Sass v. Barclays Bank PLC (In re Am. Home Mortg., Holdings, Inc.)

• Decision Date: 08 November 2013
• Docket Number: Case No. 07–11047 (CSS) Jointly Administered,Adv. Proc. No. 11–51851 (CSS)
• Citation: 501 B.R. 44
• Parties: In re: American Home Mortgage, Holdings, Inc., a Delaware Corporation, et al., Debtors. Steven D. Sass, as Plan Trustee of the American Home Mortgage Plan Trust, Plaintiff, v. Barclays Bank PLC and Barclays Capital, Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

501 B.R. 44

In re: American Home Mortgage, Holdings, Inc., a Delaware Corporation, et al., Debtors.Steven D. Sass, as Plan Trustee of the American Home Mortgage Plan Trust, Plaintiff,

v.Barclays Bank PLC and Barclays Capital, Inc., Defendants.

Case No. 07–11047 (CSS) Jointly Administered

Adv. Proc. No. 11–51851 (CSS)

United States Bankruptcy Court, D. Delaware.

Filed November 8, 2013

Morris, Nichols, Arsht & Tunnell LLP, Gregory W. Werkheiser, Erin R. Fay, 1201 North Market Street, Wilmington, DE 19899, Linklaters LLP, Lance Croffoot–Suede, Paul Hessler, 1345 Avenue of the Americas, New York, NY 10105, Counsel for Defendants.

Young, Conaway, Stargatt & Taylor, LLP, Sean M. Beach, Michael S. Neilburg, 1000 North King Street—Rodney Square, Wilmington, DE 19899, Han & Hessen LLP, Mark S. Indelicato, Edward L. Schnitzer, 488 Madison Avenue, New York, NY 10022, Counsel for Plaintiff.

Chapter 11

OPINION¹

Sontchi, J.

INTRODUCTION

The question before the Court is whether an (alleged) agreement to setoff amounts owed to affiliates of a counterparty (a so called “triangular setoff”) is enforceable under the “safe harbor” provisions in sections 559–561 of the Bankruptcy Code. Prior to their bankruptcy, AHM Investment, one of the Debtors,² was a party to a Swap Agreement with Barclays Capital and a Repurchase Agreement with Barclays Bank. After the filing, Barclays Capital setoff monies owed to the AHM Investment under the Swap Agreement against funds owed to Barclays Bank under the Repurchase Agreement. Plaintiff herein brought an action for breach of the Swap Agreement, turnover of property of the estate, declaratory judgment regarding the triangular setoff taken by Defendants; as well as, violations of the automatic stay for such setoff. In addition, Plaintiff also objected to the claims filed by Defendants. In response, Defendants filed a motion to dismiss the complaint, on which this is the Court's opinion.

As set forth below, the Court finds that a contractual right of setoff that permits netting by multiple affiliates of the contract-counterparty outside of bankruptcy may not be enforced after the commencement of the debtor's bankruptcy cases. A triangular setoff lacks mutuality and is, therefore, not authorized under the Bankruptcy Code. As a result, Plaintiff has made plausible claims against Defendants. Herein, the Court denies the defendant's motion to dismiss the Amended Complaint.

Furthermore, the Court finds that Plaintiff has made plausible factual allegations that rebut the valid claim presumption established by Defendants. As a result, the Court denies the motion to dismiss the objections to Defendants' proofs of claim.

STATEMENT OF FACTS

I. The Parties

Plaintiff, Steve D. Sass, as Plan Trustee (the “Plan Trustee” or “Plaintiff”) of the American Home Mortgage Plan Trust brought this adversary proceeding asserting both affirmative claims against Barclays Bank PLC (“Barclays Bank”) and its affiliate Barclays Capital Inc. (“Barclays Capital” and with Barclays Bank, “Barclays” or the “Defendants”) and objections to the claims filed by Defendants.

II. The Debtors' Bankruptcy Cases

On August 6, 2007, the Debtors filed for relief under chapter 11 of the Bankruptcy Code. As of the petition date, the above-captioned debtors (the “Debtors”) were authorized to continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On February 23, 2009, the Court entered the Confirmation Order. The Effective Date of the Plan (as defined therein) occurred on November 30, 2010. Pursuant to the Confirmation Order and the Plan, certain of the Debtors' assets were transferred to the Plan Trust upon the Effective Date.

Pursuant to the Plan and the Plan Trust Agreement, the Plan Trustee is permitted to, among other things, prosecute Causes of Action and object to Claims (each as defined in the Plan).

