In Re: Motors Liquidation Company

Filing 17

MEMORANDUM AND ORDER: The August 24, 2016 Memorandum Opinion and Order of the bankruptcy court and the Stipulation and Agreed Order entered August 30, 2016 are AFFIRMED. The Clerk is directed to close the matter. (As further set forth in this Order.) (Signed by Judge P. Kevin Castel on 8/14/2017) (cf)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE MOTORS LIQUIDATION COMPANY
f/k/a General Motors Corporation, et al.,
Debtors.
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DAVIDSON KEMPNER CAPITAL MANAGEMENT LP,
Appellant,

16 Civ. 6927 (PKC)

Chapter 11
Case No. 09-50026 (MG)
MEMORANDUM
AND ORDER

-againstOFFICIAL COMMITTEE OF UNSECURED CREDITORS
OF MOTORS LIQUIDATION COMPANY, MOTORS
LIQUIDATION COMPANY AVOIDANCE ACTION
TRUST, UNITED STATES DEPARTMENT OF THE
TREASURY, and EXPORT DEVELOPMENT CANADA,
Appellees.
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CASTEL, Senior District Judge:
This appeal arises out of the bankruptcy of Motors Liquidation Company,
formerly known as General Motors Corporation, and related entities (together, “Old
GM”). Appellant Davidson Kempner Capital Management LP (“Davidson”) appeals the
August 24, 2016 memorandum opinion and order (the “Memorandum Opinion and
Order”) of the bankruptcy court (Martin Glenn, U.S.B.J.) approving a settlement, related
to a dispute over entitlement to certain assets of the debtor, among the Official
Committee of Unsecured Creditors, the U.S. Department of Treasury, Export
Development Canada, and the Motors Liquidation Company Avoidance Action Trust,
and a stipulation and agreed order (the “Stipulation and Agreed Order”) so-ordered on

August 30, 2016 effectuating the settlement. Davidson asserts that the matter resolved in
the settlement was not ripe for review by the bankruptcy court. Alternatively, it argues
that if the bankruptcy court had jurisdiction, it abused its discretion in entering the
August 24, 2017 Memorandum Opinion and Order approving the settlement and soordering the Stipulation and Agreed Order (together, the “Orders”). For the reasons
explained, the bankruptcy court had jurisdiction to enter the Orders and did not abuse its
discretion in approving the settlement. The Orders are affirmed and the appeal is
dismissed.
BACKGROUND
The factual background of Old GM’s bankruptcy and the events leading
up to the bankruptcy court’s approval of the settlement are not disputed.
I.

Old GM’s Secured Financing Arrangements.
In October 2001, over seven years before filing for bankruptcy, Old GM

entered into a synthetic lease financing transaction (the “Synthetic Lease”), 1 by which it
obtained approximately $300 million in financing from a syndicate of financial
institutions, using the proceeds to acquire and construct facilities on several properties.
In re Motors Liquidation Co., 755 F.3d 78, 79 (2d Cir. 2014). Old GM’s obligation to
repay the Synthetic Lease was secured by liens on twelve pieces of real estate. Id. The
lenders’ security interests in Old GM’s properties were perfected by filing UCC–1
financing statements in the counties in which the properties were located and with the
Delaware Secretary of State. Id.

A synthetic lease is a financing transaction under which an asset (most commonly real property) is
acquired not by its user but a by a separate entity (often a special purpose vehicle) which then leases the
asset to the ultimate user. In re Motors Liquidation Co., 486 B.R. 596, 603 n.4 (Bankr. S.D.N.Y. 2013).

1

2

In November 2006, over two years before filing for bankruptcy, Old GM
and then-subsidiary Saturn Corporation entered into a separate term loan facility (the
“Term Loan”). Id. The Term Loan was entirely unrelated to the Synthetic Lease and
provided Old GM with approximately $1.5 billion in financing from a different syndicate
of financial institutions (the “Term Loan Lenders”). Id. To secure the loan, the lenders
took security interests in a large number of Old GM’s assets, including all of Old GM’s
equipment and fixtures at forty-two facilities throughout the United States. Id.
JPMorgan Chase Bank, N.A. (“JPMorgan”) served as the administrative
agent and secured party of record for both the Synthetic Lease and the Term Loan. Id. In
connection with the Term Loan, JPMorgan caused the filing of twenty-eight UCC–1
financing statements to perfect the lenders’ security interests in the collateral. Id. The
most important of these financing statements, the Main Term Loan UCC–1, was filed
with the Delaware Secretary of State. Id.
In October 2008, in connection with Old GM repaying its creditors and
closing the Synthetic Lease transaction, Old GM’s counsel filed two UCC–3 statements
with the Delaware Secretary of State to terminate liens against Old GM’s properties in
connection with the Synthetic Lease. Id. at 81-82. In addition to these documents, Old
GM’s counsel mistakenly filed a third UCC–3 statement that erroneously identified the
Main Term Loan UCC–1 for termination. Id. at 81-82. Old GM, JPMorgan, and both
companies’ separate counsel reviewed these documents before they were filed. In re
Motors Liquidation Co., 777 F.3d 100, 101 (2d Cir. 2015). This mistake went unnoticed
until after Old GM filed for bankruptcy. Id.

