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 (Bani
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 Banl1£.’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 (Bani;.'
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_