Drennen v. Certain Underwriters At Lloyd's of London (In re Residential Capital), Case No. 12-12020 (MG) (Jointly Administered)
| Decision Date | 27 December 2019 |
| Docket Number | Case No. 12-12020 (MG) (Jointly Administered),Adv. No. 15-01025 (SHL) |
| Citation | 610 B.R. 725 |
| Parties | IN RE: RESIDENTIAL CAPITAL, et al., Debtors. Rowena Drennen, Flora Gaskin, Roger Turner, Christie Turner, John Picard and Rebecca Picard, individually and as the representatives of the Kessler Settlement Class, Steven and Ruth Mitchell, individually and as the representatives of the Mitchell Settlement Class, and ResCap Liquidating Trust, Plaintiffs, v. Certain Underwriters at Lloyd's of London, et al., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
WALTERS, RENWICK, RICHARDS, SKEENS & VAUGHN, P.C., Counsel for the Kessler Class and the Mitchell Class, 2500 City Center Square, 1100 Main, Kansas City, Missouri 64105, By: R. Fredrick Walters, Esq., Karen W. Renwick, Esq., David M. Skeens, Esq., Garrett M. Hodes, Esq., Michael B. Sichter, Esq.
CARLSON LYNCH SWEET & KILPELA, LLP, Counsel for the Kessler Class, 115 Federal Street, Suite 210, Pittsburgh, Pennsylvania 15212, By: R. Bruce Carlson, Esq., Gary Lynch, Esq., Edwin J. Kilpela, Jr., Esq.
PERKINS COIE, LLP, Counsel for the ResCap Liquidating Trust, 700 13th Street NW, Suite 600, Washington, DC 20005, By: Selena J. Linde, Esq., Vivek Chopra, Esq., Alexis Danneman, Esq.
TROUTMAN SANDERS LLP, Counsel for Clarendon National Insurance Company, 401 9th Street NW, Washington, DC 20004, By: John W. Duchelle, Esq., Thomas S. Hay, Esq.
KAUFMAN DOLOWICH & VOLUCK, LLP, Counsel for Continental Casualty Company, 60 Broad Street, 36th Floor, New York, New York 10038, By: Patrick M. Kennell, Esq., Kevin M. Mattessich, Esq.
ROBINSON & COLE LLP, Counsel to Certain Interested Underwriters and Lloyd's, London, Chrysler East Building, 666 Third Avenue, 20th Floor, New York, New York 10017, By: Lawrence Klein, Esq., J. Gregory Lahr, Esq., Soo Y Kim, Esq.
FORAN GLENNON PALANDECH PONZI & RUDLOFF P.C., Counsel to Those Certain Underwriting Members at Lloyd's, London and Those Companies Whose Names are Severally Subscribed to Policy No. FD0001142 and Those Certain Underwriting Members at Lloyd's, London and Those Companies Whose Names are Severally Subscribed to Policy No. FD0001144, Twin City Fire Insurance Company, Continental Casualty Company, Clarendon National Insurance Company, Swiss Re International S.E. (formerly know as SR International Business Insurance Company Ltd.), Steadfast Insurance Company, St. Paul Mercury Insurance Company, and North American Specialty Insurance Company, 222 N. La Salle Street, Suite 1400, Chicago, Illinois 60601, By: Susan N.K. Gummow, Esq., John Eggum, Esq.
ARNOLD & PORTER KAYE SCHOLER LLP, Counsel to North American Specialty Insurance Company, 250 West 55th Street, New York, New York 10019, By: Daniel Bernstein, Esq.
CAHILL GORDON & REINDEL LLP, Counsel for Swiss Re International S.E. (formerly known as SR International Business Insurance Company Ltd.), 80 Pine Street, New York, New York 10005, By: Thorn Rosenthal, Esq., Samuel G. Mann, Esq., Tamara M. O'Flaherty, Esq.
KAUFMAN BORGEEST & RYAN LLP, Counsel for St. Paul Mercury Insurance Company, 200 Summit Lake Drive, 1st Floor, Valhalla, New York 10595, By: Scott A. Schechter, Esq., Patrick Stoltz, Esq., Matthew E. Mawby, Esq.
HANGLEY ARONCHICK SEGAL PUDLIN & SCHILLER, Counsel for Steadfast Insurance Company, One Logan Square, 27th Floor, Philadelphia, Pennsylvania 19103-6933, By: Ronald P. Schiller, Esq., Sharon F. McKee, Esq.
WILEY REIN LLP, Counsel for Twin City Fire Insurance Company, 1776 K Street NW, Washington, DC 20006, By: Daniel J. Standish, Esq., Cara Tseng Duffield, Esq.
Before the Court are cross-motions for partial summary judgment filed by the plaintiffs1 —including the Liquidating Trust in the underlying bankruptcy case and certain class action plaintiffs with claims against one of the debtors—and eight of the defendants2 —including various tiers of insurers—in the above-captioned adversary proceeding.3 The Plaintiffs assert that their claims against Residential Funding Company, LLC ("RFC"), one of the debtors, are covered by insurance policies that were originally issued by the Defendants to General Motors Corporation. See Joint Concise Statement of Undisputed Material Facts (the "SUF") [ECF No. 336] ¶ 1. The question at issue in the present cross-motions is whether two exclusions in the policies preclude coverage of the Plaintiffs' claims. For the reasons set forth below, the Court concludes that the two exclusions do not bar coverage. Accordingly, the Court grants the Plaintiffs' partial motions for summary judgment and denies the Defendants' cross-motions for partial summary judgment as to these two exclusions.
