Sher v. RBC Capital Mkts., LLC

539 B.R. 260

Joel I. SHER, Plaintiff

v.RBC CAPITAL MARKETS, LLC, Defendant.

Civil Action No. GLR–11–1998.

United States District Court, D. Maryland.

Signed Aug. 26, 2015.

Daniel Joseph Zeller, Richard Marc Goldberg, Eric R. Harlan, Joel I. Sher, Paul Mark Sandler, Shapiro Sher Guinot and Sandler, Baltimore, MD, for Plaintiff.

Claudia Callaway, Katten Muchin Rosenman LLP, Washington, DC, Brian Lee Muldrew, Bruce Gordon Vanyo, William Michael Regan, Katten Muchin Rosenman LLP, New York, NY, for Defendant.

MEMORANDUM OPINION

GEORGE L. RUSSELL, III, District Judge.

THIS MATTER is before the Court on Defendant's, RBC Capital Markets, LLC (as successor in interest to RBC Capital Markets Corporation and RBC Dominion Securities Corporation) (“RBC”), Motion for Summary Judgment (ECF No. 127), which is supported by a Memorandum of Law (Def.'s Summ. J. Memo, ECF No. 131) and voluminous exhibits. Plaintiff Joel I. Sher, Chapter 11 Trustee (“Trustee”) for Thornburg, Inc., f/k/a Thornburg Mortgage, Inc. (“Thornburg”), opposes the Motion, and has filed a Cross–Motion for Summary Judgment. (ECF No. 139). In support of his Motion, the Trustee also filed a Memorandum of Law (Pl.'s Summ. J. Memo, ECF No. 139–1) and hundreds of pages of exhibits. Also pending is RBC's Motion to Exclude the Testimony of the Trustee's Expert, Gregory W. Minard. (ECF No. 133). The issues have been fully briefed and no hearing is necessary. See Local Rule 105.6 (D.Md.2014). For the reasons that follow, RBC's Motion for Summary Judgment will be denied, RBCs Motion to Exclude the Testimony of the Testimony of the Trustee's Expert, Gregory W. Minard, will be denied as moot, and the Trustee's Cross Motion for Summary Judgment will be granted.

I. BACKGROUND¹

Thornburg, until its delisting in 2008, was a sophisticated publicly traded real estate investment trust, investing in residential mortgage-backed securities (“RMBS” or “MBS”) supported primarily by high-grade adjustable-rate mortgages. The RMBS at issue in this case are bonds representing an ownership interest in a group of residential mortgage loans. Residential homeowners make mortgage payments which are ultimately pooled each month. These pooled payments are then “passed through” to RMBS holders in the form of principal and interest cash flow. RMBS feature two primary risks for investors: first, the risk that homeowners will refinance their mortgages when interest rates decline and, second, the risk that homeowners will fail to make full and timely payments on their mortgage loans. Thus, any unexpected increase in refinancing or defaults will adversely impact the value of MBS.

Thornburg's earnings were derived from the spread between the interest income it earned on the RMBS and the cost of borrowing to acquire and own them. Thornburg financed its acquisition of MBS primarily through financing agreements with investment banking and securities firms such as RBC. These transactions were generally in the form of repurchase agreements (“repo transactions”) and were governed by an umbrella Master Repurchase Agreement (“MRA”).

In a typical repo transaction, the buyer (lender) will advance funds to the seller (borrower). The seller uses the funds to acquire MBS, which it sells to the buyer. At the same time, the seller agrees to repurchase the MBS at a later date, for a higher price. Though different in form, the transaction effectively serves as a secured loan, with the difference in sale price and repurchase price representing the cost of financing.

Like any readily traded asset, the value of MBS fluctuates with market conditions. To ensure that the MBS are always sufficient collateral to secure the loan, the buyer may issue a margin call to the seller if the value of the MBS drops below a certain predetermined level. The seller must then turn over additional cash or securities to satisfy the deficit. Likewise, if the value of the MBS increases above a certain level, the seller may issue a reverse margin call.

Many times, upon the maturity of the individual repo transaction, the parties would enter into roll over agreements. When a repo transaction matured, instead of Thornburg repurchasing the MBS, the parties would agree to “roll” the transaction into another term. At that time, Thornburg was required to pay RBC an amount equal to any accrued and unpaid interest, as well as any change in price on the MBS. Roll over agreements were settled by means of a “pair-off,” in which Thornburg's repurchase of the MBS was off-set by RBC's purchase of the same MBS at the new amount based on current market values. The difference in the trade was calculated, and cash or other collateral was transferred to the appropriate party to satisfy the difference.