3

II.

Old GM Files for Bankruptcy.
On June 1, 2009 (the “Petition Date”), Old GM filed a voluntary petition

for relief under Chapter 11 of the Bankruptcy Code. (Memorandum Opinion and Order
at 4.) That same day, Old GM as debtor filed a motion seeking authority from the
bankruptcy court to obtain $33.3 billion in post-petition financing (the “DIP Financing”)
from the United States Department of the Treasury and Export Development Canada
(collectively, the “DIP Lenders”). (Id.) The bankruptcy court approved three DIP
Orders: (1) the Interim DIP Financing Order, entered on June 2, 2009, (2) the Final DIP
Financing Order, entered on June 25, 2009, and (3) the modified final DIP financing
order, entered on July 5, 2009. (Id.)
Old GM, as debtor, requested and was granted authority to use a portion of
the DIP Financing to fully repay the approximately $1.5 billion Term Loan. (Id. at 5.)
On the assumption that the Term Loan Lenders’ claims arising under the Term Loan
Agreement were fully secured, Old GM repaid the Term Loan Lenders in full. (Id.)
However, before the entry of the Final DIP Financing Order, the Official Committee of
Unsecured Creditors (the “Committee”) learned that the Term Loan Lenders’ security
interests may not have been perfected as of the Petition Date as a result of the erroneously
filed UCC–3. (Id.) Therefore, the Final DIP Financing Order, while conditionally
approving repayment of the Term Loan, expressly preserved the right for the Committee
to investigate and bring actions based upon, among other things, the purported perfection
of the security interests related to the Term Loan. (Id.)

4

III.

The Term Loan Avoidance Action and Dispute over Potential Recovery.
On July 31, 2009, the Committee commenced an adversary proceeding

before the Bankruptcy Court (the “Term Loan Avoidance Action”) to recover amounts
paid to the Term Loan Lenders after the Petition Date based on the erroneous assumption
that the Term Loan Lenders’ interests were perfected and their claims fully secured. (Id.)
The Committee alleged that the Term Loan Lenders’ security interest with respect to the
collateral secured by the Main Term Loan UCC–1 was not perfected as of the Petition
Date, and that the Term Loan Lenders were thus substantially undersecured. (Id.)
On March 29, 2011, the bankruptcy court entered an order confirming the
plan, which provided for the creation of the Motors Liquidation Company Avoidance
Action Trust (the “Trust”) to liquidate and distribute its non-administrative assets, which
would consist entirely of the proceeds, if any, of the Term Loan Avoidance Action. (Id.
at 5-6.) In December 2011 the prosecution of the Term Loan Avoidance Action was
transferred to the Trust. (Id. at 6.)
The DIP Lenders and the Committee disputed whether the DIP Lenders
could be repaid out of any proceeds from the Term Loan Avoidance Action. (Id.) On
June 6, 2011, the Committee commenced an adversary proceeding before the Bankruptcy
Court, seeking a declaratory judgment that the DIP Lenders were not entitled to any
proceeds from the Term Loan Avoidance Action, and that the holders of the allowed
general unsecured claims were entitled to all proceeds of the Term Loan Avoidance
Action and were the sole beneficiaries of the Trust. (Id.) On December 12, 2011, the
bankruptcy court ruled in favor of the Committee, granting the Committee’s motion for
summary judgment. (Id.)

