PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________
No. 09-4295
________
In Re: AMERICAN HOME MORTGAGE HOLDINGS,
INC., et al;
Debtors
*CRÉDIT AGRICOLE CORPORATE AND
INVESTMENT BANK NEW YORK BRANCH,
f/k/a Calyon New York Branch,
Appellant
v.
AMERICAN HOME MORTGAGE HOLDINGS, INC.,
ET AL
*(Pursuant to Clerk‟s Order dated 3/18/2010)
________
On Appeal from the United States Bankruptcy Court
for the District of Delaware
(D.C. No. 1-07-bk-11047)
District Judge: Honorable Christopher S. Sontchi
________
Argued November 15, 2010
Before: McKEE, Chief Judge, SLOVITER, and
RENDELL, Circuit Judges
(Filed February 16, 2011)
________
Benjamin Ackerly (Argued)
Jason W. Harbour
Hunton & Williams
Richmond, VA 23219
Michael Busenkell
Womble, Carlyle, Sandridge & Rice
Wilmington, DE 19801
Attorneys for Appellant
Michele S. Budicak
Curtis J. Crowther
John T. Dorsey (Argued)
Young, Conaway, Stargatt & Taylor
Wilmington, DE 19899
Attorneys for Appellees
_____________
OPINION OF THE COURT
_____________
SLOVITER, Circuit Judge.
If we can avoid preoccupation with the dazzling
number of monetary digits involved in this case (the
contractual repo price of almost $1.2 billion, the Purchaser‟s
claim totaling in excess of $478 million, and the parties‟
damages calculations that are nearly $500 million apart), the
issue before us is limited to a determination of the meaning of
the statutory phrase requiring damages to be measured based
on a “commercially reasonable determinant[ ] of value.” It is
an issue of statutory construction such as those routinely faced
by federal courts, although it appears to be an issue of first
impression.
2
I.
Factual and Procedural History
Appellees American Home Mortgage Holdings, Inc.,
American Home Mortgage Investment Corp., American
Home Mortgage Acceptance, Inc., AHM SV, Inc.,1 and
American Home Mortgage Corp. (collectively, “Debtor”), and
Appellant Calyon New York Branch (“Calyon”),2 as
Administrative Agent (the “Purchasers”), are parties to a
Repurchase Agreement (the “Repurchase Agreement”), dated
November 21, 2006, covering a portfolio of home mortgages.
A repurchase agreement, often referred to as a “repo
agreement,” is defined in § 101(47) of the Bankruptcy Code
as “an agreement, including related terms,” that (1) “provides
for the transfer of one or more . . . mortgage loans, [or]
interests in mortgage related securities or mortgage loans[;]”
(2) “against the transfer of funds by the transferee of such . . .
mortgage loans, or interests[;]” (3) “with a simultaneous
agreement by such transferee to transfer to the transferor
thereof . . . mortgage loans, or interests [in mortgage related
securities or mortgage loans;]” (4) “at a date certain not later
than 1 year after such transfer or on demand[;]” (5) “against
the transfer of funds[.]” In simple words, the purchaser of an
asset promises to sell it back at the time fixed or when asked.
Repurchase Agreements are among the transactions governed
by § 562 of the Bankruptcy Code which was enacted as part
of the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005 (“BAPCPA”), Pub. L. No. 109-8, § 910, 119
Stat. 23, 184 (2005), described by Congress as “a
1
AHM SV, Inc. was previously American Home
Mortgage Servicing, Inc., and changed its name during the
course of the bankruptcy proceedings as a result of the sale of
the servicing business.
2
As of February 7, 2010, Calyon became Crédit
Agricole Corporate and Investment Bank, New York Branch.
3
comprehensive package of reform measures pertaining to both
consumer and business bankruptcy cases.” H.R. Rep. No.
109-31, at 2 (2005).
Pursuant to the 2006 Repurchase Agreement, Calyon
purchased approximately 5,700 mortgage loans with an
original unpaid principal balance of just under $1.2 billion.
The mortgage properties were located in all fifty states of the
United States. The portfolio was principally comprised of
adjustable rate mortgages and pay option adjustable rate
mortgages, as well as a small portion of Government
conforming loans and second lien loans.
Sometime before August 1, 2007, the Debtor
defaulted on some of its obligations under the Repurchase
Agreement. Calyon served the Debtor with a notice of default
and accelerated the Repurchase Agreement on August 1, 2007
(the “Acceleration Date”). Section 562 of the Bankruptcy
Code covers the timing for measurement of damages in the
event of acceleration. Because of the acceleration of the
Agreement, the Debtor became obligated to repurchase the
mortgage loans at the Repurchase Price which, on the
Acceleration Date, was $1,143,840,204.36. The Debtor filed
its voluntary petition for Chapter 11 relief under the
Bankruptcy Code on August 6, 2007, and the case was
assigned to Christopher S. Sontchi, a Bankruptcy Judge from
the District of Delaware.
