BANKRUPTCY BULLETIN
Contributing Author: David M. Tanabe, Winthrop & Weinstine, P.A.
In ResCap Liquidating Trust v. Primary Residential Mortgage, Inc., 59 F.4th 905 (8th Cir. 2023), the United States Court of Appeals for the Eighth Circuit affirmed that the chapter 11 plan preserved indemnity claims to be pursued by a liquidating trust on behalf of certain bankruptcy claimants.
A lender sold loans to a mortgage loan sponsor (“sponsor”) pursuant to agreements wherein the lender agreed to indemnify the sponsor for all losses from any representation, warranty, or obligation made by the sponsor in reliance on a misstatement or omission by the lender. After the 2008 housing market collapse, the sponsor entered into pre-bankruptcy and bankruptcy settlements with trusts, investors, and insurers for claims against the sponsor for its representations made in the securitization of the loans as residential-mortgage backed securities (“RMBS”). In the sponsor’s chapter 11 case, the bankruptcy court confirmed a chapter 11 plan that expressly: (1) preserved “Causes of Action,” including indemnity claims; (2) created a liquidation trust to pursue indemnification claims against the lender; and (3) exchanged claims for equity for a class of trusts and insurers (“unitholders”) in the liquidating trust and for a pro rata distribution to the unitholders of proceeds recovered from the indemnity claims against the lender.
The liquidating trust brought indemnity claims against several defendants including the lender. In a motion to dismiss argued in 2015, several defendants maintained that the indemnity claims were expressly discharged in the chapter 11 plan; and therefore, the sponsor was released from all liabilities for the indemnity claims. (To read the full June 2015 decision, click here.)
In the June 2015 decision, the district court discussed that property of the bankruptcy estate reverts to the debtor except “as otherwise provided in the plan or the order confirming the plan.” 11 U.S.C. § 1141. In distinguishing cases cited by the defendants, the district court held that the chapter 11 plan preserved the contractual indemnity claims via express preservation language. Note the Bankruptcy Code, under 11 U.S.C. § 1123(b)(3), states that the contents of a chapter 11 plan may provide for “the retention and enforcement . . . by a representative of the estate” to pursue claims of the bankruptcy estate.
The district court later reaffirmed the June 2015 decision and granted summary judgment in favor of the liquidating trust on the issue of preservation of the contractual indemnity claims in the chapter 11 plan. (To read the full August 15, 2018 decision, click here, and the full December 20, 2019 decision, click here.)
On appeal, the lender argued before the Eighth Circuit that the bankruptcy court’s confirmation order “extinguished” (discharged) indemnity claims; and therefore, the liquidating trust can only seek indemnity for what the sponsor actually paid in bankruptcy. In calling the argument preposterous, the Eighth Circuit concluded the chapter 11 plan transferred to the liquidating trust the contractual indemnity claims against the lender. Further, the Eighth Circuit affirmed that the lender’s indemnification provisions applied to the sponsor’s liabilities, not just its actual losses.
The Eighth Circuit also affirmed the district court on contractual issues, damages, and attorney’s fees, but vacated a portion of the award of state statutory interest as preempted by 28 U.S.C. § 1961(a) for postjudgment interest.
To read the full February 2, 2023 opinion, click here.
Editors-in-Chief:
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.