In re: HomeBanc Mortgage Corporation, et al.

Filing 29

MEMORANDUM OPINION regarding 1 Notice of Bankruptcy Appeal. Signed by Judge Richard G. Andrews on 3/27/2014. (nms)

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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

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In re: HomeBanc Mortgage Corporation, et
Bankruptcy Case No. 07-11079-KJC
al.,
ADV. No. 07-51740 (KJC)
BAP No. 13-48
Debtor.
George L. Miller, Chapter 7 Trustee for the
Estate of HomeBanc Corp.,
Appellant,

v.

Civil Action No. 13-1064-RGA

Bear Stearns & Co., Inc., Bear Stearns
International Ltd., and Strategic Mortgage
Opportunities REIT Inc.,
Appellees.
MEMORANDUM OPINION

William J. Burnett, Esq., Plaster Greenberg, P.C., Wilmington, DE; Steven M. Coren,
Esq. (argued), Kaufman, Coren & Ress, P.C., Philadelphia, PA; Howard J. Kaufman, Esq.,
Kaufman, Coren & Ress, P.C., Philadelphia, PA; Andrew J. Belli, Esq., Kaufman, Coren &
Ress, P.C., Philadelphia, PA, attorneys for Appellant.
Karen S. Owens, Esq., Ashby & Geddes, P.A., Wilmington, DE; Andrew W. Stem, Esq.
(argued), Sidley Austin LLP, New York, NY; James 0. Heyworth, Esq., Sidley Austin LLP,
New York, NY, attorneys for Appellees.

MarchJ:/-, 2014

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Pending before the Court is an appeal by Appellant George L. Miller (the "Trustee"), the

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Chapter 7 trustee ofHomeBanc Corporation ("HomeBanc"), challenging the Bankruptcy Court's
grant of partial summary judgment in favor of Appellees (collectively referred to as "Bear") on
January 18, 2013. The Court has had regular briefing, oral argument, and supplemental letters.

I.

BACKGROUND
The dispute arises in connection with Bear's auction of securities owned by HomeBanc,

which Bear contends were held subject to zero purchase price repo agreements. Between
October 2005 and August 2007, Bear lent money to HomeBanc in a number ofrepo transactions
made pursuant to a Global Master Repurchase Agreement ("GMRA"). 1 Each individual
transaction made pursuant to the GMRA was accompanied by a confirmation which identified
the purchase date, the purchase price, the repurchase date, and the pricing rate. Between 2005
and 2007 HomeBanc obtained approximately $200 million from Bear through numerous repo
transactions.
This litigation involves nine securities, which Bear obtained in three sets of transactions
that took place in June 2006, June 2007, and July 2007. Each of the securities was transferred to
Bear along with other securities, and the confirmation corresponding to each of the securities
showed a purchase price of zero and open repurchase dates. 2 HomeBanc's repos became due on
August 7, 2007, at which point Bear offered to extend the repos if HomeBanc reduced its
outstanding debt by making a payment of approximately $27 million. HomeBanc did not make
the payment. On August 9, 2007, Bear issued formal notices of default. That night, HomeBanc
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A repurchase agreement, or repo, is a transaction whereby one party transfers a security to
another in exchange for funds along with a simultaneous agreement by the transferee to give
back the security upon repayment of the funds.
2
An "open repurchase date" means the security is payable on demand. (D.I. 1-2 at 7).
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filed chapter 11 bankruptcy petitions. The bankruptcy was later converted to a chapter 7
proceeding.
On the morning of August 10,2007, Bear distributed auction solicitations, also known as
bid lists, for the securities on repo under the GMRA, including the nine disputed securities. The
bid lists were sent to approximately 200 investors, with bids due on August 14, 2007. In addition
to soliciting outside bids, the Bear repo finance desk also solicited bids from the Bear mortgage
trading desk. In order to ensure that Bear affiliates were not at an advantage, any bid from an
affiliate was required to be submitted 30 minutes prior to the close of the auction. The repo
finance desk received only two bids, an all or nothing bid of $60.5 million from the Bear
mortgage trading desk, and a bid of $2.19 million by Tricadia Capital for two individual
securities, neither of which is among the nine at issue in this appeal. The securities were sold to
the Bear mortgage trading desk.
The Bankruptcy Court held that the zero purchase price repo transactions were
repurchase agreements under a "bucket theory." (D.I. 1-2 at 21). In order to qualify as a repo
transaction under the Bankruptcy Code, the agreement must be "against the transfer of funds."
11 U.S.C. § 101(47)(A)(i). In order to meet this requirement, the Bankruptcy Court pointed to§
13 of the GMRA, which stated that each transaction entered into under the agreement is:
in consideration of and in reliance upon the fact that all Transactions hereunder
constitute a single business and contractual relationship and are made in
consideration of each other[ ... and] that payments, deliveries and other transfers
made by either of [the parties] in respect of any Transaction shall be deemed to
have been made in consideration of payments, deliveries and other transfers in
respect of any other Transactions hereunder.
(D.I. 1-2 at 20-21). The Bankruptcy Court held that even though individual transactions might
have a purchase price of zero, other transactions under the GMRA with purchase prices greater

