In Re: Residential Capital, LLC

Filing 19

OPINION AND ORDER. FHFAs October 15, 2012, appeal is dismissed as moot. (Signed by Judge Denise L. Cote on 3/29/2013) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------X
:
In Re: Residential Capital, LLC
:
Debtor,
:
----------------------------------------:
:
Federal Housing Finance Agency,
:
as Conservator for the Federal Home
:
Loan Mortgage Corporation,
:
Appellant,
:
:
-v:
:
Residential Capital, LLC, et al.,
:
Appellees.
:
:
----------------------------------------X

APPEARANCES:
For the appellant:
Andrew K. Glenn
Kanchana Wangkeo Leung
Daniel A. Fliman
Kasowitz, Benson, Torres & Friedman, LLP
1633 Broadway
New York, NY 10019
For the appellees:
Joel C. Haims
Kayvan B. Sadeghi
Jonathan C. Rothberg
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, NY 10104
Deanne E. Maynard
Marc A. Hearron
Morrison & Foerster LLP
2000 Pennsylvania Ave., N.W.
Washington, D.C. 20006

12 Civ. 8487 (DLC)
OPINION & ORDER
Also filed in:
11 Civ. 5201 (DLC)

DENISE COTE, District Judge:
Appellant Federal Housing Finance Agency (“FHFA”) appeals
an October 12, 2012, Order of the bankruptcy court denying
FHFA’s motion to compel discovery (“Discovery Order”) from
appellee Residential Capital, LLC (“ResCap”).

For the following

reasons, the appeal is dismissed as moot.

BACKGROUND
This proceeding is related to sixteen actions filed by FHFA
in this district, all of which are being coordinated and
supervised by this Court. 1

In these actions FHFA, serving as

conservator for the Federal National Mortgage Association
(“Fannie Mae”) and the Federal Home Loan Mortgage Corporation
(“Freddie Mac”) (collectively, the “GSEs”), has sued many banks
and related entities and individuals in connection with the
packaging, marketing and sale of residential mortgage-backed
securities that the GSEs purchased from 2005 to 2007.

Appellee

ResCap was originally named as a defendant in one of those
actions, FHFA v. Ally Financial, Inc., et al., 11 Civ. 7010
(DLC) (the “Ally action”).

When ResCap filed a petition for

relief under Chapter 11 of the Bankruptcy Code in May 2012,
however, litigation against it was automatically stayed pursuant

1

One of the sixteen actions, FHFA v. General Electric Co., et
al., 11 Civ. 7048 (DLC), has been resolved.
2

to 11 U.S.C. § 362(a).

In response, on June 12, 2012, FHFA

amended its complaint in the Ally action to drop ResCap as a
defendant.

ResCap’s corporate affiliates Ally Financial, Inc.,

GMAC Mortgage Group, Inc., and Ally Securities, LLC, however,
remain as defendants in the Ally action, along with other nonaffiliated defendants.
According to ResCap, “nearly all” of the documents at issue
in the Ally action are in its possession, meaning that even
though it is no longer a defendant, producing documents for the
Ally action remains its responsibility.

ResCap therefore filed

an adversary proceeding against FHFA in the bankruptcy court.
Residential Capital, LLC v. FHFA (In re Residential Capital
LLC), No. 12-ap-1671 (Bankr. S.D.N.Y. filed May 25, 2012).

In

that proceeding, ResCap sought a declaratory judgment holding
that the automatic stay of 11 U.S.C. § 362(a) extended to the
Ally action against ResCap’s corporate affiliates, even though
ResCap itself was no longer a defendant.

In the alternative,

ResCap sought an injunction under Section 105 of the Bankruptcy
Code temporarily staying the Ally action.
The Court withdrew the reference of the adversary
proceeding and orally denied ResCap’s motion pursuant to Section
362(a) on July 17, 2012.

The Court also indicated that it did

not find ResCap’s Section 105 analysis very strong either.
parties were unable to answer several questions posed by the

The

3

Court about the extent of the burden that would be imposed on
ResCap if it were ordered to produce loan tapes 2 and loan files 3
immediately.

It was clear, however, that the production of the

documents would be ministerial or clerical tasks and would not
involve executives who were managing the ResCap business or
negotiating a restructuring.

The Court emphasized the impact

that the production of the ResCap loan files would have not just
on the Ally action but on seven other underwriter defendants
named in several of the actions before the Court.

It also

emphasized the need for expeditious action, as depositions were
due to begin in January.

