Rescap Liquidating Trust v. U.S. Bank, N.A.

• Decision Date: 05 June 2017
• Docket Number: Civ. No. 17-198 (PAM/HB),Civ. No. 16-4067 (PAM/HB),Civ. No. 17-197 (PAM/HB)
• Parties: ResCap Liquidating Trust, Plaintiff, v. U.S. Bank, N.A., Defendant. ResCap Liquidating Trust, Plaintiff, v. BMO Harris Bank, N.A., Defendant. ResCap Liquidating Trust, Plaintiff, v. WMC Mortgage, LLC, Defendant.
• Court: U.S. District Court — District of Minnesota

ResCap Liquidating Trust, Plaintiff,
v.
U.S. Bank, N.A., Defendant.

ResCap Liquidating Trust, Plaintiff,
v.
BMO Harris Bank, N.A., Defendant.

ResCap Liquidating Trust, Plaintiff,
v.
WMC Mortgage, LLC, Defendant.

Civ. No. 16-4067 (PAM/HB)
Civ. No. 17-197 (PAM/HB)
Civ. No. 17-198 (PAM/HB)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

June 5, 2017

MEMORANDUM AND ORDER

This matter is before the Court on Motions to Dismiss filed in these so-called "second wave" of the consolidated In re RFC and ResCap Liquidating Trust Litigation, D. Minn. No. 13cv3451, cases. For the following reasons, the "omnibus" Motion is denied, BMO Harris Bank's case-specific Motion is denied, and U.S. Bank's case-specific Motion is granted and the Complaint against U.S. Bank is dismissed without prejudice.

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BACKGROUND

The full factual background of this matter has been detailed in many previous Orders and will not be repeated here. Briefly, Plaintiff ResCap Liquidating Trust, successor to Residential Funding Company (collectively referred to as "RFC"), alleges that the mortgages the various bank Defendants sold to RFC, and which RFC aggregated into mortgage-backed securities, were defective and did not comply with the underwriting and originating standards in the parties' agreements. RFC claims breach of contract and indemnification against the banks.

DISCUSSION

A. Omnibus Motion¹

The banks' omnibus Motion contends that the Court lacks jurisdiction over these cases. Jurisdiction in all RFC actions now pending in federal court is premised on the Bankruptcy Code. Defendants argue that these cases must be dismissed because they are insufficiently related to RFC's bankruptcy to confer subject-matter jurisdiction.

Jurisdiction over BMO is also premised on diversity jurisdiction. BMO argues that RFC has failed to allege its citizenship, and that RFC's citizenship must include all of the Trust's "unitholders", which number in the thousands if not tens of thousands. According to BMO, it is likely impossible for every Trust unitholder to be diverse from BMO, so diversity jurisdiction is lacking. If there is no bankruptcy jurisdiction, BMO contends, there is no basis for federal jurisdiction. The Court will first address bankruptcy

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jurisdiction, setting aside the question whether there is diversity jurisdiction over BMO.

1. Bankruptcy Jurisdiction

This Court has jurisdiction over matters "arising in or related to cases under" the Bankruptcy Code. 28 U.S.C. § 1334(b). There is no dispute that this matter did not "aris[e] in" RFC's bankruptcy proceedings. Thus, the only basis for federal jurisdiction over many of the RFC cases pending in this District is "related to" bankruptcy jurisdiction. To determine whether these cases are "related to" RFC's bankruptcy case requires a brief review of RFC's bankruptcy and the creation of the Trust.

The Bankruptcy Court for the Southern District of New York confirmed RFC's Chapter 11 plan in December 2013. In re Res. Capital, LLC, Case No. 12-12020 (Bankr. S.D.N.Y. Dec. 11, 2013). As part of that confirmation, the court created Plaintiff ResCap Liquidating Trust. RFC transferred all of its assets to the Trust, including the claims that the Trust asserts in these lawsuits. Indeed, one of the main purposes for the Trust's creation was the pursuit of the claims in these lawsuits. The Trust assigned "units" of the Trust in proportional shares to RFC's various creditors, whom the parties now call "unit-holders." The Trust's units are negotiable and have been bought and sold on the market.

In most civil litigation that claims "related to" bankruptcy jurisdiction under § 1334(b), courts evaluate federal jurisdiction by determining whether the litigation has a "conceivable effect" on the bankruptcy estate. In re RFC & ResCap Liquidating Trust Litig., No. 13-3451, 2015 WL 2373401, at * 5 (D. Minn. May 18, 2015) (Nelson, J.). The

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"conceivable effect" test is undeniably broad, and Defendants do not dispute that, under that test, these cases are "related to" RFC's bankruptcy for purposes of conferring federal jurisdiction.

a. Eighth Circuit test

Defendants argue that, because these lawsuits arose after confirmation of RFC's bankruptcy plan, the Court must use a narrower test to evaluate whether they are "related to" the bankruptcy. According to Defendants, the Court must determine whether the matter is related to the administration and interpretation of the bankruptcy plan, not merely whether it has a conceivable effect on the plan. (Defs.' Supp. Mem. (Docket No. 50 in 17cv194) at 12 (quoting In re Fairfield Cmties., Inc., 142 F.3d 1093, 1095 (8th Cir. 1998)).) The reason for this distinction, Defendants argue, is that this litigation arises long after the confirmation of RFC's bankruptcy plan, while cases using the "conceivable effect" test involved litigation that arose before the plan's confirmation.

