Lehman Bros. Holdings Inc. v. 1st Advantage Mortg., LLC (In re Lehman Bros. Holdings Inc.)

643 B.R. 48

IN RE LEHMAN BROTHERS HOLDINGS INC., et al., Debtors.

Lehman Brothers Holdings Inc., Plaintiff,

v.1st Advantage Mortgage, LLC et al., Defendants.

Lehman Brothers Holdings Inc., Plaintiff,

v.Suburban Mortgage, Inc., Defendant.

Case No. 08-13555 (SCC)

Adversary Proceeding No. 16-01019 (SCC)

Adversary Proceeding No. 18-01825 (SCC)

United States Bankruptcy Court, S.D. New York.

Signed August 16, 2022

WOLLMUTH MAHER & DEUTSCH LLP, 500 Fifth Avenue, New York, New York 10110, By: William A. Maher, Esq., James N. Lawlor, Esq., Adam M. Bialek, Esq., Brant D. Kuehn, Esq., Counsel for Lehman Brothers Holdings Inc.

LANI ADLER PARTNERS LLC, 275 West 96th Street, Suite 15G, New York, New York 10025, By: Lani Aloha Adler, Esq., Counsel for Suburban Mortgage, Inc.

MEMORANDUM DECISION AND ORDER DENYING MOTION TO DISMISS RMBS COMPLAINT PURSUANT TO RULE 12(b)(1) FOR LACK OF SUBJECT MATTER JURISDICTION AND STANDING

SHELLEY C. CHAPMAN, UNITED STATES BANKRUPTCY JUDGE

Before the Court is Certain Defendants’ Omnibus Motion to Dismiss RMBS Complaints Pursuant to Rule 12(b)(1) for Lack of Subject Matter Jurisdiction and Standing [Dkt. No. 915] and Memorandum of Law in Support thereof [Dkt. No. 915-14] (together, the "Motion"). At the time the Motion was filed over three years ago, it was filed on behalf of a collective group of twenty-two defendants in individual adversary proceedings each commenced by Lehman Brothers Holdings Inc. ("LBHI" or the "Plan Administrator"), which adversary proceedings (together with over two hundred other adversary proceedings) have been coordinated for administrative purposes under a central adversary proceeding docket, Lehman Bros. Holdings Inc. v. 1st Adv. Mortg., LLC , Adv. Pro. No. 16-01019.¹ Since the filing of the Motion, twenty-one of the moving defendants have entered into stipulations of dismissal with LBHI;² and the adversary proceedings against them have been closed. Suburban Mortgage, Inc. ("SMI") is the sole movant continuing to prosecute the Motion.³

On July 24, 2019, LBHI filed its opposition to the Motion [Dkt. No. 1236] (the "Opposition"), together with (a) the Declaration of Adam M. Bialek [Dkt. No. 1236-1] (the "Bialek Decl."), (b) the Declaration of Jack E. Desens [Dkt. No. 1236-6] (the "Desens Decl."), (c) the Declaration of Scot Osborne [Dkt. No. 1236-8] (the "Osborne Decl."), and (d) the Declaration of Zachary Trumpp [Dkt. No. 1236-13] (the "Trumpp Decl.").

On September 18, 2019, SMI and certain moving defendants filed a reply to the Opposition [Dkt. No. 1259] (the "SMI Reply"), together with the Declaration of Lani Adler [Dkt. No. 1260] and the reply affidavit of Vernon Rupp, Chief Financial Officer of SMI [Dkt. No. 1261] ("Rupp Affidavit"). The Court heard oral argument on the Motion on October 16, 2019.⁴

BACKGROUND

The Court assumes familiarity with the general background and history of the LBHI chapter 11 cases; this Decision will provide limited background facts pertinent to the Motion.

Prior to its bankruptcy, LBHI, directly or through its affiliates, including Lehman Brothers Bank, FSB ("LBB"), engaged in the purchase and sale of mortgage loans. LBHI arranged directly or through affiliates such as LBB to purchase mortgage loans from loan originators, brokers, and other third parties (collectively, the "Sellers"); LBHI then packaged such loans for securitization or sale to other third parties. One loan originator Seller from whom LBB purchased mortgage loans was SMI.

To effectuate the sale of the residential mortgage loans, each Seller entered into substantially identical Loan Purchase Agreements ("LPAs") or broker agreements ("Broker Agreements") with LBB, which agreements set forth the duties and obligations of the parties with respect to the purchase and sale of the relevant mortgage loans, including but not limited to purchase price, delivery, and conveyance of the mortgage loans and mortgage loan documents. Such agreements also set forth the Seller's duties and obligations regarding underwriting; representations and warranties concerning the parties and individual mortgage loans purchased, sold, or submitted; and the Seller's indemnification obligations. Pursuant to these agreements, among other things, SMI and the other Sellers contractually agreed to indemnify LBB and hold it harmless from liabilities or losses it might incur (including liabilities to third parties) as a result of breaches of the representations and warranties in the LPAs and Broker Agreements.⁵ By the RMBS Complaint, LBHI alleges that, pursuant to such agreements, SMI sold and/or submitted defective loans to LBB that resulted in LBHI being exposed to and incurring liability, for which LBHI now seeks indemnification from SMI.⁶