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than zero provided consideration in order to satisfy the "transfer of funds" requirement of the
Bankruptcy Code. (D.I. 1-2 at 21).
The Bankruptcy Court further held that even if the zero purchase price repo transactions
did not qualify under§ 101(47)(A)(i), they qualified under§ 101(47)(A)(v), the catchall
provision. (D.I. 1-2 at 21). The catchall provision defines a subclass of agreements which also
qualify as repurchase agreements. These are:
(v) any security agreement or arrangement or other credit enhancement related to
any agreement or transaction referred to in clause (i), (ii), (iii), or (iv), including
any guarantee or reimbursement obligation by or to a repo participant or financial
participant in connection with any agreement or transaction referred to in any
such clause, but not to exceed the damages in connection with any such
agreement or transaction, measured in accordance with section 562 of this title[.]
11 U.S.C. § 101(47)(A)(v). The Bankruptcy Court held "that the Securities at Issue, even if not
outright repos, clearly are credit enhancements related to [the] GMRA, generally, and the June
2006 Transactions and June 2007 Transactions, specifically. Therefore, the Securities at Issue
fall within the plain language of [the catchall provision] and are repurchase agreements under the
Bankruptcy Code." (D.I. 1-2 at 22).
After establishing that the zero purchase price repo transactions were repurchase·
agreements under the Bankruptcy Code, the Bankruptcy Court held that Bear's exercise of its
contractual rights to sell the disputed securities was entitled to the safe harbor protection of§
559 ofthe Bankruptcy Code. 3 (D.I. 1-2 at 25). The Bankruptcy Court then considered whether
Bear's auction of the disputed securities complied with the terms of the GMRA and was
conducted in good faith. 4 (D.I. 1-2 at 29). Because the GMRA gave discretion to the nonSection 559 prevents a court from staying, avoiding, or otherwise limiting the exercise of the
contractual rights of a repo participant. See 11 U.S.C. § 559.

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The Bankruptcy Court also held that the "commercial reasonableness" standard under Article 9
of the UCC did not apply to the auction. (D.I. 1-2 at 29).

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defaulting party, the Bankruptcy Court concluded that the only real question was whether there
was a disputed issue that the auction had been conducted in good faith, which involved
consideration of the timing and manner of the auction in light of the prevailing market
conditions. (D.I. 1-2 at 36). The Bankruptcy Court held that there was no disputed fact that the
auction was conducted in good faith and in accordance with industry practice, and granted
summary judgment for Bear. (D.I. 1-2 at 46).
HomeBanc contends that the Bankruptcy Court erred (1) in concluding as a matter of law
that the disputed securities were repurchase agreements under the Bankruptcy Code, (2) in
applying a subjective rationality standard to the GMRA's netting provisions, and (3) in
concluding that the sale of the disputed securities was not irrational or in bad faith. (D.I. 16 at 23).

II.

LEGALSTANDARD
The Court has jurisdiction to hear an appeal from a final judgment of the Bankruptcy

