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

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

SECURITY NATIONAL
MORTGAGE COMPANY

Plaintiff,

LEHMAN BROTHERS

)
)
)
)
)
v. ) C.A. No. N16C-01-221 PRW CCLD
)
)
HOLDINGS INC. )

)

)

Defendant.

Submitted: July 20, 2016
Decided: August 24, 2016
Corrected: September 9, 2016

MEMORANDUM OPIN!()N AND ORDER
Upon Defena’ant, Lehman Brothers Holdings, lnc. ’s,
Motion to Dz`smz`ss 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 vice), (Argued),
Mackey Price & Mecham, PC, Salt Lake City, UT, Blake D. Miller, Esquire (pro
hac vice) (Argued), Miller Toone PC, Salt Lake City, UT, Attorneys for Security
National Mortgage Company.

Vincent J. Poppiti, Esquire, Kasey H. DeSantis, Esquire, Fox Rothschild LLP,
Wilmington, DE, Michael A. Rollin, Esquire, Of Counsel (pro hac vice) (Argued),
Maritza Braswell, Esquire, Of Counsel (pro hac vice), Lindsay A. Unruh, Esquire,
Of Counsel (pro hac vice), 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 Mortgage 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.2

Before the Court is LBHI’s Motion to Dismiss, or in the Altemative, 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. lf unwilling to dismiss,

LBHI requests that the Court grant a stay pending resolution of related litigation in

l See Plf.’s Compl. for Declaratory J. 111[ 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).

the United States Bankruptcy Court for the Southern District of New York (“the
Bankruptcy Court”) that also involves SecurityNational.4

ln 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, LBHl’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.5 LBHI is a Delaware corporation that owned and
operated Lehman Brothers Bancorp; that entity, in turn, owned Lehman Brothers
Bank LLC (“LB Bank”).6

For several years, SecurityNational sold residential mortgage loans to LB
Bank under the terms of an April 15, 2005 Loan Purchase Agreement (“LPA”).7

The LPA incorporated the “Seller’s Guide” of LB Bank’s loan administrator and

4 See Adv. Proc., Lehman Brothers Holdings Inc. v. ]s' Advantage Mor.'gr:.'gu, LLC et al.,
No. 16-01019 (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 LBHl’s Mot. to Dismiss (“Plf.’S Opp’n”) 1.

6 Id.

7 Plf.’s Compl. 11 6.

agent, Aurora Loan Services (“Aurora”).8 These agreements outlined the parties’
responsibilities for the sale and purchase of the mortgage loans, including
SecurityNational’s indemnification obligations9 In September 2008, 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. 10

LB Bank subsequently sold many of these residential mortgage loans to
LBHI. LBHI then sold these loans to the Federal National Mortgage Association
(“Fannie l\/Iae”) and the Federal Home Loan Mortgage Corporation (“Freddie
l\/Iac”).ll

Previously, in December 2007, LB Bank, Aurora, and SecurityNational had
entered into an Indemnification Agreement.12 The Indemnification Agreement
arose out of a concern that SecurityNational had breached the LPA and Seller’s
Guide with respect to certain loans.]3 Under the Indemnification Agreement,

SecurityNational agreed to indemnify LB Bank and Aurora on those loans and

8 Id.

9 Ia’.; Def.’s Mot. to Dismiss 4 (setting forth SecurityNational’s indemnification
obligations, among other duties).

10 Pif.’s compl. 1111 24-26.
“ Id. 11 7;P1f.’s opp’n 2.
‘2 Pif.’S Compi. 1111 17-19.

'3 101.11 17.

deposited several million dollars into a reserve account to be used to cover incurred
losses.14

In the wake of the subprime mortgage crisis, on September 15, 2008, LBHI
entered into the largest Chapter 11 bankruptcy in history.15 Since then - and
perhaps for many more years - the Bankruptcy Court has overseen that
proceeding.16 ln late 2011, the Bankruptcy Court confirmed LBHI’s bankruptcy
reorganization plan, with the Plan’s effective date being March 6, 2012.'7 The
Plan grants a “Plan Trust” sole authority to liquidate LBHI’s assets, including the
ability to litigate claims to maximize distributions to creditors.18

Coinciding 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, 2011, Aurora/LB Bank

assigned to LBHI their rights under the Indemnification Agreement.20 Less than

“‘ ld, 1118.

