Drennen v. Certain Underwriters At Lloyd's of London (In re Residential Capital, LLC)

• Decision Date: 21 October 2016
• Docket Number: Adv. No. 15–01025 (SHL),Case No. 12–12020 (MG) Jointly Administered
• Citation: 563 B.R. 756
• Parties: IN RE: RESIDENTIAL CAPITAL, LLC, Debtors. Rowena Drennen, individually and as Representative of the Kessler Settlement Class, et al., Plaintiffs, v. Certain Underwriters at Lloyd's of London, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

563 B.R. 756

IN RE: RESIDENTIAL CAPITAL, LLC, Debtors.Rowena Drennen, individually and as Representative of the Kessler Settlement Class, et al., Plaintiffs,

v.Certain Underwriters at Lloyd's of London, et al., Defendants.

Case No. 12–12020 (MG) Jointly Administered

Adv. No. 15–01025 (SHL)

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

Signed October 21, 2016

WALTERS, BENDER STROHBEHN & VAUGHAN, P.C., Co–Lead Counsel for the Kessler Class and Counsel for the Mitchell Class, 2500 City Center Square, 1100 Main, Kansas City, Missouri 64105, By: R. Frederick Walters, Esq., Karen W. Renwick, Esq., David M. Skeens, Esq., Garrett M. Hodes, Esq., Michael B. Sichter, Esq.

CARLSON LYNCH SWEET & KILPELA, LLP, Co–Lead Counsel for the Kessler Class, 1133 Penn Avenue, 5th Floor, Pittsburgh, Pennsylvania 15222 By: R. Bruce Carlson, Esq., Edwin J. Kilpela, Jr., Esq.

POLSINELLI, Counsel for Kessler and Mitchell Classes, 900 Third Avenue, 21st Floor, New York, New York 10022, By: Jason A. Nagi, Esq., Daniel J. Flanigan, Esq.

PERKINS COIE, LLP, Counsel for ResCap Liquidating Trust, 700 13th St. NW, Suite 600, Washington, DC 20005, By: Selena J. Linde, Esq., Vivek Chopra, Esq., Alexis Danneman, Esq.

CLYDE & CO US LLP, Counsel for Defendant ACE Bermuda Insurance Ltd., 405 Lexington Avenue, 16th Floor, New York, New York 10174, By: Paul R. Koepff, Esq.

O'MELVENY & MYERS LLP, Counsel for Defendant ACE Bermuda Insurance Ltd., 7 Times Square, New York, New York 10036, By: Tancred Schiavoni, Esq., Michael Neumeister, Esq.

D'AMATO & LYNCH, LLP, Counsel for Defendant American International, Reinsurance Company, Ltd., Two World Financial Center, 225 Liberty Street, New York, New York 10281, By: David Kuffler, Esq., Maryann Taylor, Esq.

TROUTMAN SANDERS LLP, Counsel for Defendant Chubb Atlantic Indemnity Ltd., 401 9th Street, NW, Suite 1000, Washington, DC 20004, By: Jonathan A. Constine, Esq., Mitchel H. Perkiel, Esq., Lee W. Stremba, Esq.

SKARZYNSKI BLACK LLC, Counsel for Defendant XL Insurance Bermuda Ltd., One Battery Park Plaza, 32nd Floor, New York, New York 10004, By: James Sandnes, Esq., Michael Chester, Esq.

FORAN GLENNON PALANDECH PONZI & RUDLOFF, Counsel for Certain Insurers under GM, Combine Specialty Insurance Company Program, 222 North LaSalle Street, Suite 1400, Chicago, IL 60601, By: Susan N.K. Gummow, Esq.

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court are numerous motions in the above-captioned insurance coverage dispute. Four defendants filed a variety of motions seeking to dismiss the case for, among other things, lack of personal or subject matter jurisdiction, and to send the dispute to arbitration.¹ These four defendants, which will be collectively referred to as the "Bermuda Insurers," are ACE Bermuda, AIRCO,² Chubb Atlantic, and XLIB. The Bermuda Insurers have requested that the Court consider their Arbitration Motions first, arguing that they will moot their other motions.³ In addition to opposing the motions of the Bermuda Insurers, the plaintiffs filed a motion to strike the majority of these motions for failure to post security under New York Insurance Law § 1213(c)(1) (the "Bond Motion") [ECF No. 177].⁴ The plaintiffs also filed what is styled as a cross-motion under Section 1142(b) of the Bankruptcy Code that seeks an order to consummate the bankruptcy plan (the " Section 1142 Motion") [ECF No. 187]. In this Section 1142 Motion, the plaintiffs seek an order enjoining the defendants from raising certain defenses to insurance coverage, like anti-assignment and reasonableness, which the plaintiffs contend are inconsistent with the terms of the confirmed Chapter 11 plan. See Section 1142 Motion at 9. For the reasons set forth below, the Bermuda Insurers' Arbitration Motions are granted but the arbitration proceedings are stayed while the plaintiffs pursue their claims against other defendants on other related insurance policies. The Court denies the plaintiffs' Bond Motion, concluding that no security was required before the filing of the Bermuda Insurers' motions.⁵ All other motions are denied as moot.⁶

BACKGROUND

The plaintiffs in this action include the representatives of two class actions (the "Kessler Class," and the "Mitchell Class," and together, the "Class Plaintiffs"), and the ResCap Liquidating Trust (the "Liquidating Trust," and together with the Class Plaintiffs, the "Plaintiffs"). The Liquidating Trust is the successor to Residential Funding Company, LLC ("RFC"), one of the debtors, and was created pursuant to the Chapter 11 liquidation plan (the "Plan") in the Residential Capital LLC bankruptcy case.⁷ The Liquidating Trust was created to implement the terms of the plan by collecting assets and making distributions to creditors. See Plan, Art. VI.B [Case No. 12–12020, ECF No. 6065–1].

