United States District Court, S.D. New York
In re: RESIDENTIAL CAPITAL, LLC RESIDENTIAL FUNDING CO., LLC, Plaintiff,
GREENPOINT MORTGAGE FUNDING, INC., Defendant. Adv. Proc. Nos. 14-1916 (MG), 13-cv-8937 (PKC), 14-cv-5452 (PKC)
MEMORANDUM AND ORDER
P. KEVIN CASTEL, District Judge.
Defendant Greenpoint Mortgage Funding, Inc. ("Greenpoint") moves to withdraw the reference to the bankruptcy court in this breach of contract action brought by plaintiff Residential Funding Co., LLC ("RFC"). For the following reasons, the Court holds that the bankruptcy court has jurisdiction over the action, that the action is non-core, and that Greenpoint's motion will be denied.
RFC is a limited liability company with its principal place of business in Minneapolis, Minnesota. Prior to its insolvency, RFC was in the business of acquiring and securitizing residential mortgage loans. RFC purchased loans from many mortgage originators, including Greenpoint, and distributed the loans by either pooling them with other similar mortgage loans to sell into residential mortgage-backed security ("RMBS") trusts, or selling them to whole loan purchasers.
The complaint alleges that Greenpoint sold over 1, 200 mortgage loans with a total principal balance in excess of $470 million to RFC pursuant to a mortgage loan purchases and warranties agreement (the "Agreement"). (Compl. ¶¶ 17-18, Dkt. No. 3-1) The gravamen of the complaint is that Greenpoint breached its obligations to RFC under the Agreement by failing to ensure that mortgage loans sold to RFC met underwriting standards set forth in representations and warranties in the Agreement, and that Greenpoint is obligated to indemnify RFC for a portion of the liabilities that RFC incurred in a 2012 global settlement providing a resolution of the multifarious pre-petition RMBS-related claims against it (the "Global Settlement"). RFC's complaints in its 83 other actions (together with this action, the "RFC Actions") bring substantially similar claims against other mortgage loan originators pursuant to each of their individual purchase agreements with RFC.
In May 2012, faced with over two dozen lawsuits alleging that the loans securitized and sold by RFC were defective, RFC filed a petition for relief under Chapter 11 of the Bankruptcy Code. Dozens of claimants filed hundreds of proofs of claim in the bankruptcy proceeding, collectively alleging tens of bill ions of dollars in damages stemming from defective mortgage loans. Greenpoint did not file a proof of claim in RFC's bankruptcy proceeding. Ultimately, RFC agreed to the Global Settlement, resolving all of its RMBS-related liabilities in exchange for over $9 bill ion of allowed claims in its bankruptcy case, plus additional sums for securities fraud claims. On December 11, 2013, the bankruptcy court (Martin Glenn, U.S.B.J.) approved the Global Settlement and entered an order (the "Confirmation Order") confirming the debtor's chapter 11 liquidation plan (the "Plan"). (Dkt. No. 6065, In re Residential Capital, LLC, No. 12-12020 (MG) (Bankr. S.D.N.Y. Dec. 11, 2013))
Prior to the confirmation of the plan, RFC brought at least three civil actions against individual mortgage loan originators in the United States District Court for the District of Minnesota. A few days after confirmation of the plan, RFC brought an additional 66 substantially similar actions in the District of Minnesota. See RFC v. Cherry Creek Mortgage Co., 13-cv-3449 (JNE) (SER), 2014 WL 1686516, at *1 (D. Minn. Apr. 29, 2014). Each of the suits invoked the court's diversity jurisdiction under 28 U.S.C. § 1332 and asserted claims for broach of contract and indemnification pursuant to individual mortgage loan purchase and warranty agreements between RFC and each originator. Id . Beginning in March 2013, RFC filed motions under 28 U.S.C. § 1404 in each of the Minnesota actions seeking to transfer each case to this District, where the cases would be referred to the bankruptcy court. After the denial of seven such transfer motions, RFC withdrew its remaining transfer motions. See id. at *4-5; RFC v. First Citizens Bank & Trust Co., 13-cv-3514 (RHK) (TNL) (D. Minn. May 13, 2014) (Dkt. No. 33) (same order issued in five cases).
Subsequently, RFC filed an additional set of actions in this Court and in New York state court, and also commenced several adversary proceedings in the bankruptcy court for this district. The complaint in the instant action, filed on December 17, 2013, asserted that this court had subject matter jurisdiction pursuant to 28 U.S.C. § 1332. Residential Funding Co. v. Greenpoint Mortg. Funding, Inc., 13-cv-8937 (PKC) (Dkt. No. 1 at ¶ 13). On March 14, 2014, RFC filed an amended complaint in this action, newly alleging that this Court also has federal question jurisdiction over the matter pursuant to 28 U.S.C. § 1334, because "the matter arises under title 11 or arises in or is related to the bankruptcy proceeding...." ( Id., Dkt. No. 33 at ¶ 15) Several days after filing the amended complaint, RFC filed a letter motion requesting that the case be referred to the bankruptcy court. This Court granted the request on March 19, 2014 pursuant to the Amended Standing Order of Reference for this district (the "Standing Order"). See Amended Standing Order of Reference, 12-mc-00032 (S.D.N.Y. Jan. 31, 2012).
On July 18, 2014, Greenpoint filed the instant motion to withdraw the reference. (Dkt. No. 1) Similar motions to withdraw the reference were filed in this district by the defendants in connection with ten other adversary proceedings then pending before the bankruptcy court under a consolidated docket. In re ResCap Liquidating Trust Mortg. Purchase Litig., 14-ap-07900 (Bankr. S.D.N.Y.).