'5 Def.’S Mot. 4.

“’ Id.
17 Id
‘8 Id. ar 5.

'° Pif.’S compi. 11 19.

20 See id. 1111 19-20.

one month later, LBHI sent its first monthly bill to SecurityNational.z' On June 2,
2011, because of concerns related to overpayment, SecurityNational refused to
pay.22 LBHI unilaterally declared that the lndemnification Agreement was “null
and void.”

ln 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 mortgages24
Following the settlement, LBHI began to pursue its indemnification claims (the
“Indemnification Claims”) against various loan sellers, including
SecurityNational.25

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

2' 1a 11 21.

22 ld. 11 22.

23 Def.’s l\/Iot. 6.
24 Id.

25 Plf.’s Compl. 1129

their indemnification claims.26 The Bankruptcy Court outlined the procedure for
providing notice of the claims and directed the parties to commence ADR.27

LBHI served SecurityNational with notice of the ADR on August 28,
2015.28 SecurityNational initially objected, but ultimately agreed to participate
under a full reservation of rights.29 The parties began negotiations, but did not
resolve their issues.30

Many other loan providers likewise objected to LBHI’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.”3'

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.
22 Pif.’S Compl. 1111 30-32; Der.’s Mot. 7.

28 Def.’s Mot. 7; Plf.’s Opp’n 6 (stating that SecurityNational received the lndemnification
ADR Notice on August 27, 2015); Plf.’s Compl. 11 33.

20 Pir.’S Compi. 1111 30-32.
20 1a
31 In re Lehman Bros. Holdings Inc., 530 B.R. 601, 613 (Bankr. S.D.N.Y. 2015). See also

Hometrusl Mor!gcrge C0. v. Lehman Bros. Holdings, 2015 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 LBHI’s indemnification
claims are time-barred and that LBHI’s claims against them are invalid.32
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 17, 2016, LBHI filed in the Bankruptcy
Court a Motion to Enforce the Automatic Stay, the Plan, and the Confirmation
Order against SecurityNational35 lt asks that the Bankruptcy Court order
SecurityNational to dismiss this Delaware action as a violation of the Bankruptcy
Code’s automatic stay.36 The Bankruptcy Court heard arguments on May 5, 2016,

but has yet to issue a decision.37

32 Pir.’S Compi. 1111 37, 39(A), 39(B).
33 Def.’s Mot. 10.

34 Ia’. at lO-ll. See also Adv. Proc., Lehman Brothers Hola’i`ngs Inc. v. ls’ Aa'vantage
Mortgage, LLC et al., No. 16-01019 (SCC) 1111 49-59 (Bankr. S.D.N.Y. Feb. 3, 2016).

33 Def.’s Mot. 10-11.
30 Ia’.
37 Ia’. See also Mot. of LBHI to Enforce the Automatic Stay, the plan, and the Confirmation

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).

_8_

III. THE PARTIES’ CONTENTIONS

LBHI filed the instant Motion to Dismiss or, in the Alternative, to Stay this
Action on March 2, 2016.38 lt sets forth four separate reasons why
SecurityNational’s action in this Court is inappropriate and should be dismissed:

Lrst, LBHI argues that the Bankruptcy Code’s automatic stay statute, 11
U.S.C. §§ 362(a)(l) and (a)(3), precludes subject matter jurisdiction in any
Delaware court.39

§M, it says SecurityNational’s declaratory judgment action abuses
Delaware’s Declaratory Judgment Act.40

M, 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.41

And, fou_rt_h, LBHI urges the Court to dismiss the action on the ground
of forum non conveniens42

SecurityNational filed an answering brief opposing LBHI’s motion and the

Court held oral argument thereon last month.

33 D.i. 18 (Def.’s, Mot. to Dismiss).
30 1a at 12_18.
40 1a at 18-26.
4' 1a at 26-31.

42 1a at31-33.

A. The Automatic Stay Under §§ 362(a)(1) and (a)(3) of the
Bankruptcy Code

LBHl contends that SecurityNational’s declaratory judgment action here
violates §§ 362(a)(l) and (3) of the Bankruptcy Code. lt argues that, under the
prevailing view among federal courts, actions taken in violation of such an
automatic stay are void ab initio.43

1. Bankruptcy Code Section 362(a)(1)

Section 362(a)(1) 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.”