Court pursuant to 28 U.S.C. § 158(a)(l). The Bankruptcy Court's order was a final judgment.
(D.I. 1 at 2). In undertaking a review of the issues on appeal, the Court applies a clearly
erroneous standard to the Bankruptcy Court's findings of fact and a plenary standard to its legal
conclusions. See Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80
(3d Cir. 1999). With mixed questions of law and fact, the Court must accept the Bankruptcy
Court's finding of"historical or narrative facts unless clearly erroneous, but exercise[s] 'plenary
review of the trial court's choice and interpretation of legal precepts and its application of those
precepts to the historical facts."' Mellon Bank, NA. v. Metro Commc'ns, Inc., 945 F.2d 635, 642
(3d Cir. 1991) (citing Universal Minerals, Inc. v. CA. Hughes & Co., 669 F.2d 98, 101-02 (3d
Cir. 1981)). In other words, this Court reviews a decision ofthe Bankruptcy Court just the same
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as the Third Circuit usually reviews judgments of this Court. Should there be an appeal of this
decision to the Third Circuit, the standard by which this Court reviews the Bankruptcy Court will
be the same standard the Court of Appeals will use.
In reviewing the Bankruptcy Court's decision as to whether to grant or deny summary
judgment, the district court's standard of review is plenary. See Rosen v. Bezner, 996 F.2d 1527,
1530 n. 2 (3d Cir. 1993). In an adversary proceeding, summary judgment is appropriate ifthe
moving party can "show that there is no genuine issue as to any material fact and the moving
party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56; Bailey v. United Airlines, 279
F.3d 194, 198 (3d Cir. 2002). When ruling on a motion for summary judgment, the court must
view the evidence in the light most favorable to the non-movant. See Matsushita Elec. Indus.

Co., Ltd V. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The court must accept the nonmovant's version of the facts as true and resolve conflicts in the non-movant's favor. See Big

Apple BMW, Inc. v. BMW ofN Amer., Inc., 974 F.2d 1358, 1363 (3d Cir. 1992).
The moving party bears the initial burden of demonstrating the absence of genuine issues
ofmaterial fact. See Celotex Corp. v. Catrett, 477 U.S. 317,322-23 (1986). Once the movant
has done so, however, the non-moving party cannot simply rest on its pleadings. See
Fed.R.Civ.P. 56. A non-moving party "will not be able to withstand a motion for summary
judgment merely by making allegations; rather, the party opposing the motion must go beyond
its pleading and designate specific facts by use of affidavits, depositions, admissions, or answers
to interrogatories showing there is a genuine issue for trial." In re Ikon Office Solutions, Inc., 277
F.3d 658, 666 (3d Cir. 2002).

III.

DISCUSSION

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This appeal presents difficult issues. Although with considerable doubt, I cannot agree
with the Bankruptcy Court that the so-called "bucket theory," derived from§ 13 ofthe GMRA,
satisfied the "transfer of funds" requirement of§ 101 of the Bankruptcy Code. The Bankruptcy
Code defines a repurchase agreement as:
an agreement, including related terms, which provides for the transfer of one
or more certificates of deposit, mortgage related securities (as defined in
section 3 of the Securities Exchange Act of 1934), mortgage loans, interests in
mortgage related securities or mortgage loans, eligible bankers' acceptances,
qualified foreign government securities (defined as a security that is a direct
obligation of, or that is fully guaranteed by, the central government of a
member of the Organization for Economic Cooperation and Development), or
securities that are direct obligations of, or that are fully guaranteed by, the
United States or any agency of the United States against the transfer of funds
by the transferee of such certificates of deposit, eligible bankers' acceptances,
securities, mortgage loans, or interests, with a simultaneous agreement by
such transferee to transfer to the transferor thereof certificates of deposit,
eligible bankers' acceptance, securities, mortgage loans, or interests of the
kind described in this clause, at a date certain not later than 1 year after such
transfer or on demand, against the transfer of funds[.]
11 U.S.C. § 101(47)(A)(i). It is uncontested that the disputed securities were transferred
simultaneously with other securities in what everyone agrees were repo transactions. HomeBanc
argues that the disputed securities were nevertheless excepted from being repo transactions
because the confirmations showed there was no corresponding transfer of funds allocated to the
disputed securities. In my opinion, the language of the statute is broad: a repurchase agreement
exists when the agreement "provides for the transfer of one or more ... mortgage related
securities ... against the transfer of funds by the transferee ... , with a simultaneous agreement by
the transferee to transfer [back the securities in the short term] or on demand, against the transfer
offunds."5 There is no dispute that it was a requirement of the transactions that the disputed

