In re Residential Capital, LLC

• Decision Date: 13 September 2013
• Docket Number: Case No. 12–12020 (MG)
• Citation: 497 B.R. 720
• Parties: In re Residential Capital, LLC, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

497 B.R. 720

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

Case No. 12–12020 (MG)

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

September 13, 2013

Alston & Bird LLP, by John C. Weitnauer, Esq. (pro hac vice), Michael E. Johnson, Esq., New York, NY, Counsel to Wells Fargo Bank, N.A., as Trustee of Certain Mortgage Backed Securities Trusts.

Dechert LLP, by Glenn E. Siegel, Esq., New York, NY, Counsel to The Bank of New York Mellon and The Bank of New York Mellon Trust Company, N.A., as Trustee of Certain Mortgage-Backed Securities Trusts.

Gibbs & Bruns LLP, by Kathy Patrick, Esq., Houston, TX, Attorneys for Steering Committee of RMBS Investors.

Jones Day, by Richard L. Wynne, Esq., Howard F. Sidman, Esq., New York, NY, Attorneys for Creditor Financial Guaranty Insurance Company.

Kramer Levin Naftalis & Frankel LLP New York, NY by Philip S. Kaufman, Esq., Counsel to the Official Committee of Unsecured Creditors.

McKool Smith, P.C., by Peter S. Goodman, Esq., Michael R. Carney, Esq., New York, NY, Counsel for Federal Home Loan Mortgage Corporation.

Morrison & Foerster LLP, by Charles L. Kerr, Esq., Joseph Alexander Lawrence, Esq., New York, NY, Counsel for the Debtors and Debtors in Possession.

Moss & Kalish, PLLC, by David B. Gelfarb, Esq., New York, NY, Counsel for Federal Home Loan Mortgage Corporation.

Ropes & Gray, by Andrew G. Devore, Esq., Boston, MA, Attorneys for Steering Committee of RMBS Investors.

Seward & Kissel LLP, by Jeffrey Dine, Esq., Mark Kotwick, Esq., New York, NY, Counsel to U.S. Bank National Association, as Trustee of Certain Mortgage-Backed Securities Trusts.

White & Case LLP, by J. Christopher Shore, Esq., New York, NY, Attorneys for the Ad Hoc Group of Junior Secured Noteholders.

Willkie Farr & Gallagher LLP, by Joseph T. Baio, Esq., Mary Eaton, Esq., Emma J. James, Esq., New York, NY, Attorneys for Monarch Alternative Capital LP, Stonehill Capital Management LLC, Bayview Fund Management LLC, CQS ABSMaster Fund limited and CQS AlphaMasterFund Limited.

Chapter 11

Jointly Administered

MEMORANDUM OPINION AND ORDER, AND FINDINGS OF FACT AND CONCLUSIONS OF LAW, APPROVING THE FGIC SETTLEMENT MOTION

MARTIN GLENN, UNITED STATES BANKRUPTCY COURT

Before the Court is the Debtors' Motion Pursuant to Fed. R. Bankr.P. 9019 for Approval of the Settlement Agreement Among the Debtors, FGIC, the FGIC Trustees and Certain Institutional Investors (the “Motion,” ECF Doc. # 3929). ¹ Through the Motion, the Debtors seek approval of a settlement agreement (the “Settlement” or “Settlement Agreement,” Motion, Ex. 2) dated May 23, 2013, among the Debtors, Financial Guaranty Insurance Company (“FGIC”), the FGIC Trustees,²and the Institutional Investors ³ (collectively, the “Settlement Parties” or “Proponents”). The Proponents contend that the Settlement Agreement (i) is the product of months of good faith negotiations between numerous parties, (ii) resolves proofs of claim by FGIC totaling $5.55 billion in the aggregate, (iii) resolves the majority of the general unsecured claims asserted by the FGIC Trustees relating to the FGIC Insured Trusts, and (iv) is an essential cornerstone of the Global Settlement (defined below). The Settlement Agreement additionally contemplates a $253.3 million payment from FGIC to the FGIC Trustees in exchange for the release of FGIC's obligations under its insurance policies, and the Motion asks the Court to make affirmative findings that the FGIC Trustees acted in good faith in entering the Settlement and that the Settlement is in the best interests of the investors in each FGIC Insured Trust.

A group of investors (the “Investor Objecting Parties”) ⁴ in the FGIC Insured Trusts as well as the Ad Hoc Group of Junior Secured Noteholders (“Ad Hoc Group” or “JSNs”) opposed the Motion. This opposition created a contested matter under Fed. R. Bankr. P. 9014. The Court held a trial on the Motion on August 16 and 19, 2013, and as agreed at the conclusion of the hearing on August 19, 2013, the Court received the parties' deposition designations, counter-designations and objections on August 22, 2013. With a few exceptions noted below, all objections to the deposition designations and counter-designations are overruled, and the deposition excerpts are admitted in evidence and considered as part of the trial record.⁵ The direct trial testimony of lay and expert witnesses was presented at trial and admitted in evidence in the form of written declarations, with the declarants present in Court and available for cross-examination. The parties offered numerous exhibits that the Court admitted into evidence during the trial.⁶ Counsel conducted cross-examination and redirect examination of some of the witnesses during the trial.

