Rescap Liquidating Trust v. PHH Mortgage Corp. (In re Residential Capital, LLC)Rescap Liquidating Trust v. PHH Mortgage Corp. (In re Residential Capital, LLC)
OPINION AND ORDER
This is аn appeal pursuant to 28 U.S.C. § 158(a)(1) from the Memorandum Opinion and Order of the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) dated November 23, 2015 (the “Order”). See In re Residential Capital, LLC,
After the bar date for claims as set forth in the Order Establishing Deadline for Filing Proofs of Claim and Approving the Form and Manner of Notice Thereof (the “Bar Date Order”) had passed, and after the Debtors had filed the Second Amended Joint Chapter 11 Plan Proposed by Residential Capital, LLC, et al. and the Official Committee of Unsecured Creditors (the “Plan”), and after the entry of the Order Confirming the Plan (the “Confirmation Order”), and after the Effective Date, the Trust initiated separate litigations against Decision One, PHH and Honor Bank. The Trust asserted various claims on the Contracts related to each appellee’s representations and warranties concerning the residential mortgage loans. The Trust initiated similar litigation against Sierra Pacific three days prior to the Effective Date. In response, each appellee filed counterclaims against the Trust, asserting that the Trust’s lawsuits breached certain provisions in the Contracts, which purport to entitle each appellee to seek damages in the form of attorney’s fees and costs from
The Trust filed a motion in Bankruptcy Court to enjoin the appellees from pursuing the Counterclaims, arguing that the Counterclaims were subject to the bankruptcy discharge and the injunction provisions (the “Injunction Provisions”) of the Bar Date Order, the Plan and the Confirmation Order. However, the Trust did not contest that the appellees may otherwise seek attorney’s fees as defenses or setoffs under the Contracts.'
The Bankruptcy Court denied the Trust’s motion, reasoning that the Counterclaims are not pre-petition claims subject to discharge and the Injunction Provisions “because they result from the voluntary post-confirmation actions of RFC and the Trust.” In re Residential Capital, LLC,
For the reasons explained below, the Order is reversed and the case is remanded for further proceedings consistent with this opinion.
I.
The following facts are undisputed unless otherwise noted.
A.
Years prior to the Petition Date, RFC entered into the Contracts. See App. at 1-180; see also App. at 447-49.
B.
On August 29, 2012, the Bankruptcy Court entered its Bar Date Order setting November 9, 2012 (subsequently extended to November 16, 2012) as the general bar date by which claimants were required to file proofs of claims with the Bankruptcy
The Debtors notified their creditors, including the appellees, that the Debtors’ own pre-petition claims would survive the bankruptcy. The Debtors’ proposed disclosure statement filed on July 4, 2013 provided that the Trust “retain[s] and may enforce all rights to commence and pursue, as appropriate, any and all Causes of Action of the Debtors or the Debtors’ Estates, whether arising before or after the Petition Date” unless the Debtors had expressly waived the action in question. Bankr. Dkt. 4157 (Proposed Disclosure Statement) at 119; see also Bankr. Dkt. 4770-1 (Amended Proposed Disclosure Statement containing sаme language) at 139; Bankr. Dkt. 4809 (Order Approving Disclosure Statement) at 6. The notice of the disclosure statement, which each ap-pellee received on or around August 29, 2013, also disclosed that the Plan would “CONTAIN[ ] RELEASE, EXCULPATION, AND INJUNCTION PROVISIONS.” App. at 214 (emphasis in original).
On October 24, 2013, the Debtors filed a plan supplement (the “Plan Supplement”) in which they identified lenders, like the appellees (and Decision One and PHH in particular), as potential targets of litigation. See Bankr. Dkt. 5342-12 (The Plan Supplement). The Plan Supplement provided that the Trust “may enforce all rights to commence and pursue, as appropriate, any and all Causes of Action of the Debtors or the Debtors’ Estates, whether arising before or after the Petition Date, including any Causes of Action specifically enumerated in the Plan Supplement, and the Liquidating Trust’s and Borrower Claims Trust’s respeсtive rights to commence, prosecute,'or settle such Causes of Action shall be preserved notwithstanding the occurrence of the Effective Date” and that “the claims and Causes of Action re
The Estates are in the process of reviewing loans placed into Residential Mortgage Backed Securities for recovery opportunities. Some of those loans were sold to the Estates via correspondent relationships. Those relationships are governed by contractual agreements that contain representations and warranties for loans sold to the Estates, whereby certain correspondents may have potentially breached the contractual agreements. The Estates are investigating, and expressly reserve all Causes of Action against or related to any entity or person that sold or transferred any loan, mortgage, security, note or certificate to any Debtor, their affiliates, subsidiaries, officers, directors and employees, including, for the avoidance of doubt, entities that had a correspondent relationship with the Debtor. Bankr. Dkt. 5342-12 at 4-5.
