Official Comm. of Unsecured Creditors, v. UMB Bank, N.A. (In re Residential Capital, LLC)

• Decision Date: 01 January 2013
• Docket Number: Adversary Proceeding No. 13–01277,Case No. 12–12020 (MG) Jointly Administered,(MG), Adversary Proceeding No. 13–01343 (MG)
• Citation: 501 B.R. 549
• Parties: In re: Residential Capital, LLC, et al., Debtors. Official Committee of Unsecured Creditors, on behalf of the estates of the Debtors, Plaintiff, v. UMB Bank, N.A., as successor indenture trustee under that certain Indenture, dated as of June 6, 2008; and Wells Fargo Bank, N.A., third priority collateral agent and collateral control agent under that certain Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009, Defendants. Residential Capital, LLC, et al, Plaintiffs, v. UMB BANK, N.A., as successor indenture trustee under that certain Indenture, dated as of June 6, 2008; and Wells Fargo Bank, N.A., third priority collateral agent and collateral control agent under that certain Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

501 B.R. 549

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

Official Committee of Unsecured Creditors, on behalf of the estates of the Debtors, Plaintiff,

v.UMB Bank, N.A., as successor indenture trustee under that certain Indenture, dated as of June 6, 2008; and Wells Fargo Bank, N.A., third priority collateral agent and collateral control agent under that certain Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009, Defendants.

Residential Capital, LLC, et al, Plaintiffs,

v.UMB BANK, N.A., as successor indenture trustee under that certain Indenture, dated as of June 6, 2008; and Wells Fargo Bank, N.A., third priority collateral agent and collateral control agent under that certain Amended and Restated Third Priority Pledge and Security Agreement and Irrevocable Proxy, dated as of December 30, 2009, Defendants.

Case No. 12–12020 (MG) Jointly Administered

Adversary Proceeding No. 13–01277(MG), Adversary Proceeding No. 13–01343 (MG)

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

Filed 11/15/2013

Morrison & Foerster LLP, Attorneys for Debtors, 1290 Avenue of the Americas, New York, NY 10104, By: Gary S. Lee, Esq., Jamie A. Levitt, Esq., Stefan W. Engelhardt, Esq.

Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, NY 10036, Counsel for the Official Creditors' Committee, By: Kenneth H. Eckstein, Esq., Gregory A. Horowitz, Esq.

Pachulski Stang Ziehl & Jones, Conflicts Counsel to Official Creditors' Committee, 780 Third Avenue, 36th Floor, New York, NY 10017, By: Robert J. Feinstein, Esq., John A. Morris, Esq.

White & Case LLP, Attorneys for Ad Hoc Group of Junior Secured Noteholders, 1155 Avenue of the Americas, New York, NY 10036, By: J. Christopher Shore, Esq., Douglas P. Baumstein, Esq., Dwight A. Healy, Esq.,

Akin Gump Strauss Hauer & Feld LLP, Special Counsel to UMB Bank, N.A., One Bryant Park, New York, NY 10036, By: David M. Zensky, Esq., Deborah Newman, Esq., Brian T. Carney, Esq.

Reed Smith LLP, Attorneys for Wells Fargo as Collateral Agent, 599 Lexington Avenue, 22nd Floor, New York, NY 10022, By: David M. Schlecker, Esq.

Chapter 11

MEMORANDUM OPINION, AND FINDINGS OF FACT AND CONCLUSIONS OF LAW, AFTER PHASE I TRIAL

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

ResCap and the Creditors' Committee (the “Plaintiffs”) are co-proponents of a reorganization plan that treats the junior secured noteholders (“JSNs”) as undersecured, but would pay them the face amount of all principal and prepetition interest ($2.222 billion, less $1.1 billion repaidpostpetition). The JSNs voted against and oppose confirmation of the plan.

The JSNs contend they are oversecured and entitled to postpetition interest (at the default rate) and fees; they also contend they are entitled to recover an adequate protection claim of $515 million based on alleged diminution in value of their prepetition collateral used during the case under a series of consensual cash collateral orders.¹ They also contend that their collateral should be increased as the result of an “all assets” pledge, which purportedly attaches to the Debtors' assets that (1) were once excluded from the “all assets” pledge but no longer are, (2) were released from the JSNs' liens but were subsequently reacquired by the Debtors, or (3) were never properly released from the JSNs' liens at all.

The Plaintiffs contend that (1) the JSNs are undersecured and, therefore, not entitled to postpetition interest and fees; (2) the JSNs' collateral has not declined in value since the petition date and thus the JSNs cannot assert an adequate protection claim; (3) the JSNs' collateral should be reduced from lien challenges to deposit accounts and real estate owned (“REO”) assets; (4) the Debtors' transfers of approximately $270 million of collateral to the undersecured JSNs in the 90 days before bankruptcy are avoidable preferences; and (5) and the principal amount of the JSNs' claim must be reduced by approximately $386 million for unmatured interest arising from original issue discount (“OID”) created as part of the Debtors' “fair value” debt-exchange offer in 2008.