5

The DIP Lenders appealed, and then District Judge Colleen McMahon of
this Court vacated the judgment on the grounds that the dispute between the parties was
not ripe, and remanded with instructions to the bankruptcy court to dismiss the complaint
without prejudice due to lack of subject matter jurisdiction. United States Dep’t of the
Treasury v. Official Comm. of Unsecured Creditors of Motors Liquidation Co., 475 B.R.
347, 367 (S.D.N.Y. 2012). In her decision and order, Judge McMahon concluded that if
the defendants in the Term Loan Avoidance Action (i.e., the Term Loan Lenders),
prevailed on their then-pending motion for summary judgment, there would be no
recovery in the Term Loan Avoidance Action and no proceeds for the Trust to distribute,
and the dispute over any potential proceeds between the DIP Lenders and the Committee
would be moot. Id. at 360. At the heart of Judge McMahon’s reasoning was the
principle that “until it is clear that the parties are fighting over something more than the
hypothetical outcome of a separate litigation, it is premature to decide which among
several claimants would be entitled to any hypothetical proceeds.” Id. at 366. Judge
McMahon continued, explaining that this “renders the dispute before this Court lacking
in sufficient immediacy and reality to warrant declaratory relief at this juncture. There is
no case or controversy in the constitutional sense to decide; the action is not ripe.” Id.
IV.

The Second Circuit Grants Summary Judgment against the Term Loan
Lenders.
On March 1, 2013, on cross-motions for summary judgment in the Term

Loan Avoidance Action, the Bankruptcy Court concluded that the UCC–3 filing at issue
was unauthorized and therefore not effective to terminate the security interest of the Term
Loan Lenders and granted summary judgment to the defendants. In re Motors
Liquidation Co., 755 F.3d at 82; In re Motors Liquidation Co., 486 B.R. at 647. The

6

bankruptcy court certified the case for direct appeal to Second Circuit pursuant to 28
U.S.C. § 158(d)(2). In re Motors Liquidation Co., 755 F.3d at 82.
The Second Circuit determined that the question of whether the
erroneously filed UCC–3 effectively terminated the Main Term Loan UCC–1 was
governed by Delaware’s version of the UCC. Id. Under U.C.C. § 9–509 (6 Del. C. § 9509) a person may file a termination statement only if “the secured party of record
authorizes the filing.” Thus, “whether the UCC–3 filing effectively terminated the Main
Term Loan UCC–1 depends on whether the secured party of record, JPMorgan,
authorized the filing.” In re Motors Liquidation Co., 755 F.3d at 83. The defendants
argued that the UCC–3 filing cannot have been authorized because the termination
agreement only granted authority to terminate the Synthetic Lease, and no one involved
with the transaction thought they were authorized to terminate the Main Term Loan
UCC–1 or that their actions would have that effect. Id. The Trust argued that even if
JPMorgan did not authorize the termination of the security interest underlying the Term
Loan, it had authorized the act of filing the UCC–3 statement that identified that security
interest for termination. Id. at 83-84. This, the Trust argued, had the effect of
terminating the Main Term Loan UCC–1. Id. at 84.
The Second Circuit explained the two-part inquiry that was required,
certifying the question of what constituted authorization under the Delaware UCC to the
Delaware Supreme Court, and reserving to itself the application of the clarified law to the
facts of the case:
Intertwined in this appeal are two closely related questions.
First, the question we certify below, is what precisely a
secured lender of record must authorize for a UCC–3
termination statement to be effective: Must the secured

7

lender authorize the termination of the particular security
interest that the UCC–3 identifies for termination, or is it
enough that the secured lender authorize the act of filing a
UCC–3 statement that has that effect? Second, a question
we will address upon receipt of the Delaware court’s
answer: Did JPMorgan grant to Mayer Brown the relevant
authority—that is, alternatively, authority either to
terminate the Main Term Loan UCC–1 or to file the UCC–
3 statement that identified that interest for termination?
Id. at 84.
The Delaware Supreme Court answered the certified question, replying
that “if the secured party of record authorizes the filing of a UCC–3 termination
statement, then that filing is effective regardless of whether the secured party subjectively
intends or understands the effect of that filing.” In re Motors Liquidation Co., 777 F.3d
at 104. On the question it reserved for itself, the Second Circuit found that “although
JPMorgan never intended to terminate the Main Term Loan UCC–1, it authorized the
filing of a UCC–3 termination statement that had that effect,” and reversed the
bankruptcy court’s grant of summary judgment for the defendant and remanded with
instructions to the bankruptcy court to enter partial summary judgment for the plaintiff as
to the termination of the Main Term Loan UCC–1. Id. at 105-06.
V.

