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In re: Homebanc Mortgage Corp.

United States Court of Appeals, Third Circuit

December 24, 2019

In re: HOMEBANC MORTGAGE CORP., et al, Debtors
BEAR STEARNS & CO., INC.;BEAR STEARNS INTERNATIONAL LIMITED; HOMEBANC CORP.;STRATEGIC MORTGAGE OPPORTUNITIES REIT, INC. GEORGE L. MILLER, Chapter 7 Trustee for the Estate of HomeBanc Corp., Appellant WELLS FARGO, N.A., in its capacity as Securities Administrator

          Argued September 26, 2019

          On Appeal from the United States District Court for the District of Delaware District Court No. 1-17-cv-00797 District Judge: The Honorable Richard G. Andrews

          Francesca E. Brody Sidley Austin, James O. Heyworth [ARGUED] Sidley Austin, Andrew W. Stern Sidley Austin Counsel for Bear Stearns Co., Inc. Bear Stearns International Ltd. Strategic Mortgage Opportunities REIT, Inc.

          John T. Carroll, III Cozen O'Connor, Steven M. Coren [ARGUED] Kaufman Coren & Ress, John W. Morris Kaufman Coren & Ress Counsel for George L. Miller, Chapter 7 Trustee for the Estate of HomeBanc Corp.

          Before: SMITH, Chief Judge, McKEE, and PHIPPS, Circuit Judges



         This appeal revolves around the liquidation of defaulted mortgage-backed securities that were subject to two repurchase agreements. Following multiple rounds of litigation before the Bankruptcy and District Courts, George E. Miller, Chapter 7 trustee for the estate of HomeBanc Corp., seeks our review. On appeal, we address these questions: (1) whether a Bankruptcy Court's determination of good faith regarding an obligatory post-default valuation of mortgage-backed securities subject to a repurchase agreement receives plenary review as a question of law or clear-error review as a question of fact; (2) whether "damages," as described in 11 U.S.C. § 101(47)(A)(v), requires a non-breaching party to bring a legal claim for damages or merely experience a post-liquidation loss for the conditions of 11 U.S.C. § 562 to apply; (3) whether the safe harbor protections of 11 U.S.C. § 559 can apply to a non-breaching party that has no excess proceeds after exercising the contractual right to liquidate a repurchase agreement; and (4) whether Bear Stearns liquidated the securities at issue in compliance with the terms of the parties' repurchase agreements. Because we agree with the disposition of the District Court, we will affirm.


         HomeBanc Corp. ("HomeBanc") was in the business of originating, securitizing, and servicing residential mortgage loans. From 2005 through 2007, HomeBanc obtained financing from Bear Stearns & Co., Inc. and Bear Stearns International Ltd. (jointly referred to as "Bear Stearns") pursuant to two repurchase agreements:[1] a Master Repurchase Agreement ("MRA") dated September 19, 2005 and a Global Master Repurchasing Agreement ("GMRA") dated October 4, 2005[2] Transactions were accompanied by a confirmation that included the purchase date, purchase price, repurchase date, and pricing rate. HomeBanc transferred to Bear Stearns multiple securities in June 2006, June 2007, and July 2007; however, nine of the securities-the securities at issue ("SAI")-were accompanied by confirmations showing a purchase price of zero and open repurchase dates.[3]

         On Tuesday, August 7, 2007, HomeBanc's repo transactions became due, requiring HomeBanc to buy back thirty-seven outstanding securities, including the nine SAI, at an aggregate price of approximately $64 million. Bear Stearns, concerned about HomeBanc's liquidity, offered to roll (extend) the repurchase deadline for an immediate payment of roughly $27 million. Bear Stearns alternatively offered to purchase thirty-six of the securities outright for approximately $60.5 million, but HomeBanc rejected this proposal. HomeBanc failed to repurchase the securities or pay for an extension of the due date by the close of business on August 7. The following afternoon, Bear Stearns issued a notice of default that gave HomeBanc until the close of business on Thursday, August 9, 2007, to make payment in full. No funds were forthcoming. Consequently, Bear Stearns sent formal default notices to HomeBanc on August 9, 2007, and later that day, HomeBanc filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code.[4]

         Upon HomeBanc's default, the MRA and GMRA required Bear Stearns to determine the value of the thirty-seven remaining repo securities. This meant that Bear Stearns, within its broad discretion, had to reach a "reasonable opinion" regarding the securities' "fair market value, having regard to such pricing sources and methods ... as [it] . . . consider[ed] appropriate." J.A. 1038.

