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Lehman Brothers Holdings, Inc. v. Hometrust Mortgage Co.

United States District Court, S.D. New York

February 25, 2015

LEHMAN BROTHERS HOLDINGS, INC., Plaintiff,
v.
HOMETRUST MORTGAGE CO., Defendant.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge.

Defendant Hometrust Mortgage Co. ("Hometrust") has moved, under 28 U.S.C. § 157(d), for permissive withdrawal of the reference of adversary proceeding No. 14-2392 to the United States Bankruptcy Court for the Southern District of New York. The adversary proceeding is part of the much broader case In re Lehman Brothers Holdings, Inc., No. 08-13555, pending before the Honorable Shelley C. Chapman, United States Bankruptcy Judge. Plaintiff Lehman Brothers Holdings, Inc. ("LBHI"), the Plan Administrator for the Lehman Brothers estate, has opposed Hometrust's motion. On February 13, 2014, the Court issued a summary order denying the motion and stating that a decision-this Opinion and Order-would follow.

I. Background[1]

LBHI and its affiliates (collectively, "Lehman") once comprised the fourth largest investment bank in the United States. LBHI Br. 3. Historically, Lehman, among many other investment activities, purchased residential mortgage loans, packaged them for securitization or sale, and transferred them to buyers, including government-sponsored entities Fannie Mae and Freddie Mac. Id. at 4-5.

On February 14, 2005, Lehman entered into a loan purchase agreement with Hometrust, a loan originator. Id. at 6-7. The agreement included certain representations and warranties about the characteristics and quality of the loans. Hometrust expressly agreed to indemnify Lehman against any claims arising out of the purchase of the loans. Id. at 7. Lehman later sold those loans to Fannie with co-extensive representations, warranties, and covenants. Id.

On September 15, 2008, Lehman filed for bankruptcy. Id. at 3.[2] On December 6, 2011, the Bankruptcy Court confirmed the Chapter 11 Plan. Id. Under the Plan, LBHI is responsible for liquidating all of Lehman's assets, including litigation claims, so as to maximize distributions to creditors. Id.

In 2009, Fannie and Freddie filed claims against Lehman in the Bankruptcy Court, seeking indemnification and reimbursement for allegedly defective mortgage loans they had purchased. LBHI Br. 5; see also Lawlor Decl., Exs. A, B. Fannie's claims against Lehman included a demand for compensation related to two allegedly defective loans that originated with Hometrust and were sold to Lehman and then, in turn, to Fannie. LBHI Br. 7.

In January 2014, following extensive negotiations, Fannie and Freddie settled their claims with Lehman. Id. at 5. The settlement agreement anticipates that Lehman will bring actions against loan originators and other entities that sold defective loans to Lehman, thereby obtaining indemnification or funds to distribute to Fannie and Freddie, among other creditors. See id. at 5-6.

LBHI thereafter filed a Complaint against Hometrust in the Bankruptcy Court, alleging improprieties in connection with the sale of two mortgage loans that LBHI ultimately sold to Fannie. Id. at 6-7. Specifically, LBHI alleges that Hometrust breached the parties' agreement by failing to disclose certain information about the borrowers, and by delivering loans that were improperly underwritten. Hometrust Br. 2. Hometrust, for its part, argues that LBHI's claim is barred by the statute of limitations. LBHI Br. 8. In response, LBHI seeks a declaration that its indemnification claim against Hometrust accrued on January 22, 2014, the date the settlement between Lehman and Fannie was executed, and is therefore timely. Id.

On January 15, 2015, Hometrust moved, in this Court, to withdraw the bankruptcy reference. Dkt. 1. On February 3, 2015, LBHI filed its opposition. Dkt. 8. On February 10, 2015, Hometrust submitted its reply. Dkt. 11.

As of the point at which briefing was complete, Hometrust had a motion to dismiss pending in Bankruptcy Court and a hearing on that motion scheduled for February 17, 2015. See Dkt. 5. Hometrust therefore requested that the Court either stay the bankruptcy proceedings or rule prior to the Bankruptcy Court hearing on the motion to dismiss. Dkt. 3. On February 13, 2015, the Court issued a summary order denying Hometrust's motion to withdraw the reference and informing the parties that a written opinion explaining the reasons for the Court's decision- this Opinion and Order-would follow. Dkt. 13.

II. Applicable Legal Standards

District courts have original jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). However, a district court may refer these matters to the Bankruptcy Court, 28 U.S.C. § 157(a). The practice of courts in this District is to automatically refer all such cases to the Bankruptcy Court in the first instance. See In re Standing Order of Reference Re: Title 11, 12 Misc. 32 (LAP) (S.D.N.Y. Jan 31, 2012); In re Joseph Del Greco & Co., No. 10 Civ. 6422 (NRB), 2011 WL 350281, at *2 (S.D.N.Y. Jan. 26, 2011) (citing Official Comm. of Unsecured Creditors of the VWE Grp., Inc. v. Amlicke, 359 B.R. 441, 446 (S.D.N.Y. 2007)). This referral process is not a one-way street: District courts must withdraw a proceeding from the bankruptcy court if resolving the matter would "require a bankruptcy court judge to engage in significant interpretation, as opposed to simple application, of federal laws apart from the bankruptcy statutes." City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir. 1991) (citing, inter alia, 28 U.S.C. § 157(d)). District courts also have discretion to "withdraw... any case or proceeding referred on its own motion or on a timely motion of any party, for cause shown." 28 U.S.C. § 157(d).

Although § 157(d) does not define "cause, " the Second Circuit has instructed district courts to evaluate a motion for withdrawal of a bankruptcy reference in light of several factors. See Orion Pictures Corp. v. Showtime Networks, Inc., 4 F.3d 1095, 1101 (2d Cir. 1993). First, as a "threshold" matter, the Court must determine whether the asserted claim is "core" or "noncore." Id. Following the Supreme Court's decision in Stern v. Marshall, 131 S.Ct. 2594 (2011), which held that bankruptcy courts lack constitutional authority to enter final judgment on certain claims, id. at 2619, courts in this District have concluded that "the relevant inquiry under the first prong of the Orion test is... whether the bankruptcy court has the authority to finally adjudicate the matter, " In re Arbco Capital Mgmt., LLP, 479 B.R. 254, 262 (S.D.N.Y. 2012) (collecting cases). Second, the Court must evaluate whether the claim is legal or equitable, and thus whether a right to a jury trial exists. Orion, 4 F.3d at 1101. Third, the Court must consider whether other factors-including the efficient use of ...


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