Motion for Approval of Settlement.
The initial administrative assets of the Trust consisted of approximately

$1.6 million in cash to be held and maintained by the Trust administrator for fees and
expenses in connection with Trust administration and prosecution of the Term Loan
Avoidance Action. (Memorandum Opinion and Order at 7.) However, this proved to be
insufficient to cover litigation costs related to the Term Loan Avoidance Action and to
satisfy the Trust’s general administrative costs. (Id.) On January 20, 2012, the Motors

8

Liquidation Company GUC Trust (the “GUC Trust”) filed a motion seeking, among other
things, to liquidate securities to fund additional Trust costs. (Id.) The bankruptcy court
granted the GUC Trust’s motion and entered an order, which, among other things,
allocated an additional $13,714,000 to the Trust to satisfy the Trust’s estimated fees,
costs, and expenses for 2012, 2013, and 2014. (Id.)
Subsequently the Trust administrator, in consultation with the Trust
monitor, determined that the cash available to the Trust was insufficient to meet its
projected fees and expenses. (Id.) The Trust administrator commenced a competitive
bidding process to obtain private funding for the Trust. (Id. at 8.) On April 4, 2016, the
Trust reached an agreement in principle with a private funder (the “Private Funder”) for a
$15 million loan in exchange for a return that could be as high as the greater of 2.25
times the amount of the funds drawn or 4.75% of the aggregate proceeds of the Term
Loan Avoidance Action. (Id.) On May 19, 2016, the Trust provided the DIP Lenders
with a copy of the executed litigation funding agreement with the Private Funder (the
“Private Litigation Funding Agreement”). (Id.) On June 23, 2016, the Trust sought
approval of the Private Litigation Funding Agreement. (Id.) Included in the Private
Litigation Funding Agreement was a provision which permitted the Trust to terminate the
Private Litigation Funding Agreement within a certain period of time in the event that the
DIP Lenders agreed to provide funding to the Trust on terms materially more favorable to
the Trust than those provided by the investors under the Private Litigation Funding
Agreement. (Id.)
Subsequently the Trust obtained litigation funding on better terms in the
form of a litigation cost advance from the DIP Lenders; it therefore sought to terminate

9

the Private Litigation Funding Agreement. (Id. at 8-9.) The DIP Lenders, the Trust, and
the Committee entered into the Stipulation and Agreed Order whereby after repayment of
all DIP Lender advances and the advances from the GUC Trust, the DIP Lenders would
receive 30% of the remaining net proceeds resulting from the Term Loan Avoidance
Action and the unsecured creditors would receive the remaining 70%, with each such
distribution to the DIP Lenders and unsecured creditors to be made contemporaneously
and on a pari passu basis. (Id. at 8.) This Stipulation and Agreed Order was conditioned
upon the DIP Lenders providing a $15 million advance (the “Litigation Cost Advance
Agreement,” collectively with the Stipulation and Agreed Order, the “Settlement”) to
fund the Term Loan Avoidance Action and related litigation. (Id.) The movants
requested the bankruptcy court enter the Stipulation and Agreed Order and approve the
Litigation Cost Advance Agreement. (Id. at 9.)
Davidson objected to the bankruptcy Court’s approval of the Stipulation
and Agreed Order, arguing that the Stipulation and Agreed Order, along with the
Litigation Cost Advance Agreement, provided litigation funding at a significantly higher
cost than the Private Litigation Funding Agreement, that approval could thus expose the
Trust to a claim for breach of contract, and that the bankruptcy court lacked jurisdiction
to approve the settlement because at the time there was no ripe case or controversy
between the parties to the Settlement. (Id. at 10-11.) River Birch Capital, LLC, lodged
similar objections. (Id. at 11.)
The United States responded, arguing that the Settlement was reasonable
because it avoided the potential adverse outcome of a court deciding that the unsecured
creditors were not entitled to any proceeds from the Term Loan Avoidance Action, that it

10

maximized the return to Trust beneficiaries because, unlike the Private Litigation
Funding Agreement, it provided a no-interest, no-fee advance of litigation costs, and that
the dispute over the proceeds was ripe for judicial determination. (Id. at 12-13.) The
Trust administrator responded with similar arguments. (Id. at 13-14.) The Committee
argued that the Settlement was reasonable and should be approved. (Id. at 15.)
The bankruptcy court entered the August 24, 2017 Memorandum Opinion
and Order, approving the Settlement under Rule 9019, Fed. R. Bankr. P., evaluating the
Settlement under the seven factor test set down by the Second Circuit in Motorola, Inc. v.
Official Committee of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452,
462 (2d Cir. 2007) (the “Iridium factors”) and finding that the Settlement was fair,
equitable, and within the range of reasonableness. (Memorandum Opinion and Order at
18, 24.) Six days later the bankruptcy court so-ordered the Stipulation and Agreed Order.
VI.

