Creditors v. UMB Bank, N.A. (In re Residential Capital, LLC)

• Citation: 497 B.R. 403
• Decision Date: 20 September 2013
• Docket Number: Case No. 12–12020 (MG) Jointly Administered,Adversary Proceeding No. 13–01277,(MG), Adversary Proceeding No. 13–01343(MG)
• Parties: In re: Residential Capital, LLC, et al., Debtors. Official Committee of Unsecured Creditors, on behalf of the estates of the Debtors, Plaintiff, v. UMB Bank, N.A., as successor indenture trustee under that certain Indenture, dated as of June 6, 2008; and Wells Fargo Bank, N.A., third priority collateral agent and collateral control agent under that certain Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009, Defendants. Residential Capital, LLC, et al, Plaintiffs, v. UMB Bank, N.A., as successor indenture trustee under that certain Indenture, dated as of June 6, 2008; and Wells Fargo Bank, N.A., third priority collateral agent and collateral control agent under that certain Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009, Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

497 B.R. 403

In re: Residential Capital, LLC, et al., Debtors.

Official Committee of Unsecured Creditors, on behalf of the estates of the Debtors, Plaintiff,

v.UMB Bank, N.A., as successor indenture trustee under that certain Indenture, dated as of June 6, 2008; and Wells Fargo Bank, N.A., third priority collateral agent and collateral control agent under that certain Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009, Defendants.

Residential Capital, LLC, et al, Plaintiffs,

v.UMB Bank, N.A., as successor indenture trustee under that certain Indenture, dated as of June 6, 2008; and Wells Fargo Bank, N.A., third priority collateral agent and collateral control agent under that certain Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009, Defendants.

Case No. 12–12020 (MG) Jointly Administered

Adversary Proceeding No. 13–01277(MG), Adversary Proceeding No. 13–01343(MG)

United States Bankruptcy Court, S.D. New York.

September 20, 2013

Akin Gump Strauss Hauer & Feld LLP, Special Counsel to UMB Bank, N.A., One Bryant Park, New York, N.Y. 10036, By: David M. Zensky, Esq.

Kramer Levin Naftalis & Frankel LLP, Counsel for the Official Creditors' Committee, 1177 Avenue of the Americas, New York, N.Y. 10036, By: Gregory A. Horowitz, Esq., Kenneth Eckstein, Esq.

White & Case LLP, Attorneys for Ad Hoc Group of Junior Secured Noteholders, 1155 Avenue of the Americas, New York, N.Y. 10036, By: J. Christopher Shore, Esq.

Morrison & Foerster LLP, Attorneys for Debtors, 1290 Avenue of the Americas, New York, N.Y. 10104, By: Jamie A. Levitt, Esq.

Curtis, Mallet–Prevost, Colt & Mosle LLP, Conflicts Counsel to Debtors, 101 Park Avenue, New York, N.Y. 10178, By: Theresa Foudy, Esq.

Chapter 11

MEMORANDUM OPINION DENYING WITHOUT PREJUDICE UMB BANK'S MOTION TO DISMISS COUNTS 3 AND 5, AND GRANTING IN PART AND DENYING IN PART THE COMMITTEE'S MOTION TO DISMISS CERTAIN JUNIOR SECURED NOTEHOLDER COUNTERCLAIMS

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Pending before the Court are two motions: (1) Defendants UMB Bank, N.A. and the Ad Hoc Group of Junior Secured Noteholders' Motion to Dismiss in Part the Debtors' First Amended Complaint to Determine Extent of Liens and for Declaratory Judgment (“Claim Motion,” ECF Doc. # 52) ¹; and (2) Debtors' and Official Committee of Unsecured Creditors' Motion to Dismiss Certain of the Defendants' Counterclaims (“Counterclaim Motion,” ECF Doc. # 53). These motions relate to two Adversary Proceedings: the first, filed on February 28, 2013, by the Official Committee of Unsecured Creditors (“Committee”) against UMB Bank, N.A., as successor indenture trustee (“UMB”) under that certain Indenture, dated as of June 6, 2008 (the “Indenture”), and Wells Fargo Bank, N.A. (“Wells Fargo”), as third priority collateral agent and collateral control agent (“Collateral Agent”) under an Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009 (the “JSN Pledge Agreement”) (“Committee Adversary Proceeding,” Adv. Pro. 13–01277(MG)); the second, filed on May 3, 2013, by the Debtors against UMB and Wells Fargo (“Debtors' Adversary Proceeding,” Adv. Pro. 13–01343(MG)). On June 21, 2013, the Court consolidated the two cases. Following consolidation, UMB and the Ad Hoc Group of Junior Secured Noteholders (the “JSNs,” and together with UMB, the “Defendants”) filed counterclaims against the Debtors and the Committee.

In the Claim Motion, the Defendants seek dismissal of two of the six counts asserted in the Debtors' Amended Complaint. The Debtors and the Committee filed a joint objection to the Motion (ECF Doc. # 63), and the Defendants filed a reply (ECF Doc. # 75).

In the Counterclaim Motion, the Debtors and the Committee (collectively, the “Plaintiffs”) seek dismissal of fourteen Counterclaims (5–6, 7, 9, 22–25, 26–30, and 35) in the Committee Adversary Proceeding ( Answer, Affirmative Defenses, and Counterclaims of Defendants UMB Bank, N.A. and the Ad Hoc Group of Junior Secured Noteholders to Debtors' First Amended Complaint to Determine Extent of Liens and for Declaratory Judgment, “JSN Counterclaims”, ECF Doc. # 49, filed under seal). The Defendants filed an objection to the Counterclaim Motion (“Objection,” ECF Doc. # 64), and the Plaintiffs filed a reply (ECF Doc. # 76).

