Security National Mortgage Company v. Lehman Brothers Holdings, Inc.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
SECURITY NATIONAL
MORTGAGE COMPANY
Plaintiff,
v. C.A. No. N16C-01-221 PRW CCLD
LEHMAN BROTHERS
HOLDINGS INC.
€\é\éS&/é\./%/&/\¢J\é
Defendant.
Submitted: July 20, 2016
Decided: August 24, 2016
MZ'BV_“RANDUM '- AND ORDF ."~S`~
Upon Defeha'ant, Lehman BrotherslHoldings, Inc'l ’s,
Motion to Dismiss or, in the Alternative, to Stay this Action,
GRANTED.
Donald E. Reid, Esquire, Karl G. Randall, Esquire, Morris, Nichols, Arsht &
Tunnell LLP, Wilmington, DE‘,] Gifford W. Price, Esquire (pro hac vz'ce), (Argued),
Mackey Price & Mecham, PC, Salt Lake .City, UT, Blake D. Miller, Esquire (pro
hac vice) (Argued), Miller Toone PC, Salt Lake City, UT, Att0rneys for Security
National Mortgage Company.
Vincent J. Poppiti, Esquire, Kasey H. DeSantis, Esquire, Fox Rothschild LLP,
Wilmington, DE, Michael A. Rollin, Esquire, Of C0unsel (pro hac vice) (Argued),
Maritza Braswell, Esquire, Of C0unsel (pro hac vice), Lindsay A. Unruh, Esquire,
Of Counsel (pro hac vz'ce), Caleb Durling, Esquire Of Counsel (pro hac vice),
Rollin Braswell Fisher LLC, Greenwood Village, CO, Attorneys for Defendant
Lehman Brothers Holdings, Inc.
WALLACE, J.
I. INTRODUCTION
Security National M0rtgage Company ("SecurityNational") brings this
action pursuant to DelaWare’s Declaratory Judgment Act.l SecurityNational seeks
a declaration that Defendant Lehman Brothers Holdings Inc.’s ("LBHI")
indemnification claims related to loans sold by SecurityNational are time-barred,
or in the alternative, that the indemnification claims are otherwise invalid.z
Before the Court is LBHI’s Motion to Dismiss, or in the Alternative, to Stay
the Action. LBHI asserts that this Court does not have subject matter jurisdiction
over SecurityNational’s claims because SecurityNational’s complaint violates an
automatic stay imposed by the Federal Bankruptcy Code.3 Even if subject matter
jurisdiction exists, LBHI urges the Court to decline to exercise jurisdiction over
SecurityNational’s action because there is no present "actual controversy"
susceptible to declaratory relief. LBHI also argues that the Court should dismiss
the action on first-filed or forum non conveniens grounds. If unwilling to dismiss,
LBHI requests that the Court grant a stay pending resolution of related litigation in
l _ ` _See Plf.’s_ Compl:for beclaratory J. 1111 37 -39 ("Plf.’s Compl."). DEL. CODE ANN. tit. 10,
§ 6501 (2015) (Delaware’s Declaratory Judgment Act).
2 See Plf.’s Compl.
3 see 11 U.s.c. §§ 362(3)(1), (3) (2015).
declaratory judgment.‘l$ SecurityNational says it was unaware of any dispute with
LBHI until August 27, 2015, the day it received notice of LBHI’s ADR
proceeding. Thus, it argues, a declaratory judgment proceeding could not
commence until after the commencement of that bankruptcy proceeding and is not
barred.
2. Bankruptcy Code Section 3 62(¢1)(3)
Section 362(a)(3) of the Bankruptcy Code prohibits "any act to obtain
possession of property of the estate or of property from the estate or to exercise
control over property of the estate." Section 54l(a)(l) of that Code defines
property of the estate very broadly, with certain exceptions inapplicable here, as
"all legal or equitable interests of the debtor in property as of the commencement
of the case."lé
SecurityNational argues that the lndemnification Claims are not estate
property. LBHI could only pursue the Indemnification Claims when the estate
terminated - i.e., when the Bankruptcy plan was confirmed.‘w As a result, the
Indemnifrcation Claims accrued only once LBHI settled with FannieMae and
45 Plf.’_s Bpp’n 7-8.
46 see also Gzuz¢an@ v. FDJC, 499 B.R. 439, 543 (Bani2005 WL 3277911, at *2 (Del. Ch. Nov. 23,
2005).
58 Def.’s Mor. 27-29.
59 Ia'. at 27 (quoting Lisa, S.A. v. Mayorga, 993 A.Zd 1042, 1047 (Del. 2010) and citing
Dura Pharms., Inc. v. Scandipharm, Inc., 713 A.Zd 925, 928 (Del. Ch. 1998)).
_14_
maintain sole oversight over the issues in this case. Namely, the Bankruptcy Court
is familiar with both parties and with the statute-of-limitation and assignment
arguments similar to SecurityNational’s - they have already been raised by other
party mortgage loan originators.
