Wells Fargo Bank, N.A. v. HomeBanc Corp. (In re HomeBanc Mortg. Corp.)
| Decision Date | 18 January 2013 |
| Docket Number | Case No. 07-11079 (KJC),Adv. Proc. No. 07-51740 (KJC) |
| Court | U.S. Bankruptcy Court — District of Delaware |
| Parties | In re: HOMEBANC MORTGAGE CORPORATION, et al., Debtors. WELLS FARGO BANK, N.A., in its capacity as Securities Administrator, Plaintiff, v. HOMEBANC CORP., BEAR, STEARNS & CO. INC., BEAR, STEARNS INTERNATIONAL LIMITED, AND STRATEGIC MORTGAGE OPPORTUNITIES REIT INC., Defendants. |
On August 9, 2007 (the "Petition Date"), HomeBanc Mortgage Corporation and related entities (the "Debtors") filed voluntary chapter 11 bankruptcy petitions.2 By Order datedFebruary 24, 2009, the cases were converted to a chapter 7 liquidation.3 George Miller was appointed as the Debtors' chapter 7 trustee on February 25, 2009 (the "Trustee," and together with the Debtors, "HomeBanc").4
On October 25, 2007, Wells Fargo Bank ("Wells Fargo") commenced this adversary proceeding by filing an interpleader complaint (the "Interpleader") against three parties: (i) HomeBanc Corp., (ii) Bear, Stearns & Co. Inc. ("BSC"), and (iii) Bear, Stearns International Limited ("BSIL").5 Wells Fargo was securities administrator, paying agent, note registrar, and certificate registrar (collectively, "Securities Administrator") for certain mortgage-backed certificates (the "Mortgage Certificates") held by the Bear Defendants. As Securities Administrator for the Mortgage Certificates, Wells Fargo held $759,832.62 in principal and interest for the month of August 2007, which became payable on September 25, 2007 (the "August Payment"). The Bear Defendants and HomeBanc asserted competing claims to the August Payment, which led Wells Fargo to file the Interpleader. The Bear Defendants and Homebanc also asserted cross-claims against each other.6 Pursuant to an Order dated June 2,2011, Wells Fargo's interpleader request was granted and Wells Fargo deposited the August Payment7 with this Court and was subsequently dismissed from these proceedings as of June 8, 2011.8 The cross-claims between HomeBanc and the Bear Defendants remain.
On December 7, 2010, the Trustee and the Bear Defendants filed cross-motions for summary judgment.9 The Bear Defendants' motion for summary judgment seeks determinations in their favor with respect to the August Payment issue, their own cross-claims, and HomeBanc's cross-claims. HomeBanc's motion for partial summary judgment seeks judgment in its favor on its cross-claims for conversion (Count II), turnover of property of the estate (Count III), and violation of the automatic stay (Count IV).
This litigation arises out of the prelude to the financial crisis, which was neither widely recognized nor reached its nadir until later, and relates to private label mortgage-backed securities-based repurchase agreements between the Bear Defendants and HomeBanc. HomeBanc failed to pay the Bear Defendants repurchase prices in August 2007. Thereafter, the Bear Defendants withheld and liquidated certain securities, relying on the safe harbor of Bankruptcy Code § 559 to liquidate those securities by auction without first seeking Bankruptcy Court approval.
The parties focused their attention on three issues in their papers and at oral argument. Today, I decide only those three legal issues.
The first issue is whether certain transactions under the parties' contract for the sale and repurchase of mortgage-backed securities fall within the definition of a "repurchase agreement" (also known as a "repo") as set forth in § 101(47) of the Bankruptcy Code. If the transactions are "repurchase agreements," then they enjoy certain protections under the safe harbor of § 559 of the Bankruptcy Code. For the reasons stated below, I conclude that the transactions between HomeBanc and the Bear Defendants related to ten securities (the "Securities at Issue") are repurchase agreements under § 101(47).10 Therefore, the Bear Defendants' exercise of their contractual rights with respect to the Securities at Issue fell within the safe harbor of § 559.
The second issue is whether the August Payment should be paid to the Bear Defendants, as owners of certain Interpleader Securities, or HomeBanc, as the registered certificateholder of the Interpleader Securities on the record date.11 Under the plain language of the controlling contracts, as well as previous decisions in this Circuit on this issue, the monthly principal and interest payments should be made to the registered certificateholder of the Interpleader Securities as of the record date, i.e., HomeBanc. Therefore, HomeBanc is entitled to the August Payment.