The swing between the JSNs' projected recoveries under the proposed plan and their “ask” is at least $350 million, or perhaps more. In other words, the parties are fighting about a lot of money.

The legal issues are framed in two adversary proceedings, one filed by the Debtors and the other by the Creditors' Committee (the “Committee”) after it was given standing in an order granting an STN motion. The two adversary proceedings, asserting both claims and counterclaims, were consolidated. In two earlier written decisions, the Court granted in part (sometimes with prejudice and sometimes without prejudice) and denied in part motions to dismiss some of the claims and counterclaims. ( See In re Residential Capital, LLC, 495 B.R. 250 (Bankr.S.D.N.Y.2013), ECF Doc. # 74, and In re Residential Capital, LLC, 497 B.R. 403 (Bankr.S.D.N.Y.2013), ECF Doc. # 100. ²) Familiarity with those decisions is assumed.

The Court established an expedited schedule for discovery and trial. The trial was bifurcated into two phases because some issues involve only the Plaintiffs and Defendants (as defined below) while other issues potentially involve other creditor constituencies in the case. The Phase I trial, conducted between October 15–23 and on November 6, 2013, was limited to disputed issues between the Plaintiffs and Defendants, to simplify the trial and limit the number of parties that felt it necessary to actively participate; the Phase II trial, involving issues potentially affecting the Plaintiffs, Defendants and a broader group of parties in interest in the bankruptcy case, will be part of the contested plan confirmation hearing now scheduled to begin on November 19, 2013.

On August 23, 2013, the parties submitted an agreed list of issues for trial. (ECF Doc. # 84.) A Joint Pretrial Conference Order, approved by the Court on October 18, 2013, provides stipulations of fact, the parties' factual and legal contentions, and exhibit and witness lists. (ECF Doc. # 161.) All direct fact and expert sworn witness testimony was filed in advance, with the witnesses in court during the trial for cross and re-direct examination. Motions in limine to preclude some of the proposed expert testimony were granted in part and denied in part. (Oct. 16 Tr. 8:2–15.³) Deposition designations and counter-designations were introduced into evidence at trial mostly without objections.⁴ Voluminous exhibits were admitted in evidence at trial, mostly without objections. The parties' filed post-trial submissions on November 1, 2013, and conducted closing arguments on November 6, 2013.

This Opinion resolves the legal and factual issues in the Phase I trial. The Court completed the Opinion quickly because the outcome of the Phase I trial impacts Phase II and the confirmation hearing. This Opinion contains the Court's findings of fact and conclusions of law pursuant to Fed. R. Civ. P. 52, made applicable to these adversary proceedings by Fed. R. Bankr. P. 7052. In making its findings of fact, the Court has resolved credibility issues and the weight appropriately given to conflicting evidence. Where contested or disputed facts or opinions were offered during trial, this Opinion reflects the Court's resolution of those disputes, whether or not the opinion specifically refers to the contrary evidence introduced by the opposing parties.

All of the issues in the Phase I trial are “core,” as provided in 28 U.S.C. § 157(b)(2). Because the JSNs (through UMB, the indenture trustee) submitted a proof of claim in this case, seeking to recover all principal, prepetition and postpetition interest and fees, and have asserted an adequate protection claim, all of the issues raised and resolved in these adversary proceedings necessarily must be resolved as part of the claims-allowance process. Therefore, the Court concludes that it has the constitutional authority to enter final orders and judgment in these adversary proceedings. Because issues in these adversary proceedings remain to be resolved following the Phase II trial and confirmation hearing, no final judgment can be entered now. This Opinion does include the Court's final resolution of the issues upon which it now rules.

The results of the Phase I trial can be viewed as a split decision—some issues have been resolved in favor of the Plaintiffs and some in favor of the Defendants. Subject to the outcome of the Phase II trial, the Court concludes that the JSNs' claim should not be reduced for unmatured OID; the JSNs have failed to establish that they are entitled to recover an adequate protection claim; the JSNs have liens on certain contested collateral, including certain intangible assets, but the JSNs do not have liens on the full extent of the collateral claimed; the Plaintiffs have failed to establish that the JSNs received avoidable preferences during the preference period (as defined below); and the JSNs are undersecured and not entitled to postpetition interest and fees. As explained below, the Court concludes that (subject to the results of the Phase II trial) the JSNs are undersecured by approximately $318 million.

I. BACKGROUND

On May 14, 2012 (the “Petition Date”), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. Since the Petition Date, the Debtors have continued to operate their businesses and manage their properties as debtors in possession. Before filing for bankruptcy, the Debtors were a leading originator of residential mortgage loans and, together with their non-Debtor affiliates, the fifth largest servicer of residential mortgage loans in the United States, servicing approximately $374 billion of domestic residential mortgage loans and working with more than 2.4 million mortgage loans across the United States. (Marano Direct ¶ 23.)

Defendant UMB Bank, N.A. (“UMB”) is...