Calyon filed four identical proofs of claim against four
different debtors for an amount that exceeded the total
Repurchase Price. One year later, the Debtor filed its
objections to the claims, seeking either to disallow them or
reduce them pursuant to § 562 of the Bankruptcy Code.3
3
In the interim, Calyon sought a declaratory judgment
that its agreement with the Debtor was a “repurchase
agreement” within the meaning of § 101(47) of the
Bankruptcy Code. The Bankruptcy Court agreed, and held
that Calyon‟s rights with respect to the Loan Portfolio were
exempted from the automatic stay of 11 U.S.C. § 362(a), and
4
Section 562, which addresses the timing for the measurement
of damages in connection with repurchase and other
agreements, provides in relevant part:
(a) [I]f a . . . repo participant . . . liquidates, terminates, or
accelerates such contract or agreement, damages shall be
measured as of the earlier of --
(1) the date of such rejection; or
(2) the date or dates of such liquidation,
termination, or acceleration.
(b) If there are not any commercially reasonable
determinants of value as of any date referred to in
paragraph (1) or (2) of subsection (a), damages shall be
measured as of the earliest subsequent date or dates on
which there are commercially reasonable determinants
of value.
11 U.S.C. § 562 (emphasis added).
The parties stipulated to four possible valuation dates
of the Loan Portfolio: August 1, 2007 (the Acceleration
Date), September 30, 2007 (before the Debtor sold another
large Loan Portfolio), January 30, 2008 (after the Bankruptcy
Court‟s decision in In re Am. Home Mortg., Inc., 379 B.R.
503 (Bankr. D. Del. 2008), declaring that the agreement
constituted a repurchase agreement within the meaning of the
Code), and August 15, 2008 (the earliest date that Calyon
claimed it could obtain a reasonable market or sale price for
the Loan Portfolio).
The Repurchase Price on September 30, 2007
remained $1,143,840,204.36, the same as that on the
were not avoided or otherwise limited by any provision of the
Code. In re Am. Home Mortg., Inc., 379 B.R. 503, 518-520
(Bankr. D. Del. 2008). The Debtor does not challenge this
holding.
5
Acceleration Date. By January 30, 2008, Calyon had received
payments on the mortgage loans, reducing the Repurchase
Price to $1,070,933,296.54. As of August 15, 2008, the
Repurchase Price had been further reduced to
$994,416,230.32. Although the parties agreed on the
stipulated dates, they vigorously disagree as to the
methodology for the measurement of damages, and
consequently to the amount of damages.
In objecting to Calyon‟s claims, the Debtor argued that
a “commercially reasonable determinant of value,” namely the
Discounted Cash Flow (“DCF”) method, existed on the
Acceleration Date and that § 562(a) accordingly fixed the
measurement of Calyon‟s damages as of that date. The
Debtor claimed that using that valuation methodology, the
value of the Loan Portfolio exceeded the Repurchase Price
and that therefore Calyon lacked a deficiency claim as of the
Acceleration Date.
Not surprisingly, Calyon contested this interpretation,
arguing that the only appropriate valuation methodology
under § 562 is the market or sale value of the Loan Portfolio,
and that because the mortgage market was dysfunctional on
the Acceleration Date, there were no “commercially
reasonable determinants of value” as of that date. Calyon
asserted that, pursuant to § 562(b), the earliest possible date
that market or sale value could be determined was August 15,
2008, and that as of that date the market or sale value of the
Loan Portfolio was less than the Repurchase Price and
resulted in a deficiency claim of $478,493,165.28 when the
Loan Portfolio was valued on a servicing retained basis. As
the Bankruptcy Court had previously explained:
Mortgage loans can be bought and sold on either a
“servicing retained” or a “servicing released” basis. In a
servicing retained sale of a mortgage loan, the seller of
the loan retains the right to designate the mortgage loan
servicer.
6
379 B.R. at 510.4 The Court stated that the mortgage loans
were sold to the Purchasers on a servicing retained basis, and
because the Debtor designated AHM SV, Inc., as the servicer,
it was entitled to a monthly servicing fee.
The Bankruptcy Court held a two-day evidentiary
hearing on the Debtor=s objections. The Bankruptcy Court
recognized that if the Debtor was correct that the value of the
Loan Portfolio on the Acceleration Date exceeded the
Repurchase Price on that date, Calyon would not have any
deficiency or damage claim. Thus, the Court proceeded to
determine the value of the assets subject to the Repo
Agreement, i.e., the Loan Portfolio.
During the hearing, the Court heard testimony from the
Debtor‟s expert, Dr. Ronnie Clayton,5 who explained that the
4
The Repurchase Agreement spells out the duties of
the servicer, which include responsibility for collecting the
monthly mortgage payments of principal and interest,
monitoring past-due accounts and reporting on defaulted
loans. In response to Calyon‟s subsequent objection to this
arrangement, on August 8, 2008 the Bankruptcy Court
approved the stipulation dated July 21, 2008, authorizing
transfer of the Service Mortgage Servicing Rights to Calyon
for all purposes.