         Bear Stearns, claiming outright ownership of the securities, decided to auction them to determine their fair market value. Auction solicitations were distributed between the morning of Friday, August 10 and Tuesday, August 14, stating that Bear Stearns intended to auction thirty-six of the securities on August 14, 2017.[5] The bid solicitations listed the available securities, including their unique CUSIP identifiers, original face values, and current factors.[6] Bear Stearns's finance desk sent the bid solicitation to approximately 200 different entities, including investment banks and advisors, pension and hedge funds, asset managers, and real estate investment trusts. In some cases, multiple individuals within a single entity were solicited. The finance desk also sought bids from Bear Stearns's mortgage trading desk, implementing extra safeguards to prevent any insider advantage.

         The auction yielded two bids. Tricadia Capital, LLC submitted a bid of approximately $2.2 million for two securities, and Bear Stearns's mortgage trading desk placed an "all or nothing" bid of $60.5 million, the same amount Bear Stearns had offered before HomeBanc's default. After the auction closed, Bear Stearns's finance desk determined that Bear Stearns's mortgage trading desk had won. Bear Stearns allocated the bid across the thirty-six securities on August 15: $52.4 million to twenty-seven securities and $8.1 million divided evenly among the nine SAI ($900, 000 apiece).

         Despite its default and the results of the auction, HomeBanc believed itself entitled to the August 2007 principal and interest payments from the thirty-seven securities; Bear Stearns disagreed. Wells Fargo Bank, administratively holding the securities, commenced this adversary proceeding by filing an interpleader complaint on October 25, 2007. HomeBanc and Bear Stearns asserted cross-claims against each other. After depositing the August 2007 payment with the Bankruptcy Court, Wells Fargo was subsequently dismissed from the proceedings. The cross-claims between HomeBanc and Bear Stearns remained.

         A. HomeBanc I[7]

         After HomeBanc's bankruptcy was converted to a Chapter 7 proceeding, George Miller was appointed as trustee for the estate. Miller brought several claims against Bear Stearns, including (1) conversion (for selling the SAI via auction when HomeBanc asserted that it had superior title and interest), (2) violation of the automatic bankruptcy stay (by auctioning the SAI), and (3) breach of contract (for improperly valuing the SAI in violation of the GMRA).

         With respect to these three claims, the Bankruptcy Court granted Bear Stearns's motion for summary judgment. When a bankruptcy petition is filed, an automatic stay halts any actions by creditors. 11 U.S.C. § 362. However, § 559 generally allows repo participants to exercise a contractual right to liquidate securities without judicial interference. 11 U.S.C. § 559. The Bankruptcy Court held that the transactions underlying the nine SAI constituted repurchase agreements under 11 U.S.C. § 101(47)(A)(i) and (v), bringing the SAI within the safe harbor protections of § 559. Thus, Bear Stearns had the right to liquidate the securities: it did not violate the automatic bankruptcy stay or convert the securities. See J.A. 44-45 ("Bankruptcy Code § 559 permits liquidation of securities in accordance with a party's contractual rights, and the GMRA permits the Bear Stearns defendants to act within their discretion" to sell the securities upon default.).

         The Bankruptcy Court also entered summary judgment against HomeBanc on the breach of contract claim. Interpreting the GMRA, which is governed by English contract law, the Bankruptcy Court noted that while the agreement required Bear Stearns to rationally appraise the SAI in good faith, Bear Stearns had sizeable discretion in coming to a fair market valuation. Due to this broad discretion, the Court held that there was no dispute of material fact as to whether Bear Stearns complied with the GMRA since using a bidding process to value securities was typical practice in the industry at the time.