The Court heard argument on the motions on August 28, 2013. Because a Phase I trial of the consolidated cases was already scheduled for October 15, 2013, the Court provided a bottom line ruling on the motions from the bench at the conclusion of the arguments, followed by entry of a written order on August 29, 2013 (ECF Doc. # 94), amended by agreement in one respect by an order entered on September 18, 2013 (ECF Doc. # 98). During the bench ruling, the Court stated that a written opinion would follow explaining the reasoning for the decision. This Opinion provides that explanation.

I. BACKGROUND

A. Claim Motion Background

On or about June 6, 2008, Residential Capital, LLC (“ResCap”) entered into various financing transactions in connection with the issuance of approximately $4 billion of 9.625% Junior Secured Guaranteed Notes Due 2015 (“Junior Secured Notes”). On December 30, 2009, ResCap and certain of its affiliates entered into the JSN Pledge Agreement (attached as Ex. C to Adversary Complaint for Declaratory Judgment, Avoidance of Liens, and Disallowance of Claims, “Compl.,” ECF Doc. # 1), pursuant to which ResCap, GMAC Mortgage LLC (“GMACM”), Residential Funding Company, LLC (“RFC”), and certain other Debtor guarantors ostensibly granted or guaranteed “all-asset” liens in favor of the JSNs (including liens on general intangibles), subject to numerous exclusions and carve-outs that significantly limited the scope of the grant. ( See First Amended Complaint to Determine Extent of Liens and for Declaratory Judgment, 13–01343, ECF Doc. # 8 (“Am.Compl.”) ¶ 18; JSN Pledge Agreement §§ 2–5.)

In late 2008, Ally Financial, Inc. (“AFI”), as initial lender and lender agent, executed a $430 million loan agreement with two ResCap subsidiaries as borrowers. (Am.Compl. ¶ 28.) AFI executed another $370 million loan agreement in June 2009 with two ResCap subsidiaries as borrowers. On December 30, 2009, these two credit facilities were merged into a $1.1 billion loan facility by and among RFC, GMACM, as borrowers, ResCap and other affiliates as guarantors, and AFI as agent and lender (the “AFI LOC”). ( Id.)

Beginning in 2009, Wells Fargo, in its capacity as Collateral Agent for each of the AFI Senior Secured Credit Facility and the Notes, executed releases of AFI's and the JSNs' liens on the collateral in accordance with the terms prescribed by an Intercreditor Agreement ² and the JSN Indenture. The releases included all Pledged Mortgage Loans, all Subject Mortgage Loans, and All Servicing Rights Collateral, among other assets. (JSN Counterclaims ¶ 77.) The Collateral Agent had the authority to release whatever liens the JSNs had been granted under the JSN Pledge Agreement because the agreement granted the security interests at issue “to the Third Priority Collateral Agent.” (JSN Pledge Agreement § 2, at 13.)

The Collateral Agent also filed UCC financing statement amendments listing various categories of collateral being released. ( See ECF Doc. # 8, Ex. F.) Shortly thereafter, some or all of the released collateral was pledged to support the AFI LOC. (Am.Compl.¶ 30.) The JSNs do not allege that they ever challenged the collateral releases before May 14, 2012 (the “Petition Date”).

On the Petition Date, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, and on May 16, 2012, the United States Trustee for the Southern District of New York appointed nine members to the Committee. Also on the Petition Date, the Debtors filed a motion seeking to use cash collateral to continue operating their businesses, a request that the Court granted on June 25, 2012 (“Cash Collateral Order,” 12–12020, ECF Doc. # 491). Pursuant to the Cash Collateral Order, the Debtors stipulated to the validity of liens and security interests on all assets constituting “Collateral” under the Junior Secured Notes Documents. ( Id. ¶ 5.) These stipulations (“Stipulations”) provided the Committee with a time period to challenge the validity of the liens and security interests granted to the Secured Parties. ( Id. ¶ 28.)

The Debtors' Complaint challenges certain liens and security interests stipulated to in the Cash Collateral Order and alleges that the JSNs are not oversecured under Bankruptcy Code section 506. The Complaint asserts six counts against the Defendants. The Defendants request that the Court dismiss the following counts:

? Count III: A declaratory judgment that the JSNs are not entitled to a lien on the assets that secure the AFI LOC or any other collateral that was released by the collateral agent under the JSN Indenture.

? Count V: A declaratory judgment that Defendants are undersecured because (i) to be oversecured, Defendants must be oversecured at any individual Debtor entity that has assets against which the Defendants assert liens, without reference to collateral at other Debtor entities; and (ii) Defendants are not oversecured at any individual Debtor entity against whose assets Defendants assert liens.

B. Counterclaim Motion Background

After the Court entered the Cash Collateral Order, the Committee conducted an investigation and identified a $1.1 billion discrepancy in the Debtors' prepetition and post-petition disclosures regarding Debtors' grants of liens on and security interests in certain of their assets to the Collateral Agent (“Notes Collateral”). The Debtors' audited financial statements for the year ended December 31, 2011, and unaudited financial statements for the quarter ended March 31, 2012 (the most recent statements...