5
Dr. Clayton holds the Glenn Huie Eminent Scholar
Chair at Jacksonville State University in Jacksonville,
Alabama. He received his Ph.D. in finance, with minors in
real estate, economics, and econometrics, from the University
of Georgia in 1982. As a visiting scholar at the Federal Home
Loan Bank Board‟s Office of Policy and Economic Research,
he developed a model of mortgage cash flows to assist the
valuation of savings and loans assets. After he left as a
scholar, Dr. Clayton‟s work consisted of analyzing the risk
associated with collateralized mortgage obligations,
examining the cash flows of a mortgage portfolio, and
assessing the appropriateness of bank activities in the sub-
prime mortgage market. He has published articles dealing
7
Discounted Cash Flow analysis values the asset‟s cash flow.
There was evidence that the cash stream from the Loan
Portfolio, i.e., principal and interest that the loans generated,
was approximately $275 million as of the date of the hearing
on May 19, 2009.6 To determine the DCF value of the entire
Loan Portfolio, Dr. Clayton determined the DCF value of
each individual mortgage. He adjusted the interest rate on
each mortgage to reflect market conditions, as described in
the Federal Home Loan Mortgage Corporation‟s Primary
Mortgage Market Survey, conducted by Freddie Mac. He
also took into account actual delinquency rates on the
mortgage loans as of the particular valuation date.7 Dr.
with mortgage interest rates and the relationship of those
mortgage interest rates to other interest rates in the market,
and other articles addressing the performance of saving
associations. The Court found Dr. Clayton to be an expert in
the area of finance and specifically in the area of valuations of
assets that generate cash flows.
6
At oral argument, counsel for the Debtor calculated
that as 20% of the asset value as of August, 2008, and stated
that it reached 25% as of the date of the hearing.
7
Dr. Clayton‟s valuation did not take into account the
subsequent deterioration of credit performance and increase in
delinquency rates. With regard to how the actual delinquency
rates factored into the DCF methodology, Dr. Clayton
testified as follows:
Q: Did you utilize the actual delinquency information
from the mortgage data?
A: I did. And then we would then take the present
value of those, as interest rates fluctuated, you would adjust
those.
Q: How did you determine the recovery at 50% under
the line item for that?
A: When a mortgage becomes delinquent, at that
8
Clayton‟s relevant testimony is set forth in the margin. He
then applied the adjusted rates to discounted cash flows on
each mortgage as of each of the four stipulated dates, the sum
of which resulted in the valuation of the Loan Portfolio as of
each of those dates. Dr. Clayton testified that using this
valuation method, the value of the Loan Portfolio on each of
the stipulated dates exceeded the applicable Repurchase Price,
leading the Bankruptcy Court to conclude that Calyon
suffered no damage during the relevant period. Calyon did
not, and does not now, attack the methodology Dr. Clayton
used to calculate the DCF but only attacks DCF as a
recognizable commercially reasonable determinant of value.
Dr. Clayton also testified that he did not deviate in any
way from the accepted methodology to conduct a DCF
valuation of each mortgage. He explained that “[u]nless there
is something very, very strange going on in the market, the
market value of the assets and the discounted cash flow value
of the assets will be very, very similar . . . .” App. at 540. All
of the experts (and the parties) agreed that the secondary
mortgage market was dysfunctional on August 1, 2007 (the
Acceleration Date). Dr. Clayton noted that even in a
dysfunctional market his valuation of the Loan Portfolio
would be the same because the assets “are held for the cash
flow, not for the distress sale in the market.” App. at 550.
point, you know, we know we got -- we have an issue.
And you may recover everything from a delinquency, or
you may recover nothing. And, you know, it depends
upon the efforts that you put forth, and a variety of other
things.
But, if you take the average of zero recovery and a
100% recovery, if -- you know, assuming in that case,
the property was probably sold to recover -- for enough
to recover everything, then the average between those
two numbers is 50%. And so I -- that‟s what I utilized.
App. at 546.
9
The premise underlying the acceptance of the DCF
methodology for the case is that the Loan Portfolio held by
Calyon was held, and not sold, at that time. Calyon‟s counsel
stated at oral argument that Calyon had the option to retain the
Loan Portfolio. Admittedly, Calyon did not purchase the
Loan Portfolio to have an income stream. Its intent was to
resell the Portfolio within the year. However, the Repurchase
Agreement gave Calyon the right to retain the Loan Portfolio,
and it chose that option in light of the distressed market. Both
counsel for the Debtor and for Calyon agreed that a sale on or
about the Acceleration Date would not have been
“commercially reasonable.”
The Court also heard testimony from Calyon‟s
witnesses; its managing director, John-Charles van Essche,8
and its expert, Robert Branthover.9 Van Essche testified that
8
Van Essche worked in Calyon‟s workout and
distressed asset department. That department handled “the
distressed and workout situations at the bank, either loans or
investments that have gone bad.” App. at 586. His group was
charged with managing those assets in order “to maximize
recoveries and/or minimize losses.” Id. His group was also
charged with managing the Repurchase Agreement. Van
Essche stated that, with respect to the Repurchase Agreement:
“I‟m the point person for all matters concerning this
transaction. I‟m the one who deals with the debtor where
there needs to be an interaction with the debtor and the case
here, this particular situation where there‟s litigation. I‟m the
one that‟s involved in running that with attorneys . . . . I
basically run this transaction, manage it for the group at
large.” App. at 587-88.