In addition, the Plan Supplement included a non-exhaustive table identifying certain recovery efforts on behalf of the estate. See Bankr. Dkt. 5342-12 at 6-14.
On December 6, 2013, the Debtors filed the Plan. See App. at 297-420 (The Plan). It is undisputed that no appellee objected to the Plan and, on December 11,2013, the Bankruptcy Court entered the Confirmation Order with an Effective Date of December 17, 2013. App. at 217-96 (The Confirmation Order); see also Bankr. Dkt. 6137 (Notice of Entry of Confirmation Order); The Plan and the Confirmation Order each provided for the discharge of claims arising prior to the Effective Date
The rights afforded herein and the treatment of all Claims and Equity Interests herein shall be in exchange for and in complete satisfaction and release of all Claims of any nature whatsoever, including any interest accrued on such Claims from and after the Petition Date, against the Debtors, the- Liquidating Trust, or any of their respective assets or properties arising prior to the Effective Date. App. at 405 (The Plan).
[E]ach holder ... of a Claim against or Equity Interest in a Debtor shall be deemed to have forever waived, released and discharged the Debtors, to the fullest extent permitted by section 1141 of the Bankruptcy Code, of and from any and all Claims, Equity Interests, rights and liabilities that arose prior to the Effective Date. ... App. at 272-73 ¶ 42 (The Confirmation Order).
Except as otherwise provided in the Confirmation Order or herein and in accordance with Article IX.E hereof, all Entities .,. who have held, hold or may hold Claims, Equity Interеsts, Causes of Action or liabilities that constitute Released Claims, are permanently enjoined and precluded, from and after the effective date of the Plan, from: (a) commencing or continuing in any manner or action or other proceeding of any kind against any Released Party whether directly, derivatively or otherwise, on account of or in connection with or with respect to any Released Claims ... (b) enforcing, attaching, collecting or recovering by any manner or means any judgment, award, decree or order against any Released Party on account of or in connection with or with respect to any Released Claims ... and (e) commencing or continuing in any manner or action or other proceeding of any kind against any Released Party on acсount of or in connection with or with respect to any Released Claims. ...6 App. at 404-05 (The Plan).
Except as otherwise expressly specified in the Plan, after the Effective Date, any holder of such Claim or Equity Interest shall be precluded from asserting against the Debtors, the Liquidating Trust, or any of their respective assets or properties, any other or further Claim based on any document, instrument, act, omission, transaction, or other activity of any kind or nature that occurred before the entry of the Confirmation Order. App. at 405 (The Plan).
[A]ll such holders shall be forever precluded and enjoined, pursuant to section 524 of the Bankruptcy Code, from prosecuting or asserting any discharged Claim against or terminated Equity Interest in the Debtors. App. at 273 ¶ 42 (The Confirmation Order).
The Plan also provided for the automatic rejection of all executory contracts that had not been already assumed or that were not expressly assumed under the Plan. See App. at 377 (The Plan). None of the Contracts were expressly assumed under the Plan.
C.
Pursuant to the Plan and the Confirmation Order, the Trust was established to pursue causes of actions on behalf of the bankruptcy estate. See App. at 281-82 ¶ 48 (The Confirmation Order). Between December 14, 2013 and May 13, 2014, the Trust sued each of the appellees alleging that each breached representations and warranties contained in the Contracts. See, e.g., Appellees’ App. at 1-79. Subsequently, between August 16, 2014 and July 16, 2015, each appellee filed the Counterclaims based on alleged breaches of the Clauses. See App. at 449-50, 481-84, 507-15, 573-81. The Trust thereafter filed a motion asking the Bankruptcy Court to enjoin the Counterclaims, which are currently pending in the United States District Court for the District of Minnesota. The Bankruptcy Court denied the motion. This appeal followed.
The Court reviews the Bankruptcy Court’s factual findings for clear error and its legal conclusions de novo. See Cellmark Paper, Inc. v. Ames Merch. Corp. (In re Ames Dep’t Stores, Inc.),
III.