LBHl 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)(1).

SecurityNational argues that the relevant inquiry is not the contracts’

effective dates, but rather the date SecurityNational could have filed its request for

43 Id. at 17-18 (ciring e.g. Raymark lndus., lnc. v. Lai, 973 F.2d 1125, 1132 (3d Cir. 1992)
(“actions taken in violation of the automatic stay are void ab initio”)).

44 1a at 14.

_1()_

declaratory judgment.45 SecurityNational says it was unaware of any dispute with
LBHl 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(a)(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.”46

SecurityNational argues that the lndemnification Claims are not estate
property. LBHI could only pursue the lndemnification Claims when the estate
terminated - i.e., when the Bankruptcy plan was confirmed.47 As a result, the

lndemnification Claims accrued only once LBHl settled with FannieMae and

45 Plf.’s Opp’n 7-8.

44 see also qulzano v. FDIC, 499 B.R. 439, 543 (Bankr. D. Dei. 2013) (stating that “estate
property” includes “every conceivable interest of the debtor, future, nonpossessory, contingent,
speculative, and derivative”).

47 Plf.’s Opp’n 10.

_11_

FreddieMac in 2014.48 As such, these claims arose only after the completion of the
bankruptcy proceeding and were not part of the estate. So § 362(a)(3) does not
apply.

ln response, LBHl argues that SecurityNational’s declaratory judgment is a
clear attempt to assert control over the estate’s property. The Bankruptcy Plan
expressly provides that the automatic Stay will remain in place to protect any
property, whether it is “unliquidated,” “contingent” or “unmatured.”49 The
indemnification claims were always protected under § 362(a)(3) as contingent
interests that LBHl at all times during the bankruptcy proceeding intended to
pursue to fund creditor recoveries.50 Because SecurityNational’s declaratory
judgment action is an attempt to gain possession of estate property and would
undermine LBHI’s ability to litigate the lndemnification Claims, it is barred by
§ 362(3)(3).3‘

B. Delaware’s Declaratory Judgment Act

LBHl argues that the Court should decline to exercise its broad discretion

under Delaware’s Declaratory Judgment Act. lt says SecurityNational’s action

43 1a ar 12.
49 Def.’s Reply 12.
30 1a

34 Def.’S Mot. 15.

_12_

does not present an “actual controversy” appropriate for resolution via declaratory
judgment because it is “overripe.”52 LBHl cites a number of factors supporting its
argument that the action is inappropriate, including: that the Bankruptcy Court is
the most efficient forum to address the dispute, given its particular expertise and
familiarity with the Lehman Brothers bankruptcy proceedings; that
SecurityNational will be able to obtain all requested relief in those proceedings;
and that judicial resources will be preserved by litigating in one forum.53 Thus,
posits LBHl, given the duplicative proceedings, declaratory judgment in this action
is unwarranted

SecurityNational largely opposes this argument on the basis that LBHl has
filed its own motion for declaratory judgment in the Bankruptcy Court requesting a
similar ruling on the lndemnification Claims.54 SecurityNational also argues that
its cause relates solely to state law contract issues which the Bankruptcy Court is
no more qualified to handle than any other court.55 Also, according to

SecurityNational, the Bankruptcy Court is not a particularly efficient forum

52 Id. at 20 (quoting Burris v. Cross, 538 A.2d 1364, 1372, 1376 n. 6 (Del. Super. Ct. 1990),
which explains that declaratory judgment is not proper where the facts and circumstances of the
case demonstrate that the case has “proceeded past the point where declaratory action will serve
a practical and useful purpose”).

53 Ia’. at 22-26 (using Burris factors as guidelines).
34 Pif.’S opp’n 20-25.

55 Id

_13_

because it cannot render final dispositive orders - the federal District Court must
confirm all its decisions related to “non-core” issues, including those at play here.

