Ocwen Loan Servicing, LLC v. Rescap Liquidating Trust (In re Residential Capital, LLC)

• Decision Date: 14 July 2015
• Docket Number: Case No. 12–12020 MG,Adv. Proc. No. 14–02388 MG
• Citation: 533 B.R. 379
• Parties: In re: Residential Capital, LLC, et al., Debtors. Ocwen Loan Servicing, LLC, Plaintiff, v. The Rescap Liquidating Trust, a Delaware Statutory Trust, Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

533 B.R. 379

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

Ocwen Loan Servicing, LLC, Plaintiff

v.The Rescap Liquidating Trust, a Delaware Statutory Trust, Defendant.

Case No. 12–12020 MG

Adv. Proc. No. 14–02388 MG

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

Signed July 14, 2015

HUNTON & WILLIAMS LLP, Attorneys for Ocwen Loan Servicing, LLC, 200 Park Avenue, 52nd Floor, New York, New York 10166–0136, By: Joseph J. Saltarelli, Esq., Patrick L. Robson, Esq.

MORRISON & FOERSTER LLP, Attorneys for ResCap Liquidating Trust, 250 West 55th Street, New York, New York 10019, By: Jamie A Levitt, Esq., Todd M. Goren, Esq.

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART CROSS-MOTIONS FOR SUMMARY JUDGMENT

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Before the Court are cross-motions for summary judgment (the “Motions”) filed in the above-captioned adversary proceeding (the “Adversary Proceeding”) and with respect to an administrative expense claim filed against the debtors (the “Debtors”) in the above-captioned chapter 11 proceedings. The Adversary Proceeding and administrative claim arise out of Plaintiff Ocwen Loan Servicing, LLC's (“Ocwen”) purchase of Debtor Residential Capital, LLC's (“ResCap”) mortgage loan servicing platform and loan servicing rights. ResCap's loan servicing business was large and complex. The successful sale of the business as a going concern required a smooth transition that could not be accomplished overnight. Ocwen purchased the rights to service most but not all loans previously serviced by the Debtors. This transaction was an integral part of the Debtors' eventually confirmed chapter 11 plan of liquidation and is memorialized in several writings signed by Ocwen and ResCap. At least four written documents between Ocwen and ResCap allocate rights, responsibilities, and, most important for present purposes, who pays or is supposed to pay for certain services, costs, and expenses. The parties agree that New York law controls the interpretation of their agreement.

The parties' dispute centers on alleged breaches of the parties' agreement. They disagree about who bears third-party vendor costs for storage, segregation, removal, repackaging, and relocation of the mortgage loan servicing files.¹ This is no trifling issue—as much as $11 million as an administrative expense may be at stake; this would result in a potentially big hit for prepetition creditor distributions. The servicing files stored at some third-party vendors are commingled; some loan servicing files were acquired by Ocwen, while some loan servicing files were retained by ResCap (and now the ResCap Liquidating Trust (the “Trust”) as one of the Debtors' successors in interest) and/or its parent company, but all of the files in certain vendor locations are stored together and have yet to be completely segregated. Together, the commingled files continue to incur large monthly storage charges. Ocwen contends that its files should be segregated at the Trust's expense, and delivered to Ocwen, cutting off continued storage charges.

The Motions² raise the following issues: (1) which contract provision(s) governs who bears the costs of the Segregation and Delivery of the servicing files; (2) whether, if Ocwen's choice of contract provision(s) controls, there is a condition precedent that Ocwen failed to satisfy before it can claim the right to payment or reimbursement for storage and/or Segregation and Delivery of the loan files; and (3) to what extent does Ocwen bear the burden of vendor storage costs.

For the reasons explained below, the Court GRANTS the Plaintiff's Motion in part and DENIES it in part, and DENIES the Defendant's Motion in its entirety. First, Ocwen is correct that section V.1 of the Statement of Work for Records Management Services (the “RM SOW,” SUF Ex. D) governs the Segregation and Delivery of the servicing files acquired by Ocwen and requires that ResCap, and now the Trust, bear the Segregation and Delivery costs under certain circumstances. Second, the Court does not decide whether section V.1 imposes a condition precedent upon Ocwen. On the one hand, the Trust cannot rely on Ocwen's failure to satisfy the purported condition precedent because ResCap clearly frustrated Ocwen's attempted satisfaction—at least with respect to the directed Segregation and Delivery of certain files stored at Iron Mountain. On the other hand, there are disputed issues of fact and law whether ResCap's breach of section V.1 of the RM SOW is material and/or constitutes a repudiation such that Ocwen would be excused from satisfying a condition precedent as to other servicing files. Third, ResCap (and now the Trust) must bear the storage costs for the servicing files that ResCap and/or its parent company retain, but the amount of those charges is not established by the summary judgment record. Fourth, Ocwen must bear the storage costs for the servicing files that Ocwen acquired at least for some period of time. Though Ocwen argues that if ResCap had not breached the agreement, Ocwen's files would have been transferred from third-party storage many months ago thereby cutting off further storage charges for those files, the summary judgment record does not permit the Court to resolve this issue either. Finally, the Court is unable on the summary judgment record to determine the amount of damages Ocwen is entitled to recover. Further proceedings, including discovery if necessary, will be required to resolve the remaining issues if the parties are unable to resolve them on their own.³