The Court concluded by requiring FHFA

to make its discovery requests for loan tapes and for loan files
to Judge Glenn in the bankruptcy court in the first instance.
That ruling is currently before the Second Circuit on appeal.
Residential Capital, LLC v. FHFA (In re Residential Capital,
LLC), No. 12-3342 (2d Cir. filed Aug. 22, 2012).
In submissions of July 17 and 20, FHFA asked that the
bankruptcy court compel production of the loan tapes and loan

2

A loan tape is a collection of data concerning individual loans
in a securitization complied by the securitization’s sponsor
while the securitization is being created. See FHFA v. JPMorgan
Chase & Co., No. 11 Civ. 6188 (DLC), 2012 WL 60000885, at *5 n.5
(S.D.N.Y. Dec. 3, 2012).
3

The terms “loan file” and “sample loan” are defined in the
Court’s Opinion of March 26, 2013, filed in FHFA v. UBS
Americas, Inc., et al., 11 Civ. 5201 (DLC), as well as in
previous Opinions in this coordinated litigation.
4

files pertinent to the Ally action from ResCap.

In advance of

an August 14 hearing before the bankruptcy court, ResCap agreed
to provide FHFA with the loan tapes.

At the hearing, FHFA

requested production of a sample of 5,000 loan files.
ultimately lowered that number to 2,100 loan files.

It
Following

the hearing, non-Ally underwriter defendants in the sixteen
actions 4 requested 43,000 loan files from ResCap.
On October 12, the bankruptcy court issued the Discovery
Order, which denied the motion to compel production of Loan
Files.

In re Residential Capital, LLC, No. 12-12020 (Bankr.

S.D.N.Y. October 12, 2012).

The bankruptcy court held that

while the automatic stay of Section 362(a) did not prevent
discovery of the loan files, it had the equitable authority
under Section 105 to issue a stay of discovery from ResCap.

The

bankruptcy court imposed a stay to last until February 2013, but
explained that it was “not issuing an injunction against FHFA,”
Discovery Order at 11 (emphasis in original), and that ResCap
was “entitled to a respite but not an exemption from discovery.”
Id. at 33.

The bankruptcy court also held that third parties

could move to “lift the stay to permit discovery” and that the
burden would then be on ResCap to “demonstrate why discovery

4

The non-Ally underwriter defendants are Barclays Capital, Inc.,
Citigroup Global Markets, Inc., Credit Suisse Securities (USA)
LLC, Goldman, Sachs & Co., J.P. Morgan Securities, LLC, RBS
Securities, Inc., and UBS Securities LLC.
5

should be limited or conditioned.”

Id. at 23.

The court also

indicated its willingness to “hold joint hearings with the
district court regarding the discovery issues” and to entertain
“other approaches” like “phased production.”

Id. at 33.

It is

this order from which FHFA appeals.
At a conference on October 15, three days after the
Discovery Order was issued, this Court indicated its intent to
order ResCap to produce the 2,100 loan files that constituted
the loans in the FHFA sample.

The Court indicated that it would

allow defendants to identify any additional files up to 1,000 in
number if they believed that FHFA’s sample was too small, and
that Ally would be required to pay ResCap’s expenses in making
that production.

The Court set a schedule for Ally to file any

brief in opposition to such an order.

FHFA filed its notice of

appeal from the Discovery Order that same day.
In a joint Order filed on October 16, this Court and the
bankruptcy court scheduled for October 29 a joint conference
before both Courts to address the proposed production order for
the 2,100 to 3,100 sample loan files.

The October 29 conference

was adjourned due to Hurricane Sandy, and then cancelled when
the parties indicated in letters of November 1 and 2 that they
had reached an agreement to produce the 2,100 loan files to
FHFA.

The defendants never requested that additional files be

included in the FHFA sample.

On November 9, the Courts jointly

6

signed a stipulation in which ResCap agreed to produce by
January 31, 2013, the 2,100 loan files requested by FHFA.
ResCap completed its production in advance of that date.
FHFA filed its opening brief on December 21, and ResCap
filed its opposition on January 18, 2013.

ResCap’s opposition

brief argued in part that this appeal is moot, as ResCap had
already produced all of the requested loan files pursuant to the
November 9 stipulation.

In its reply brief, filed on February

1, 2013, FHFA argued that an additional 295 loan files related
to loans in six other FHFA actions were still needed from
ResCap, and that the case was therefore not moot.
FHFA did not, however, indicate that it had requested these
files from the bankruptcy court or from ResCap, and in an Order
of February 19, FHFA was directed to appear at a conference on
February 21 and explain this omission.

At the conference, FHFA

indicated that the number of outstanding loan files it sought
from ResCap had increased to 460.

The Court ordered FHFA to

request the loan files from the bankruptcy court, and on March
11, the Court ordered FHFA to provide an update on the status of
its efforts.