SecurityNational contends that their action was first-filed because an ADR
proceeding is not tantamount to the filing of a lawsuit. And so, its filing, not
LBHI’S, should be given deference.
D. The Forum non Conveniens Doctrine
When determining whether to dismiss or stay an action on forum non
conveniens grounds, the Court will examine the six factors announced in General
Foods v. Cryo-Maid: (l) whether Delaware law governs the case; (2) the relative
ease of access to proof; (3) the availability of compulsory process for witnesses;
(4) the pendency or nonpendency of a similar action or actions in another
jurisdiction; (5) the possibility of a view of the premises; and (6) all other practical
considerations that would make the trial easy, expeditious, and inexpensive.60
LBHI contends that factors one, two, four, and six weigh heavily against
Delaware: New York law applies to this action; no documents or witnesses are
located in Delaware; the ongoing bankruptcy action in New York’s Banl198 A.2d 681, 684 (Del. 1964); Parvin v.
Kaufinann, 236 A.Zd 425, 427 (Del. 1967); Certain Underwrz`ters at Lloya's Severally
Subscribing P0licy No. DP359504 v. Tys0n Fooa's, Inc., 2008 WL 660485, at *3 (Del. Super. Ct.
Mar. 7, 2008).
_15_
Court replicates this declaratory judgment action; and LBHI’s bankrupt entity
status makes duplicate litigation costly and inefficient.él LBHI suggests that
factors three - availability of compulsory process for witnesses - and five -
viewing the premises - are inapplicable and do not favor either jurisdiction.éz
According to SecurityNational, LBHI has failed to show that litigation in
this forum presents an "overwhelming hardship" as required under Delaware law.63
.And even if some lower standard were applied, it says, the Cryo-Maia' factors do
not support New York over Delaware. SecurityNational argues that none of the
alleged loans at issue involved New York property; that New York and Delaware
are equally onerous for compulsory process for witnesses and premise viewing;
that Delaware’s statute-of-limitations law applies due to New Yorl<’s borrowing
statute; and that it is impractical to force all 149 alleged defendants to litigate in the
Southem District of New York, one of the country’s busiest.64 SecurityNational
6‘ 'ef.’s Mor. 33-34.
63 Plf.’s Opp. 28-30 (citing BP Oil Supply Co. v. ConocoPhillips Co., 2010 WL 702382
(Del. Super. Ct. Feb. 25, 2010)).
To justify dismissal, the movant must demonstrate that litigating in
Delaware would cause overwhelming hardship. To justify a stay, the movant need
only demonstrate that the preponderance of applicable forum factors "tips in
favor" of litigating the dispute in the non-Delaware forum.
BP 011 supply, 2010 wL 702332, ar *2.
64 1a
_16_
also makes much of the Bankruptcy Court’s alleged "inefficiency" because it
cannot issue a final judgment on non-core issues, such as those present here.
Instead, the Bankruptcy Court can only make findings of fact and conclusions of
law; these are then reviewable by the federal district court.65 So, Security National
concludes, the Court should not dismiss its action here on forum non conveniens
grounds.
IV. DISCUSSION
The Court has thoroughly considered each of the parties’ arguments on these
issues.66 After careful review though, the Court finds that the analysis suitable to
the purpose here is that engaged under Delaware’s Declaratory Judgment Act.
Accordingly, for the reasons hereafter, the Court exercises its judicial discretion to
decline jurisdiction over this action.
65- ._S'ee 28 U-.S.C-. §:l_57(_c)(l) ((c)(l) ("A bankruptcy judge may hear a proceeding that is not
a core proceeding but that is otherwise related to a case under title ll. In such proceeding, the
bankruptcy judge shall submit proposed findings of fact and conclusions of law to the district
court, and any final order or judgment shall be entered by the district judge after considering the
bankruptcy judge’s proposed findings and conclusions and after reviewing de novo those matters
to which any party has timely and specifically objected."); see also In re Lehman Bros. Hola'ings
Inc., 18 F. Supp. 3d 553, 556-58 (S.D.N.Y. 20l4).
66 See IV-C, z`nj’ra,_,
_1'7_
A. Standard of Review for Delaware’s Declaratory Judgment Act
Delaware’s Declaratory Judgment Act states:
Except where the Constitution of this State provides otherwise,
courts of record within their respective jurisdictions shall have power
to declare rights, status and other legal relations whether or not further
relief is or could be claimed. No action or proceeding shall be open to
objection on the ground that a declaratory judgment or decree is
prayed for. The declaration may be either affirmative or negative in
form and effect, and such declaration shall have the force and effect of
a final judgment or decree.67
"The basic purpose of the Declaratory Judgment Act is to enable the courts to
adjudicate a controversy prior to the time when a remedy is traditionally available
and, thus, to advance to [a] stage at which a matter is traditionally justiciable."68 lt
9
is a tool to "promote preventive justice,"é not "a means of eliciting advisory
opinions from the courts."m
lt is well-settled that the Court has discretion to grant or deny declaratory
judgment.n But, the Court cannot exercise that discretion unless the underlying
Y _ _ _-»_.,§
67 DEL. CoDE ANN. tit_. 1.0, § 6501.
68 Diebold Computer Leasing, Inc. v. Commercial Crea'it Corp., 267 A.2d 586, 591-92 (Del.
1970)-.-_-.
