Residential Funding Co. v. Ubs Real Estate Sec., Inc. (In re Residential Capital, LLC)

• Decision Date: 25 August 2014
• Docket Number: Case No. 12–12020(MG) Jointly Administered,Adv. Pro. Case No. 14–01926(MG)
• Citation: Residential Funding Co. v. Ubs Real Estate Sec., Inc. (In re Residential Capital, LLC), 515 B.R. 52 (Bankr. S.D.N.Y. 2014)
• Parties: In re: Residential Capital, LLC, et al., Debtors. Residential Funding Company, LLC, Plaintiff, v. UBS Real Estate Securities, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

515 B.R. 52

In re: Residential Capital, LLC, et al., Debtors.Residential Funding Company, LLC, Plaintiff,

v.UBS Real Estate Securities, Inc., Defendant.

Case No. 12–12020(MG) Jointly Administered

Adv. Pro. Case No. 14–01926(MG)

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

Signed August 25, 2014

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Alexander C. Drylewski, Skadden, Arps, Slate, Meagher & Flom LLP, Attorneys for DefendantUBS Real Estate Securities, Inc., Four Times Square, New York, New York 10036.

Isaac Nesser, Quinn Emanuel Urquhart & Sullivan, LLP, Attorneys for PlaintiffResidential Funding Company, LLC, 51 Madison Avenue, 22nd Floor, New York, New York 10010.

MEMORANDUM OPINION AND ORDER DENYING MOTION TO REMAND

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Debtor Residential Funding Company, LLC(“RFC”) filed this lawsuit against UBS Real Estate Securities, Inc.(“UBS”) in the New York State Supreme Court, seeking breach of contract damages and indemnification related to loans UBS sold to RFC.RFC then removed the action to this Court, and UBS now seeks to remandthe case to state court.¹UBS also filed a motion to withdraw the reference of the action to this Court.Judge Daniels of the District Court denied that motion without prejudice, in part to await this Court's decision on this Remand Motion.²

The complaint filed in this action is substantially similar to complaints in 83 other lawsuits (the “RMBS Actions”) initiated by RFC or its successor in interest, the ResCap Liquidating Trust (the “Trust”).The majority of the RMBS Actions are currently pending in the U.S. District Court for the District of Minnesota.Thirteen adversary proceedings substantially similar to this action are currently pending before this Court, under the central docket In re ResCap Liquidating Trust Mortgage Purchase Litigation, Adv.No. 14–07900(Bankr.S.D.N.Y.).At least ten defendants in those adversary proceedings have pending motions to withdraw the bankruptcy reference and/or transfer venue, each in front of a different district judge.³

The RMBS Actions involve similar state law claims for breach of contract and indemnification related to the packaging and sale of residential mortgage backed securities (“RMBS”).What sets the UBS action apart is the fact that UBS filed a proof of claim against RFC in the bankruptcy case.That distinction is determinative of the outcome of this Motion.UBS's proof of claim seeks contract breach damages and indemnification under a separate but similar contract governing the sale of loans from RFC to UBS.As explained below, RFC's claims against UBS are counterclaims to UBS's proof of claim.As such, the counterclaims are statutorily “core” under 28 U.S.C. § 157(b)(2)(C) as “counterclaims by the estate against persons filing claims against the estate.”It follows that the counterclaims fall within Congress' grant of federal subject matter jurisdiction under 28 U.S.C. § 1334(b) over “civil proceedings arising under title 11, or arising in or related to cases under title 11.”Whether this Court has the constitutional authority (absent consent) to enter final judgment on the counterclaims is a separate issue, not necessary for a ruling on the Remand Motion.⁴Further, because RFC's claims are “core,”they are not subject to mandatory abstention under 28 U.S.C. § 1334(c)(2), and the Court will not abstain from hearing this action under the permissive abstention principles of 28 U.S.C. § 1334(c)(1).Accordingly, the Remand Motion is DENIED for the reasons set forth below.

I.BACKGROUND

A.The Complaint

RFC asserts common law causes of action for breach of contract and contractual indemnification arising out of RFC's purchase of loans from UBS (the “Loans”).( SeeSecond Amended Complaint (“SAC”), ECF Doc. # 33¶¶ 81–91).According to RFC, it purchased over 2,200 mortgage loans from UBS, with an original principal balance in excess of half a billion dollars.( Id.¶¶ 18, 20.)In connection with that sale, the parties entered into a Master Seller's Purchase and Warranties Agreement dated May 12, 2005(the “MSPA,” SAC Ex.A), under which UBS represented and warranted that the Loans would meet certain criteria and satisfy certain characteristics (the “Warranties”).( SeeSAC ¶ 25.)UBS also agreed to indemnify RFC against any liabilities and losses that RFC might incur if UBS's Warranties were false.( See, e.g.,MSPA § 3.03;SAC¶ 28.)

After purchasing the Loans, RFC either securitized them by creating so-called “RMBS Trusts,” or sold them into whole loan pools.(SAC¶¶ 22–24.)In doing so, RFC made certain representations to the RMBS or whole-loan purchasers concerning the characteristics of the Loans, relying on information provided by UBS and other mortgage originators.( Id.¶¶ 26, 32.)