I. BACKGROUND

A. Stipulated Facts

The parties sensibly agreed to resolve the Adversary Proceeding and objection to Ocwen's administrative expense claim together. This Court's case management and scheduling order (the “CMSO,” Adv. Proc. No. 14–02388, ECF Doc. # 6) sets forth consolidated procedures for resolving the Adversary Proceeding and the Trust's objection (the “Claims Objection,” Case No. 12–12020, ECF Doc. # 8129) to Ocwen's two administrative claims (the “Administrative Claims”), which partially relate to certain records management issues also at issue in the Adversary Proceeding. (See Case No. 12–12020, ECF Doc. # # 6296–6297.) The CMSO permitted the parties to file the Motions and directed that the Court's “ruling on the [M]otions shall be dispositive of Ocwen's claims in the Adversary Proceeding and that portion of [the Trust's] objection in the main action to that portion of Ocwen's Administrative Claim Dkt. 6297” related to the claims in the Adversary Proceeding. (CMSO at 1–2.) The CMSO also requested that the parties submit a joint statement of undisputed facts, to the extent the parties were able to agree. (Id. at 2–3.)

The parties then stipulated to the following facts.

1. The Debtors' Bankruptcy and Ocwen's Purchase of Certain of the Debtors' Assets

On May 14, 2012 (the “Petition Date”), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. (SUF ¶ 1.) The Court supervised a competitive bidding process culminating with the Court's approval of Ocwen's purchase of ResCap's mortgage loan servicing platform and certain mortgage servicing rights. (Id. ¶ 5.) The purchase and sale were memorialized in the Asset Purchase Agreement (the “APA,” id. Ex. A), dated November 2, 2012. (SUF ¶ 5; see also APA.) Pursuant to the APA, Ocwen acquired substantially all of ResCap's loan servicing operations, including ResCap's books and records relating to the business it acquired, and by taking assignment of numerous related contracts, including agency contracts and servicing agreements under which ResCap previously acted as primary or master servicer for investors, thousands of which are private label securitization trusts. (SUF ¶¶ 5–6.) Upon completion of the transfers and assignments, Ocwen obtained an “active” servicing platform from ResCap and agreed to provide services to the mortgage servicing customers. (Id. ¶ 7.) The servicing files (the “Servicing Files”) that are the subject of the parties' dispute were also transferred to Ocwen via the APA and other related agreements. (Id. ¶ 8.) Also as a result of the transaction, ResCap transferred to Ocwen certain employees, infrastructure, and resources that Ocwen needed to carry on ResCap's business. (Id. ) In connection with the sale, the parties negotiated the mechanics for the transfer of the various assets and the provision of certain services and resources to each other for a period of time following the closing of the sale. (Id. ¶ 9.)

The APA is the primary agreement governing the sale of the servicing platform and mortgage servicing rights from ResCap to Ocwen that was consummated on February 15, 2013. (Id. ¶ 11 (citing APA).)

Ocwen and ResCap also entered into several ancillary agreements. (Id. ¶ 10.) The Servicing Transfer Agreement (the “STA,” id. Ex. B), executed on February 15, 2013, describes how certain aspects of the transfer of the mortgage servicing to Ocwen would occur. (Id. ¶¶ 10, 12.) The STA provides in pertinent part:

Section 3.04 Possession of Servicing Loan Files.

On or prior to each Servicing Transfer Date, Sellers shall deliver or cause to be delivered to Purchaser all Servicing Loan Files pertaining to the related Serviced Mortgage Loans subject to the Servicing Agreements and all related servicing records as of such Servicing Transfer Date (to the extent not previously delivered to Purchaser), as provided in this Section 3.04. To the extent such Servicing Loan Files are physically located in a facility acquired by Purchaser under the APA, transfer of possession of the Servicing Loan Files will be effected by Purchaser's taking possession of such facility. To the extent such Servicing Loan Files are physically located with a vendor utilized by both Sellers and Purchaser, transfer of possession of the Servicing Loan Files will be effected by the vendor reflecting its possession of such files for the account of Purchaser on its records. To the extent such

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