The statute is mentioned in In re American Home Mortgage Holdings, Inc., 637 F.3d 246, 248
(3d Cir. 2011). The exact issue in the instant case, however, is unprecedented. (D.I. 23 at 39).
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securities be transferred to Bear as a necessary part ofthe transactions. (D.I. 19-1 at 61-62).
HomeBanc does offer testimony that there was a single conversation in which a Bear employee
told a HomeBanc employee that Bear would be holding the disputed securities "in the vault for
you." (D.I. 16 at 10, citing D.I. 19-1 at 59). 6 The conversation, which was also cited by the
Bankruptcy Court (D.I. 1-2 at 20 n.65), does not raise any disputed material fact, as it is entirely
consistent with the rest of the record that all of the disputed securities were transferred as part of
repo packages.
HomeBanc argues that because no part of the funds transferred in the transactions was
assigned to the disputed securities, they cannot be transferred back "against the transfer of
funds." I agree with the Bankruptcy Court that§ 13 of the GMRA makes the zero purchase price
repo agreements part of a larger package for which there was consideration. The parties
essentially agree that the zero purchase price repos could have been transferred back, however,
without being "against the transfer of funds." (D.I. 27 at 1; D.I. 28 at 1). Thus, I do not think
they fall within a plain reading of§ 101 (4 7)(A)(i).
The Bankruptcy Court held alternatively that the disputed securities qualified as repurchase
agreements under§ 101(47)(A)'s catchall provision. (D.I. 1-2 at 22-23). This provision
encompasses collateral agreements that are secondary to the underlying repo transaction,
including:
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HomeBanc argued in its Opening Brief that it was entitled to summary judgment that the
disputed securities were not subject to a repurchase agreement. It did not argue that there were
disputed facts. (D.I. 16 at 20-24). It did, without identifying any disputed facts, suggest that if
there were any, the grant of summary judgment to Bear should be reversed. (Id. at 24). In its
Reply Brief, there is explicit argument string-citing pages in the appendices for the proposition
that the disputed securities "were delivered to Bear in a custodial capacity for future repo
transactions that never took place." (D.I. 21 at 9). It is too late to be string-citing the record in a
Reply Brief for an argument that was not made in the Opening Brief. In addition, I do not think
extrinsic evidence can be used to contradict the otherwise clear contract and contemporaneous
contractual documentation, such as the confirmations. (See D.I. 17-1 at 9).
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any security agreement or arrangement or other credit enhancement related to any
agreement or transaction referred to in clause (i), (ii), (iii), or (iv), including any
guarantee or reimbursement obligation by or to a repo participant or financial
participant in connection with any agreement or transaction referred to in any
such clause, ....
11 U.S.C. § 101(47)(A)(v). It seems to me that the only possible reading of this provision is that
it is designed to encompass some sorts of transactions that do not fall neatly within the first four
subsections. There is no doubt that the disputed transactions were part and parcel of their
undisputed repo transactions. It therefore seems to me that the extra securities were plainly
within the umbrella of "credit enhancements." I conclude that the disputed securities were repo
agreements within the meaning of§ 101(47)(A)(v).
HomeBanc further argues that the Bankruptcy Court erred in deciding that the GMRA
gave Bear discretion about how to dispose of the disputed securities, and, further, that, assuming
Bear had the discretion, there was a disputed material fact as to whether Bear had exercised the
discretion in good faith. The parties agree that the GMRA was governed by English law, and
further agree that Article 9 ofthe Uniform Commercial Code did not apply. (D.I. 16 at 19
["UCC may not apply to repurchase transactions per se"]).
English principles of contract interpretation support the Bankruptcy Court's
determination that the GMRA gave the non-defaulting party- Bear- a certain amount of
discretion in what to do with the disputed securities once HomeBanc had declared bankruptcy.
As I understand the dispute (which is informed by the Bankruptcy Court's discussion of the
GMRA, D.l. 1-2 at 31-32), the issue is whether the auction complied with the GMRA. In tum,
that depends upon whether the auction process resulted in an amount that meets the GMRA's
definition of"net value." Net value is "the amount which, in the reasonable opinion of [Bear],
represents [the disputed securities'] fair market value, having regard to such pricing sources and
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methods (which may include, without limitation, available prices for Securities with similar
maturities, .. ) as [Bear] considers appropriate .... " (D .I. 17-1 at 19). The Bankruptcy Court
construed the "reasonable" language to mean "in good faith." Thus, if there was no disputed fact
that the auction process was a good faith attempt by Bear to determine the market value of the
disputed securities, it was appropriate for the Bankruptcy Court to grant summary judgment for
Bear.
The Bankruptcy Court reached the conclusion against a background of English law. The
Bankruptcy Court principally relied upon an English case - Socimer-for the proposition that
English law recognizes subjective and objective reasonableness. HomeBanc criticizes the
reliance on Socimer because the decision was after a trial, but the timing of the decision is
irrelevant to the legal principle. HomeBanc also criticizes reliance on the case because the
contractual language was different. This is true, and was recognized by the Bankruptcy Court. I
do not think the Bankruptcy Court relied upon the particular facts of Socimer for its conclusion.
Instead, it analyzed the language of the GMRA, and decided, correctly I think, that it too had
language giving discretion to Bear. Certainly, "as [Bear] considers appropriate" is language
giving discretion to Bear. Nevertheless, the word "reasonable" modifying the nature of Bear's
opinion must also have meaning. The Bankruptcy Court gave it meaning, treating it as adding a
"rationality" requirement. (D.I. 1-2 at 35 n.96). The Bankruptcy Court equated this with good
faith.
HomeBanc' s final argumenf is that there is a disputed material fact about Bear's good
faith in using the auction process "in a dysfunctional market," where the winning bidder was