Davidson’s Appeal.
Davidson timely appeals from the Orders on two grounds. First, Davidson

argues that the bankruptcy court lacked jurisdiction under Article III of the Constitution
to enter the Orders because the dispute over the allocation of the proceeds of the Term
Loan Avoidance Action was not ripe and there was thus no case or controversy. Second,
Davidson argues that even if there was a live case or controversy, the bankruptcy court
misapplied the Iridium factors and abused its discretion by entering the Orders.

11

DISCUSSION
I.

Standard of Review.
A bankruptcy court’s legal conclusions are reviewed de novo. In re

Zarnel, 619 F.3d 156, 161 (2d Cir. 2010). Its factual determinations are reviewed for
clear error. In re Penn Traffic Co., 524 F.3d 373, 378 (2d Cir. 2008).
The reasonableness of a bankruptcy court’s application of Rule 9019, Fed. R. Bankr. P.,
in approving a settlement is reviewed for abuse of discretion. In re Iridium Operating
LLC, 478 F.3d at 461 n.13. A reviewing court should overturn a bankruptcy court’s
approval of a settlement under Rule 9019 only if the settlement falls “below the lowest
point in the range of reasonableness.” In re W.T. Grant Co., 699 F.2d 599, 608 (2d Cir.
1983)
II.

Application.
A. The Bankruptcy Court had Jurisdiction to Approve the Settlement.
“Article III of the Constitution limits the jurisdiction of federal courts to

‘Cases’ and ‘Controversies.’” Lance v. Coffman, 549 U.S. 437, 439 (2007). To be
appropriate for judicial determination, a case or controversy “must be definite and
concrete, touching the legal relations of parties having adverse legal interests. . . . That
is, courts may not give an opinion advising what the law would be upon a hypothetical
state of facts, for instance, where a party did not seek the adjudication of any adverse
legal interests.” Elliott v. GM LLC (In re Motors Liquidation Co.), 829 F.3d 135, 168
(2d Cir. 2016) (internal quotation marks and citations omitted). These limitations also
apply to bankruptcy courts. Id.

12

The related doctrine of ripeness, “drawn both from Article III limitations
on judicial power and from prudential reasons for refusing to exercise jurisdiction,” is
“peculiarly a question of timing.” Nat’l Org. for Marriage, Inc. v. Walsh, 714 F.3d 682,
687 (2d Cir. 2013). “A claim is not ripe if it depends upon contingent future events that
may not occur as anticipated, or indeed may not occur at all. The doctrine’s major
purpose is to prevent the courts, through avoidance of premature adjudication, from
entangling themselves in abstract disagreements.” Id. (internal quotation marks and
citation omitted). “The standard for ripeness in a declaratory judgment action is that
there is a substantial controversy, between parties having adverse legal interests, of
sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”
Duane Reade, Inc. v. St. Paul Fire and Marine Ins. Co., 411 F.3d 384, 388 (2d Cir. 2005)
(internal quotation marks omitted).
It may be that, insofar as ripeness and mootness are concerned, the
circumstance of a bankruptcy proceeding is fundamentally different from a plenary action
pending in district court. Indisputably, there is subject matter jurisdiction over a
bankruptcy proceeding and the court may adjudicate the rights and interests of those who
claim an interest in the bankrupt’s estate. But there is scant precedent addressing the
authority of a bankruptcy court to approve a settlement under Rule 9019 in the face of a
ripeness or mootness argument. On the present briefing, this Court is not prepared to say
that a bankruptcy court must always first adjudicate claims of ripeness and mootness
before addressing the question of the appropriateness of a settlement. Here, the Court
comfortably concludes that there was a case or controversy between the DIP Lenders and
the Committee that was ripe for adjudication by the bankruptcy court.