C. McWane’s First-Filed Doctrine

The Mc Wane first-filed doctrine grants the Court discretion to stay or
dismiss a pending action when there “is a prior action pending elsewhere, in a
court capable of doing prompt and complete justice, involving the same parties and
the same issues.”56 Generally, a Delaware court will “uphold a plaintiffs choice of
forum” where her action is filed before the other action, “except in the rare case
where that choice imposes overwhelming hardship on the defendant.”57

LBHl suggests that its August 2015 ADR proceedings in Bankruptcy Court
should be given preference over this ~proceeding, filed January 26, 2016.58 Because
“strong deference” is given to the choice of forum in the first-filed action,
SecurityNational’s second-filed action should be dismissed “to avoid wasteful,

duplicative litigation and the attendant risk of inconsistent judgments.”59 LBHl

reiterates many of the above-identified reasons why the Bankruptcy Court should

56 McWane Cast Iron Pipe Corp. v. McDowell-Wellrnan Eng’g Co., 263 A.2d 281, 283
(Del. 1970).

37 Rapoport v. Litig, Trttst of MDIP lnc., 2005 WL 3277911, at *2 (Dei. ch. Nov. 23,
2005)

33 Def.’s Mot. 27-29.

30 1a at 27 (quoting Lt'sa, s.A. v. Mayorga, 993 A.2d 1042, 1047 (Dei. 2010) and citing
Dura Pharms., lnc. v. Scana'ipharm, Inc., 713 A.2d 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
Foocls v. Cryo-Maz'a’: (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 inexpensive60

LBHl 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 Bankruptcy

60 Gen. Fooa’s Corp, v. Cryo-Maia’, Inc., 198 A.2d 681, 684 (Del. 1964); Parvin v.
Kaufmann, 236 A.2d 425, 427 (Del. 1967); Certal`n Underwriters al Lloya's Severally
Sabscribing Poll'cy No. DP359504 v. Tyson Fooa's, Inc., 2008 WL 660485, at "‘3 (Del. Super. Ct.
l\/Iar. 7, 2008).

_15_

Court replicates this declaratory judgment action; and LBHI’s bankrupt entity
status makes duplicate litigation costly and inefficient61 LBHl Suggests that
factors three - availability of compulsory process for witnesses - and five _
viewing the premises _ are inapplicable and do not favor either jurisdiction.62
According to SecurityNational, LBHl 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 York’s borrowing
statute; and that it is impractical to force all 149 alleged defendants to litigate in the

Southern District of New York, one of the country’s busiest.64 SecurityNational

34 Def.’s Mot. 33-34.
32 1a

63 Plf.’s Opp. 28-30 (citing BP Oil Supply Co. v. ConocoPhillips Co., 2010 WL 702382
(Dei. 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 oil supply, 2010 wL 702382, at *2.

64 101

_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.
lnstead, 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
issues66 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 See 28 U.S.C. § 157(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. ln 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
lnc., 18 F. Supp. 3d 553, 556-58 (S.D.N.Y. 2014).

66 See lV-C, infra.

_17_

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

1969

is a tool to “promote preventive justice, not “a means of eliciting advisory

opinions from the courts.”70

lt is well-settled that the Court has discretion to grant or deny declaratory

judgment.71 But, the Court cannot exercise that discretion unless the underlying

07 DEL. CODE ANN. tit. 10, § 6501.

68 Diebola’ Compater Leasing, Inc. v. Comlnercial Crea'it Corp., 267 A.2d 586, 591-92 (Del.
1970).

30 stale v. Ramsay, 88 A.2d 546, 551, (Dei. 1952) atl/aerea ta an reh ’g, 89 A.2d 544 (Dei.
1952).

20 Atltermaa v. stemamaa, 201 A.2d 173, 175 (Dei. 1964) (citing slabla).
34 DEL. can ANN. tit. 10, § 6506;X1speclally las. ca v. WMlLtqalalaltag Trast, 93 A.3d

1208, 1216 (Del. 2014); Delaware Bla’g. & Constr. Traa'es Councl`l, AFL-CIO v. Univ. of
Delaware, 2015 WL 884058, at *2 (Del. Super. Ct. Feb. 20, 2015).

_18_

9972

matter presents an “actual controversy. To determine whether an actual

controversy exists, the following elements must be satisfied:
(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 determination73

ln 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 issue.

The ripeness prerequisite seeks to avoid adjudication of issues that “have not
yet matured to a point at which judicial action is appropriate.”74 The requirement
“reflects two goals: first, 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

72 See Gannett Co., Inc. v. Ba'. of Managers of the Delaware Crl'ml`nal Justice Info. Sys., 840
A.2d 1232, 1237 (Del. 2003); Xl Specl`ally, 93 A.3d at 1216-17.