This appeal turns on when the appellees’ Counterclaims accrued. The Trust argues that, under the settled law in this circuit, the appellees’ Counterclaims are contingent claims that accrued pre-petition at the time the Contracts were executed, were discharged during the bankruptcy, and are thus subject to the Injunction Provisions. The appellees countеr by repeatedly relying on the refrain that the Trust’s voluntary, post-confirmation, post-discharge lawsuits breached the Contracts, meaning their Counterclaims accrued post-confirmation, post-discharge and accordingly survived the bankruptcy. The appel-lees’ argument ignores that the Trust filed its lawsuit against Sierra Pacific post-petition but prior to the Effective Date. In any event, the distinction is ultimately immaterial because all of the appellees’ Counterclaims accrued pre-petition.
A.
As an initial matter, the appellees argue that the Bankruptcy Court made factual findings regarding the Contracts that control in this case. The facts concerning when the Trust sued the appellees and when the appellees asserted their Counterclaims are not disputed. Thе Trust voluntarily initiated litigation against the appellees after the Petition Date (and, in the case of Decision One, Honor Bank, and PHH, after the Effective Date). The appel-lees asserted their Counterclaims thereafter. The Trust’s claims against the appel-lees and the appellees’ Counterclaims against the Trust derive from the same Contracts. However, when the appellees’ Counterclaims accrued, and whether the bankruptcy’s discharge and Injunction Provisions apply to those Counterclaims, is an issue of statutory interpretation and bankruptcy law, which the Court reviews de novo.
B.
“The Bankruptcy Code determines when [a] claim arose.” Conway Hosp., Inc.,
The appellees, through their Counterclaims, are seeking attorney’s fees and costs pursuant to provisions in the prepeti
In Ogle,
The issue before the Second Circuit Court of Appeals in Ogle, was thus “whether an unsecured creditor can collect posi-petition attorneys’ fees based on a pre-petition indemnity agreement.” Id. at 144. The Supreme Court in Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co.,
Ogle went on to hold “that an unsecured claim for post-petition fees, authorized by a valid pre-petition contract,” is a contingent claim “deemed to have arisen pre-petition.” Id. at 147 (citing In re SNTL Corp.,
The appellees do not dispute that they contemplated that litigation related to the Contracts might arise when they executed
Contrary to the appellees’ argument, Ogle is not limitеd to claims for the post-petition costs of enforcing pre-petition indemnification agreements. Ogle,
The appellees also argue that Travelers and Ogle support their position because the Supreme Court and the Court of Appeals, respectively, permitted claims for attorney’s fees to proceed against debtors. But the creditors in both cases had timely preserved their claims for attorney’s fees by satisfying applicable procedural requirements, including by filing proofs of claims, which supports the conclusion that the appellees were also required to do so in this case. See Travelers,
The appellees’ claims for attorney’s fees accrued at the time the Contracts were executed even though they remained contingent until the Trust allegedly breached the Contracts. The appellees could have submitted proofs of claims to preserve these claims prior to the bar date but did not. Therefore, pursuant to the Bar Date Order, the Plan, and the Confirmation Order, the Counterclaims were discharged and became subject to the Injunction Provisions. This is true regardless'of whether the Contracts are executory or non-execu-
.Accordingly, the appellees’ Counterclaims arose prepetition, were discharged in bankruptcy and are thеrefore subject to the Injunction Provisions.
C.
The appellees nonetheless urge that the relevant claim accrual inquiry should focus on what they perceive as the self-serving nature of the Trust’s post-confirmation acts. They protest that the Trust’s litiga-tions on the Contracts are asymmetrical, apparently calculated to take advantage of the bankruptcy discharge to allow the Trust to pursue riskless litigation.
For support, the appellees ask the Court to follow the Bankruptcy Court and adopt, the Ninth Circuit’s nonbinding “Ybarra rule,” which provides that a claim for at-torneas fees “is deemed to have arisen postpetition if the debtor ‘returned to the fray' postpetition by voluntarily and affirmatively acting to commence or resume the litigation with the creditor.” In re Gillespie,
The appellees’ reliance on the Ybarra rule is unpersuasive. The exception — which had never been relied upon in this Circuit prior to the Bankruptcy Court’s Order in this case — is at odds with well-established Second Circuit precedent that looks to contract execution as the time of claim accrual, not to the act that caused the breach, let alone the character of, or intent associated with, that act. See Conway,
While the Bankruptcy Court cited Ybar-ra, it did not mention Ogle. The Bankruptcy Court discounted cases holding that contract claims accrue upon contract execution because those cases dealt with “administrative priority” while this case “involves discharge.” See In re Residential Capital, LLC,
Courts in the Ninth Circuit have recognized that this purported distinction is questionable. See In re Sec. Aviation, Inc.,
Moreover, the appellees overstate the risk that discharge of their contingent claims for attorney’s fees would allow the Trust to engage in riskless litigation. The Trust concedes that the appellees’ contractual rights to attorney’s fees can be used as defenses or setoffs against the Trust’s claims.