As described supra , after LBHI acquired mortgage loans, it then sold such loans or packaged them for securitization. When it sold the loans, LBHI typically either sold them to Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (together, the "GSEs"). When LBHI securitized the loans, the loans packaged for securitization by LBHI were transferred through a depositor to securitized trusts (the "RMBS Trusts"). In connection with both the sale and the securitization of loans, LBHI relied on information that the Sellers had provided to LBB, and it made representations and warranties to the GSEs and to the RMBS Trusts based, in large part, on the representations the Sellers made to LBB.

On September 15, 2008 (the "Petition Date"), LBHI and certain of its subsidiaries and affiliates (collectively, the "Debtors") filed voluntary chapter 11 cases in this Court.

In 2009, the trustees of hundreds of RMBS Trusts (collectively, the "RMBS Trustees") filed claims to recover for losses in the RMBS Trusts securitized by LBHI (collectively, the "RMBS Trustee Claims"). By such claims, the RMBS Trustees asserted breaches of representations, warranties, and/or covenants in the agreements governing the securitizations, which provided that the applicable RMBS Trustees may seek contractually defined repurchases of loans in the event certain breaches of representations and warranties occurred.

LBHI objected to, and vigorously contested, the RMBS Trustee Claims. LBHI eventually entered into a settlement agreement with the RMBS Trustees, pursuant to which it agreed to seek estimation of the liability underlying their claims in a proceeding before this Court (the "Estimation Proceeding"). See In re Lehman Bros. Holdings, Inc. , 566 B.R. 353, 356-57 (S.D.N.Y. 2017). In the Estimation Proceeding, the RMBS Trustees sought damages of over $11.4 billion based upon losses flowing from, among other things, the mortgage loans acquired from the Sellers and securitized by LBHI. After a lengthy trial, on March 15, 2018, this Court entered the Order Estimating Allowed Claims Pursuant to RMBS Settlement (the "Estimation Order"),⁷ which resulted in allowed claims for the RMBS Trustees of more than $2.37 billion. Entry of the Estimation Order gave rise to third-party indemnification claims (the "RMBS Indemnification Claims") that LBHI has asserted against, among other Sellers, SMI, for LBHI's incurred losses, liability, and/or judgment to the RMBS Trustees.⁸ The Estimation Order provides that "[t]his Court shall retain jurisdiction with respect to all matters arising from or related to the implementation of this Order." (Id. at ¶ 5.)

On December 6, 2011, this Court confirmed the Modified Third Amended Joint Chapter 11 Plan of LBHI and Its Affiliated Debtors (the "Plan").⁹ (See Order Confirming Plan [Case No. 08-13555, Dkt. No. 23023] (the "Confirmation Order").¹⁰ )

I. The Parties’ Arguments

By the Motion, SMI moves, pursuant to Federal Rule of Civil Procedure 12(b)(1) (" Rule 12(b)(1)"), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012, to dismiss the RMBS Complaint for lack of subject matter jurisdiction and lack of standing on the grounds that LBHI allegedly did not possess prepetition indemnification claims against SMI or the right to sue on such claims when LBHI filed the RMBS Complaint. SMI argues that the RMBS Indemnification Claims were never property of the LBHI bankruptcy estate because such claims were not held by LBHI prepetition; accordingly, SMI asserts that the Court does not have subject matter jurisdiction over the RMBS Indemnification Claims, and those claims must be dismissed. SMI reincorporates by reference the arguments made in the Motion to Dismiss for Lack of Subject Matter Jurisdiction and Improper Venue [Dkt. No. 413] (the "GSE Motion to Dismiss"), which motion was previously denied by this Court.¹¹ In the alternative, SMI submits that because, prior to the Petition Date, LBHI purportedly was divested of any rights and remedies it had with respect to the loans at issue in the RMBS Complaint, LBHI does not have standing to bring the RMBS Complaint.

LBHI vehemently argues that the Motion should be denied because subject matter jurisdiction is proper in this Court and because the Plan Administrator has standing to bring the RMBS Indemnification Claims. Specifically, LBHI asserts that the Plan Administrator obtained contingent, unmatured indemnification rights against SMI prior to the Petition Date, which rights ripened into the RMBS Indemnification Claims following this Court's entry of the Estimation Order allowing the RMBS Trustee Claims, giving the Court subject matter jurisdiction over the RMBS Indemnification Claims.¹² As to standing, LBHI asserts that, with respect to the loans at issue, LBHI retained indemnification rights for such loans when it packaged them for securitization, and SMI mischaracterizes or simply misunderstands the relevant securitization documents. LBHI submits that the Motion must be denied whether it is treated by this Court as a facial motion or as a fact-based motion under Rule 12(b)(1).

DISCUSSION

I. Applicable Law

Rule 12(b)(1), made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012,...