9
Branthover is the Senior Vice President in charge of
the Secondary Solutions Group at Mortgage Industry
Advisory Corporation (“MIAC”). He was retained by Calyon
to testify regarding the market value of the mortgages in the
Loan Portfolio, i.e., to determine the fair value that those
loans could be sold for in the marketplace. Branthover
graduated with a B.S. in finance from the University of
10
there were issues with the Loan Portfolio that affected its
salability on the Acceleration Date. He explained that, among
other things, there was a dispute as to the ownership of the
Loan Portfolio, there were issues regarding servicing, and
Calyon lacked complete records on the mortgage loans.10
According to him, “all those elements put together made it
extremely difficult, if not impossible, for [Calyon] to sell
these loans at anything close to a reasonable price, assuming
there was a market there in the first place.” App. at 607.
Branthover similarly testified to the issues affecting the
salability of the Loan Portfolio, and opined that the value of
the Loan Portfolio as of the Acceleration Date was “extremely
Maryland. He had worked in the financial services industry
for twenty years, and in the most recent ten he had been
involved, almost exclusively, with the mortgage industry,
valuing mortgage product, pricing from an origination,
hedging from a distribution perspective, and selling that
collateral under the secondary market. Branthover explained
that MIAC writes software that permits institutions to manage
their mortgage portfolios to value mortgage collateral, hedges
advisory services and works with mortgage companies to
allow MIAC or the companies to price, hedge and sell their
mortgages into the secondary market, does consulting work,
and also does valuation work. The Court found that
Branthover was an expert on the subject of mortgage
valuation.
10
The parties stipulated in the Bankruptcy Court to the
following facts: (1) the Debtor initially asserted that it was
the legal owner of the mortgage loans and its proceeds; (2) the
Bankruptcy Court held that as of January 30, 2008, Calyon
owned the mortgage loans; (3) Calyon did not receive, and
the Debtor did not send to Calyon, the proceeds from the
mortgage loans until after the entry of a stipulation on January
25, 2008; and (4) as of January 30, 2008, Calyon did not have
complete and accurate copies of the mortgage files related to
the mortgage loans.
11
low,” ascribing it a value of ten cents on the dollar, or ten
percent of the unpaid principal balance. App. at 705.11 He
explained that this value was a result of “the title who owned
the loans [being] in question, the MERS identification, the
proceeds of the loans being unknown, incomplete document,
no reps and warranties, and generally a poor market.” Id.
Branthover further opined that the value of the Loan Portfolio
on August 15, 2008, the earliest date upon which Calyon
claimed it could have sold the Loan Portfolio at a reasonable
price, was $515,923,065.04 on a servicing retained basis and
$510,862,841.14 on a servicing released basis, still far below
the Repurchase Price of $994,416,230.32 on that date.12
Of note, the Debtor cross examined van Essche about a
letter Calyon sent in May 2008 to the Shared National Credit
Program (“SNC”),13 appealing the SNC‟s rating of the Loan
11
Branthover testified that were there no salability
issues the value of the Loan Portfolio would be fifty cents on
the dollar. App. at 727.
12
Branthover did not state, when asked, that his
opinion regarding the value of the Loan Portfolio on August
15, 2008 represented a “reasonable” price. He was asked:
“[F]ocusing on the August 15th, 2008 value, taking into
consideration the facts and circumstances that existed on
August 15th, 2008 with respect to the Calyon portfolio, could
the Calyon portfolio have been sold on that date for a
reasonable price?” App. at 717. Branthover responded:
“„Reasonable‟ is not for me to decide. But I think it could
have been sold, yes.” Id.
13
“The Shared National Credit Program was
established in 1977 by the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation,
and the Office of the Comptroller of the Currency to provide
an efficient and consistent review and classification of any
large syndicated loan.” Shared National Credit Program,
Federal Reserve.Gov, http://www.federalreserve.gov
/econresdata /releases/snc/snc.htm (last visited Jan. 28, 2011).
12
Portfolio.14 In that letter, which van Essche wrote, Calyon
had minimized the deficiencies in the Loan Portfolio that van
Essche stated at the Bankruptcy hearing adversely affected the
portfolio‟s salability.15 Calyon noted in the letter, “the
existence of deficiencies does not impact sales value as long
as the bank purchasers make and stand behind representations
and warranties that would be made in connection with sales.”
App. at 438. Moreover, in that letter Calyon disputed the
contention that it lacked a desire to liquidate the portfolio
under current market conditions, stating that “[t]his is true
only because it makes more sense to sell when liquidity in the
market recovers, which will result in higher prices. In the
mean time, portfolio collections of P&I and full payoffs
continue, thus reducing exposure. The strategy being
employed by holding is to maximize value.” Id.
