In re Am. Home Mortgage Holdings Inc.

• Decision Date: 16 February 2011
• Docket Number: No. 09–4295.,09–4295.
• Citation: 637 F.3d 246
• Parties: In re AMERICAN HOME MORTGAGE HOLDINGS, INC., et al; Debtors*Crédit Agricole Corporate and Investment Bank New York Branch, f/k/a Calyon New York Branch, Appellantv.American Home Mortgage Holdings, Inc., et al.*(Pursuant to Clerk's Order dated 3/18/2010).
• Court: U.S. Court of Appeals — Third Circuit

637 F.3d 246

65 Collier Bankr.Cas.2d 10

In re AMERICAN HOME MORTGAGE HOLDINGS, INC., et al; Debtors*Crédit Agricole Corporate and Investment Bank New York Branch, f/k/a Calyon New York Branch, Appellant

v.American Home Mortgage Holdings, Inc., et al.*(Pursuant to Clerk's Order dated 3/18/2010).

No. 09–4295.

United States Court of Appeals, Third Circuit.

Argued Nov. 15, 2010.Filed Feb. 16, 2011.

Benjamin Ackerly (Argued), Jason W. Harbour, Hunton & Williams, Richmond, VA, Michael Busenkell, Womble, Carlyle, Sandridge & Rice, Wilmington, DE, Attorneys for Appellant.Michele S. Budicak, Curtis J. Crowther, John T. Dorsey (Argued), Young, Conaway, Stargatt & Taylor, Wilmington, DE, Attorneys for Appellees.Before: McKEE, Chief Judge, SLOVITER, and RENDELL, Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

If we can avoid preoccupation with the dazzling number of monetary digits involved in this case (the contractual repo price of almost $1.2 billion, the Purchaser's claim totaling in excess of $478 million, and the parties' damages calculations that are nearly $500 million apart), the issue before us is limited to a determination of the meaning of the statutory phrase requiring damages to be measured based on a “commercially reasonable determinant[ ] of value.” It is an issue of statutory construction such as those routinely faced by federal courts, although it appears to be an issue of first impression.

I.Factual and Procedural History

Appellees American Home Mortgage Holdings, Inc., American Home Mortgage Investment Corp., American Home Mortgage Acceptance, Inc., AHM SV, Inc.,¹ and American Home Mortgage Corp. (collectively, “Debtor”), and Appellant Calyon New York Branch (“Calyon”),² as Administrative Agent (the “Purchasers”), are parties to a Repurchase Agreement (the “Repurchase Agreement”), dated November 21, 2006, covering a portfolio of home mortgages.

A repurchase agreement, often referred to as a “repo agreement,” is defined in § 101(47) of the Bankruptcy Code as “an agreement, including related terms,” that (1) “provides for the transfer of one or more ... mortgage loans, [or] interests in mortgage related securities or mortgage loans[;]” (2) “against the transfer of funds by the transferee of such ... mortgage loans, or interests[;]” (3) “with a simultaneous agreement by such transferee to transfer to the transferor thereof ... mortgage loans, or interests [in mortgage related securities or mortgage loans;]” (4) “at a date certain not later than 1 year after such transfer or on demand[;]” (5) “against the transfer of funds[.]” In simple words, the purchaser of an asset promises to sell it back at the time fixed or when asked. Repurchase Agreements are among the transactions governed by § 562 of the Bankruptcy Code which was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub.L. No. 109–8, § 910, 119 Stat. 23, 184 (2005), described by Congress as “a comprehensive package of reform measures pertaining to both consumer and business bankruptcy cases.” H.R.Rep. No. 109–31, at 2 (2005).

Pursuant to the 2006 Repurchase Agreement, Calyon purchased approximately 5,700 mortgage loans with an original unpaid principal balance of just under $1.2 billion. The mortgage properties were located in all fifty states of the United States. The portfolio was principally comprised of adjustable rate mortgages and pay option adjustable rate mortgages, as well as a small portion of Government conforming loans and second lien loans.

Sometime before August 1, 2007, the Debtor defaulted on some of its obligations under the Repurchase Agreement. Calyon served the Debtor with a notice of default and accelerated the Repurchase Agreement on August 1, 2007 (the “Acceleration Date”). Section 562 of the Bankruptcy Code covers the timing for measurement of damages in the event of acceleration. Because of the acceleration of the Agreement, the Debtor became obligated to repurchase the mortgage loans at the Repurchase Price which, on the Acceleration Date, was $1,143,840,204.36. The Debtor filed its voluntary petition for Chapter 11 relief under the Bankruptcy Code on August 6, 2007, and the case was assigned to Christopher S. Sontchi, a Bankruptcy Judge from the District of Delaware.

