497 B.R. 720
Bankr. S.D.N.Y.2013Background
- Debtors (ResCap and affiliates) filed Chapter 11; they sought court approval under Fed. R. Bankr. P. 9019 of a settlement (May 23, 2013) among the Debtors, FGIC (a monoline insurer), FGIC’s trustees for 47 FGIC‑insured RMBS trusts (the Trustees), and institutional investors. The Settlement is a key piece of a broader Global Settlement/PSA.
- FGIC had asserted roughly $5.55 billion in general unsecured claims against the Debtors and the FGIC Trustees asserted additional claims on behalf of trusts (Dr. D’Vari estimated trustee claims ≈ $5.4 billion). FGIC had been in New York rehabilitation since 2012.
- The Settlement: FGIC pays $253.3 million (a commutation) to the FGIC Trustees in exchange for release of FGIC’s policy obligations; FGIC’s allowed claims against the Debtors are capped between $934 million (if plan confirmed) and $1.8 billion (if plan fails); trustees/trusts receive other value (waived premiums, potential additional plan distributions, and foregone reimbursements).
- Objectors included certain large investors (initially Freddie Mac and other funds; they later withdrew) and the Ad Hoc Group of Junior Secured Noteholders (JSNs), who remain objecting. Objections concerned jurisdiction, trustee authority under Governing Agreements/TIA, adequacy of consideration, process, and potential subordination under § 510(b).
- The Court held evidentiary hearings, received expert testimony and declarations (Duff & Phelps and experts for trustees, Debtors’ CRO Kruger, Debtors’ experts, and objectors’ experts), and found by a preponderance that the Settlement is fair, reasonable, and in the best interests of the Debtors’ estates and the investors in the FGIC‑insured trusts; it also found the Trustees acted in good faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Jurisdiction to approve Settlement and make findings (including over trustee conduct) | Investor objectors: McCarran‑Ferguson and Rehabilitation Court control policy issues; reverse‑preemption limits this Court | Debtors/Trustees: Bankruptcy court has core and "related to" jurisdiction because trustee indemnification claims and allowance of FGIC claims affect estates | Held: Bankruptcy court has core and related‑to jurisdiction; MFA does not bar these findings because Rehabilitation Court approved commutation and the Findings do not invalidate state insurance law |
| Trustee authority to commute/settle policy rights (TIA and Governing Agreements) | Investors: Trustees lack authority to commute without investor consent; TIA §316(b) protects holders’ rights | Trustees/Debtors: Trustees are policyholders’ representatives with authority to litigate and settle claims; §316(b) does not apply to insolvency/bankruptcy context | Held: Trustees were authorized to settle as policyholders/trustees; TIA §316(b) restrictions do not prevent settlement in insolvency proceedings |
| Adequacy/fairness of consideration (is $253.3M commutation and claim allowances reasonable?) | Objectors/JSNs: Commutation undervalues trust recoveries; FGIC claims could be subordinated under §510(b); process and valuation insufficient | Proponents: Duff & Phelps and independent experts supported valuation, showed commutation within reasonable present‑value range of Rehabilitation Plan payments; settlement reduces disputed claims and litigation risk, yields immediate, fixed payment and other benefits | Held: Settlement falls within the range of reasonableness under Rule 9019/Iridium factors; commutation and allowed claim structure are reasonable and in best interests of estates and trust investors |
| Whether settlement improperly impairs potential subordination claims (§510(b)) and should be preserved | JSNs: Settlement forecloses pursuing subordination under §510(b) and is thus not in estate’s best interest | Debtors: Subordination is uncertain; settlement avoids costly, protracted litigation and achieves material reductions/caps of asserted claims | Held: Even if subordination were a live issue, courts may approve settlements involving claims that might be subordinated; Iridium factors favor approval and business judgment of CRO supports settlement |
Key Cases Cited
- Iridium Operating LLC v. Motorola, Inc., 478 F.3d 452 (2d Cir. 2007) (sets the seven‑factor test for Rule 9019 settlements in the Second Circuit)
- Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (U.S. 1950) (constitutional standard for notice — notice reasonably calculated to apprise interested parties)
- Celotex Corp. v. Edwards, 514 U.S. 300 (U.S. 1995) (definition of "related to" bankruptcy jurisdiction; outcome must have a conceivable effect on estate)
- In re Delta Air Lines, Inc., 370 B.R. 537 (Bankr. S.D.N.Y. 2007) (trustee’s implicit authority to settle claims tied to trustee powers; TIA considerations in insolvency)
- In re Adelphia Communications Corp., 327 B.R. 143 (Bankr. S.D.N.Y. 2005) (approving settlements where complex legal questions, including possible subordination, were elements of the dispute)