The Bankruptcy Court was not persuaded by the
testimony of van Essche or Branthover. Rather, in addressing
this issue of first impression, the Bankruptcy Court agreed
with the Debtor, concluding the phrase “commercially
reasonable determinants of value” is not limited only to the
market or sale value of an asset and that the Debtor=s
proffered method of evaluation, the DCF method, was such a
“commercially reasonable determinant of value.” In re Am.
Home Mortg. Holdings, Inc., 411 B.R. 181, 199 (Bankr. D.
Del. 2009).
The Bankruptcy Court stated that it was resorting to
“first principles.” Id. at 191. It began its analysis by
concluding that § 562 was ambiguous, in part based on a
14
The SNC review found that Calyon‟s entire portfolio
would have to be classified at 100% Doubtful. Calyon was
concerned with that classification because it would have
required it to set a 50% loan loss valuation reserve.
15
The letter explained that the “difference in selling
price caused by the servicing rights issue” was minimal. App.
at 437.
13
perceived conflict with § 559, the Code provision governing
the disposition of excess proceeds upon liquidation of assets
under a repurchase agreement. Id. at 190. It found the
legislative history surrounding § 562 to be “extremely
sparse.” Id. The Bankruptcy Court examined the purpose and
intent of the Code provisions relating to repurchase
agreements, noting that “the primary purpose of the Code
provisions relating to repurchase agreements is to preserve
liquidity in the relevant assets, including mortgage loans and
interests in mortgage loans.” Id. at 191. It stated that § 562
“align[s] the risks and rewards associated with an investment
in those assets,” and prevents the “moral hazard” that would
result if damages were measured at a date other than the date
of termination, acceleration, or liquidation, such that “the repo
participant [here Calyon] could hold the asset at little or no
risk.” Id. “[T]his would make the debtor an insurer of the
repo participant‟s investment even though the debtor has no
control over the management of the asset-thus, the moral
hazard.” Id.
In attempting to determine the value of an asset, the
Court reasoned that value is the asset‟s “material or monetary
worth, i.e., „the amount of money, goods, etc., for which a
thing can be exchanged and traded.‟” Id. (quoting Shorter
Oxford English Dictionary 3495 (6th ed. 2007)). The
Bankruptcy Court noted that inefficient or dysfunctional
markets may not fairly estimate the potential sale price of an
asset. Id. at 192. The Bankruptcy Court continued, “[t]here is
nothing in section 562 that would imply a limitation on any
methodology used to determine value, provided it is
commercially reasonable. Indeed, the use of the word
determinants suggests just the opposite-that any commercially
reasonable valuation may be used.” Id. Based on this
reasoning, and its concern with the moral hazard the Code is
designed to prevent, the Bankruptcy Court concluded that “the
phrase „commercially reasonable determinants of value,‟ as
used in Section 562 of the Code means that any commercially
reasonable valuation methodology may be used as evidence of
the damages under a repurchase agreement after its rejection,
liquidation, termination or acceleration.” Id. at 193.
14
With respect to whether the DCF method constituted a
“commercially reasonable determinant of value,” the
Bankruptcy Court concluded that it was. The Bankruptcy
Court found that the Debtor had overcome its initial burden of
rebutting the presumption of validity of Calyon‟s claims. Id.
at 196. It found Dr. Clayton credible and his methodology to
be generally accepted within the relevant field. Id. The
Bankruptcy Court found the entirety of Calyon‟s evidence,
which focused on the quality of the loans and their ownership
issues, to be irrelevant. Id. at 197. That testimony related
only to whether Calyon could sell the Loan Portfolio.
Significantly, the Bankruptcy Court had concluded that a sale
or market price was not the only commercially reasonable
determinant of value contemplated by § 562. Moreover, the
Bankruptcy Court found van Essche‟s testimony to be not
credible in light of the letter he sent to the SNC. Id. at 196-
97. The Bankruptcy Court recognized that the representations
van Essche made in that letter were directly contradictory to
his testimony at the hearing. Id.
Accordingly, the Bankruptcy Court sustained the
Debtor‟s objections and ordered the repurchase claims
expunged.
II.
Jurisdiction
The Bankruptcy Court had jurisdiction pursuant to 11
U.S.C. § 502; 28 U.S.C. §§ 157(b), 1334. Calyon filed a
timely notice of appeal from the Bankruptcy Court‟s
judgment. The statute also permits the parties to jointly
certify the Bankruptcy Court‟s order that involves “a question
of law as to which there is no controlling decision of the court
of appeals for the circuit or of the Supreme Court of the
United States,” 28 U.S.C. § 158(d)(2)(A)(i), which the parties
jointly certified in this case. See also Fed. R. Bankr. P.
8001(f)(2). Forty-one days after the Bankruptcy Court‟s
judgment, the parties filed their joint certification in the
15
District Court pursuant to 28 U.S.C. § 158(d)(2)(A). We hold
that both the joint certification and joint petition for
permission to appeal were timely filed. See 28 U.S.C. §
158(d)(2)(E); see also Fed. R. Bankr. P. 8001(f)(1), (5). We
therefore have jurisdiction to entertain the appeal.
III.
