In re Residential Resources Mortg. Investments
Decision Date | 13 April 1989 |
Docket Number | Bankruptcy No. B-89-0200,Adv. No. "B" and 89-53. |
Citation | 98 BR 2 |
Parties | In re RESIDENTIAL RESOURCES MORTGAGE INVESTMENTS CORPORATION, Debtor. THOMSON McKINNON SECURITIES, INC., Movant, v. RESIDENTIAL RESOURCES MORTGAGE INVESTMENTS CORPORATION, Respondents. |
Court | U.S. Bankruptcy Court — District of Arizona |
COPYRIGHT MATERIAL OMITTED
COPYRIGHT MATERIAL OMITTED
Redfield T. Baum, Richard M. Lorenzen, J. Matthew Derstine, O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, Phoenix, Ariz., for debtor.
C. Taylor Ashworth, William J. Maledon, Jean K. FitzSimon, Meyer, Hendricks, Victor, Osborn & Maledon, Phoenix, Ariz., for Thomson McKinnon Securities Inc.
Jerry C. Bonnett, Andrew S. Friedman, H. Sullivan Bunch, Bonnett, Fairbourn & Friedman, P.C., Phoenix, Ariz., for Shareholder Class Representatives.
David C. Tierney, Marcia J. Busching, Sacks, Tierney, Kasen & Kerrick, P.A., Phoenix, Ariz., for Ecoban Capital Ltd.
On January 9, 1989, Residential Resources Mortgage Investments Corporation ("Debtor") filed a petition under Chapter 11 of the Bankruptcy Code. On January 19, 1989 Thomson McKinnon Securities, Inc. ("Thomson") filed a complaint, requesting that this Court determine that Section 555 of the Bankruptcy Code was applicable to the various transactions entered into by Thomson with the Debtor. Thomson argued that the automatic stay imposed pursuant to Section 362 of the Bankruptcy Code was inapplicable to Thomson, and requested that an injunction should issue prohibiting the Debtor from interfering with the registration into Thomson's name of certain securities held by Thomson. If the securities were so registered, Thomson would be able to liquidate the securities.
On January 19, 1989, Thomson also filed a Motion to Vacate the Stay, requesting emergency relief pursuant to Section 362(f) of the Bankruptcy Code.
At an expedited pretrial conference, and pursuant to discussions between Thomson and the Debtor, the parties prepared a Joint Pretrial Order, and requested that this Court bifurcate any trial to be held.
The Debtor conceded in the Joint Pretrial Order, filed with this Court, that if the Court found that securities contracts had been entered into between Thomson, as stockbroker, and the Debtor, as customer, an injunction should issue against the Debtor prohibiting the Debtor from interfering with the liquidation of the securities held by Thomson. The parties agreed to defer consideration of whether the stay should be vacated.
Ecoban Capital Limited and certain shareholder class representatives were permitted to intervene in these proceedings to allow such intervenors to file a memorandum of law or "statement of position".
The first portion of the bifurcated trial in this matter was held on January 31, February 1, February 2, and February 6, 1989. The memoranda of law by the intervenors was filed in a timely fashion on February 7, 1989.
This Court has jurisdiction over this matter, and this is a core proceeding, pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157.
This Memorandum Decision contains the findings of fact and conclusions of law of this Court pursuant to Bankruptcy Rule 7052.
The Debtor is a Maryland Corporation, conducting business in Arizona, which elected to be taxed as a real estate investment trust ("REIT"), under the Internal Revenue Code of 1986, as amended. Residential Advisors Management Corporation ("Manager") conducted the day-to-day operations of the Debtor, under the supervision of the Board of Directors of the Debtor. There was a crossover of the principals or senior management of the Manager and the Debtor.
As long as the Debtor maintained its qualification as a REIT under the Internal Revenue Code, the income of the REIT would not be taxed at the corporate level prior to the distribution of earnings to the shareholders of the Debtor.
The sole business of the Debtor was to purchase various mortgage assets, and distribute any net income generated therefrom to its shareholders.
Thomson is a privately owned investment banking and brokerage firm, located in New York City, with approximately 180 offices worldwide.1 One of its many branch offices is located in Dallas, Texas. Mr. Guinchard of Thomson's Texas office was the principal salesman involved in the disputed transactions with the Debtor.