69 Stabler v. Ramsay, 88 A.2d 546, 55l, (Del. l952) adhered to on reh ’g, 89 A.Zd 544 (Del.
1952);.,;.
70 Ackerman v_ s¢emerman, 201 A.zd 173, 175 (Del. 1964) (¢iring Szabz@r)t-..
71 DEL. CODE ANN. tit. lO, § 6506; XI Specz`alty Ins. Co. v. WMI Liquidating Trust, 93 A.3d
1208, 1216 (Del. 2014); Delaware Bldg. & Constr. Trades Council, AFL-CIO v. Um`v. of
Delaware, 2015 WL 884058, at *2 (Del. Super. Ct. Feb. 20, 20l5).
_18_
1172
matter presents an "actual controversy. To determine whether an actual
controversy exists, the following elements must be satisfled:
(l) lt must be a controversy involving the rights or other legal
relations of the party seeking declaratory relief; (2) it must be a
controversy in which the claim of right or other legal interest is
asserted against one who has an interest in contesting the claim;
(3) the controversy must be between parties whose interests are real
and adverse; and (4) the issue involved in the controversy must be ripe
for judicial determination.n
In this case, the first three factors are met and do not appear to be
contested by either party. lt is the last - ripeness - that poses:'i*ssue.
The ripeness prerequisite seeks to avoid adjudication of issues that "have not
yet matured to a point at which judicial action is appropriate."m The requirement
"reflects two goals: frrst, to conserve judicial resources by not allocating them to
resolution of disputes that are not ready for judicial disposition, and, second, to
avoid the development of the law in the absence of concrete facts and adversary
positions upon which case law is premised."75
52_ See Gannett C0., Inc. v. Bd. of Managers of the Delaware Criminal justice Info. Sys., 840
A.Zd 1232, 1237 (Del. 2()03); XISpecialZ)/, 93 A._°)d at lZl6-l7.
73 Rollins Int’l, Inc. v. Int’l Hydronics Corp., 303 A.Zd 660, 662-63 (Del. l973) (adopting
the "actual controversy" requisites articulated by this Court in Marshall v. Hill, 93 A.2d 524
(Del. Super. Ct. l952)).
74 Schick Inc. v. Amalgamated Clothing & Textile Workers Union, 533 A.2d 1235, 1239
(Del. Ch. 1987).
75 Tenneco Auto. Inc. v. El Pczso Corp., 2001 WL l64l744, at *6 (Del. Ch. Nov. 29, 2001)-_.4-_
_19_
"In the typical declaratory judgment action, an unwilling litigant will have
cast a cloud upon a property right of the declaratory plaintiff, but will not have
moved forward to litigate the claim."%
But this is not a typical case. The action is clearly ripe for adjudication.
Litigation is ongoing, has been for many years, and seems destined to continue. In
fact, LBHI urges the Court to dismiss the action as "overripe." lt cites Burris v.
77
Cross.
In Burris, the conflict centered around the scope of an easement.78 The
parties had for many months prior been attempting to resolve the matter through
good faith settlement negotiations.w The defendant provided the plaintiffs with a
draft Chancery Court complaint he intended to file should the negotiations fail.g°
_ _ __ _ .
7"’ schzck, 533 A.zd at 1_239.
Delaware courts generally look at five specific things to determine whether a matter is
"ripe" for purposes of declaratory judgment: (l) a practical evaluation of the legitimate interests
of the plaintiff in a prompt resolution of the question presented; (2) the hardship that further
delay may threaten; (3) the prospect of future factual development that might affect the
determination made; (4) the need to conserve scarce resources; and (5) a due respect for
identifiable policies of law touching upon the subject matter in dispute. See id. at 1239-40;
Delaware Bldg. & Constr. Trades Council, AFL-CIO v. Univ. of Delaware, 2015 WL 884058, at
*2 (Del. Super. Ct. Feb. 20, 2015); Hoechst Celanese Corp. v. Nat’l Union Fire Ins. C0. of
Pittsburgh, Pa., 623 A.2d ll33, 1137 (Del. Super. Ct. June l7, 1992); Monsanto C0. v. Aetna
Cas. & Sur. C0., 565 A.2d 268, 274 (Del. Super. Ct. May 22, 1989).