Analysis
We proceed first with Calyon‟s argument that the
Bankruptcy Court erred (1) in concluding that § 562 is
ambiguous and (2) in interpreting the phrase “commercially
reasonable determinants of value” to mean that “any
commercially reasonable valuation methodology may be used
as evidence of the damages under a repurchase agreement
after its rejection, liquidation, termination or acceleration.” In
re Am. Home Mortg. Holdings, Inc., 411 B.R. at 193.
The proper construction of the phrase “commercially
reasonable determinants of value” in § 562(a) has not, to our
knowledge, been previously addressed by any of the courts of
appeals. Our role in interpreting the statute is to give effect to
Congress‟ intent. In re Lord Abbett Mut. Funds Fee Litig.,
553 F.3d 248, 254 (3d Cir. 2009). If that intent is made plain,
it is unnecessary for us to refer to other cannons of statutory
construction, and indeed we should not do so. United States
v. Gregg, 226 F.3d 253, 257 (3d Cir. 2000); see In re Phila.
Newspapers, LLC, 599 F.3d 298, 304 (3d Cir. 2010). To
determine whether a statute‟s meaning is plain, we begin with
its text. Gregg, 226 F.3d at 257. “[C]ourts must presume that
a legislature says in a statute what it means and means in a
statute what it says there.” Conn. Nat’l Bank v. Germain, 503
U.S. 249, 253-54 (1992). Often, that initial inquiry is also the
last that need be made. “If the language of a statute expresses
Congress‟s intent with sufficient precision, the inquiry ends
there and the statute is enforced according to its terms.”
Gregg, 266 F.3d at 257.
The Supreme Court has indicated a reluctance to
16
declare provisions of the Bankruptcy Code ambiguous. See In
re Price, 370 F.3d 362, 369 (3d Cir. 2004) (citing Kelly v.
Robinson, 479 U.S. 36, 43 (1986)). It has instead instructed
that courts “not be guided by a single sentence or member of a
sentence, but look to the provisions of the whole law, and to
its object and policy.” Kelly, 479 U.S. at 43 (quotations
omitted).
With this instruction in mind, we next return to the text
of § 562. That statute provides:
(a) [I]f a . . . repo participant, . . . liquidates, terminates,
or accelerates such contract or agreement, damages shall
be measured as of the earlier of--
(1) the date of such rejection; or
(2) the date or dates of such liquidation,
termination, or acceleration.
(b) If there are not any commercially reasonable
determinants of value as of any date referred to in
paragraph (1) or (2) of subsection (a), damages shall be
measured as of the earliest subsequent date or dates on
which there are commercially reasonable determinants
of value.
11 U.S.C. § 562 (emphasis added).
The Bankruptcy Court declared § 562 “ambiguous as
to whether (i) the damage calculation is limited to either
selling the assets or checking the market price of those assets;
or (ii) damages may be measured by some other commercially
reasonable method.” In re Am. Home Mortg. Holdings, Inc.,
411 B.R. at 191. It found that this ambiguity was a result of
the “conflict” between § 562 and § 559. Id. at 190. We are
not persuaded that there is any conflict between § 562 and §
559 in the Bankruptcy Code.
Section 559, to which the Bankruptcy Court referred,
17
provides in relevant part:
In the event that a repo participant . . . liquidates one or
more repurchase agreements with a debtor and under the
terms of one or more such agreements has agreed to
deliver assets subject to repurchase agreements to the
debtor, any excess of the market prices received on
liquidation of such assets (or if any such assets are not
disposed of on the date of liquidation of such repurchase
agreements, at the prices available at the time of
liquidation of such repurchase agreements from a
generally recognized source or the most recent closing
bid quotation from such a source) over the sum of the
stated repurchase prices and all expenses in connection
with the liquidation of such repurchase agreements shall
be deemed property of the estate, subject to the available
rights of setoff.
11 U.S.C. § 559 (emphasis added).
Sections 559 and 562 address different situations.
Section 559 applies only in the event that a repurchase
agreement is liquidated, and the liquidation results in excess
proceeds (where the proceeds from the market prices exceed
the stated repurchase prices). If any assets are not disposed of
on the date of liquidation, those assets are valued at the prices
available at the time of liquidation from a generally
recognized source or the most recent closing bid quotation
from such a source. On the other hand, § 562 which covers,
inter alia, repurchase agreements, applies when the contract is
liquidated, terminated, or accelerated, and results in damages
rather than excess proceeds.
We see no conflict between these provisions and
therefore agree with Calyon in rejecting the Bankruptcy
Court‟s conclusion that § 562 is ambiguous because it is in
conflict with § 559. The fact that the parties proffer different
interpretations of the statutory language does not make the
language ambiguous. It just makes the court‟s role difficult in
deciding which interpretation is persuasive.
18
Calyon‟s second argument with the Bankruptcy
Court‟s conclusion that the market or sale price is not the only
reasonable determinant of value of the asset is the centerpiece
of Calyon‟s position in this case. The Debtor responds that
because the market was dysfunctional there was no
commercially reasonable market value on the Acceleration
Date.
