Sec. Nat'l Mortg. Co. v. Lehman Bros. Holdings Inc.

• Decision Date: 24 August 2016
• Docket Number: C.A. No. N16C-01-221 PRW CCLD
• Parties: SECURITY NATIONAL MORTGAGE COMPANY Plaintiff, v. LEHMAN BROTHERS HOLDINGS INC. Defendant.
• Court: Delaware Superior Court

SECURITY NATIONAL MORTGAGE COMPANY Plaintiff,
v.
LEHMAN BROTHERS HOLDINGS INC. Defendant.

C.A. No. N16C-01-221 PRW CCLD

SUPERIOR COURT OF THE STATE OF DELAWARE

Submitted: July 20, 2016
Corrected: September 9, 2016
August 24, 2016

MEMORANDUM OPINION AND ORDER
Upon Defendant, Lehman Brothers Holdings, Inc.'s, Motion to Dismiss or, in the Alternative, to Stay this Action, GRANTED.

Donald E. Reid, Esquire, Karl G. Randall, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, DE, Gifford W. Price, Esquire (pro hac vice), (Argued), Mackey Price & Mecham, PC, Salt Lake City, UT, Blake D. Miller, Esquire (pro hac vice) (Argued), Miller Toone PC, Salt Lake City, UT, Attorneys for Security National Mortgage Company.

Vincent J. Poppiti, Esquire, Kasey H. DeSantis, Esquire, Fox Rothschild LLP, Wilmington, DE, Michael A. Rollin, Esquire, Of Counsel (pro hac vice) (Argued), Maritza Braswell, Esquire, Of Counsel (pro hac vice), Lindsay A. Unruh, Esquire, Of Counsel (pro hac vice), Caleb Durling, Esquire Of Counsel (pro hac vice), Rollin Braswell Fisher LLC, Greenwood Village, CO, Attorneys for Defendant Lehman Brothers Holdings, Inc.

WALLACE, J.

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I. INTRODUCTION

Security National Mortgage Company ("SecurityNational") brings this action pursuant to Delaware's Declaratory Judgment Act.¹ SecurityNational seeks a declaration that Defendant Lehman Brothers Holdings Inc.'s ("LBHI") indemnification claims related to loans sold by SecurityNational are time-barred, or in the alternative, that the indemnification claims are otherwise invalid.²

Before the Court is LBHI's Motion to Dismiss, or in the Alternative, to Stay the Action. LBHI asserts that this Court does not have subject matter jurisdiction over SecurityNational's claims because SecurityNational's complaint violates an automatic stay imposed by the Federal Bankruptcy Code.³ Even if subject matter jurisdiction exists, LBHI urges the Court to decline to exercise jurisdiction over SecurityNational's action because there is no present "actual controversy" susceptible to declaratory relief. LBHI also argues that the Court should dismiss the action on first-filed or forum non conveniens grounds. If unwilling to dismiss, LBHI requests that the Court grant a stay pending resolution of related litigation in

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the United States Bankruptcy Court for the Southern District of New York ("the Bankruptcy Court") that also involves SecurityNational.⁴

In short, LBHI argues that the Bankruptcy Court is the most appropriate and suitable forum for the cause SecurityNational presents here. The Court agrees. Because SecurityNational's declaratory judgment request fails to satisfy the requirements of Delaware's Declaratory Judgment Act, LBHI's motion to dismiss is GRANTED.

II. FACTUAL AND PROCEDURAL BACKGROUND

SecurityNational is a Utah-based corporation that acts as an originator of residential mortgage loans.⁵ LBHI is a Delaware corporation that owned and operated Lehman Brothers Bancorp; that entity, in turn, owned Lehman Brothers Bank LLC ("LB Bank").⁶

For several years, SecurityNational sold residential mortgage loans to LB Bank under the terms of an April 15, 2005 Loan Purchase Agreement ("LPA").⁷ The LPA incorporated the "Seller's Guide" of LB Bank's loan administrator and

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agent, Aurora Loan Services ("Aurora").⁸ These agreements outlined the parties' responsibilities for the sale and purchase of the mortgage loans, including SecurityNational's indemnification obligations.⁹ In September 2008, LB Bank and LBHI entered into an Assignment Agreement whereby LB Bank assigned its rights under SecurityNational's LPA and Seller's Guide to LBHI.¹⁰

LB Bank subsequently sold many of these residential mortgage loans to LBHI. LBHI then sold these loans to the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").¹¹

Previously, in December 2007, LB Bank, Aurora, and SecurityNational had entered into an Indemnification Agreement.¹² The Indemnification Agreement arose out of a concern that SecurityNational had breached the LPA and Seller's Guide with respect to certain loans.¹³ Under the Indemnification Agreement, SecurityNational agreed to indemnify LB Bank and Aurora on those loans and

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deposited several million dollars into a reserve account to be used to cover incurred losses.¹⁴

