- Case Type:
- Case Status:
- 18-2887 (3rd Circuit, Dec 24,2019) Published
- (1) A Bankruptcy Court's determination of good faith regarding an obligatory post-default valuation of collateral receives mixed review on appeal. Factual findings are reviewed for clear error while ultimate issue of good faith receives plenary review. (2) Sect. 101(47)(A)(v) "damages" require a non-breaching party to bring a legal claim for damages, which may trigger Section 562. (3) The safe harbor protections of Section 559 can apply to a non-breaching party that has no excess proceeds. (4) Bear Stearns liquidated the securities in good faith in compliance with the applicable contracts.
- Procedural context:
- Chapter 7 Trustee of HomeBanc brought claims against Bear Stearns for (1) conversion for selling securities via auction when HomeBanc asserted it had superior title, (2) violation of the automatic stay (by auctioning the securities), and 3) breach of contract for improperly valuing the securities in violation of the parties' repurchase agreements. Bankruptcy Court granted summary judgment, deeming the transactions repurchase agreements and thus subject to the safe harbor of section 559. Because Bear Stearns had the right to liquidate the securities, there was no conversion or violation of the stay. The Bankruptcy Court also found that Bear Stearns acted in good faith by using a bidding process to value the securities, which was the typical practice in the industry. The trustee appealed the decision arguing that the bankruptcy court erred in (1) determining that the transactions qualified as repurchase agreements entitled to the safe harbor of Section 559, (2) interpreting the contracts between the parties as imposing a nonexistent subjective rationality standard upon Bear Stearns to value the securities, and (3) deciding that the sale of the securities was rational and in good faith. The district court affirmed on issues one and two, and remanded for further factual findings on the third issue. On remand, the Bankruptcy Court found, after a trial, that the auction that Bear Stearns had conducted was fair and customary, and as a result, Bear Stearns acted in good faith. The trustee appealed again to the district court, contending that Bear Stearns did not act in good faith because the auction was held in a non-functioning market, failed to produce an actual sale and resulted in an inexplicable valuation of the securities. The District Court affirmed. The Trustee appealed anew to the Third Circuit.
- HomeBanc was in the business of originating, securitizing, and servicing residential mortgage loans. From 2005 through 2007, HomeBanc obtained financing from Bear Stearns pursuant to two repurchase agreements. Transactions were accompanied by a confirmation that included the purchase date, purchase price, repurchase date, and pricing rate. HomeBanc transferred to Bear Stearns multiple securities in June 2006, June 2007, and July 2007. Nine of the securities (the "Securities at Issue") transferred were accompanied by confirmations showing a purchase price of zero and open repurchase dates. In August 2007, HomeBanc's repo transactions became due, requiring HomeBanc to buy back thirty-seven outstanding securities, including the Securities at Issue, at an aggregate price of $64 million. Bear Stearns, concerned about HomeBanc's liquidity, offered to extend the repurchase deadline for an immediate payment of roughly $27 million. Bear Stearns alternatively offered to purchase thirty-six of the securities outright for approximately $60.5 million, but HomeBanc rejected the proposal. HomeBanc failed to repurchase the securities or pay for an extension of the due date. Bear Stearns then issued a notice of default that gave HomeBanc two days to make payment in full. No payment occurred. As a result, Bearn Stearns sent a formal notice of default. On that same day, HomeBanck filed for bankruptcy. Upon default, the repurchase agreements required Bear Stearns to determine the value of the thirty-seven securities. The agreements granted Bear Stearns broad discretion to reach a "reasonable opinion" regarding the securities' "fair market value, having regard to such pricing sources and methods... as [Bear Stearns] ... considered appropriate." Bear Stearns decided to auction the securities to determine their fair value. Auction solicitations were distributed over a span of four days, for an auction to be conducted on the fourth day. Bear Stearns sent bid solicitations to approximately 200 different entities. The auction yielded two bids. Tricadia Capital submitted a bid of approximately $2.2 million for two securities, and Bear Stearns' mortgage trading desk place and "all or nothing" bid of $60.5 million, the same amount Bear Stearns had offered before HomeBanc's default. Bear Stearns' bid was declared the winner. Bear Stearns allocated the bid accross the thirty-six securities after the auction as follows: $52.4 million to twenty-seven securities and $8.1 million divided evenly among the nine Securities at Issue.
- Smith, McKee and Phipps
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