Calyon‟s proofs of claim carried a presumption of
validity. Fed. R. Bankr. P. 3001(f) (“A proof of claim
executed and filed in accordance with these rules shall
constitute prima facie evidence of the validity and amount of
the claim.”); see also 11 U.S.C. § 502(a) (claim deemed
allowed unless party in interest objects). It was therefore the
Debtor‟s initial burden to rebut the presumption of the validity
of Calyon‟s proofs of claim. This entailed a demonstration
that Calyon‟s reliance on the market value was not
“commercially reasonable” but that other commercially
reasonable determinants of value existed as of the
Acceleration Date. See 11 U.S.C. § 562(c)(2) (if damages not
measured as of date of acceleration and trustee objects, repo
participant has burden to show that no commercially
reasonable determinants of value existed as of that date); H.R.
Rep. No. 109-31, at 135 (2005).16
In the Bankruptcy Court, the Debtor proffered at least
two methodologies to determine damages that it claimed were
“commercially reasonable determinants of value” that existed
on the Acceleration Date. One was the DCF based largely on
the testimony of its expert witness, Dr. Clayton. The other
was market analyses that Calyon had obtained outside of the
context of this litigation. The Bankruptcy Court concluded
that the latter was not a commercially reasonable determinant
of the Loan Portfolio‟s value because the market was
16
See 11 U.S.C. § 101(46) (“repo participant” means
“an entity that, at any time before the filing of the petition, has
an outstanding repurchase agreement with the debtor”).
19
distressed. In re Am. Home Mortg. Holdings, Inc., 411 B.R.
at 198. The Debtor does not press this issue on appeal and
instead limits its proposed alternative commercially
reasonable determinant of value to the DCF methodology.
The Debtor principally relied on the testimony of Dr. Clayton
to support its position. His testimony is discussed in detail
above. See text and accompanying notes at Typescript Op. at
7-9.
Dr. Clayton testified that the DCF valuation
methodology is a particularly apt methodology for valuing
debt instruments such as mortgage loans where the owner is
receiving the cash flows. As he explained, the assets “are
held for the cash flow, not for the distress sale in the market.”
App. at 550. Only in unusual circumstances will the cash
flow valuation differ from the market price.
Calyon‟s challenge to the use of the DCF valuation
method as a commercially reasonable determinant of value is
essentially directed to what it argues are the deficiencies in
the Loan Portfolio. Among those deficiencies are what it
claims is the DCF‟s failure “to account for the subsequent
deterioration of credit performance.” Appellant‟s Br. at 47.
Calyon‟s experts also focused their testimony on problems
they saw with the loans, such as the dispute regarding the
ownership of the loans, the direction of the proceeds, and
questions regarding the servicing. As the Bankruptcy Court
recognized, these problems relate to the difficulties that would
affect the market price or sale price of the Loan Portfolio,
were it placed on the market for sale.
The Bankruptcy Court stated,
Even if the Court were to find Mr. van Essche‟s
testimony on this issue credible, it would have no effect
on the Court‟s conclusion. The Court finds that the
issues regarding the quality of the loans and their
ownership are irrelevant to the issue of whether
“commercially reasonable determinants of value” existed
on the Acceleration Date. The evidence submitted shows
20
that, from the time of the Acceleration Date, Calyon had
no intention of selling the Loan Portfolio due to the
dysfunctional state of the market. Because Calyon‟s
intent was to hold the loans, and not sell them, testimony
regarding the variables that might have had an impact on
a sale price is not relevant. Moreover, the entire issue
appears to be one contrived solely for purposes of this
litigation. Accordingly, the Court will not consider the
problems with the loans in its analysis and, even if it
were to do so, would give such problems minimal
weight.
411 B.R. at 197 (footnote omitted) (emphasis added).
The Bankruptcy Court thus honed in on the intrinsic
problem with Calyon‟s position in this case. All the parties
agree that the secondary mortgage market was dysfunctional
on the Acceleration Date, and because of that market
condition, it was not reasonable to sell the Loan Portfolio.
Indeed, Calyon made no effort to sell the Loan Portfolio.
Instead, it retained the Loan Portfolio and received and
retained the income generated by the mortgages that
constituted that portfolio.
We find the Bankruptcy Court‟s analysis persuasive. It
stated that the market price should be used to determine an
asset‟s value when the market is functioning properly. It is
only when the market is dysfunctional and the market price
does not reflect an asset‟s worth should one turn to other
determinants of value. Id. at 193 (“When a sale would be
unreasonable or cannot be performed one turns to the market
price, [h]owever, if a market price is unavailable or the
market is disrupted or dysfunctional one must use a different
method to discover the value of the asset.”).
We agree with the Debtor‟s characterization of the
logical flaw in Calyon‟s position that only the market price
should be considered. It states, “In cases like the case at bar,
where the court concludes that a valuation methodology other
than a market value (in a dysfunctional market context)
21
evidences that the asset‟s value exceeds the underlying
repurchase price obligation, the result is not that the counter-
party is deprived of recourse to recover its damages, but rather
that the counter-party has incurred no damages capable of
being recovered.” Appellee‟s Br. at 35. Accordingly, we do
not share Calyon‟s concern that our reading of § 562 of the
Code will chill the repurchase agreement market. To the
contrary, as the Bankruptcy Court stated, Calyon‟s
interpretation involves a moral hazard that is counter to the
policy of preserving liquidity. See Typescript Op. at 14. In
short, if Congress had intended § 562 to be limited to market
or sale price, it would have said so. It did so in § 559.