On September 11, 2013, the Investor Objecting Parties withdrew their objections to the Settlement Agreement (ECF Doc. ## 5020, 5021). The JSNs' objection remains pending. All of the evidence introduced in connection with this contested matter will be considered in resolving the issues raised by the Proponents and the JSNs even though the Investor Objecting Parties have withdrawn their objections.

Following a thorough review of the record, the Court finds based on a preponderance of the evidence that (i) the Settlement Agreement is fair, equitable and in the best interests of the Debtors and their estates, and (ii) the FGIC Trustees acted in good faith in entering the Settlement and the Settlement is in the best interests of the investors in each FGIC Insured Trust. As explained below, the legal standards for approval of the Settlement are satisfied. Therefore, the Motion is GRANTED.

The findings set forth herein constitute the Court's findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure, made applicable herein by Bankruptcy Rules 7052 and 9014. In making the findings of fact, the Court considered the credibility of the witnesses based on the Court's observation of their live testimony as well as their written direct testimony and deposition testimony, when considered in relation to the rest of the evidence submitted at trial.

I. BACKGROUND

On May 14, 2012 (the “Petition Date”), each of the Debtors filed a voluntary petition in this Court for relief under Chapter 11 of Bankruptcy Code. On July 3, 2012, the Court approved Arthur J. Gonzalez as the examiner (the “Examiner”) (ECF Doc. # 674). On November 19, 2012, the Court approved the Debtors' sale of (i) their mortgage servicing businesses (the “Platform Sale”) and (ii) most of the estates' whole loan portfolio (the “Whole Loan Sale”). After the sales of the Debtors' assets, the Debtors focused their efforts on reaching a consensual resolution of a chapter 11 plan. After months of negotiations that failed to lead to a consensual plan of reorganization, the Debtors sought the appointment of a plan mediator and, separately, of a chief restructuring officer. The Court selected my colleague, the Honorable James M. Peck, as Plan Mediator (the “Plan Mediator”). The Debtors, in consultation with the Creditors' Committee, selected and the Court approved the appointment of Lewis Kruger as the Debtors' Chief Restructuring Officer (the “CRO”). Mr. Kruger is a very experienced bankruptcy lawyer who is independent, having had no prior relationship with the Debtors.

Following the Court's appointment of the Plan Mediator and months of arm's-length mediation negotiations, the Debtors and most of their claimant constituencies reached a broad settlement embodied in the Plan Support Agreement (the “Plan Support Agreement” or “PSA”) and Plan Term Sheet (the “Plan Term Sheet”), each dated May 13, 2013, and the Supplemental Term Sheet (the “Supplemental Term Sheet”), dated May 23, 2013, for which the Debtors sought Court approval (collectively, the “Global Settlement”). The PSA was approved by the Court on June 26, 2013, and the Court entered a written opinion on June 27, 2013. (ECF Doc. ## 4098, 4102.) The Settlement Agreement that is the subject of this Motion, while a stand-alone agreement, represents a critical component of the Global Settlement. Because the Settlement Agreement involves an insurance company that is subject to a New York state court rehabilitation proceeding, it required approval by the Supreme Court of the State of New York, FGIC's rehabilitation court (the “Rehabilitation Court”); on August 19, 2013, Justice Doris Ling–Cohan, in a written opinion, approved the Settlement.

A. FGIC's Claims Against the Debtors

As part of the Debtors' mortgage servicing and origination businesses, Debtors GMAC Mortgage, LLC (“GMAC Mortgage”)and Residential Funding Company, LLC (“RFC”) acted as Sponsor, Depositor, Master Servicer, Primary Servicer, or Subservicer in connection with transactions involving the securitization of residential mortgages through securitization trusts (the “RMBS Transactions”). (Kruger Decl. ¶ 8.)

FGIC, a monoline financial guaranty insurance company, issued irrevocable insurance policies (the “Policies”) for certain securities (the “Securities”) issued by certain of the RMBS Trusts. By “wrapping” the Securities, FGIC guaranteed the payment of principal and interest due on the Securities. ( See Kruger Decl. ¶ 9.) Additionally, FGIC entered into an Insurance and Indemnity Agreement with one or more of the Debtors in connection with each of the trusts “wrapped” by FGIC (the “Insurance Agreements”). ( Id.) Pursuant to the Insurance Agreements, the Debtor-parties agreed, among other things, to reimburse FGIC for certain payments FGIC made under the Policies that resulted from the applicable Debtor's failure to repurchase or substitute mortgage loans that breached one or more representations or warranties contained in the applicable governing agreements.⁷ ( See Kruger Decl. ¶ 9.)

Beginning before 2008, certain of the Debtors originated or acquired residential mortgage loans that were contributed or sold to various trusts (the “RMBS Trusts”). The RMBS Trusts were...