77 Bum's v. cr@ss, 583 A.zd 1364(13@1. Super. ct sept 27, 1990).
78 1a. ar 137011
79 1a at 1369;§
80 1a
_2'@_
the United States Bankruptcy Court for the Southem District of New York ("the
Bankruptcy Court") that also involves SecurityNational.4
In short, LBHI argues that the Bankruptcy Court is the most appropriate and
suitable forum for the cause SecurityNational presents here. The Court agrees.
Because SecurityNational’s declaratory judgment request fails to satisfy the
requirements of Delaware’s Declaratory Judgment Act, LBHI’s motion to dismiss
is GRANTED.
II. FACTUAL AND PROCEDURAL BACKGROUND
SecurityNational is a Utah-based corporation that acts as an originator of
residential mortgage loans.§ LBHI is a DelaWare corporation that owned and
operated Lehman Brothers Bancorp; that entity, in turn, owned Lehman Brothers
Bani< LLC (“LB Bani<")?
For several years, SecurityNational sold residential mortgage loans to LB
Bank under the terms of an April l5, 2005 Loan Purchase Agreement ("LPA").7
The LPA incorporated the "Seller’s Guide" of LB Bank’s loan administrator and
:-"“.f_ " ' __" _ 1 ~
4 See Adv. Proc., Lehman Brothers Hola'ings Inc. v. ]s’ Aa’vantage Mortgage, LLC et al.,
No. 16-0l0l9 (SCC) (Feb. 3, 2016) (multi-party proceeding in the Bankruptcy Court against a
number of loan originators including SecurityNational).
__,..
5 Plf.’s Ans. Br. in Opp’n to to LBHI’s Mot. to Dismiss ("Plf.’s Opp’n") l.
6 Id.
7 Plf.’s Compl. 11 6_;.
As negotiations deteriorated, it became clear litigation would likely result.gl
Knowing that the defendant intended to file suit in the Chancery Court, the
plaintiffs filed for declaratory judgment in this Court. Four days later, defendant
filed a similar suit in Chancery.gz
This Court found that, while the suit was ripe for adjudication, it should
dismiss the matter as "overripe."$z In making this determination, the Court
considered the following factors:
(l) Whether the defendant is truly an unwilling litigant, thus
necessitating declaratory action;
(2) What form of relief is truly being sought by the plaintiff and
whether that relief, if not solely a declaration of rights, would
require resort to another court for supplemental relief. If so,
whether both the rights and relief could be attained in a single
non-declaratory action already available;
(3) Whether another remedy exists and whether it would be more
effective or efficient and, thus, whether declaratory judgment
would serve a useful purpose;
(4) Whether another action is pending, instituted either before or
after the instant action, at the time of consideration of the
Motion to Dismiss, and whether plaintiff would be able to raise
all claims and defenses available in the instant action, as part of
the pending action;
82 Id§-
83 Id. at l372, n. 6 (The Court noted that "overripeness is merely another aspect of the total
concept of ripeness. Just as the Court has the discretion to dismiss an action if not ripe for
determination, so may a Court dismiss an action if a practical evaluation of the peculiar facts and
circumstances of the case lead the Court to believe that events have proceeded past the point
where declaratory action will serve a practical and useful purpose.").
_21_
(5) Whether the instant action has truly been instituted to seek a
declaration of rights or merely for tactical or other procedural
advantage;
(6) Whether the instant action was filed in apparent anticipation of
other__pending proceedings; and
(7) ""°F§,tiff will suffer any prejudice if the instant action
is f;_>
The Court finds the Burris factors are suited to resolution of LBHI’s motion.
As in Burris, the parties have moved far forward to litigate the claim. As in Burris,
the Court will use the seven above-enumerated factors to determine whether
SecurityNational’s declaratory judgment action is indeed "overripe."
B. Application of Burris Fact0rs
Taking each in turn, the Court concludes that the Burris factors, as well as
considerations of judicial economy, outweigh any argument for the propriety of
this Court’s further involvement.
Factor _One_: LBHI is a willing litigant.
LBHI is a willing litigant. lt has already proceeded with litigation under the
method approved by the Bankruptcy Court. Prior to the filing of this action, LBHI
initiated its own ADR proceedings against SecurityNational in Bankruptcy Court.
LBHI continues to be a willing and very active litigant in that court. And there is
no indication that LBHI will abandon its efforts there.
~=_ _e- _z_:
84 1a ar 1372-73.
_22_
_.Eact_onsTwom_Threea_ Four: The Bankruptcy Court can hear all of
SecurityNational’s claims and defenses and provide all rights and relief
sought in a single action; declaratory judgment here does not serve a
useful purpose.
The Court concludes that the Bankruptcy Court is the appropriate forum for
resolution of these issues. The Bankruptcy Court can provide full due process
rights to all parties. SecurityNational can raise any defense there it wishes. And,
most importantly, Bankiuptcy Court can provide the same relief sought here.