In an effort to provide investors with the opportunity to participate in the residential mortgage market, certain governmental and quasi-governmental agencies have pooled or acquired residential mortgages. After pooling the residential mortgages, the agencies issued mortgage certificates, representing an undivided interest in the underlying residential mortgages.2 These pools were created to reduce the risk of an individual investor in a mortgage transaction, to provide a relatively long-term, stable interest rate to the investing public, and to provide liquidity to investors. The pools reduce the risk to the individual investors, because the risk of the nonpayment on any underlying mortgage is divided among all the participants in the pool.3
The governmental or quasi-governmental issuers of these mortgage certificates include the Government National Mortgage Association ("GNMA", which issued certificates referred to at trial as "Ginnie Maes"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"),4 and the Federal National Mortgage Association ("Fannie Maes"). These mortgage certificates generally provide that the principal and interest on the underlying residential mortgages are passed through to the holder of the certificate.5
These mortgage certificates may, in turn, be deposited into a trust or a special purpose corporation. The sole purpose of the trust or special purpose corporation is to hold these certificates.
When the form of a trust is used, the trust then issues a beneficial interest to the depositor of the mortgage certificates.
When the corporate form is used, the special purpose corporation issues a security to the depositor of the mortgage certificates.
Whether the structure is a trust or a special purpose corporation, the interest or security issued is a collateralized mortgage obligation ("CMO"), which is sold to the investing public.6
The issuer of the CMOs collects the "pass through" of the principal and interest on the mortgage certificates. The issuer then pays to the holders of the CMOs the amount required under the terms of the CMO. The difference between the amount collected and the amount paid out is known as the residual. The residuals are also securities offered to the investing public.7
Thomson was involved in the designing of certain CMOs that became involved in subsequent controversies between the Debtor and Thomson. One such security designed by Thomson was the "Tommy Mac" Series 11 Bond.8 Once Thomson designed the security, it was purchased by Thomson, as the underwriter, for resale to the investing public.
An affiliate of the Debtor, Residential Resources, Inc., was also an issuer of some of the CMOs that became involved in the controversy between the parties.9 The securities issued by the Debtor's affiliate were purchased by an underwriter who, in turn, redistributed such securities to the investing public.10
Both CMOs and residual interests in mortgage certificates are securities for which a certificate is issued. These certificated securities bear their own rate of interest, which rate fluctuates with the market. These securities are publicly traded.11
Both CMOs and residuals may be the subject of a repurchase agreement. The Debtor and Thomson agreed that, for purposes of trial in this matter, a Repurchase Agreement would be defined as follows:
. . . a transfer of specified securities by one party, the seller, to another party, the buyer, with a contemporaneous agreement by the seller to repurchase the securities at the original price, plus an agreed upon amount of interest, on a specified future date.12
Repurchase Agreements are one side of the Transaction. Although not defined by the parties in their Joint Pretrial Order, a reverse repurchase agreement is also an integral part of these transactions. For purposes of this Opinion, a Reverse Repurchase Agreement shall be considered the same agreement as viewed from the perspective of the buyer.
Thus, if a party sells a security, and agrees to buy it back at a specified future date, that is a Repurchase Agreement. If the same party buys a security, and agrees to sell it back at a specified future date, that is a Reverse Repurchase Agreement.
Mr. Palmieri, who testified on behalf of Thomson at the time of trial, identified a Repurchase Agreement as containing the following language:
This will confirm our purchase from you and your subsequent repurchase from us.13
Although this has been labelled a Repurchase Agreement for purposes of this Opinion, this transaction from the perspective of Thomson would be a Reverse Repurchase Agreement. Moreover, Exhibit No. 53 was identified by Mr. Palmieri as being a Reverse Repurchase Agreement. The confirmations state:
This will confirm our sale to you and our subsequent repurchase from you.
However, from the perspective of Thomson this would have been a Repurchase Agreement. It is not material that Thomson has labelled its documentation from the perspective of the Thomson customers, and not Thomson.
In reviewing Repurchase or Reverse Repurchase Agreements, the transactions were at one time documented as follows:
The initial price paid for the security was previously referred to as "$'s financed." Other such terms as "principal amount," "interest," or "repo interest" have also historically...
To continue reading
Request your trial