On March 13, FHFA submitted a letter in response,

indicating that 241 of the 460 loan files had been produced and
that the parties were working together to ensure that the
remainder were produced in a timely fashion; ResCap had agreed

7

to produce the loan files to FHFA without a formal application
to the bankruptcy court.

DISCUSSION
“The mootness doctrine provides that an actual controversy
must be extant at all stages of review, not merely at the time
the complaint is filed.”

Conn. Office of Prot. & Advocacy for

Persons with Disabilities v. Hartford Bd. of Educ., 464 F.3d
229, 237 (2d Cir. 2006) (citation omitted).

A case is moot

“when the issues presented are no longer ‘live.’”

Already, LLC

v. Nike, Inc., 133 S. Ct. 721, 726 (2013) (quoting Murphy v.
Hunt, 455 U.S. 478, 481 (1982) (per curiam)).

Stated

differently, a case is moot “if the dispute ‘is no longer
embedded in any actual controversy about the plaintiffs’
particular legal rights.’”

Already, 133 S. Ct. at 727 (quoting

Alvarez v. Smith, 558 U.S. 87, 93 (2009)).
The “voluntary cessation” exception to the mootness
doctrine recognizes, however, that “voluntary cessation of
challenged conduct does not ordinarily render a case moot
because a dismissal for mootness would permit a resumption of
the challenged conduct as soon as the case is dismissed.”
v. SEIU, Local 1000, 132 S. Ct. 2277, 2287 (2012).

Knox

Thus a case

is not moot unless “subsequent events [make] it absolutely clear
that the allegedly wrongful behavior could not reasonably be

8

expected to recur.”

Friends of the Earth, Inc. v. Laidlaw

Environmental Services, Inc., 528 U.S. 167, 189 (2000) (quoting
United States v. Concentrated Phosphate Export Ass’n, 393 U.S.
199, 203 (1968)).

On the other hand, a case is still

“inarguably” moot where the cessation of the conduct at issue is
less voluntary, as when the parties enter into a settlement or a
“binding, judicially enforceable agreement.”

Kidder, Peabody &

Co., Inc. v. Maxus Energy Corp., 925 F.2d 556, 563 (2d Cir.
1991) (quoting Stokes v. Vill. of Wurtsboro, 818 F.2d 4, 5 (2d
Cir. 1987)).
This appeal is clearly moot.

The original dispute

presented to the bankruptcy court was over two sets of
documents: loan tapes and loan files relating to FHFA’s sample
in the Ally action.

The loan tapes were produced pursuant to a

joint stipulation between the parties even before the bankruptcy
court’s discovery order.

Discovery Order at 4 n.2.

The loan

files have also already been produced, pursuant to a “binding,
judicially enforceable agreement” entered into by both parties
and signed by both this Court and the bankruptcy court before
FHFA filed its opening brief.
563.

See Kidder, Peabody, 925 F.2d at

The only two requests on which the bankruptcy court ruled

are thus no longer at issue. 5

5

The bankruptcy court indicated in its discovery order that it
would entertain future discovery requests, and that the burden
9

FHFA argues in its reply brief that this appeal is not moot
because ResCap is still in possession of loan files relating to
other FHFA actions.

Those too are being produced.

The only

reason no court has ordered their production thus far has been
ResCap’s total willingness to produce them without waiting for
an order from either this Court or the bankruptcy court, as FHFA
admits in its March 13 letter.

See Official Comm. of Unsecured

Creditors of Hechinger Inv. Co. v. Friedman (In re Subpoena
Issued to Dennis Friedman), 350 F.3d 65, 72 (2d Cir. 2003)
(appeal of order quashing subpoena dismissed as moot where
appellee voluntarily agreed to be deposed).
Indeed, while the bankruptcy court’s protective order
remains in place, both the bankruptcy court and this Court have
made it clear that ResCap will be required to produce any
documents necessary for the prosecution of the FHFA actions.
Nor can there be any apprehension that ResCap is engaged in one
of those “maneuvers designed to insulate a decision from review”
that should “be viewed with a critical eye.”
at 2287.

Knox, 132 S. Ct.

After all, ResCap began providing the requested

discovery before this appeal was filed.

It is thus clear that

there is currently no “actual controversy about [FHFA’s]
would be on ResCap to “demonstrate why discovery should be
limited or conditioned.” Discovery Order at 23. Indeed, even
FHFA argues that the Discovery Order did not foreclose all
future requests, as that would render it an impermissible
advisory opinion.
10

particular legal rights.”

Already, 133 S. Ct. at 727 (citation

omitted).

CONCLUSION
FHFA’s October 15, 2012, appeal is dismissed as moot.

SO ORDERED:
Dated:

New York, New York
March 29, 2013

11