At oral argument, SecurityNational conceded that the Bankiuptcy Court
could address its claims, although it alleged that such resolution would not be in
the expedited manner SecurityNational would prefer. lt argues too that the
Bankruptcy Court cannot offer a final disposition until its decision is reviewed and
upheld by the United States District Court. But that does not change the fact that
the Bankruptcy Court can hear and decide these issues. Several times already, a
party’s request to withdraw their "non-core" issues from Bankruptcy Court to the
district court based on this "inefficient-two~litigation" argument has been denied.g§
The Court finds these holdings persuasive and they inform its decision here.
- _1,.,
85 See, e_.g.,-Ila_re Lehma;t Bros. Holdings Inc., l8 F. Supp. 3d 553, 557-58 (S.D.N.Y. 2014)
(holding that defendant’s concerns about double litigation are "exaggerated" because even if the
Bankruptcy Court’s decision was challenged, the Bankruptcy Court’s findings would "be helpful
to the Court and the review by the District Court could hardly be characterized as a separate and
additional litigation."); In re Formica Corp., 305 B.R. l47, 150 (S.D.N.Y. 2004) ("The
plaintiff s contention that [the District Court] would have to review any bankruptcy court
determination de novo carries little weight in light of the litigation already occurring before the
bankruptcy court."); Lehman Bros. Holdings Inc. v. Wellmont Health Sys., 2014 WL 3583089, at
*4 (S.D.N.Y. July l8, 2014) ("although the bankruptcy court is limited to issuing a report and
_23_
Moreover, the Bankruptcy Court is particularly well-suited for this case. For
over eight years the Bankruptcy Court has overseen LBHI’s dissolution. As the
District Court of Southern New York has previously observed:
[J]udicial efficiency will be served by keeping the present
action in the bankruptcy court given its substantial experience with the
'_°':__:_:tcy proceedings, the breadth and complexity of
This Court recognizes the obvious complexity of the Lehman bankruptcy
and the diligent and extraordinary efforts already undertaken (and completed) by
the Bankruptcy Court. This Court should and will not waste judicial resources
;,-;_- _-__- -_._ - - _. _. _______=___._`._
recommendation, which must be reviewed de novo by the district court, neither court’s efforts
will be duplicative. Multiple courts have observed that "experience strongly suggests that having
the benefit of the report and recommendation will save the district court and the parties an
immense amount of time.") (quoting Sec. Investor Prot. Corp. v. Berrcard L. Maclojj’[nv. Sec.
LLC (Irc re Madojj’$ec.), 490 B.R. 46, 56 (S.D.N.Y. 2013)).
86 Lehman Bros. Hola'ings lnc. v. Wellmont Health Sys., 2014 WL 3583089, at *4 (S.D.N.Y.
July l8, 20l4). See also Court Minutes and Order, Guaranty Bank, FSB v. Lehman Brothers
Holding Inc., No. 2:l5-cv-00549-PP (E.D. Wis. May 20, 20l6) (expressing the opinion that
"because of her long-standing relationship with the claims in the Lehman bankruptcy,
[Bankruptcy Court’s] Judge Chapman was uniquely suited to decide this claim."); In re Lehman
Bros. Holdings, Inc., 2014 WL 4635576, at *l (S.D.N.Y. Sept. 5, 20l4) ("Keeping this matter in
the bankruptcy court promotes judicial economy. The bankruptcy court has handled the Lehman
bankruptcy for over five years and is well equipped to address these disputes."); In re Lehman
Bros. Hola'ings Inc., 502 B.R. 376, 383 (Bankr. S.D.N.Y. 2013) ("Regardless of whether a
particular count is core or non-core, it is most efficient and eminently sensible for all disputes
involving swap agreements where Lehman and its affiliates are counterparties to be handled in
this Court."); Lehman Bros. Holdings Irzc. v. Intel Corp. (In re Lehman Bros. Hola'ings Inc.), 18
F. Supp. 3d 553, 558 (S.D.N.Y. 20l4) ("The Bankruptcy Court’s resolution of any motion for
summary judgment, or any decision by the Bankruptcy Court based on the documentary record,
will be very useful to the District Court given the Bankruptcy Court’s experience with the
Lehman bankruptcies and related adversary proceedings involving swap agreements and
derivative-based claims.").
_24_
duplicating that work already done.87 Judicial efficiency weighs heavily in favor
of dismissal-,_
Accordingly, factors two, three, and four weigh against SecurityNational.
,_Fzi_ctor_s This action was filed in anticipation of the
Bankruptcy Court’s ADR proceedings and appears to have been filed
for tactical advantage.
Declaratory judgment is not a means to achieve tactical advantage.gg At oral
argument, SecurityNational claimed that "forum shopping" exists only where a
party is trying to gain an advantage in a favorable forum. lt argues that it could not
have engaged in forum shopping because Delaware courts do not demonstrably
present a particular advantage here.