         B. HomeBanc II

         HomeBanc appealed to the District Court, arguing that the Bankruptcy Court erred by (1) determining that the transactions involving the SAI qualified as repurchase agreements entitled to the safe harbor protections of § 559; (2) interpreting the GMRA to impose a nonexistent subjective rationality standard for Bear Stearns to value the securities upon HomeBanc's default; and (3) deciding that the sale of the SAI was rational and in good faith.

         The District Court affirmed on the first two issues but remanded for further proceedings as to whether Bear Stearns complied with the GMRA in good faith. First, the District Court decided that the transactions underlying the SAI did not qualify as repos under § 101 (47)(A)(i) because the confirmations accompanying the transactions showed that the securities had a purchase price of zero, allowing the SAI to "have been transferred back . . . without being 'against the transfer of funds . . . .'"[8] J.A. 59-60. Instead, they were credit enhancements under § 101(47)(A)(v).[9] "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.'" J.A. 60 (quoting 11 U.S.C. § 101(47)(A)(v)). While the nine SAI were credit enhancements rather than traditional repos, [10] the District Court still held that they received the protections of § 559.

         As to HomeBanc's second claim, the District Court decided that the Bankruptcy Court correctly discerned the relevant English law, finding that the GMRA's "reasonable opinion" language equated to a "good faith" requirement.

         The Court, responding to HomeBanc's last argument, held that the record created a fact question as to whether Bear Stearns acted in good faith by auctioning the SAI. Two concerns led to this decision. First, only Bear Stearns submitted a bid that included the nine SAI. J.A. 62 ("When . . . Bear Stearns 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."). Second, the District Court believed that the Bankruptcy Judge erroneously discounted the opinion of HomeBanc's expert witness, who stated that Bear Stearns designed the auction to dissuade outside bidders. Because of these issues, the case was remanded for further proceedings to determine if the auction complied with the GMRA.

         C. HomeBanc III

         Upon remand and after a six-day trial, the Bankruptcy Court ruled that the auction was fair and customary, and therefore, Bear Stearns acted in good faith accepting the auction results as the fair market value of the thirty-seven securities. In reaching this holding, the Bankruptcy Court divided the question of good faith compliance with the GMRA into "three parts: (i) whether Bear Stearns'[s] decision to determine the Net Value of the Securities at Issue by auction in August 2007 was rational or in good faith; (ii) whether the auction process utilized by Bear Stearns was in accordance with industry standards; and (iii) whether Bear Stearns'[s] acceptance of the value obtained through the auction was rational or in good faith." J.A. 76.

         The Court, in addressing the first sub-question, concluded that Bear Stearns acted in good faith by determining the securities' value via an auction, despite the turbulent condition of the residential mortgage-backed securities market in August 2007. HomeBanc argued that an auction cannot provide accurate price discovery when a market is dysfunctional, and while HomeBanc presented testimony that the residential mortgage-backed securities market was non-functional in August 2007, there was substantial opposing testimony that the market, though troubled, was functioning. "[T]here was [also] no evidence of other factors that might be considered indicia of market dysfunction: asymmetrical information between buyers and sellers, inadequate information in general. . ., market panic . . ., high transaction costs, the absence of any creditworthy market participants or fraud." J.A. 86. Moreover, "there was no indication . . . when or if market prices would stabilize." J.A. 85-87. It was therefore reasonable for Bear Stearns to quickly liquidate the collateral via a sale. Because the Court found that the market was functioning in August 2007, it concluded that the auction was a commercially reasonable determinant of value.

         Bear Stearns's auction process was also found to be reasonable: the procedures provided possible bidders with sufficient information to formulate a bid; the 4.5 days to place bids was more than what was typically given to sophisticated purchasers of residential mortgage-backed securities; Bear Stearns solicited many potential buyers, including its main competitors; ...

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