558 B.R. 77
S.D.N.Y.2016Background
- RFC and affiliates (Debtors) purchased residential mortgage loans from Decision One, PHH, Honor Bank, and Sierra Pacific under prepetition contracts containing clauses (fee-shifting, notice/cure, covenants not to sue, forum selection).
- Debtors filed Chapter 11 on May 14, 2012; bar date was set (general bar date Nov. 2012); appellees received notice but did not file proofs of claim covering the fee claims (PHH filed an unrelated claim).
- Plan, disclosure statement, and plan supplement expressly reserved the Debtors’/Trust’s causes of action (pre- and postpetition) and disclosed release/exculpation/injunction provisions; Plan confirmed Dec. 11, 2013; Effective Date Dec. 17, 2013.
- Postpetition (and for three appellees, post-Effective Date) the Trust sued the lenders for breaches of reps and warranties; the lenders asserted counterclaims seeking attorneys’ fees under the prepetition Contracts.
- The Trust moved in bankruptcy court to enjoin the lenders’ counterclaims as discharged and barred by the Plan/Confirmation Order; the Bankruptcy Court denied the injunction, reasoning the counterclaims accrued post-confirmation because the Trust “returned to the fray.”
- District Court reversed: held the lenders’ fee counterclaims were contingent prepetition contract claims that accrued at contract execution, were subject to the bar date, and were discharged/subject to the Plan’s injunction; remanded for further proceedings.
Issues
| Issue | Plaintiff's Argument (Trust) | Defendant's Argument (Lenders) | Held |
|---|---|---|---|
| When did the lenders’ fee counterclaims accrue? | Accrued prepetition as contingent contract claims at contract execution | Accrued post-confirmation/post-discharge because Trust’s later suits caused breaches (Trust “returned to the fray”) | Accrued prepetition upon contract execution; contingent fee claims were within parties’ contemplation and thus prepetition claims |
| Are the counterclaims discharged / barred by the Plan’s injunction if not timely filed? | Yes — failure to file a proof of claim bars and discharges such prepetition contingent claims | No — lenders may assert post-confirmation counterclaims tied to post-discharge conduct | Yes — counterclaims were discharged and are subject to the Plan/Confirmation injunction; lenders could have filed proofs of claim and did not |
| Does the Ninth Circuit “Ybarra” exception (claim arises postpetition when debtor reinitiates litigation) apply? | N/A (Trust opposed adoption) | Bankruptcy Court relied on Ybarra; lenders urged adoption to save claims | Rejected — Ybarra is inconsistent with Second Circuit law (Ogle/Manville) and statutory definition of ‘claim’; exception not adopted here |
| Can equitable revival/reaffirmation save the fee clauses? | No — revival requires statutory reaffirmation procedures under §524(c) | Lenders urged equitable relief or revival based on post-confirmation conduct | Denied — no statutory reaffirmation; equitable exception not warranted; fees may still be used defensively or as setoff |
Key Cases Cited
- Ogle v. Fid. & Deposit Co. of Md., 586 F.3d 143 (2d Cir.) (prepetition indemnity/fee rights are contingent claims that arise at contract execution)
- Travelers Cas. & Sur. Co. v. Pac. Gas & Elec. Co., 549 U.S. 443 (2007) (permitted recovery of postpetition fees authorized by prepetition contract where claims preserved)
- In re Manville Forest Prods. Corp., 209 F.3d 125 (2d Cir.) (contractual right to payment arises at execution; contingencies do not convert claim to postpetition)
- Mazzeo v. United States (In re Mazzeo), 131 F.3d 295 (2d Cir.) (definition of ‘claim’ in Bankruptcy Code is broad)
- Conway Hosp., Inc. v. Lehman Bros. Holdings Inc., 531 B.R. 339 (S.D.N.Y.) (contract claims accrue at execution and can be discharged when not preserved)