The Plaintiffs' claims against RFC are based on origination and closing fees that were paid by the Class Plaintiffs in connection with second mortgages or subordinate loans (the "Loans") they obtained from several lenders (the "Originating Banks"). See SUF ¶¶ 14-15, 44-45. These fees were paid to the Originating Banks and certain other third parties at either the time of closing or during the disbursement of the Loans. See id. ¶¶ 16, 18-19, 20, 22, 24, 26, 28, 45-47, 49-51, 54. The fees were financed with the proceeds of the Loans and were included in and disbursed from the principal of the Loans. See id. ¶¶ 23, 25, 27, 29-30, 52. The Class Plaintiffs assert that certain of these fees were unlawful (the "Fees"). See id. ¶¶ 19-21, 31, 58.
Formerly known as GMAC-Residential Funding Corporation or Residential Capital Corporation, RFC operated during this period as a financial services company that bought and packaged mortgage loans, which it then securitized or sold directly to investors. See id. ¶¶ 35, 56. In this capacity, RFC entered into contracts with the Originating Banks pursuant to which RFC agreed to purchase and take assignment of certain high loan-to-value loans. See id. ¶¶ 36, 57. Under these contracts, the Class Plaintiffs' Loans were acquired by RFC after the closing and funding of the Loans by the Originating Banks. See id. ¶¶ 39, 41, 43, 58, 61. RFC then packaged the Loans, which were subsequently securitized or sold. See id. ¶¶ 38, 39, 43, 58, 63, 64, 65.
None of the Fees were paid to RFC or its subsidiaries or affiliates during the closing and funding of the Loans. See id. ¶¶ 16-20, 22, 24, 26, 28, 32-33, 46-47, 49-51, 53-54. RFC did not originate or close any of the Loans itself, and it did not have any contact or relationship with the Class Plaintiffs prior to its purchase of the Loans. See id. ¶¶ 38, 41-42, 58, 62. Rather, the Class Plaintiffs sought to hold RFC derivatively liable for the acts of the Originating Banks pursuant to 15 U.S.C. § 1641(d), and directly liable for acts that RFC itself performed after the loans originated, closed and the Fees were paid. See id. ¶¶ 4, 66, 68-70; Kessler Joint Consol. Am. Compl., attached as Ex. B to the SUF [ECF No. 336-2], at ¶¶ 12, 15, 50, 52, 108-109, 251, 488, 502-504, 506, 508, 525-526, 528; Mitchell Third Am. Pet., attached as Ex. J to the SUF [ECF No. 336-10], at ¶¶ 1, 7, 77.
Representatives of both the Mitchell Class and the Kessler Class filed actions against RFC, among others, relating to the Fees (respectively, the "Mitchell Action" and the "Kessler Action"). See SUF ¶¶ 4, 66. The Kessler Action, which was filed in October 2011, was still pending at the time that RFC filed for bankruptcy in 2012. See id. ¶¶ 4, 5.
The Mitchell Action, filed in July 2003, proceeded to trial and the trial court entered a partial directed verdict against RFC and certain of the other defendants. See id. ¶¶ 67, 68. The jury awarded compensatory damages in the amount of $4,329,048 and punitive damages in the amount of $92,000,000. See id. ¶ 76. RFC appealed the trial court's ruling and the judgment was subsequently affirmed as to the compensatory damages, but reversed and remanded for retrial as to the punitive damages claim. See id. ¶ 78. Ultimately, RFC paid $15,648,868.12 to satisfy the compensatory damages judgment, along with related attorneys' fees. See id. ¶ 79. By the time of RFC's bankruptcy filing in 2012, RFC and the Mitchell Class had reached an agreement to settle the remanded claim for punitive damages for the amount of $14.5 million (the "Mitchell Settlement"), but no money had been paid under that settlement. See id. ¶ 81.
In May 2012, RFC filed for protection under Chapter 11 of the Bankruptcy Code. See id. ¶¶ 5, 82. In December 2013, the Court approved a Chapter 11 plan (the "Plan"), establishing the Liquidating Trust for the purpose of liquidating and distributing RFC's remaining assets to its unsecured creditors. See id. ¶ 83.
During the bankruptcy proceedings, RFC reached a resolution with both the Kessler Class and the Mitchell Class regarding their respective remaining claims against RFC. In November 2013, the Court entered an order approving a settlement agreement between RFC and the Kessler Class (the "Kessler Settlement"), which provided the Kessler Class with a $300 million allowed claim against RFC's bankruptcy estate. See id. ¶¶ 8-10. As part of the Kessler Settlement, RFC's rights under the applicable insurance policies issued to RFC by the Defendants were assigned to the Kessler Class and the Liquidating Trust. See id.
Similarly, the Plan approved the terms of the Mitchell Settlement that RFC and the Mitchell Class had reached prepetition with respect to punitive damages, resulting in an allowed claim against RFC's bankruptcy estate in the amount of $14.5 million. See id. ¶ 84. The Plan also assigned the Mitchell Class the right to pursue the Defendants for any insurance proceeds under the applicable policies to satisfy the Mitchell Claim. See id. Additionally, the Plan assigned to the Liquidating Trust any rights of RFC to recover $6.1 million from the Defendants in costs incurred by RFC in defense of the Mitchell Action, as well as...
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