But it is clear that Delaware presents a tactical advantage over the
Bankruptcy Court - a forum which has demonstrably disfavored arguments such as
SecurityNational’s in the related bankruptcy litigation. Given the history between
the parties and what occurred before the filing of this suit, the Court can only
87 See Burris v. Cross, 583 A.Zd 1364, 1373 (Del. Super. Ct. Sept. 27, 1990) (declining
declaratory judgment where the defendant had already moved to litigate in a forum "which can
provide a more efficient and complete remedy"); Hoechst Celanese Corp. v. Nat’l Union Fire
Ins. Co. of Pittsburgh, Pa., 623 A.2d ll33, ll37 (Del. Super. Ct. June l7, 1992) (explaining that
declaratory judgment will only be granted where an actual controversy exists so that judicial
resources are not wasted on "situations in which a judicial declaration will not end the dispute
between the parties"). Cf Am. Guar. & Liab. Ins. Co. v. Intel Corp., 2009 WL 2589597, at *13,
n. 85 (Del. Super. Ct. July 24, 2009) (rejecting argument that California court had more
experience on the contested policy because the related California case settled before that court
ruled on the policy and that case involved different issues).
88 Bum's, 583 A.zd ar 1375.
_25_
conclude that SecurityNational engaged in preemptive forum shopping when it
decided to file a declaratory judgment action here rather than face this issue as a
defendant in Banl2003 WL 25849476, at *2
(Del. Super. Ct. Jan. 24, 2003) (quoting Az`r Proa'. & Chemicals, Inc. v. Lummus Co., 252 A.2d
545, 547 (Del. Ch. 1968) rev’a' on other grounds, 252 A.2d 543 (Del. l969) (decidingforum non
conveniens issue)).
90 See, e.g., Saudi Basic, 2003 WL 25849476, at *l (finding forum shopping occurred
where the party filed its Delaware action to avoid having a trier of fact in New Jersey hear about
the charges); See also Gen. Fooa's Corp. v. Cryo-Maid, lnc., 198 A.2d 681, 684 (Del. l964)
(possible "jockeying" for position considered as factor in favor of granting motion to stay
Delaware action).
_26_
the Bankruptcy Court provides rights and remedies equal to this Court. But given
the peculiar history of this case, it is better-suited to resolve this specific claim.
C. The Parties’ Remaining Arguments
Because the Court dismisses this action on the grounds explicated, it need
not reach the parties’ other arguments, namely: whether SecurityNational’s
declaratory judgment action would violate the Bankruptcy Code’s automatic stay
statute; whether the "first-filed" doctrine warrants dismissal of this action; or
whether this action should be dismissed under forum non conveniens.
But the Court notes its very healthy skepticism that SecurityNational would
fare any better under any of those alternative arguments.
First, it seems quite likely that this declaratory judgment action does violate
the automatic stay under § 362 (a)(3). At a minimum, the lndernnification Claims
seem to qualify as estate property under the Bankruptcy Code, given the Code’s
broad definition of "estate property" to include "intangible or contingent
interests."g] These Indemnification Claims directly impact the distribution of the
_: "___ "? 1 ____ -¢'T -'-1¢`.'.
91 See, e.g., Begier v. I.R.S., 496 U.S. 53, 58 (l990) (defining an interest of the debtor in
property as "that property that would have been part of the estate had it not been transferred
before the commencement of bankruptcy proceedings"); Unitea' States v. Whiting Pools, Inc.,
462 U.S. 198, 205-06 n. 9 (1983) (noting that the legislative history of Bankruptcy Code
§ 541(21)(1) demonstrates that the definition of "estate property" was intended to sweep broadly
to include "all kinds of property, including tangible or intangible property, causes of action . . .
and all other forms of property currently specified in section 70a of the Bankruptcy Act."); In re
Michener, 342 B.R. 428, 430 (Bankr. D. Del. 2006) ("It is well-settled that section 54l(a)(l)
encompasses ‘all legally recognizable interests,’ even those that are "contingent and not subject
_2'7_
estate and were explicitly included in the Bankruptcy Plan. But, as the Bankruptcy
Court is currently considering this very issue, this Court will not substitute its own
judgment in that area.
Second, while Delaware has not decided whether the first-filed doctrine
applies to a non-binding mediation, such as the one entered into by LBHI and
SecurityNational, the Delaware Supreme Court has recently applied the doctrine to
arbitration proceedings.92 Our high Court explained that there simply is "no
principled reason to distinguish an arbitration proceeding from other first-filed
actions."% "[A]rbitrations are typically treated as ‘prior actions’ for other
purposes."94 And, the principles underlying the McWane doctrine - "the desire to
avoid the ‘wasteful duplication of time, effort, and expense that occurs when
judges, lawyers, parties, and witnesses are simultaneously engaged in the
adjudication of the same cause of action in two courts,’ and ‘the possibility of
inconsistent and conflicting rulings and judgments" - apply equally to arbitration
proceedings.% The Court might reasonably conclude that the same "underlying
_ -- '_1 _.'a-.__-.§
1 :_-- -=._ ___
to possession until some future_time.’_’) (quc_)ting_l_rz__re_R-y_erson, 739 F.2d 1423, 1425 (9th Cir.
l984)).