73 Rollins Inl"l, Inc. v. Int’l Hya'ronics Corp., 303 A.2d 660, 662-63 (Del. 1973) (adopting
the “actual controversy” requisites articulated by this Court in Marshall v. Hill, 93 A.2d 524
(Del. Super. Ct. 1952)).

74 Schl'ck Inc. v. Alnalgalnatea’ Clothl`ng & Texl‘ile Workers Union, 533 A.2d 1235, 1239
(Del. Ch. 1987).

23 Teaaeca Aata. laa v. El Pasa Carp., 2001 wL 1641744, at*6(De1. Ch. Nov. 29, 2001).

_19_

“ln 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.”76

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. ln
fact, LBHl urges the Court to dismiss the action as “overripe.” lt cites Burris v.
Cl”oss.77

ln Bl,lrris, 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 negotiations79 The defendant provided the plaintiffs with a

draft Chancery Court complaint he intended to file should the negotiations fail.80

23 schick, 533 A.2d at 1239.

Delaware courts generally look at five specific things to determine whether a matter is
“ripe” for purposes of declaratory judgment: (1) 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 Bla’g. & Constr. Traa’es Council, AFL-CIO v. Univ. ofDelaware, 2015 WL 884058, at
*2 (Del. Super. Ct. Feb. 20, 2015); Hoechsl Celanese Corp. v. Nat’l Union Fire Ins. Co. of
Pittsburgh, Pa., 623 A.2d 1133, 1137 (Del. Super. Ct. June 17, 1992); Monsanto Co. v. Aelna
Cas. & Sar. Co., 565 A.2d 268, 274 (Del. Super. Ct. May 22, 1989).

22 Barrls v. Crass, 583 A.2d 1364 (Dei. super. Ct. sept 27, 1990).
23 lal. at 1370.
20 lal. at 1369.

30 lal.

_20_

As negotiations deteriorated, it became clear litigation would likely result.81
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.82

This Court found that, while the suit was ripe for adjudication, it should

dismiss the matter as “overripe.”83 ln making this determination, the Court

considered the following factors:

(1) 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. lf 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;

34 lal.
32 lal.

83 Ia’. at 1372, 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.”).

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(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) Whether plaintiff will suffer any prejudice if the instant action
is dismissed84
The Court finds the Burris factors are suited to resolution of LBHI’s motion.
As in Barris, the parties have moved far forward to litigate the claim. As in Barrl's,
the Court will use the seven above-enumerated factors to determine whether
SecurityNational’s declaratory judgment action is indeed “overripe.”
B. Application of Burris Factors
Taking each in turn, the Court concludes that the Burrl's 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.
LBHl 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, LBHl
initiated its own ADR proceedings against SecurityNational in Bankruptcy Court.

LBHl continues to be a willing and very active litigant in that court. And there is

no indication that LBHl will abandon its efforts there.

34 1a at 1372-73.

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Factors TWo, Three, and 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, Bankruptcy Court can provide the same relief sought here.

At oral argument, SecurityNational conceded that the Bankruptcy 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.85

The Court finds these holdings persuasive and they inform its decision here.

85 See, e.g., In re Lehman Bros. Hola'l`ngs Inc., 18 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 Forlnica Corp., 305 B.R. 147, 150 (S.D.N.Y. 2004) (“The
plaintiffs 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. Hola’l`ngs Inc. v. Welllnont Health Sys., 2014 WL 3583089, at
*4 (S.D.N.Y. July 18, 2014) (“although the bankruptcy court is limited to issuing a report and

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Moreover, the Bankruptcy Court is particularly well-suited for this case. F or
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
Lehman bankruptcy proceedings, the breadth and complexity of
which are unparalleled . . .86
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 a’e 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 Prol‘. Corp. v. Bernara' L. Maa'oj?' Inv. Sec.
LLC (In re Maa’o)_‘fSec.), 490 B.R. 46, 56 (S.D.N.Y. 2013)).