Calyon filed four identical proofs of claim against four different debtors for an amount that exceeded the total Repurchase Price. One year later, the Debtor filed its objections to the claims, seeking either to disallow them or reduce them pursuant to § 562 of the Bankruptcy Code. ³ Section 562, which addresses the timing for the measurement of damages in connection with repurchase and other agreements, provides in relevant part:

(a) [I]f a ... repo participant ... liquidates, terminates, or accelerates such contract or agreement, damages shall be measured as of the earlier of—

(1) the date of such rejection; or

(2) the date or dates of such liquidation, termination, or acceleration.

(b) If there are not any commercially reasonable determinants of value as of any date referred to in paragraph (1) or (2) of subsection (a), damages shall be measured as of the earliest subsequent date or dates on which there are commercially reasonable determinants of value.

11 U.S.C. § 562 (emphasis added).

The parties stipulated to four possible valuation dates of the Loan Portfolio: August 1, 2007 (the Acceleration Date), September 30, 2007 (before the Debtor sold another large Loan Portfolio), January 30, 2008 (after the Bankruptcy Court's decision in In re Am. Home Mortg., Inc., 379 B.R. 503 (Bankr.D.Del.2008), declaring that the agreement constituted a repurchase agreement within the meaning of the Code), and August 15, 2008 (the earliest date that Calyon claimed it could obtain a reasonable market or sale price for the Loan Portfolio).

The Repurchase Price on September 30, 2007 remained $1,143,840,204.36, the same as that on the Acceleration Date. By January 30, 2008, Calyon had received payments on the mortgage loans, reducing the Repurchase Price to $1,070,933,296.54. As of August 15, 2008, the Repurchase Price had been further reduced to $994,416,230.32. Although the parties agreed on the stipulated dates, they vigorously disagree as to the methodology for the measurement of damages, and consequently to the amount of damages.

In objecting to Calyon's claims, the Debtor argued that a “commercially reasonable determinant of value,” namely the Discounted Cash Flow (“DCF”) method, existed on the Acceleration Date and that § 562(a) accordingly fixed the measurement of Calyon's damages as of that date. The Debtor claimed that using that valuation methodology, the value of the Loan Portfolio exceeded the Repurchase Price and that therefore Calyon lacked a deficiency claim as of the Acceleration Date.

Not surprisingly, Calyon contested this interpretation, arguing that the only appropriate valuation methodology under § 562 is the market or sale value of the Loan Portfolio, and that because the mortgage market was dysfunctional on the Acceleration Date, there were no “commercially reasonable determinants of value” as of that date. Calyon asserted that, pursuant to § 562(b), the earliest possible date that market or sale value could be determined was August 15, 2008, and that as of that date the market or sale value of the Loan Portfolio was less than the Repurchase Price and resulted in a deficiency claim of $478,493,165.28 when the Loan Portfolio was valued on a servicing retained basis. As the Bankruptcy Court had previously explained:

Mortgage loans can be bought and sold on either a “servicing retained” or a “servicing released” basis. In a servicing retained sale of a mortgage loan, the seller of the loan retains the right to designate the mortgage loan servicer.

379 B.R. at 510.⁴ The Court stated that the mortgage loans were sold to the Purchasers on a servicing retained basis, and because the Debtor designated AHM SV, Inc., as the servicer, it was entitled to a monthly servicing fee.

The Bankruptcy Court held a two-day evidentiary hearing on the Debtor's objections. The Bankruptcy Court recognized that if the Debtor was correct that the value of the Loan Portfolio on the Acceleration Date exceeded the Repurchase Price on that date, Calyon would not have any deficiency or damage claim. Thus, the Court proceeded to determine the value of the assets subject to the Repo Agreement, i.e., the Loan Portfolio.

During the hearing, the Court heard testimony from the Debtor's expert, Dr. Ronnie Clayton,⁵ who explained that the Discounted Cash Flow analysis values the asset's cash flow. There was evidence that the cash stream from the Loan Portfolio, i.e., principal and interest that the loans generated, was approximately $275 million as of the date of the hearing on May 19, 2009. ⁶ To determine the DCF value of the entire Loan Portfolio, Dr. Clayton determined the DCF value of each individual mortgage. He adjusted the interest rate on each mortgage to reflect market conditions, as described in the Federal Home Loan Mortgage Corporation's Primary Mortgage Market Survey, conducted by Freddie Mac. He also took into account actual delinquency rates on the mortgage loans as of the particular valuation date.⁷ Dr. Clayton's relevant testimony is set forth in the margin. He then applied the adjusted rates to discounted cash flows on each mortgage as of each of the four stipulated dates, the sum of which resulted in the valuation of the Loan Portfolio as of each of those dates. Dr. Clayton testified that using this valuation method, the value of the Loan Portfolio on each of the stipulated dates exceeded the applicable Repurchase Price, leading the Bankruptcy Court to conclude that Calyon suffered no damage during the relevant period. Calyon did not, and does not now, attack the methodology Dr. Clayton used to calculate the DCF but only attacks DCF as a recognizable commercially reasonable determinant...