92 LG Elecs., Inc. v. InterDigital Commc’ns, Inc., ll4 A.3d l246 (Del. 2015).
93 ld. at 1252;~_\.;
94 Id.
95 Ia'. (quoting McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g C0., 263 A.2d
28l, 283 (Del. 1970)).
_23_
policies" could support application of the first-filed doctrine to non-binding
mediation. But given the lack of precedent and its resolution here on other
grounds, the Court need not do so now.
Lastly, in evaluating whether to dismiss or stay an action on forum non
conveniens grounds, the Court notes that the six Cryo-Maio’ factors% are practically
coextensive with the Burrz's factors discussed above. So, as above, application of
the forum non conveniens principals too would seem to weigh against this
litigation in Delaware.
V. CONCLUSION
Accordingly, for the reasons stated above, this action is not right for
declaratory judgment by this Court and LBHI’s Motion to Dismiss is GRANTED.
IT IS SO ORDERED.
@,J..a.)
Paul R. Wallace, Judge
96 See supra III-D, n. 60.
_29_
agent, Aurora Loan Services ("Aurora").g These agreements outlined the parties’
responsibilities for the sale and purchase of the mortgage loans, including
SecurityNational’s indemnification obligations.9 In September 20()8, LB Bank and
LBHI entered into an Assignment Agreement whereby LB Bank assigned its rights
under SecurityNational’s LPA and Seller’s Guide to LBHI.‘°
LB Bank subsequently sold many of these residential mortgage loans to
LBHI. LBHI then sold these loans to the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie
Mac")."
Previously, in December 2007, LB Bank, Aurora’, and SecurityNational had
entered into an Indemnification Agreement.lz The Indemnification Agreement
arose out of a concern that SecurityNational had breached the LPA and Seller’s
3
Guide with respect to certain loans.l Under the Indemnification Agreement,
SecurityNational agreed to indemnify LB Bank and Aurora on those loans and
9 Id.; Def.’s Mot. to Dismiss 4 (setting forth SecurityNational’s indemnification
obligations, among other duties). '
‘°_ Pif.’s compi. 1111 24-26.
" 1¢1.11 7;1>1£.’3 opp’n 2.
‘2 Plf.’s c<>mp1.111117-19.
13 1¢1.1117.
deposited several million dollars into a reserve account to be used to cover LBHI’s
incurred losses.m
In the wake of the subprime mortgage crisis, on September l5, 2008, LBHI
entered into the largest Chapter ll bankruptcy in history.l$ Since then - and
perhaps for many more years - the Bankruptcy Court has overseen that
proceeding.m In late 20ll, the Bankruptcy Court confirmed LBHI’s bankruptcy
reorganization plan, with the Plan’s effective date being March 6, 2012.17 The
Plan grants a "Plan Trust" sole authority to liquidate LBHI’s assets, including the
ability to litigate claims to maximize distributions to creditors.lg
with the Bankruptcy proceedings, SecurityNational expressed
concerns that it had overpaid into the indemnification reserve account in a letter
dated November 2010.19 Months later, on March 28, 20ll, Aurora/LB Bank
assigned to LBHI their rights under the Indemnification Agreement.zo Less than
. _1-_1_-___= - _.__
14 1§1118.
15 Der.’s Mot. 4.
‘6 1¢1.
" ld.
18 ld. ar 5.
19 Plf.’s compi. 11 19.-,;_
2° see zd. 1111 19-20.
'2‘ 1a 11 21_.
one month later, LBHI sent its first monthly bill to SecurityNational.zl On June 2,
20ll, because of concerns related to overpayment, SecurityNational refused to
pay.zz LBHI unilaterally declared that the Indemnification Agreement was "null
and void."
In January and February 2014, the Bankruptcy Court approved LBHI’s
multi-billion dollar settlements with Fannie Mae and Freddie Mac.23 These
settlements resolved issues related to LBHI’s sale of the defective mortgages.z"
Following the settlement, LBHI began to pursue its indemnification claims (the
"Indemnification Claims") against various loan sellers, including
SecurityNational.”
To simplify LBHI’s indemnification claims against approximately three-
thousand counter-parties, the Bankruptcy Court granted LBHI’s request to
implement an Altemative Dispute Resolution ("ADR") Procedure specifically for
22 1a 1 22.
23 Def.’s Mot.
24 rd.
