereby Oakwood promised to cover any shortfalls in payments by the Trusts of principal or interest. For example, in the Guarantee for one of the Trusts at issue here, Oakwood agreed to "unconditionally and absolutely guarantee[] the full and prompt payment to the Trustee on or prior to the Remittance Date relating to each Distribution Date of the Limited Guarantee Payment Amount."

The B-2 Certificates, and distributions thereon, were governed by the Pooling and Servicing Agreement for each Trust. One Trust at issue here, the 1997-D Trust, 2 issued certificates with a total principal value of over $250 million, of which about $10 million were B-2 Certificates. The Pooling and Servicing Agreement explicitly provided for "the distribution of the principal of and interest on the Certificates in accordance with their terms." The agreement specified the applicable interest rates, distribution dates, and priorities for each of the classes of issued certificates, including the B-2 Certificates. On each distribution date, the trustee of the Trust was instructed to distribute principal and interest payments to each class, in order of priority. Distribution dates stretched almost to the year 2030.

The distributions from the Trusts fundamentally depended on the mortgage customers making their scheduled mortgage payments to the Trusts. This did not happen in many cases. The future ability of the Trusts to make principal and interest payments to the B-2 Certificate holders, who had the lowest payment priority, therefore came into doubt. Such nonpayment would trigger Oakwood's obligation under the Guarantees to ensure full payment of principal and interest to the B-2 Certificate holders.

B. Bankruptcy Proceedings

Oakwood filed for Chapter 11 bankruptcy protection on November 15, 2002, in the United States Bankruptcy Court for the District of Delaware. Various creditors filed proofs of claim with the Bankruptcy Court. U.S. Bank, for example, filed proofs of claim as indenture trustee for holders of $300 million of more senior notes issued directly by Oakwood. JP Morgan filed proofs of claim on behalf of B-2 Certificate holders, seeking over $1 billion. The holders of $605 million of these claims, covered under different Guarantees than those at issue here, settled their claims, leaving about $400 million in claims remaining.

JP Morgan alleged that because the Trusts were unable to fully service the B-2 Certificates, Oakwood was, and would continue to be, liable for the principal and interest shortfalls on the Certificates by virtue of the Guarantee. Of the $400 million

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in claims, about $116 million was attributable to future shortfalls in the Trusts' payment of principal to the B-2 Certificate holders. Another $1 million was attributable to shortfalls in the Trusts' payment of interest, due before oakwood filed its bankruptcy petition ("pre-petition interest"). The remainder was attributable to future shortfalls in interest payments, that would come due after the petition date ("post-petition interest" or "unmatured interest").

U.S. Bank filed objections to JP Morgan's claims on October 10, 2003, and November 21, 2003, pursuant to the objection provisions of 11 U.S.C. § 502. U.S. Bank alleged (1) JP Morgan's claims should not include post-petition interest; and (2) JP Morgan's remaining claims for principal payments should be discounted to present value as of the bankruptcy petition date. The parties stipulated to the shortfalls in principal and interest payments that Oakwood, as Guarantor, would be obligated to pay at various distribution dates on each Trust's B-2 Certificates.

Following several hearings, the Bankruptcy Court issued two rulings relevant here. First, the Bankruptcy Court at a hearing on November 26, 2003, disallowed any portion of JP Morgan's claims attributable to post-petition interest, totaling hundreds of millions of dollars, pursuant to 11 U.S.C. § 502(b)(2) ("allow such claim . . . except to the extent that . . . such claim is for unmatured interest"). Second, the Bankruptcy Court at a hearing on January 23, 2004, ruled without discussion or explanation that the portion of the claims attributable to principal shortfalls ($116,370,915) should be discounted to present value pursuant to language in 11 U.S.C. § 502(b) directing a court to "determine the amount of such claim . . . as of the date of the filing of the petition." The Bankruptcy Court entered orders on May 6, 2004, reflecting these rulings, ultimately allowing JP Morgan's claims for pre-petition interest and $30,491,930 in principal claims.3

While immaterial to this appeal, we note that the Bankruptcy Court approved a reorganization plan for Oakwood on April 16, 2004. JP Morgan will ultimately receive a distribution equal to between 37.4% and 50% of its allowed claims.

C. Appeals and Collateral Litigation

Acting now on behalf of the holders of B-2 Certificates allegedly entitled to $95.5 million (of the $116 million at issue in the Bankruptcy Court) in future principal shortfall payments, JP Morgan appealed the Bankruptcy Court's Orders to the District Court for the District of Delaware on May 17, 2004. The District Court affirmed both of the Bankruptcy Court's rulings – disallowing interest and discounting principal – on February 22, 2005.

The District Court rejected JP Morgan's argument that 11 U.S.C. § 502(b) did not require discounting an interest-bearing unmatured principal claim to present value on top of disallowing all post-petition interest, and that such a further reduction would be "double discounting." In so doing, the District Court held that § 502(b) was clear and unambiguous in its instruction to discount a claim to present value. The District Court stated that it was "not persuaded that the distinction between interest-bearing claims and non-interest-bearing claims is significant to the issue at bar." Although the Bankruptcy Court had

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provided no explanation for its rulings, the District Court concluded that the...

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