In the wake of the subprime mortgage crisis, on September 15, 2008, LBHI entered into the largest Chapter 11 bankruptcy in history.¹⁵ Since then - and perhaps for many more years - the Bankruptcy Court has overseen that proceeding.¹⁶ In late 2011, the Bankruptcy Court confirmed LBHI's bankruptcy reorganization plan, with the Plan's effective date being March 6, 2012.¹⁷ The Plan grants a "Plan Trust" sole authority to liquidate LBHI's assets, including the ability to litigate claims to maximize distributions to creditors.¹⁸

Coinciding with the Bankruptcy proceedings, SecurityNational expressed concerns that it had overpaid into the indemnification reserve account in a letter dated November 2010.¹⁹ Months later, on March 28, 2011, Aurora/LB Bank assigned to LBHI their rights under the Indemnification Agreement.²⁰ Less than

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one month later, LBHI sent its first monthly bill to SecurityNational.²¹ On June 2, 2011, because of concerns related to overpayment, SecurityNational refused to pay.²² LBHI unilaterally declared that the Indemnification Agreement was "null and void."

In January and February 2014, the Bankruptcy Court approved LBHI's multi-billion dollar settlements with Fannie Mae and Freddie Mac.²³ These settlements resolved issues related to LBHI's sale of the defective mortgages.²⁴ Following the settlement, LBHI began to pursue its indemnification claims (the "Indemnification Claims") against various loan sellers, including SecurityNational.²⁵

To simplify LBHI's indemnification claims against approximately three-thousand counter-parties, the Bankruptcy Court granted LBHI's request to implement an Alternative Dispute Resolution ("ADR") Procedure specifically for

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their indemnification claims.²⁶ The Bankruptcy Court outlined the procedure for providing notice of the claims and directed the parties to commence ADR.²⁷

LBHI served SecurityNational with notice of the ADR on August 28, 2015.²⁸ SecurityNational initially objected, but ultimately agreed to participate under a full reservation of rights.²⁹ The parties began negotiations, but did not resolve their issues.³⁰

Many other loan providers likewise objected to LBHI's indemnification claims. Several, not including SecurityNational, pursued statute-of-limitation claims in the Bankruptcy Court. The Bankruptcy Court rejected those arguments, finding that "LBHI's claim for indemnification . . . did not accrue until its liability to a third-party [FannieMae] was fixed or payment was made."³¹

SecurityNational did not join in these motions, but the arguments were substantially similar to those it now asserts.

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After ADR negotiations failed, SecurityNational initiated this action on January 26, 2016. It seeks a declaratory judgment that LBHI's indemnification claims are time-barred and that LBHI's claims against them are invalid.³² SecurityNational served LBHI notice of this suit on February 4, 2016.³³

LBHI filed a similar "omnibus" lawsuit against all loan providers, including SecurityNational, in the Bankruptcy Court on February 3, 2016. It seeks a declaratory judgment that the loan providers owe LBHI indemnity for losses sustained on the loans.³⁴ On February 17, 2016, LBHI filed in the Bankruptcy Court a Motion to Enforce the Automatic Stay, the Plan, and the Confirmation Order against SecurityNational.³⁵ It asks that the Bankruptcy Court order SecurityNational to dismiss this Delaware action as a violation of the Bankruptcy Code's automatic stay.³⁶ The Bankruptcy Court heard arguments on May 5, 2016, but has yet to issue a decision.³⁷

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III. THE PARTIES' CONTENTIONS

LBHI filed the instant Motion to Dismiss or, in the Alternative, to Stay this Action on March 2, 2016.³⁸ It sets forth four separate reasons why SecurityNational's action in this Court is inappropriate and should be dismissed:

First, LBHI argues that the Bankruptcy Code's automatic stay statute, 11 U.S.C. §§ 362(a)(1) and (a)(3), precludes subject matter jurisdiction in any Delaware court.³⁹

Second, it says SecurityNational's declaratory judgment action abuses Delaware's Declaratory Judgment Act.⁴⁰

Third, LBHI asserts that as its ADR proceeding was filed prior to the current action, it should be afforded deference under Delaware's "first-filed" doctrine.⁴¹

And, fourth, LBHI urges the Court to dismiss the action on the ground of forum non conveniens.⁴²

SecurityNational filed an answering brief opposing LBHI's motion and the Court held oral argument thereon last month.

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A. The Automatic Stay Under §§ 362(a)(1) and (a)(3) of the Bankruptcy Code

LBHI contends that SecurityNational's declaratory judgment action here violates §§ 362(a)(1) and (3) of the Bankruptcy Code. It argues that, under the prevailing view among federal courts, actions taken in violation of such an automatic stay are void ab initio.⁴³

1. Bankruptcy Code Section 362(a)(1)

Section 362(a)(1) of the Bankruptcy Code prohibits "the commencement or continuation . . . of a judicial . . . or other action or proceeding against the debtor that was or could have been commenced before the commencement of a case under this title, or to recover a claim against the debtor that arose before commencement."

LBHI asserts that SecurityNational's action seeks a declaration as to the enforceability of LBHI's claims arising from pre-bankruptcy ("prepetition") contracts between the parties,⁴⁴ and thus, are barred under § 362(a)(1).

SecurityNational argues that the relevant inquiry is not the contracts' effective dates, but rather the date SecurityNational could have filed its request for

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declaratory judgment.⁴⁵ SecurityNational says it was unaware...