In two separate decisions arising from adversary proceedings in the New Century TRS Holdings, Inc., et al. (the “Debtors”) bankruptcy, signed May 10, 2011, Judge Carey of the Delaware Bankruptcy Court denied requests to stay dismissal, requiring each of the moving parties to accept the limitations of their settlement agreements. The first opinion was made in the case Leslie Marks v. New Century TRS Holdings, Inc., and is available here (the “Marks Opinion”). The second opinion was made in the case Anita B. Carr v. New Century TRS Holdings, Inc., and is available here (the “Carr Opinion” and together with the Marks Opinion, the “Opinions”).
Both plaintiffs had received home loans that were serviced by, and eventually assigned and transferred to another party, by the Debtors prior to the Debtors entering bankruptcy. The Debtors filed their chapter 11 petitions on April 2, 2007. Thereafter, the plaintiffs in each case took differing legal actions, all of which culminated in each plaintiff commencing an adversary action and filing a complaint against the Debtors. In both cases, the complain asserted claims for (1) fraudulent conveyance, (2) violation of chapter 11 of the Bankruptcy Code, (3) fraudulent misrepresentation and negligence, (4) violation of the Truth-in-Lending Act, 15 U.S.C. §1601 et seq., (5) violation of the Business and Professions Code Section 17200 et seq., (6) violation of RESPA, 12 U.S.C. §2605, and (7) quiet title to real property against all defendants. Opinions at *2.
Shortly after both adversary cases were filed, Judge Carey entered an Order confirming a Plan of Liquidation, part of which involved the appointment of a Liquidating Trustee. When the Opinions refer to the “Trust” or “Trustee” they are referring to the Liquidating Trust or its Trustee.
In both cases, the plaintiffs settled with the Trustee for a cash payment “in full and final satisfaction of the Causes of Action and any other claims(s) that [Plaintiff] may have against the Debtors or the Trust.” Opinions at *3. The plaintiff in each case then filed a Notice of Dismissal, asking the Court to dismiss the adversary proceeding with prejudice. Just over one month after filing the Notice of Dismissal, each of the plaintiffs filed a Request to Stay Dismissal.
The Marks Case
Leslie Marks argued in her Request to Stay Dismissal, that the Trustee “violated the Settlement Agreement by not expunging negative credit reporting information as agreed.” Marks Opinion at *3. Ms. Marks also moved for a TRO to prevent foreclosure proceedings on her primary residence located in California.
Judge Carey’s Marks Opinion
After a brief analysis of the choice of law rules of Delaware and California, Judge Carey determined that there was no conflict between California and Delaware law in this matter since the settlement agreement was not ambiguous. Marks Opinion at *6. Judge Carey then compared the requirements of the settlement agreement to the actions taken by the Trustee, and found that the Trustee complied with the parties’ mutual agreement. Marks Opinion at *7.
Judge Carey then examined the TRO request and the Trustee’s objection. Because the relief sought would not have any impact on the Debtors’ bankruptcy or estate, Judge Carey held that it was beyond the Delaware Bankruptcy Court’s jurisdiction and denied the TRO Request. Marks Opinion at *9-10
The Carr Case
Anita Carr argued in her Request to Stay Dismissal, that the Trustee convinced her to agree to the settlement agreement through fraudulent inducement. Carr Opinion at *3-4. She argued that the notary logs created a question as to the authenticity of the signatures on the documentation through which her loan was assigned and transferred. She asked that the Court stay the dismissal and filed a Request for a Show Cause Order, essentially asking the Court to stop all proceedings involving loans transferred or assigned by the Debtors.
Judge Carey’s Carr Opinion
Like the Marks Opinion, Judge Carey began his analysis by examining choice of law rules, and found that Delaware law should be applied. Carr Opinion at *5-8.
The plaintiff in this case knew of the possibility of issues concerning the notarized signature prior to signing the release and settlement, prompting Judge Carey to hold that she was bound by the settlement. Carr Order at *9-10. Judge Carey also held that because the settlement contained a release of all her causes of action, her Request for a Show Cause Order was likewise barred. Lastly, Judge Carey discusses that in this instance, the Delaware Bankruptcy Court lacks the jurisdiction that would be required to stop ALL proceedings involving loans that the Debtors transferred or assigned. Carr Opinion at *11.
Unless a party can prove fraud, it is extremely difficult to convince a judge to stay a dismissal that is the result of a consensual settlement that has already been approved. So before you settle a claim or a lawsuit, make sure you understand all of the repercussions and limitations contained in the settlement – as well as the limitations that are implicit in every settlement agreement. One last note, Judge Carey’s analysis of the choice of law rules, particularly in the Carr Opinion, was very thorough, and is a good review for anyone who is rusty on the mechanics of such an exercise.