On September 8, 2003, RBC and Thornburg entered into a MRA that would govern anticipated repo transactions between the parties. The MRA is attached to RBC's Motion for Summary Judgment as Exhibit 9. (Def.'s Mot. for Summ. J. Ex. 9 [“MRA”], ECF No. 128–9).

In August 2007, the MBS market began experiencing sudden and unprecedented declines due to panic, and a variety of other factors, amidst the widely chronicled collapse of the subprime mortgage and housing markets. As of August 9, 2007, Thornburg had twenty-one repo transactions outstanding with RBC, consisting of thirty separate MBS. The Complaint alleges that, as of August 13, 2007, these MBS had an approximate value of $573.2 million.

On August 10, 2007, an outstanding repurchase agreement matured. RBC agreed to roll the transaction over for one month, which resulted in Thornburg owing RBC a $1.1 million pair-off. Thornburg, however, did not immediately satisfy this pair-off. On August 13, five more repurchase agreements matured. RBC again agreed to roll the agreements over for another month, this time resulting in a $4.2 million pair-off. The same day, RBC served Thornburg with a margin call in the amount of $10.3 million. Thornburg satisfied the $10.3 million margin call, but did not satisfy the $4.2 million pair-off.

On August 14, RBC issued another margin call in the amount of $11 million and, in support, provided Thornburg with its internal margin call price estimates for the collateral MBS, valuing them at $576.3 million. The same day, RBC Managing Director Richard Tavoso faxed Thornburg a letter stating that RBC “hereby declares an Event of Default to have occurred under the MRA as a result of Thornburg's failure to repurchase Purchased Securities upon the applicable Purchase Dates.” (Correspondence from R. Tavaso, ECF No. 128–35).

Pursuant to the MRA, if Thornburg failed at any time to meet a margin call or to repurchase securities as required by a maturing repurchase agreement, RBC had the option to declare an Event of Default. Post-default, the MRA gave RBC two options to use Thornburg's MBS collateral to recover the loan proceeds. RBC, in its sole discretion, could choose to (a) “immediately sell” part or all of the collateral MBS “in a recognized market (or otherwise in a commercially reasonable manner) at such price or prices as [RBC] may reasonably deem satisfactory,” or (b) keep the MBS and give Thornburg credit “in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source.” (MRA ¶ 11(d)(i)).

RBC attempted to sell the largest MBS on the day of Thornburg's default, but was unable to do so because of market conditions. Thornburg and RBC then attempted to negotiate multiple “workout” proposals. On August 15, Thornburg disputed RBC's $11 million margin call of the previous day, contending that RBC had undervalued the collateral MBS by some $6.2 million. Thornburg also satisfied the $1.1 million pair-off that had been outstanding since August 10. The parties continued workout negotiations.

On August 16, Tavoso emailed Thornburg indicating that he needed “either ... an agreement as far [as] continuing the repo for one month or ... to start soliciting bids for the entire portfolio.” (Email from R. Tavaso, ECF No. 128–49). Tavoso further advised Thornburg that “the auction process, [would include] soliciting bids for the portfolio as a whole in order to gauge its worth.” (Id. ). The parties never came to an agreement either to roll over the repurchase transactions that had matured on August 13, or to satisfy the disputed August 14 margin call. When the workout negotiations failed, RBC exercised its default remedies by electing to retain the collateral MBS and give Thornburg a credit based on an arm's-length bid that RBC obtained from Goldman Sachs.

By letter dated August 21, 2007, RBC informed Thornburg that, pursuant to the default declared on August 14, it had exercised its rights and taken twenty-seven MBS into its own account, crediting Thornburg's account with their value. The letter stated that “[t]o determine the deemed purchase price ... of the Remaining Securities, we obtained bids from three generally recognized dealers, Bear Stearns, Lehman Brothers and Goldman Sachs.” (August 21, 2007 Tavaso Correspondence, ECF No. 128–38). The letter went on to recite that RBC had elected to credit Thornburg with the highest of the three bids, yielding a credit of $356,291,737. (Id. ) The letter does not reflect the date of the bids or the manner in which they were obtained. (See id. ) After subtracting the total credit from the total outstanding loan amount, there was a shortfall of $8,021,511. (See id. ) On August 28, 2007, Thornburg paid the $8,021,511 without objection.

The parties disagree as to whether the manner in which the liquidation credit was calculated was proper under the terms of the MRA. The amount of the credit was equal to the highest of three bids RBC received on August 17, 2007, from generally recognized sources Bear Stearns, Lehman Brothers, and Goldman Sachs. RBC argues the MRA afforded it sole discretion, as the non-defaulting party, to credit Thornburg with “any good faith price obtained from a generally...