Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Christopher (C.J.) Harayda, Faegre Baker Daniels LLP
Nelson_13-cv-3451_RFC_v_RESCAP.pdf
In In re RFC and RECAP Liquidation Trust Action, 13-cv-3451, 2018 WL 4469249 (D. Minn. Sept. 18, 2018), the District Court for the District of Minnesota held that the issue of whether a bankruptcy settlement is reasonable and prudent must be proven to a jury as finder of fact, rather than the court.
Residential Funding Company, LLC (“RFC”) was involved in the residential mortgage-backed securities (RMBS) market. Starting around 2008, RFC was the defendant in numerous cases based on its roles in those deals and related mortgage defaults. In 2013, RFC filed for bankruptcy in the Southern District of New York. It filed its bankruptcy case as part of its settlements resolving the RMBS litigation claims against it. Those settlements were approved as part of RFC’s Chapter 11 plan. After its bankruptcy, the liquidating trust established by RFC’s bankruptcy plan, ResCap, filed suit against counter-parties to RMBS deals with RFC (the “Rescap Litigation”). In those actions, ResCap sought damages, including indemnity for the amounts RFC paid in the bankruptcy settlements.
ResCap and the defendants cross-moved for summary judgment in the ResCap Litigation. See 332 F.Supp. 3d 1101 (D. Minn 2018). Defendants challenged the reasonableness of the settlements RFC entered into, which the bankruptcy court had previously approved. ResCap asserted that the settlements could not be challenged by the defendants, based on contractual terms between the parties. The court held that the reasonableness of the settlements was a fact issue that could not be determined as a matter of law on summary judgment.
Before rendering its opinion on the summary judgment motions, however, the court sua sponte raised the issue of whether the reasonableness of the settlements must be determined by a jury or if the court could do so as a constitutional matter. After issuing its summary judgment opinion, the court then returned to its constitutional question, which the parties had separately briefed.
The court’s inquiry focused on whether the action and remedy were more legal or equitable in nature. If the answer was that they were more legal than equitable, then the court had to further inquire as to whether the determination must fall to a jury to preserve the common law right to a jury established by the Seventh Amendment.
The court first noted that the case was a contractual indemnity action, most closely analogous to a legal matter that would have been tried before a jury at common law. Second, it concluded that the sole remedy sought by ResCap was money damages, a form of legal rather than equitable relief. The third inquiry, and the most challenging according to the court, was whether this issue required determination by a jury to preserve the right established by the Seventh Amendment in 1791. Although, the court found that Minnesota law treats the reasonableness of settlements as an equitable matter, under federal law this is a legal issue.
Ultimately, the court held that the Seventh Amendment mandated a jury trial as to the reasonableness of the settlements. This was based on its above analysis, particularly the intermingled nature of the reasonableness determination with the money damages sought making it more akin to legal relief, and also guided by federal law, which compels courts to err on the side of a jury on close calls.