III. Procedural History

In April 2011, Plaintiff commenced this adversary action against Defendants by filing a complaint. Subsequently, Plaintiff filed an amended complaint ³ (the “Amended Complaint”) asserting both affirmative claims against Defendants and objections to Defendants' Swap Claim and Repurchase Claim (both as defined below). The Amended Complaint alleges nine (9) causes of action, which include: breach of the Swap Agreement, request for turnover of property of the estate, a request for declaratory judgment regarding triangular set-off and violation of the automatic stay, and objections to the Repurchase Claim and Swap Claim.⁴ In response, Defendants filed a motion to dismiss each of the nine counts based on the argument that (i) the Bankruptcy Code and the terms of the Swap Agreement permit the triangular setoff effectuated by Defendants and as such Counts I–VII and IX fail to state a claim; and (ii) Counts VIII should be dismissed because Plaintiff failed to rebut the prima facie validity of the Repurchase Claim (more specifically, the “Deficiency Claim” portion of the claim). Plaintiff refutes Defendants' motion to dismiss. The motion to dismiss has been fully briefed and is ripe for the Court's consideration.

IV. Repurchase Agreement and Swap Agreements and Related ClaimsA. The Repurchase Agreement

American Home Mortgage Investment Corp. (“AHM Investment”) and Barclays Capital are parties to a Master Repurchase Agreement dated February 8, 2006 (together with all annexes, confirmations and schedules thereto and as amended, supplemented and/or modified, the “Repurchase Agreement”).⁵

The Repurchase Agreement provides that, among other things, AHM Investment, as seller, agrees to transfer to Barclays Capital, as buyer, various securities and other assets (including any Additional Purchased Securities transferred to Barclays Capital during the term of the Repurchase Agreement (the “Purchased Securities”)) in exchange for the transfer of funds from Barclays Capital, with a simultaneous agreement by Barclays Capital to transfer to AHM Investment such Purchased Securities as a date certain or on demand in exchange for the transfer of funds from AHM Investment (the “Repurchase Price”). Barclays Capital and Plaintiff (for the most part) agree on the Repurchase Price (but not the value of the Purchased Securities).

B. Defaults Under and Termination of the Repurchase Agreement

On August 3, 2007 (the “Repo Termination Date”), Barclays Capital sent AHM Investment a letter captioned as “Declaration of Event of Default/Notice of Repurchase Date/Notice of Termination” (the “Repo Termination Notice”). Therein, Barclays Capital (i) asserted that AHM Investment was in default under the Repurchase Agreement; (ii) accelerated the obligations under the Repurchase Agreement such that AHM Investment was required to immediately repurchase all of the Purchased Securities in Barclays Capital's possession under the Repurchase Agreement as of August 3, 2007; and (iii) terminated the Repurchase Agreement. Because AHM Investment did not have the cash to buy back the Purchased Securities, Barclays Capital retained possession of the Purchased Securities and subsequently asserted a deficiency claim against AHM Investment for the alleged difference between the Repurchase Price and the value of the Purchased Securities.

C. Swap Agreement and the Cap Transactions

In March of 2006, AHM Investment created the securitization trust AHM Investment Trust 2006–1 (the “Trust”) with Deutshe Bank National Trust Company acting as Indenture Trustee. Barclays Bank was chosen to underwrite the Trust's securitization of various adjustable rate mortgage loans (the “Trust Mortgages”) whose rates were tied to the 1–year Treasury Index. The Trust issued floating rate notes (the “Trust Securities”) based on these underlying Trust Mortgages.

The Trust Mortgages have an approximate average interest rate cap of 10%, with an effective interest rate cap of approximately 9% after netting out Trust expenses. The floating rate of the Trust Securities, however, is not capped. The lack of an interest rate cap on the Trust Securities means that an increase in market interest rates over 9% could lead to an inability to service the Trust Securities with payments from the underlying Trust Mortgages.

As part of the underwriting of the Trust Securities, the Trust, Barclays Bank and AHM Investment entered into a series of interest rate cap transactions to hedge against the possibility that prevailing interest rates on the Trust Securities would increase over the effective interest rate cap on the Trust Mortgages. In order for the Trust Securities to be eligible for a AAA rating, the interest rate cap transactions were set up so that Barclays Bank—which was rated AAA at the relevant time—sold an interest rate cap option (the “Front Cap”) to the Trust and AHM Investment simultaneously sold an interest rate cap option to Barclays (the “Back Cap”).

The Front Cap would protect the Trust in the event that the interest rate on the Trust Securities increased beyond the interest rate of the underlying Trust Mortgages and the Back Cap would cover Barclays Bank's liability in the event that the Front Cap was exercised by the Trust. Barclays also entered into two interest rate cap options (“Hedge Cap 1” and “Hedge Cap 2,” collectively the “Hedge Caps”) with AHM Investment. These corridor cap transactions were intended to hedge AHM Investment's potential exposure relating to the Back Cap.

The Back Cap and Hedge Caps transactions were governed by the ISDA Master Agreement (Multicurrency–Cross Border), dated as of March 13, 2006 (the “Master Agreement”), the Schedule to the Master Agreement, dated as of March 13, 2006 (the “Schedule”), the ISDA Credit Support Annex (Bilateral Form) dated as of March 13, 2006 (the “Credit Support Annex”), and certain related Confirmations, and other related transactional documents, as amended, supplemented and modified (collectively, the “Swap Agreement”).

The Swap...