13

Because the dispute between the DIP Lenders and the Committee regards
the apportionment of funds derived from a potential future recovery in the Term Loan
Avoidance Action, it is possible that any determination by the bankruptcy court as to
either sides’ entitlement to such funds would ultimately have no effect. However, the
simple fact that the dispute is over a contingent claim does not render the dispute beyond
the scope of an Article III case or controversy. Associated Indem. Corp. v. Fairchild
Indus., Inc., 961 F.2d 32, 35 (2d Cir. 1992) (“That the liability may be contingent does
not necessarily defeat jurisdiction of a declaratory judgment action.”). A court must
assess “the practical likelihood that the contingencies will occur.” Id.
In the context of a declaratory judgment action between an insurer and an
insured over entitlement to potential future recoveries in ongoing tort litigation against
third parties, the Second Circuit found in a summary order that the dispute was ripe for
judicial determination, noting the “practical likelihood” of recovery. SR Int’l Bus. Ins.
Co. v. Allianz Ins. Co., L.L.C., 343 F. App’x 629, 631-32 (2d Cir. 2009) (summary
order).
Davidson relies on Certain Underwriters at Lloyd’s, London v. St. Joe
Minerals Corp., 90 F.3d 671, 672, 676 (2d Cir. 1996), where the Second Circuit upheld
the district court’s dismissal of a declaratory judgement action by an excess liability
insurer against the insured to determine the status of the insurer’s obligations as not a ripe
controversy. In that case, the insured, having conducted mining and smelting operations
throughout the United States for approximately a century, was exposed to potentially
significant liability after being identified as a Potentially Responsible Party (“PRP”)
pursuant to the Comprehensive Environmental Response, Compensation, and Liability

14

Act of 1980 (“CERCLA”), 42 U.S.C. § 9601 et seq., for twenty contaminated sites. Id. at
672-73. This case is readily distinguishable from the case at hand. In Lloyd’s, the
obligation of the excess liability insurer was contingent upon, among other factors, the
possibility of the Environmental Protection Agency designating other entities as PRPs at
the contaminated sites, id. at 673, unresolved legal questions regarding the liability of
subsidiaries, id. at 673-74, the allocation of liability among the various PRPs, id. at 674,
apportionment of liability over more than six decades, id., and potential contribution to
the insured from third parties, id. For more than half of the contaminated sites, the
insurer produced no evidence of the potential likelihood or extent of liability, and for
multiple sites the insured produced conflicting evidence regarding the extent of liability.
Id. at 673. Ultimately, the Second Circuit determined that:

Id. at 674.

[T]he record as a whole consists in large measure of
speculation. Uncertainty surrounds [the insured]’s liability.
It has viable defenses, there are numerous other PRPs to
share the unestablished remedial costs, and the challenged
activity is spread out over a substantial time period, during
much of which [the insurers’] policies were not in
existence.
The present case is much more like SR Int’l Bus. Ins. Co. than Lloyd’s.

The Second Circuit found that the UCC–3 filed by JPMorgan terminated the Main Term
Loan UCC–1, and thus a significant portion of the Term Loan Lenders’ security interest
in Old GM’s assets. In re Motors Liquidation Co., 777 F.3d at 105-06. The Term Loan
Avoidance Action then survived a motion to dismiss in the bankruptcy court. Motors
Liquidation Co. Avoidance Action Tr. v. JPMorgan Chase Bank, N.A. (In re Motors
Liquidation Co.), 552 B.R. 253, 282 (Bankr. S.D.N.Y. 2016). Both of these events
occurred prior to the bankruptcy court’s approval of the Settlement. Following

15

discovery, the bankruptcy court held a trial to determine (a) which of 40 representative
assets (out of over 200,000 total assets) were fixtures, and (b) the valuation of each of the
representative assets. (Joint Final Pretrial Order, April 19, 2017, 09-00504-mg, Dkt. 962
at 2). The parties have submitted full post-trial briefing and proposed findings of fact and
conclusions of law, which are pending before the bankruptcy court. (Case No. 09-00504mg, Dkts. 993, 994.) The potential for recovery from the Term Loan Avoidance Action
has thus surpassed speculative and is approaching a practical likelihood. The dispute
over the proceeds of the Term Loan Avoidance Action was ripe for judicial determination
at the time the bankruptcy court approved the Settlement.
Judge McMahon’s 2012 decision that there was not then a case or
controversy does not foreclose a finding that there was a case or controversy as of August
24, 2016, the date of Judge Glenn’s Memorandum Opinion and Order approving the
Settlement. The “general rule” of issue preclusion is that “[w]hen an issue of fact or law
is actually litigated and determined by a valid and final judgment, and the determination
is essential to the judgment, the determination is conclusive in a subsequent action
between the parties, whether on the same or a different claim.” B&B Hardware, Inc. v.
Hargis Indus., 135 S. Ct. 1293, 1303 (2015) (alteration in original). However, “a
decision that a matter is not ripe for review does not necessarily hold for all time. Things
ripen. . . . [S]uit may be brought again where a jurisdictional defect has been cured or
loses its controlling force.” Park Lake Res. Ltd. Liab. Co. v. USDA, 378 F.3d 1132,
1137 (10th Cir. 2004).
As discussed above, the Term Loan Avoidance Action has progressed
substantially since Judge McMahon’s ruling five years ago. The issues addressed in