The final issue relates to the Bear Defendants' post-default auction to liquidate the Securities at Issue. HomeBanc alleges that the Bear Defendants breached the terms of the repurchase agreements and wrongfully converted HomeBanc's property by selling the Securities at Issue to themselves via an auction that was not conducted in good faith or in a commercially reasonable manner. Because Article 9 of the Uniform Commercial Code is inapplicable torepurchase agreements, the "commercially reasonable" standard does not apply to the auction. Instead, the applicable repurchase agreement allowed the Bear Defendants to use their discretion in valuing the securities post-default, so long as the Bear Defendants acted rationally, and their sale of the securities by auction was not irrational or in bad faith. I conclude that, under these circumstances, the auction should not be upset.
Accordingly, for the reasons set forth herein, partial summary judgment will be granted in favor of HomeBanc on the claim for turnover of the August Payment, and partial summary judgment will be granted in favor of the Bear Defendants on the claim for violation of the automatic stay and the claim for breach of contract as it relates to the auction of nine of the ten Securities at Issue.12
HomeBanc and the Bear Defendants entered into two sophisticated "master repurchase agreements" in 2005.13 First, on September 19, 2005, BSC and HomeBanc, entered into the Master Repurchase Agreement (the "MRA").14 Later, on October 4, 2005, BSIL and HomeBanc entered into the Global Master Repurchase Agreement (the "GMRA").15 The MRA and GMRA governed HomeBanc's and the Bear Defendants' relationship at the macro level.
Pursuant to the MRA and GMRA, specific transactions between HomeBanc and the BearDefendants were confirmed on the micro level with written "confirmations," which are, essentially, receipts identifying, among other things, the purchase date, the purchase price, the repurchase date, and the pricing rate (i.e., the differential between the purchase price and the repurchase price) for each purchased security (a "Confirmation").16 Between 2005 and 2007, HomeBanc obtained significant financing (approximately $200 million) from the Bear Defendants through numerous repurchase transactions. These transactions were evidenced by Confirmations.
In August 2007, HomeBanc was unable to meet certain obligations under its repurchase agreements with the Bear Defendants. On August 8, 2007, BSC and BSIL sent notices to HomeBanc, advising that the term repurchase agreements would not be "rolled" or extended, declaring all amounts due and, without waiving any rights, agreeing to accept full payment by close of business on August 9, 2007. After HomeBanc failed to pay the amounts due under the repurchase agreements on August 9, 2007, the Bear Defendants sent HomeBanc notices of default.
After noticing HomeBanc of its default, the Bear Defendants asserted that they had the contractual right to liquidate the securities in their possession by auction, and to offset the auction proceeds against HomeBanc's unpaid repurchase amounts. HomeBanc filed for bankruptcy protection on August 9, 2007. On August 10, 2007, the Bear Defendants solicited bids, due on August 14, 2007 by 3:00 p.m., for certain HomeBanc securities (the "Auction").17
This litigation involves ten Securities at Issue, arising from three related sets of transactions, described below.18
The first set of transactions was completed on June 23, 2006 (the "June 2006 Transactions"). On that date, BSIL provided $11 million to HomeBanc in exchange for a group of 11 securities, including three Securities at Issue.19 The Bear Defendants' employee, Edward Neibert, described the transaction to HomeBanc's employee, Yancy Lockie, in an email dated June 23, 2006, stating:
Bear Stearns is lending 11mm dollars versus all of the above collateral [i.e., a list of 11 securities described in the collateral sheets attached to the email]. Three of the securities are vs money (7/26/2006) and the balance of securities are held as free collateral (on open). Please feel free to call me if you have any questions. Thanks."20
"On open" is considered a term of art in the repurchase agreement market, generally known to mean "payable on demand."21
The Bear Defendants sent Confirmations, dated June 13, 2006, to document each securitysold by HomeBanc to BSIL as part of the June 2006 Transactions.22 The Confirmations for three of the securities showed purchase prices of $4 million, $4 million and $3 million, respectively. The Confirmations for the remaining eight securities showed a purchase price of zero and open repurchase dates.23 Included in the group showing the zero purchase price were three of the Securities at Issue (HMBT 2005-4B2, HMBT 2005-3R, and HMBT 2005-4R).24
HomeBanc sought additional capital in June 2007. The Bear Defendants advanced $10 million to HomeBanc.25 The parties initially negotiated an exchange of seven securities for the $10 million advance,26 but five of the seven contemplated securities had been three-hole-punched, rendering them void.27 Thus, the parties agreed Bear Stearns would...
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