33 Lehman Bras. Halalngs ma v. Wellmaat Health sys., 2014 wL 3583089, at *4 (s.D.N.Y.
July 18, 2014). See also Court Minutes and Order, Guaranly Bank, FSB v. Lehman Brolhers
Hola'ing Inc., No. 2:15-cv-00549-PP (E.D. Wis. May 20, 2016) (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. Hola'ings, Inc., 2014 WL 4635576, at *1 (S.D.N.Y. Sept. 5, 2014) (“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. Hola’ings Inc. v. Inl‘el Corp. (In re Lehman Bros. Hola'ings Inc.), 18
F.Supp.3d 553, 558 (S.D.N.Y. 2014) (“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.”).

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duplicating that work already done.87 Judicial efficiency weighs heavily in favor
of dismissal.

Accordingly, factors two, three, and four weigh against SecurityNational

Factors Five and Six: 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 advantage88 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

32 see Baals v. crass, 583 A.2d 1364, 1373 (Dei. super. Ct. sept 27, 1990) mechang
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
lns. Co. ofPitlsburg/l, Pa., 623 A.2d 1133, 1137 (Del. Super. Ct. June 17, 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. Gaar. & Liab. Ins. Co. v. lnlel 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).

33 Baals, 583 A.2d at 1375.

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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 Bankruptcy Court. This Court has before noted that:
. . . the use of the device of declaratory judgment to anticipate

and soften the impact of an imminent suit elsewhere concerning long

past dealings between the parties for the purpose of gaining an

affirmative judgment in a favorable forum requires a closer look at the

deference historically accorded a plaintiffs choice of forum.89

LBHl and SecurityNational had been involved in ADR proceedings prior to
the filing of this suit. When those efforts failed, SecurityNational had a reasonable
expectation that LBHl would file its adversary suit in Bankruptcy Court. lts
knowledge of that Court’s negative decisions on the very issues SecurityNational

. . . . . 90
now presses here raises an inference of tactical, preemptive forum shopping

Factor Seven: SecurityNational will not suffer prejudice if this action is
dismissed.

Finally, given the above, the Court concludes that SecurityNational will
suffer no prejudice if this state action is dismissed. Dismissal here leaves the

parties to pursue their action in Bankruptcy Court. ln this particular circumstance,

89 Saua’i Basic Indus. Corp. v. Mobil Yanbll Petrochelnical Co., 2003 WL 25849476, at *2
(Del. Super. Ct. Jan. 24, 2003) (quoting Air Proa'. & Chemicals, Inc. v. Lummlls Co., 252 A.2d
545, 547 (Del. Ch. 1968) rev ’a' on other grounds, 252 A.2d 543 (Del. 1969) (decidingforaln non
conveniens issue)).

90 See, e.g., Saudi Basic, 2003 WL 25849476, at *1 (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-Maia’, Inc., 198 A.2d 681, 684 (Del. 1964)
(possible “jockeying” for position considered as factor in favor of granting motion to stay
Delaware action).

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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 lndemnification 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.”91 These lndemnification Claims directly impact the distribution of the

91 See, e.g., Begier v. I.R.S., 496 U.S. 53, 58 (1990) (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”); Unilea' Stales v. Whiting Pools, Inc.,
462 U.S. 198, 205-06 n. 9 (1983) (noting that the legislative history of Bankruptcy Code
§ 541(a)(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) (“lt is well-settled that section 54l(a)(1)
encompasses ‘all legally recognizable interests,’ even those that are “contingent and not subject

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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 LBHl and
SecurityNational, the Delaware Supreme Court has recently applied the doctrine to
arbitration proceedings92 Our high Court explained that there simply is “no
principled reason to distinguish an arbitration proceeding from other first-filed
actions.”93 “[A]rbitrations are typically treated as ‘prior actions’ for other
purposes.”94 And, the principles underlying the Mc Wane 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

proceedings95 The Court might reasonably conclude that the Same “underlying

to possession until some future time.”) (quoting In re Ryerson, 739 F.2d 1423, 1425 (9th Cir.
1984)).

02 LG Elecs., ma v. laterl)lgt'tal Camma ’ns, laa., 114 A.3d 1246 (Dei. 2015).

03 lal. at 1252.

04 lal.

95 Ia’. (quoting McWane Casl Iron Pl'pe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d
281, 283 (Del. 1970)).

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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-Maia’ factors96 are practically
coextensive with the Barris 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.

Wj_>

Paul R. Wallace, Judge

IT IS SO ORDERED.

96 See supra lll-D, n. 60.

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