RFC alleges that the performance of the Loans revealed that the Loans contained a massive number of defects, in violation of the Warranties that UBS had made to RFC.(Opp.at 3;SAC¶¶ 33–42.)The Loans began to default in large numbers, triggering losses in RMBS Trusts.( SeeSAC ¶ 43.)RMBS investors and others filed claims against RFC seeking compensation for these losses.( Id.¶ 9.)These claims, relating to the Loans RFC bought from UBS as well as loans purchased from other mortgage originators, alleged staggering liability, involving more than 100 RMBS Trusts and a combined original principal balance of over $100 billion.( Id.¶¶ 62–72.)Among the allegations common to these claims were that the loans backing RFC's RMBS Trusts breached RFC's representations and warranties concerning loan quality and underwriting guidelines—representations and warranties that, by extension, RFC had received from UBS and the other mortgage originators when buying the loans.( Id.)

On May 14, 2012, RFC, Residential Capital, LLC, and numerous affiliates (the “Debtors”) filed for chapter 11 bankruptcy protection, due in part to their enormous potential exposure from these RMBS-related lawsuits.( Id.¶ 74.)RMBS investors, monoline insurers, whole-loan purchasers, indenture trustees, and others filed hundreds of proofs of claim in these bankruptcy proceedings, many of which mirrored pre-petition litigation, and all of which stemmed from allegedly defective mortgage loans.( Id.¶ 75.)After protracted and contested proceedings, and through a lengthy mediation process, a global settlement was reached that provided for the resolution of all of the Debtors' RMBS-related liabilities—including liability arising from the Loans purchased from UBS—in exchange for over $10 billion in allowed claims, allocated by various means to the RMBS Trusts, monoline insurers, FHFA, securities law claimants, and others (the “Global Settlement”).( Id.¶ 78.)

On December 11, 2013, the Court entered an order (the “Confirmation Order,”Ch. 11 ECF Doc. # 6065)⁵ confirming the Second Amended Joint Chapter 11 Plan Proposed by Residential Capital, LLC et al. and the Official Committee of Unsecured Creditors(the “Plan,”Ch. 11 ECF Doc. # 6065–1).The Plan, which is a liquidation plan, became effective on December 17, 2013(the “Effective Date”).(Ch. 11 ECF Doc. # 6137.)As part of the confirmed Plan, the Court approved the Global Settlement, finding it to be fair, reasonable, and in the best interests of each of the Debtors.( SeeFindings of Fact¶¶ 98–176, Ch. 11 ECF Doc. # 6066.)

RFC filed this action on December 17, 2013, after its RMBS-related liabilities became fixed through confirmation of the Plan.RFC asserts that

[p]ursuant to its express contractual obligations, UBS is obligated to compensate RFC for the portion of [the] Global Settlement associated with UBS's breaches [of] its representations and warranties, as well as for the portion of RFC's other liabilities and losses (including the tens of millions of dollars that RFC has paid in attorneys' fees to defend against, negotiate, and ultimately settle claims relating to allegedly defective loans) associated with those same breaches.

(SAC¶ 80.)

B. UBS's Proof of Claim

On November 9, 2012—before RFC filed this action—UBS timely filed proof of claim number 4200(the “UBS Claim”) in RFC's bankruptcy proceeding.The UBS Claim relates to mortgage loans that UBS bought from RFC that were subsequently included in UBS-sponsored RMBS offerings.( See Proof of Claim, Fumerton Decl. Ex. F.)Like RFC, UBS bought mortgage loans—including loans from RFC—to be repackaged and sold.UBS's purchase of loans from RFC was governed by a set of contracts (the “POC Contracts”)⁶ that contained representations and warranties, as well as indemnification provisions, some of which were identical or similar in form to those in the MSPA governing RFC's purchase of Loans from UBS.⁷In its proof of claim, UBS asserts that it has been named as a defendant in third-party lawsuits related to RMBS offerings and that, under the terms of the POC Contracts, RFC is obligated to indemnify UBS for any claims, causes of action, losses, damages, judgment, costs, and fees related to or arising from the lawsuits.( Id.)The proof of claim explicitly states that it is not intended to waive any rights of UBS to contest the jurisdiction of this Court.On December 12, 2013, the Debtors objected to UBS's proof of claim solely on the ground of “Insufficient Documentation.”( SeeDebtors' Fifty–Second Omnibus Objection to Claims (Insufficient Documentation),Ch.11 ECF Doc. # 6075.)The Debtors' objection and the UBS Claim remain pending—a hearing on the objection has been adjourned several times, most recently to a date to be determined.( SeeCh. 11 ECF Doc. # # 6210, 6328, 6490, 6641.)

C.Procedural History and the Remand Motion

RFC filed this action against UBS in the New York State Supreme Court, New York County, on December 17, 2013.( See Compl., ECF Doc. # 1–2.)In its state court Complaint, RFC alleged that jurisdiction was proper in New York state court under CPLR sections 301and302, and that venue...