Before filing for bankruptcy in 2012, RFC was a company specializing in " the purchase and resale of mortgage loans." See In re Residential Capital, LLC , 2015 WL 9302834, at *1 (S.D.N.Y. Dec. 21, 2015). "The Class Plaintiffs are individuals who obtained mortgage loans, which RFC later acquired on the secondary market." Id. The Class Plaintiffs brought several lawsuits against RFC before the bankruptcy in connection with its acquisition of the mortgage loans. See id. RFC filed for Chapter 11 on May 14, 2012. Id. The Class Plaintiffs subsequently filed proofs of claim in the bankruptcy. Id. The parties ultimately settled the Kessler Class and Mitchell Class lawsuits as part of a global settlement and the Plan. See id.

Under the settlement, the Kessler Class received a $300 million allowed claim and the Mitchell Class received a $14.5 million allowed claim. See id. The Plan assigned RFC's rights under certain insurance policies (the "GM Policies") to the Class Plaintiffs for recovery of their allowed claims. See id. ; Plan, Art. IV.G; see also Order, dated December 17, 2013 [Case No. 12–12020, ECF No. 6133] (providing the same assignment of rights to Mitchell Class as afforded the Kessler Class in the Plan). Pursuant to the Kessler settlement agreement and the Plan, the Class Plaintiffs' recovery is limited to the GM Policies and distributions from a Borrower Claims Trust. See Plan, Art. IV.G.1.⁸ The Kessler settlement agreement sets forth the conditions for the Class Plaintiffs' ability to recover against the GM Policies:

The sole source of recovery of the Kessler Settlement Class shall be distributions from the Borrower Claims Trust and Insurance Rights under the [GM] Policies and not from any other assets or property of the Settling Defendants, Released Persons or any other Debtor ....

....

The Kessler Settlement Class and the Liquidating Trust take on all risk of recovery or lack thereof (including non-collectability), on the Insurance Rights. The assignment of the Insurance Rights under the Policies is without recourse or warranty with respect to actual recovery on such assigned rights. The lack of recovery on the Insurance Rights by the Kessler Settlement Class or the Liquidating Trust, as applicable, shall not create any rights of recovery against any Debtor, Released Person or Settling Defendant. To avoid any doubt, there shall be no claims upon the Debtors, Released Persons, or Settling Defendants based upon the failure to recover insurance proceeds or other Insurance Rights or the recovery of only a limited amount of insurance proceeds or other Insurance Rights, even in such instances where the Debtor, Released Person, or Settling Defendants' own past conduct is what precludes or limits the recovery or such instance where the assignments embodied in this Agreement are found to be invalid for any reason.

Amended Kessler Settlement Agreement, Exh. A § 5(a), (f) [Case No. 12–12020, ECF No. 4793]; see also Plan, Art. IV.G; Order, dated December 17, 2013 ¶ 9. These same conditions also apply to the Mitchell Class. See Order, dated December 17, 2013; Debtors' Motion Pursuant to Section 362 of the Bankruptcy Code and Bankruptcy Rule 9019 (A) Granting Claimants Limited Relief from Automatic Stay and (B) Approving the Debtors' Entry into the Settlement Agreement [Case No. 12–12020, ECF No. 5700]; see also Compl. ¶¶ 147–48. Other rights of RFC under the GM policies were assigned to the Liquidating Trust, such as the right to recover defense costs and pre-bankruptcy settlements. See In re Residential Capital , 2015 WL 9302834, at *1 ; see also Plan, Art. IV.G.2.

The Plan includes an "insurance neutrality" provision making clear that the settlement does not modify the rights of the insurers under the GM Policies. The provision states:

Except as set forth below in VII.K.2.(e), nothing contained in this Plan, in the Disclosure Statement, in the Liquidating Trust Agreement, or in the Borrower Claims Trust Agreement (including addendums, exhibits, schedules, or supplements to the Plan, Disclosure Statement, Liquidating Trust Agreement, or Borrower Claims Trust Agreement, and including any provision that purports to be preemptory or supervening), shall in any way operate to, or have the effect of, impairing, altering, supplementing, changing, expanding, decreasing, or modifying the rights under the GM Policies of any of those insurers that issued the GM Policies (the "GM Insurers").

Plan, Art. VII.K.2.(b) (emphasis added). The Plan further provides that, except as related to defenses regarding the assignment of rights, "for all issues of insurance coverage or otherwise, the provisions, terms, and conditions of the GM Policies, as construed under applicable non-bankruptcy law, shall control." Id. Under the Plan, however, "any defense [by the GM Insurers] to coverage that is based on the assertion that the transfer of the insurance rights in this Plan are invalid, unenforceable or otherwise breach the terms of the GM Policies" was waived. Id. at Art. VII.K.2.(e). All other defenses were unaffected by the Plan. See id. The Plan defines "GM Insurers" as "those insurers that issued the GM Policies," which includes...