25 Plf.’s Compl. 11 29_.,__
their indemnification claims.% The Bankruptcy Court outlined the procedure for
providing notice of the claims and directed the parties to commence ADR.N
LBHI served SecurityNational with notice of the ADR on August 28,
2015.28 SecurityNational initially objected, but ultimately agreed to participate
29
under a full reservation of rights. The parties began negotiations, but did not
resolve their issues.30
Many other loan providers likewise objected to LBHl’s indemnification
claims. Several, not including SecurityNational, pursued statute-of-limitation
claims in the Bankruptcy Court. The Bankruptcy Court rejected those arguments,
finding that "LBHI’S claim for indemnification . . . did not accrue until its liability
to a third-party [FannieMae] was fixed or payment was made."m
SecurityNational did not join in these motions, but the arguments were
substantially similar to those it now asserts.
26 Id. 1111 30-32. See also ADR Order, attached as Ex. F. to Def.’s Mot.
27 Plf.’s Compl. 1111 30-32; Def.’s Mot. 7.
28 Def.’s Mot. 7; Plf.’s Opp’n 6 (stating that SecurityNational received the Indemnification
ADR Notice on August 27, 2015); Plf.’s Compl. jj 33.
29 Pif.’s Compl. 1111 30-32.
30 1a
3' 1a re Lehman Bms. Holdzngs Inc., 530 B.R. 601, 613 (Bani2015 WL 5674899, at *3 (S.D.N.Y. Sept.
25, 2015) (denying motions for leave to appeal from the Bankruptcy Court’s decision).
_7_
After ADR negotiations failed, SecurityNational initiated this action on
January 26, 2016. lt seeks a declaratory judgment that LBHl’s indemnification
claims are time-barred and that LBHl’s claims against them are invalid.”
SecurityNational served LBHI notice of this suit on February 4, 2016.33
LBHI filed a similar "omnibus" lawsuit against all loan providers, including
SecurityNational, in the Bankruptcy Court on February 3, 2016. lt seeks a
declaratory judgment that the loan providers owe LBHI indemnity for losses
sustained on the loans.34 On February l7, 2016, LBHI filed in the Banl;.'
37 Ia'. See also Mot. of LBHI to Enforce the Automatic Stay, the plan, and the Confmnation
Order Against iFreedom Direct Corporation and SecurityNational Mortgage Company, In re
Lehman Brothers Hldgs. Inc., et al., No. 08-13555 (SCC) (Bankr. S.D.N.Y. Feb. l7, 2016).
_3_
III. THE PARTIES’ CONTENTIONS
LBHI filed the instant Motion to Dismiss or, in the Alternative, to Stay this
Action on March 2, 2016.38 It sets forth four separate reasons why
SecurityNational’s action in this Court is inappropriate and should be dismissed:
Lst, LBHI argues that the Bankruptcy Code’s automatic stay statute, ll
U.S.C. §§ 362(a)(l) and (a)($), precludes subject matter jurisdiction in any
DelaWare court.39
Second, it says SecurityNational’s declaratory judgment action abuses
Delaware’s Declaratory Judgment Act.lo
Third, LBHI asserts that as its ADR proceeding was filed prior to the current
action, it should be afforded deference under Delaware’s "first-filed" doctrine.‘"
And, fourth, LBHI urges the Court to dismiss the action on the ground
. 42
of forum non convenzens.
SecurityNational filed an answering brief opposing LBHI’s motion and the
Court held oral argument thereon last month.
38 D.I. 18 (Def.’a Mar. Dismiss).
39 Ial. at 12-18-§
‘*° 1a ar 18-26.
"‘ la'. ar 26-31.
42 1a ar31-33.
713
A. The Automatic Stay Under §§ 362(a)(1) and (a)(3) of the
Bankruptcy Code
LBHI contends that SecurityNational’s declaratory judgment action here
violates §§ 362(a)(l) and (3) of the Bankruptcy Code. It argues that, under the
prevailing view among federal courts, actions taken in violation of such an
automatic stay are void ab initio.“
1. Bankmptcy Code Section 362(¢1)(1)
Section 362(a)(l) of the Bankruptcy Code prohibits "the commencement or
continuation . . . of a judicial . . . or other action or proceeding against the debtor
that was or could have been commenced before the commencement of a case under
this title, or to recover a claim against the debtor that arose before
commencement."
LBHI asserts that SecurityNational’s action seeks a declaration as to the
enforceability of LBHI’s claims arising from pre-bankruptcy ("prepetition")
contracts between the parties,44 and thus, are barred under § 362(a)(l).
SecurityNational argues that the relevant inquiry is not the contracts’
effective dates, but rather the date SecurityNational could have filed its request for
1a air 17-18_ (i:icing e_.g_ Raymark lndus_, ma v. Laz, 973 F.zd 1125, 1132 (3<1 Cir. 1992)
("actions taken in violation of the automatic stay are void ab initio")).
44 1¢1. ar 14.
_10_