The Bankruptcy Court agreed with the Debtor‟s
analysis. It concluded that Calyon did not meet its burden of
demonstrating that no commercially reasonable determinant
of value existed on the Acceleration Date. It found credible
the testimony of Dr. Clayton that the DCF analysis is a
commercially reasonable methodology for determining the
value of the Loan Portfolio, and that a DCF analysis of the
Loan Portfolio showed the value of the loans was either
$1,162,817,745.15 (servicing included with mortgages) or
$1,148,282,523.34 (servicing not included with mortgages).
It found that Calyon‟s argument that the quality of the Loan
Portfolio prevented it from obtaining a commercially
reasonable price at market on the Acceleration Date to be
irrelevant, noting that Calyon‟s position in the litigation was
not credible because it was far different than the position it
took with the SNC during its review process. It characterized
Calyon‟s testimony as appearing litigation driven.
The Bankruptcy Court also found the testimony of
Calyon‟s expert witness to be irrelevant and “that Calyon‟s
internal valuation analysis and the market analyses performed
by Calyon‟s advisor, Compass, do not fairly reflect the Loan
Portfolio‟s market value as of that date because the market
was dysfunctional.” In re Am. Home Mortg. Holdings, Inc.,
411 B.R. at 199.
Accordingly, the Bankruptcy Court found that “the
22
value of the Loan Portfolio exceeds the amount of Calyon‟s
Claim” and that as a result “Calyon has no deficiency claim
and therefore no damage claim under Section 562.” Id. The
Court thus concluded that Calyon has shown no damages
under § 562 and sustained the Debtor‟s objections to the
repurchase claims and directed expunging those repurchase
claims.
We hold that Bankruptcy Judge Sontchi‟s findings and
conclusions are persuasive and supported by the evidence.
We will therefore affirm the Bankruptcy Court‟s order.
23
RENDELL, Concurring.
I join in Judge Sloviter's fine opinion and write
separately only to note that while I was initially skeptical of
Judge Sontchi's view that a valuation based on discounted
cash flow (DCF) was an appropriate “commercially
reasonable determinant[ ] of value” of a repurchase
agreement, I now wholeheartedly endorse this view. The
factors that I believed, at first, warranted the conclusion that
sale price was the only “commercially reasonable
determinant[ ] of value” of a repurchase agreement were
twofold: first, the Bankruptcy Code treats repurchase
agreements differently, permitting these transactions to be
exempt from the automatic stay provisions because of the
need for their liquidity. 11 U.S.C. § 559; See American Home
Mortgage Holdings, Inc., 411 B.R. 181, 190 (Bankr. D. Del.
2009); See Also Bankruptcy Law and Repurchase
Agreements: Hearings on S. 445 Before the Subcomm. on
Monopolies and Commercial Law of the Senate Comm. on the
Judiciary, 98th Cong., 1st Sess. 306 (1983) (Statement of Peter
Sternlight, Executive Vice President, Federal Reserve Bank
of New York). Accordingly, I thought, their value in a sale,
i.e. a liquidation, should provide the basis for damages.
Second, the term „commercially reasonable‟ is usually
associated with „disposition‟, such that it anticipates a sale.
Black’s Law Dictionary 305 (9th ed. 2009); U.C.C. § 9-610
(b).
However, I now conclude that Judge Sontchi was
correct for three reasons. First, the statute clearly uses the
plural of “determinants” so that sale price should not be
viewed as exclusive. Second, while admittedly 'commercially
1
reasonable' is linked most often with 'disposition', the
determination of what is „commercially reasonable‟ involves
a fact-intensive inquiry, dependent on the totality of the
circumstances, and calls for an examination of the particular
situation, which may not include a sale. See United States v.
Tabor Court Realty Corp., 803 F.2d 1288, 1306 (3d Cir.
1986); See also Victaulic v. Tieman, 499 F.3d 227, 235 (3d
Cir. 2007)(“[T]he determination of reasonableness is a factual
one, requiring consideration of all the facts and
circumstances.” (quoting WellSpan Health v. Bayliss, 869
A.2d 990, 999 (Pa. Super. Ct. 2005))). Third, and along those
same lines, here, Calyon acknowledges that it has retained the
mortgages and is receiving the monthly payments, i.e. the
cash flow. Given this particular fact setting, a “determinant[ ]
of value” that would appear to be “commercially reasonable”
– indeed, perhaps the most reasonable – is DCF because
Calyon clearly has determined that it will maximize its value
by retaining the mortgages, preferring to receive the cash
flow over time, rather than selling them. Thus, I believe
Judge Sontchi was correct, as are we, and Calyon has no
damage claim.
2