16

summary judgment motions, pending before the bankruptcy court when Judge McMahon
issued her decision, have since been resolved by the Second Circuit in favor of the Trust.
The Trust’s complaint has survived a motion to dismiss and a trial has concluded. Judge
McMahon found that the Term Loan Lenders were just as likely to prevail as the Trust on
the question of whether the Main Term Loan UCC–1 was terminated by the erroneously
filed UCC–3, and that “[n]either side ha[d] the upper hand.” United States Dep’t of the
Treasury, 475 B.R. at 366. This is no longer the case. Circumstances have changed. The
dispute over the allocation of proceeds from the Term Loan Avoidance Action has
ripened. The judgment does not have preclusive effect. Further, the Trust was not a
party to the prior action, and thus the requirement that the precluded party “ha[ve] a full
and fair opportunity to litigate the issue” is not met. Ball v. A.O. Smith Corp., 451 F.3d
66, 69 (2d Cir. 2006).
In the alternative, the Court finds that a ripe and justiciable controversy
existed between the Committee, the DIP Lenders, and the Trust at the time the Trust
entered the Private Litigation Funding Agreement in order to continue to pursue the Term
Loan Avoidance Action. 2 The Private Litigation Funding agreement, finalized in June
2016, entitled third parties to substantial sums out of any recovery in the Term Loan
Avoidance Action. Unchallenged, the Private Litigation Funding Agreement would
diminish any potential recovery by either the Committee or the DIP Lenders. There was
thus an actual controversy between the Committee and the DIP Lenders on the one hand,
and the Trust, on the other. The provision allowing the Trust to terminate the Private

This dispute, not having occurred until after Judge McMahon’s decision, was not and could not have been
addressed in that decision, which thus has no issue preclusive effect regarding the ripeness of this
controversy.

2

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Litigation Funding Agreement upon the Trust attaining alternative litigation funding on
more favorable terms was operative for only a limited time. (Memorandum Opinion and
Order at 8.) The controversy was thus ripe for judicial determination. In other words,
even if the dispute between the Committee and the DIP Lenders over potential future
proceeds of the Term Loan Avoidance Action was not a ripe controversy, the dispute
between those parties, as beneficiaries of the Trust, and the Trust itself, over the Private
Litigation Funding Agreement, was a ripe controversy, and the bankruptcy court had
jurisdiction to approve the Settlement, which, while settling the latter, ripe controversy,
also had the tangential effect of doing away with the former, unripe dispute.
B. The Bankruptcy Court did not Abuse its Discretion by Finding that the
Settlement was Fair and Equitable.
The Second Circuit has set out the factors by which a court should
evaluate the reasonableness of a settlement under Rule 9019, Fed. R. Bankr. P. In re
Iridium Operating LLC, 478 F.3d at 462. Upon review, this Court concludes that the
bankruptcy court assessed the settlement under the proper standard and did not abuse its
discretion in approving the Settlement.
The bankruptcy court found that the first Iridium factor (“the balance
between the litigation’s possibility of success and the settlement’s future benefits,” In re
Iridium Operating LLC, 478 F.3d at 462) weighed in favor of approving the Settlement.
(Memorandum Opinion and Order at 22.) The bankruptcy court found that the outcome
of any future litigation between the DIP Lenders and the Committee over the proceeds of
the Term Loan Avoidance Action was uncertain and that the Settlement would not only
resolve this long standing dispute, but would also maximize recovery by both sides
through access to a costless litigation advance. (Id.)