Logically, it is HomeBanc's final argument, but HomeBanc recognized it as its strongest
argument. (D.I. 23 at 6; D.l. 16 [putting it first in the Opening Brief]).

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Bear, and the disputed securities have proven to have a much greater value than what Bear paid
for them. One argument that HomeBanc makes is that Bear's procedures for ensuring that the
"trading desk" did not have an unfair advantage were a "fiction." (D.I. 21 at 12). HomeBanc
offers precious little to back up that accusation, whereas Bear cites significant evidentiary
support to the contrary. (D.I. 18 at 11). A second argument is that the auction was not a rational
way of valuing the disputed securities. The Bankruptcy Court concluded that there was no
factual dispute on this point, but I do not agree with the Bankruptcy Court. There are two
reasons why I think there is a factual dispute. One, the auction process resulted in only one bid
that included the disputed securities- Bear's. The Bankruptcy Court held, and I agree, that the
sale ofthe disputed securities to Bear was not per se evidence ofbad faith. When, however,
Bear was the winning bidder because it was the only bidder, I think that is indisputable evidence
that the market was not working, or that there was something else wrong with the auction
process. 8 I appreciate, as did the Bankruptcy Court, that the time of the auction was in the
middle of a financial collapse, and maybe the Court's conclusion eventually would be that in the
fairly unique situation that Bear found itself in, it acted in good faith, but I cannot conclude that
this is the only conclusion the Court could reach.
HomeBanc also relies upon its expert, Scott Calahan, and his report. (Bkr. Adv. No. 0751740 (KJC), D.l. 245-25). The Bankruptcy Court rejected Calahan's analysis because he used
the wrong "commercial reasonableness" standard. (D.I. 1-2 at 42). I agree that he used the
wrong standard, but I do not think that his opinions may be completely disregarded at the
If the results of the auction had been that there was one bid but it was from an independent
party, that would be a much stronger case for good faith. It is understandable that Bear, having
obtained securities it did not want to own, through no fault of its own, might sell them in a
volatile market at a fire-sale price, and be found to have acted in good faith. It is not so clear to
me that selling them to itself is entirely consistent with why the parties would have agreed in the
GMRA to give Bear discretion in valuation in the first place.
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summary judgment stage. He not only reached his "commercial reasonableness" conclusion, but
he also explained why he thought Bear's auction conduct "suffered from a large number of
serious flaws." (Bkr. Adv. No. 07-51740 (KJC), D.I. 245-25 at 22). He explained that the
auction process was not designed to obtain a competing bid. In particular, the combination of
speed of the auction, complexity of the securities at auction, lack of information about the
securities at auction, Bear's trading desk's knowledge of the securities, and other factors were
such that it was unlikely that there would be a competing bid. (!d. at 22-26). Mr. Calahan may
have 20-20 hindsight, but I think his opinions, in combination with the fact that Bear ended up
with the securities after being the only bidder, do create a disputed factual issue about Bear's
good faith.

IV.

CONCLUSION

For the reasons discussed, the Court will affirm the order of the Bankruptcy Court dated
January 18, 2013, except in regard to the grant of summary judgment on the issue of whether the
auction complied with the GMRA. An appropriate Order will be entered.

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