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In re HomeBanc Mortgage Corp.

United States District Court, D. Delaware

August 14, 2018

In re HOMEBANC MORTGAGE CORP., et al. Debtors.
v.
BEAR STEARNS & CO., INC., BEAR STEARNS INTERNATIONAL LIMITED, AND STRATEGIC MORTGAGE OPPORTUNITIES REIT, INC. Appellees. GEORGE L. MILLER, TRUSTEE FOR THE ESTATE OF HOMEBANC CORP., Appellant, BAP No. 17-24 Civil Action No. 17-797-RGA

          John T. Carroll, Barry M. Klayman, COZEN O'CONNOR, Wilmington, DE; Steven M. Coren (argued), David M. DeVito, KAUFMAN, COREN & RESS, P.C., Philadelphia, PA. Attorneys for Appellant.

          William P. Bowden, Karen B. Skomorucha Owens, ASHBY & GEDDES, P.A., Wilmington, DE; Andrew W. Stern (argued), James O. Heyworth, Francesca E. Brody, SIDLEY AUSTIN LLP, New York, NY. Attorneys for Appellees.

          MEMORANDUM OPINION

          ANDREWS, U.S. DISTRICT JUDGE.

         This is an appeal from the Bankruptcy Court's June 14, 2017 final judgment. (D.I. 30-2 at A512). The appeal is fully briefed. (D.I. 29; D.I. 31; D.I. 34). I held oral argument on June 22, 2018. (D.I. 40 ("Tr.")). After oral argument, I ordered the parties to produce letter briefs. (D.I. 38; D.I. 39). For the reasons set forth below, the Bankruptcy Court's judgment is AFFIRMED.

         I. BACKGROUND

         The parties' dispute arises in connection with an auction of securities owned by HomeBanc Corporation ("HomeBanc"), which was conducted by Appellees Bear, Stearns & Co., Inc., Bear Stearns International Limited, and Strategic Mortgage Opportunities REIT, Inc. (collectively, "Bear"). Between October 2005 and August 2007, Bear lent money to HomeBanc in a number of repo 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 at Issue ("SAI"), which Bear obtained in three sets of transactions that took place in June 2006, June 2007, and July 2007. Each of the SAI was transferred to Bear along with other securities, and the confirmation corresponding to each of the SAI showed a purchase price of zero and open repurchase dates. 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 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 SAL 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 solicited bids from the Bear mortgage trading desk. To ensure that Bear affiliates were not at an advantage, any bids from an affiliate were 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 SAL The securities were sold to the Bear mortgage trading desk.

         The Bankruptcy Court granted summary judgment in Bear's favor, holding that the SAI were subject to "repurchase agreements" under the Bankruptcy Code. In re HomeBanc Mortg. Corp., 2013 WL 211180 (Bankr. D. Del. Jan. 18, 2013) (D.I. 30-1 at A313-64). More specifically, the Bankruptcy Court found that the repo transactions qualified as "repurchase agreements" under 11 U.S.C. § 101(47)(A)(i), having been transferred "against the transfer of funds." (Id. atA333). The Bankruptcy Court alternatively held that even if the transactions did not qualify under § 101(47)(A)(i), they qualified under § 101(47)(A)(v), the catchall provision. (Id. at A334). Having established that the transactions were "repurchase agreements" under the Bankruptcy Code, the Bankruptcy Court found that Bear's exercise of its contractual right to sell the SAI was entitled to the safe harbor protection of § 559 of the Bankruptcy Code.[2] (Id. at A316). The Bankruptcy Court then considered whether Bear's auction of the SAI complied with the terms of GMRA. (Id. at A358). Because the GMRA gave discretion to the non-defaulting party, the Bankruptcy Court concluded that the only real question was whether the timing and manner of the auction was in good faith, given the prevailing market conditions. (Id.). The Bankruptcy Court held that there existed no disputed fact as to whether the auction was in good faith and in accordance with industry practice, and granted summary judgment for Bear. (Id.).

         On appeal, I affirmed in part and reversed in part. In re HomeBanc Mortg. Corp., 2014 WL 1268677 (D. Del. Mar. 27, 2014) (D.I. 30-1 at A365-77). In relevant part, I held that the SAI were not transferred "against the transfer of funds," and therefore did not meet the definition of "repurchase agreements" in § 101(47)(A)(i). (D.I. 30-1 at A372). Rather, I held that the SAI were "credit enhancements," which qualified as "repurchase agreements" under § 101(47)(A)(v), the catchall provision. (Id. at A373). I remanded the case for the Bankruptcy Court to determine "whether the auction complied with the GMRA." (Id. at A376). In doing so, I affirmed that the GMRA gave Bear "a certain amount of discretion in what to do with the disputed securities once HomeBanc had declared bankruptcy," cabined by good faith and rationality. (Id. at A373-75).

         On remand, after a six-day trial, the Bankruptcy Court found that Bear's "auction of [HomeBanc] repurchase agreement collateral in August 2007 was rational, in good faith and in compliance with the [GMRA]." (Id. at A376; D.I. 30-2 at A47l).

         The Chapter 7 trustee of HomeBanc, George L. Miller (the "Trustee"), appealed the Bankruptcy Court's decision on June 21, 2017. (D.I. 1).

         II. LEGAL STANDARD

         The Court has jurisdiction to hear an appeal from a final judgment of the Bankruptcy Court pursuant to 28 U.S.C. § 158(a)(1). 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, N.A. v. Metro Commc'ns, Inc.,945 F.2d 635, 642 (3d Cir. 1991) (citing Universal Minerals, Inc. v. C.A. Hughes & Co.,669 F.2d 98, 101-02 (3d Cir. 1981)). In other words, this Court reviews a decision of the Bankruptcy Court just the ...


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