On the same day that Greenpoint's motion in this case was filed, Judge Hellerstein issued a decision granting a defendant's motion to withdraw the reference and transfer the action to the District of Minnesota. Rescap Liquidating Trust v. RBC Mortg. Co., 14-cv-4457 (AKH), Dkt. No. 10 (S.D.N.Y. Jul. 18, 2014). On September 9, 2014, Judge Pauley ordered the same relief in a separate case. ResCap Liquidating Trust v. CMG Mortg., Inc., 14cv-4950 (WHP), 2014 WL 4652664 (S.D.N.Y. Sep. 10, 2014). Judge Swain followed suit on September 16, 2014 in another of the RFC Actions. Rescap Liquidating Trust v. Primary Capital Advisors, LLC, 14-cv-05224 (LTS), Dkt. No. 31 (S.D.N.Y.). In each of those three actions, the underlying contract between RFC and the originator-defendant included an exclusive forum selection provision requiring that claims arising out of the contract be litigated before the state or federal courts of Minnesota. In this case, a similar exclusive forum selection provision in the Agreement points to the state and federal courts of New York. Am. Compl. Ex. A at 45, Dkt. No. 33-1, 13-cv-8937 (PKC) (S.D.N.Y. Mar. 3, 2014).
A "district court may withdraw, in whole or in part, any case or proceeding referred [to the bankruptcy court] under this section, on its own motion or on timely motion of any party, for cause shown." 28 U.S.C. § 157(d). By statute, bankruptcy judges may enter final judgments in "all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section...." 28 U.S.C. § 157(b)(1). A bankruptcy court's final judgment in a core proceeding is appealable to the district court. 28 U.S.C. § 158(a)(1). In a referred matter that is not a core proceeding but "that is otherwise related to a cause under title 11, " a bankruptcy court may "submit proposed findings of fact and conclusions of law to the district court, and any final order or judgment shall be entered by the district court" after reviewing the proposals de novo. 28 U.S.C. § 157(c)(1).
In order to understand the import of the core/non-core distinction, some context regarding the Supreme Court's decisions on this subject is necessary. In 1982, the Supreme Court struck down as unconstitutional the provisions of the Bankruptcy Code of 1978 that granted bankruptcy courts final adjudicative authority over state law claims brought against third parties that were not otherwise part of the bankruptcy proceeding, holding that Article III of the Constitution required those matters to be adjudicated by an Article III Court. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co. , 458 U.S. 50, 87 (1982). In response, Congress enacted the Bankruptcy Amendments and Federal Judgeship Act of 1984 (the "1984 Act"), establishing the above-described division of matters referred to the bankruptcy courts into "core" and "non-core" proceedings. See Red Piper Casuals, Inc. v. Ins. Co. of State of Pa. , 72 B.R. 156, 158 (S.D.N.Y. 1987). Subsequently, in Stern v. Marshall , 131 S.Ct. 2594 (2011), the Supreme Court held that bankruptcy courts lack the constitutional authority to enter final judgments in certain cases that were statutorily designated as core proceedings under the 1984 Act. Specifically, the Court held that bankruptcy courts "lack[ ] the constitutional authority to enter a final judgment on a state law counterclaim that is not resolved in the process of ruling on a creditor's proof of claim." Id. at 2620. The Supreme Court recently reaffirmed that bankruptcy courts retain the authority to submit proposed findings of fact and conclusions of law in any "proceeding that is not a core proceeding but that is otherwise related to a case under title 11...." Exec. Benefits Ins. Agency v. Arkison , 134 S.Ct. 2165, 2173 (2014).
As a result of the foregoing line of cases, in order to determine the appropriate procedural approach district courts and bankruptcy courts may be call ed upon to determine whether a bankruptcy court may enter a final judgment in a particular matter. In making this determination, courts in this district consider (1) whether the claim involves a public or private right, (2) whether the claim would be resolved in adjudicating a creditor's proof of claim, or (3) whether the parties consented to final adjudication by the bankruptcy court. Dynegy Danskammer, L.L.C. v. Peabody COALTRADE Int'l Ltd. , 905 F.Supp.2d 526, 530 (S.D.N.Y. 2012) (citing Stern at 2608, 2614, 2617); accord Pryor v. Tromba, 13-cv-676 (JFB), 2014 WL 1355623, at *3 (E.D.N.Y. Apr. 7, 2014).
"A district court considering whether to withdraw the reference should first evaluate whether the claim is core or non-core, since it is upon this issue that questions of efficiency and uniformity will turn." Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.) , 4 F.3d 1095, 1101 (2d Cir. 1993). "[O]nce a district court makes the core/non-core determination, it should weigh questions of efficient use of judicial resources, delay and costs to the parties, uniformity of bankruptcy administrations, the prevention of forum shopping, and other related factors." Id . "Post-Stern, district courts faced with a motion to withdraw the reference to the bankruptcy court have considered, in addition to whether a claim is designated as "core" by statute, whether the bankruptcy court would have constitutional authority to enter a final judgment." ResCap Liquidating Trust v. CMG Mortg., Inc., 2014 WL 4652664, at *2 (citing Dynegy Danskammer , 905 F.Supp.2d at 532; Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP , 462 B.R. 457, 467 (S.D.N.Y. 2011)); see also In re Extended Stay, Inc. , 466 B.R. 188, 204 (S.D.N.Y. 2011) ("Accordingly, the core/non-core distinction is still a relevant consideration in permissive withdrawal analysis, except to the extent Stern holds that Congress's classification of a claim as "core" exceeds the boundaries of Article III.").
Greenpoint argues that its motion to withdraw the reference should be granted for two separate reasons. First, it contends that because RFC's claims neither arise under the bankruptcy code nor bear any meaningful relationship to its Chapter 11 case, the bankruptcy court lacks jurisdiction over this matter. Second, it argues that even if ...