Defendants draw their narrow test from the Eighth Circuit's Fairfield Communities decision. That case involved claims against a bankrupt debtor that arose from the debtor's post-confirmation conduct. Id. at 1095. The Eighth Circuit stated the general principle that a bankruptcy court could retain post-confirmation jurisdiction "over aspects of a plan related to its administration and interpretation" by explicitly providing for such continuing jurisdiction in the confirmation order. Id. (quoting Norwest Equip. Fin., Inc. v. Nath, 91 F.3d 1072, 1074 (8th Cir. 1996)). In the Fairfield Communities case, the bankruptcy court retained jurisdiction "over cases involving the enforcement of the plan." Id. As the

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Eighth Circuit put it, the resolution of that question required determining when the claims arose: "this case could involve [enforcement of] the plan only if the [creditors'] claims arose before the plan's confirmation." Id. at 1095. Because the creditors' claims solely involved the debtor's post-confirmation conduct, the Eighth Circuit held that those claims did not involve enforcement of the plan and that there was therefore no bankruptcy jurisdiction over them. Id. at 1096.

Fairfield Communities presented a far different situation than is presented in the RFC cases. The Bankruptcy Court in RFC's bankruptcy proceedings retained "exclusive jurisdiction over all matters arising out of, or related to, the Chapter 11 Cases and the Plan . . . including jurisdiction . . . to hear and determine any Causes of Action preserved under the Plan." (Markowitz Decl. Ex. 1 (Docket No. 51-1 in 17cv194) Art. XII (pp. 110-12).) RFC's bankruptcy plan specifically contemplates post-confirmation litigation and preserved jurisdiction over that litigation. See In re RFC & ResCap, 2015 WL 2373401, at *5 ("The Plan expressly preserved RFC's claims [against the banks] and transferred them to ResCap to pursue.") (citations omitted). Moreover, "[t]he very purpose of these actions is to prosecute those [preserved] claims." Id.

And all of the RFC litigation relates to conduct—each bank's sale of allegedly defective loans to RFC—that occurred long before the plan's confirmation, and indeed long before RFC declared bankruptcy. RFC claims that the sale of these allegedly defective loans is one cause, if not the sole cause, of RFC's bankruptcy in the first instance. It is difficult to imagine litigation that more fundamentally relates to RFC's bankruptcy

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than these cases.

Defendants acknowledge that all six federal courts to have considered this issue in the context of these RFC cases have held that those courts can properly exercise "related to" bankruptcy jurisdiction over the cases. They maintain that either the decisions were wrongly decided or that the courts used a test from the Second Circuit that is ostensibly broader than the test the Eighth Circuit set forth in Fairfield Communities.

b. Second Circuit test

There is some dispute regarding the test for post-confirmation "related to" jurisdiction in the Second Circuit. See Allstate Ins. Co. v. CitiMortg., Inc., No. 11cv1927, 2012 WL 967582, at *5 (S.D.N.Y. Mar. 13, 2012) (summarizing caselaw on the issue). But the most stringent test courts in the Second Circuit use for post-confirmation "related to" jurisdiction is whether the matter has a "close nexus to the bankruptcy plan or proceeding." In re Gen. Media, Inc., 335 B.R. 66, 73 (Bankr. S.D.N.Y. 2005). A close nexus requires proof that the lawsuit "affects an 'integral aspect' of the bankruptcy proceedings, such as 'the interpretation, implementation, consummation, execution, or administration of the confirmed plan or incorporated litigation trust agreement.'" ResCap Liquidating Trust v. Primary Capital Advisors, LLC, 527 B.R. 865, 870-71 (S.D.N.Y. 2014) (quoting In re Metro-Goldwyn-Mayer Studios Inc., 459 B.R. 550, 556 (Bankr. S.D.N.Y. 2011)). The "close nexus" test also requires that the bankruptcy plan expressly provide for retention of jurisdiction of the dispute. Id. at 871.

Each court to have faced the issue has found that RFC satisfies even the stringent

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"close nexus" test for the post-confirmation litigation against the banks. As one decision stated, the claims RFC raises in these cases "directly affect the interpretation, implementation, consummation, execution, or administration of the bankruptcy plan." Primary Capital, 527 B.R. at 871. This is so because the plan expressly preserved these claims and transferred the claims to the Trust to prosecute. Id.; see also Residential Funding Co., LLC v. Greenpoint Mortg. Funding, Inc., 519 B.R. 593, 600 (S.D.N.Y. 2014) (finding "close nexus" over RFC's claims because "confirmed plan of liquidation expressly preserves RFC's claims and transfers them to the...