Finally, in a recent decision decided after the Bankruptcy Court issued its Order, the Court оf Appeals for the Ninth Circuit acknowledged that broad application of the Ybarra rule (and its progeny and ancestry) is inconsistent with the Ninth Circuit’s fair contemplation test for claim accrual and, in an effort to reconcile the two, explained that the “voluntarily ... returned to the fray” exception is only implicated where the creditor could not “fairly and reasonably contemplate” further post-discharge litigation with the insolvent debtor. See In re Castellino Villas, A. K. F. LLC, No. 12-57186,
In this case, the Trust’s litigation on the Contracts was entirely foreseeable, certainly within the appellees’ contemplation at the time of Contract execution with the protective Clauses (a point the appellees do not dispute) and in fact presaged during the bankruptcy proceedings by the disclosure statement and the Plan Supplement. See, e.g., In re Manville,
For these same reasons, the appellees’ request for equitable relief is equally unavailing. The cases the appellees cite in which courts allowed parties to pursue pre-petition claims for attorney’s fees notwithstanding a bankruptcy discharge involve circumstances not present here, namely indicia of bad faith by the debtor ' who was re-litigating issues post-discharge that had already been decided in court pre-discharge.
Therefore, the appellees’ Counterclaims for attorney’s fees were discharged in the bankruptcy.
D.
Based on language in Ybarra and equitable principles, the Bankruptcy Court found in the alternative that the Trust’s litigations had revived the Clauses. See In re Residential Capital, LLC,
CONCLUSION
The Court has considered all of the arguments raised by the parties. To the extent not specifically addressed, they are either moot or without merit. Therefore, for the reasons stated above, the Order entered by the Bankruptcy Court on No
SO ORDERED.
Notes
. Sierra Pacific asserted its Counterclaims pursuant to settlement agreements related to the Contracts. The settlement agreements also predated the Petition Date. Sierra Pacific contends that there is no relevant difference between pursuing claims under a settlement agreement as opposed to an original contract. See Sierra Pacific’s Op. Br. at 5. Therefore, references to the Contracts include Sierra Pacific's settlement agreements unless otherwise noted.
. Citations to "App.” refer to the Appendix filed by the Trust. Citations to "Appellees’ App.” refer to the Appendix filed by the appel-lees.
. While the general bar date was November 16, 2012, the Confirmation Order set a bar date of no later than 45 days аfter the Effective Date for claims arising from the rejection of executory contracts. See App. at 285. In their papers, the parties disagreed on whether the Contracts were executory or non-executo-ry, and thus which bar date applied. However, at oral argument, counsel for both Decision One and the Trust agreed that whether the Contracts were executory or non-executo-ry does not affect, the outcome of this case. Indeed, because it is undisputed that no ap-pellee' filed a proof of claim that covers the Counterclaims, it is unnecessary to resolve the issue.
. The Table did not specifically mention Sierra Pacific or Honor Bank. See Bankr. Dkt. 5342-12 at 6-14.
. As in the bar date notice, the term “claim” in both the Plan and the Confirmation Order pоssessed the same broad meaning as contained in the Bankruptcy Code. App. at 309 (The Plan) (citing 11 U.S.C. § 101(5)); see also App. at 217 n.l (The Confirmation Order).
. The term "Released Claims” was in turn defined to include "liabilities that ... have been discharged ... pursuant to the ,.. Plan,” App. at 329 (The Plan). The term "Released Party” included the Trust, App. at 329 (The Plan).
. The appellees, like the Bankruptcy Court, rely on In re Texaco Inc.,
The appellees cite several similar, inappo-site out-of-circuit cases that found that contractual claims arose post-discharge because the debtor continued to incur new obligations under pre-petition contracts. See, e.g., Wuthrich v. Amer Sports Winter & Outdoor Co., No. C-14-0871 EMC,
. The appellees cite several cases involving legal fees sought pursuant to court- or arbitration-awarded sanctions. See, e,g., In re Ruben,
, As a matter of policy, the Bankruptcy Court determined that claims for attorney’s fees should accrue post-petition in parj. to avoid inundating bankruptcy courts with speculative proofs of claims. But such proofs of claims are part of the normal bankruptcy process, the wisdom of which is best left to the legislature, See In re Mac-Go Corp., 541 B.R, 706, 719 (Bankr.N.D,Cal.2015) (discounting same concern and noting "[c]redi-tors frequently do file contingent, unliquidat-ed claims; and the Bankruptcy Code expressly allows such claims”).
. These circumstances are nearly identical to those described in Castellino Villas,