18

Davidson’s primary argument with respect to the first Iridium factor is that
the Private Litigation Funding Agreement, to which Davidson was a party, actually
provided for litigation funding at a lower cost than the Litigation Cost Advance
Agreement approved as part of the Settlement. (Davidson Opening Brief at 24-26.)
Davidson’s argument lacks merit. While an unwary observer might at first
be persuaded by the charts Davidson submitted purporting to show that the recovery to
the unsecured creditors would be greater under the Private Litigation Funding Agreement
than it would be under the funding provided pursuant to the Settlement, closer
examination reveals these contentions to lack merit. Davidson’s entire argument rests on
an unsupported assumption: that after successful litigation against the DIP Lenders (or
superior settlement terms) the Committee would be entitled to, subtracting litigation costs
and financing fees, more than 70% of the proceeds of the Term Loan Avoidance Action,
such that the recovery to the Committee would be higher, even when paying a premium
for funding through the Private Litigation Cost Advance Agreement, than it would be
pursuant to the Settlement.
There is no reason to believe that the Committee could get substantially
better settlement terms absent the Litigation Cost Advance Agreement or that litigation
against the DIP Lenders over the proceeds of the Term Loan Avoidance Action would be
short or easy. As the bankruptcy court noted, “[t]he Settlement was negotiated by very
experienced counsel, at arm’s length, and approved by the Committee’s members after
due deliberations,” and that it was “entirely possible” that the Committee would lose
future litigation against the DIP Lenders. (Memorandum Opinion and Order at 21-22.)

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The bankruptcy court thus did not abuse its discretion in finding that the first Iridium
factor weighed in favor of approving the Settlement.
The bankruptcy court found that the second Iridium factor (“the likelihood
of complex and protracted litigation, with its attendant expense, inconvenience, and
delay, including the difficulty in collecting on the judgment,” In re Iridium Operating
LLC, 478 F.3d at 462 (internal quotation marks omitted)) also weighed in favor of
approving the Settlement, explaining that a “lengthy trial and appeals process” was likely
absent settlement. (Memorandum Opinion and Order at 22-23.) Davidson challenges
this assertion, yet itself acknowledges that a trial before the bankruptcy court could take
up to six months, district court review on appeal could take up to a year, with Second
Circuit review years in the future. (Davidson Opening Brief at 28-29.) The bankruptcy
court did not abuse its discretion with respect to the second Iridium factor.
The bankruptcy court found that the third Iridium factor (“the paramount
interests of the creditors, including each affected class’s relative benefits and the degree
to which creditors either do not object to or affirmatively support the proposed
settlement,” In re Iridium Operating LLC, 478 F.3d at 462 (internal quotation marks
omitted)) was inconclusive. (Memorandum Opinion and Order at 23.) Davidson argues
that this factor weighs in favor of rejecting settlement, based primarily upon the same
unsupported assumptions discussed with respect to the first Iridium factor. (Davidson
Opening Brief at 29-30.) The bankruptcy court did not abuse its discretion with respect
to the third Iridium factor.
The bankruptcy court found that the fourth Iridium factor (“whether other
parties in interest support the settlement,” In re Iridium Operating LLC, 478 F.3d at 462)

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weighed in favor of approving the Settlement, noting that no creditor opposed the
Settlement other than Davidson, which had a private financial interest against the
Settlement. (Memorandum Opinion and Order at 24.) The bankruptcy court did not
abuse its discretion with respect to the fourth Iridium factor.
The bankruptcy court found that the fifth (“the competency and
experience of counsel supporting, and [t]he experience and knowledge of the bankruptcy
court judge reviewing, the settlement”) and seventh (“the extent to which the settlement
is the product of arm’s length bargaining”) Iridium factors, In re Iridium Operating LLC,
478 F.3d at 462 (internal quotation marks omitted; alteration in original), supported
approving the settlement, and that the sixth Iridium factor was irrelevant. (Memorandum
Opinion and Order at 24.) Davidson does not challenge these findings. (Davidson
Opening Brief at 33.)
Balancing all of these factors, the bankruptcy court found that the
Settlement was “within the range of reasonableness and should be approved.”
(Memorandum Opinion and Order at 24.) This Court agrees. The bankruptcy court did
not abuse its discretion.

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CONCLUSION
The August 24, 2016 Memorandum Opinion and Order of the bankruptcy
court and the Stipulation and Agreed Order entered August 30, 2016 are AFFIRMED.
The Clerk is directed to close the matter.
SO ORDERED.

Dated: New York, New York
August 14, 2017

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