In re Residential Capital, LLC

491 B.R. 63, 2013 Bankr. LEXIS 1507, 2013 WL 1497203
United States Bankruptcy Court, S.D. New York·Decided April 12, 2013·No. No. 12-12020 (MG)·Published·Cited by 1 cases

Opinion

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART THE UNSECURED CREDITORS COMMITTEE’S PRECLUSION MOTION

MARTIN GLENN, Bankruptcy Judge.

Pending before the Court is the Motion of the Official Committee of Unsecured Creditors to Preclude the Debtors from Offering Any Evidence of their Reliance on Counsel for Advice Concerning the Evaluation, Negotiation or Approval of the RMBS Settlement (the “Motion,” ECF Doc. # 2906). MBIA Insurance Corpora[65]*65tion, Wilmington Trust, and FGIC have filed joinders to the Motion (ECF Doc. ## 2931, 2983, and 2932, respectively). The Debtors oppose the Motion (“Response,” ECF Doc. #2984) and their opposition is supported by the declaration of LaShann M. DeArcy, an attorney at Morrison & Foerster (ECF Doc. # 2982). The Unsecured Creditors Committee (the “Committee”) filed their reply on February 25, 2013 (“Reply,” ECF Doc. # 3025). The Court heard argument on the Motion on April 11, 2013.

For the reasons explained below, the Court grants in part and denies in part the Committee’s Motion.

I. BACKGROUND

Discovery relating to the RMBS Trust Settlement Motion (the “9019 Motion”) began last August and has continued at a swift pace thereafter. Under the applicable Case Management and Scheduling Order, the deadlines for completing all fact and expert discovery were November 16, 2012 and December 14, 2012, respectively. (ECF Doc. # 1926.) After completing document production, the Debtors provided the Committee with privilege logs reflecting at least 2,200 documents withheld on the basis of attorney-client privilege. According to the Committee, the documents withheld by Debtors encompassed a range of categories involving communications with counsel. Mot. ¶ 6.

Throughout the discovery period, the Committee has consistently pressed for the production of all documents bearing on the evaluation, negotiation, and approval of the RMBS Trust Settlement, including any documents communicating legal advice, analysis of claims, or analysis of potential liabilities to the Debtors’ Board of Directors (“ResCap Board”) or its individual members. With few exceptions, the Debtors’ counsel asserted attorney-client privilege to all document production requests and deposition testimony concerning advice of counsel. The Committee argues that the Debtors should be precluded at trial from offering any evidence of reliance on advice of counsel — affirmatively or defensively — in seeking approval of the RMBS Trust Settlement.

The Committee’s counsel argues that the Debtors’ counsel affirmatively represented to them and the Court that the Debtors would not offer evidence of the advice of counsel. On November 4, 2012, the Debtors filed a letter with the Court (“November 4 th Letter,” ECF Doc. # 2052). The parties now dispute whether the November 4th Letter served as a promise from the Debtors not to raise the argument that they relied on the advice of counsel in approving the RMBS Trust Settlement. The Committee claims that it dropped its attack on the Debtors’ privilege assertions because the Debtors’ November 4 th Letter “explicitly disclaim[ed]” the reliance-on-counsel argument. The Debtors argue that the letter did no such thing, and that, in fact, the Debtors never intended to drop the argument. Indeed, the parties entered into a Limited Waiver (defined below) on November 5, 2012 in which the Debtors agreed to produce a narrow range of previously-withheld documents concerning the approval of the RMBS Trust Settlement. The Debtors argue that the main purpose of entering into the Limited Waiver was to preserve the Debtors’ ability to argue that they relied on counsel in approving the settlement. Nonetheless, the Committee’s interpretation of the substance of the November 4th Letter, and not the Limited Waiver, led the Committee to stop its challenge of the documents withheld by the Debtors.

According to the Committee, the “mere handful” of documents produced pursuant [66]*66to the Limited Waiver includes a two-page presentation distributed to the ResCap Board on May 9, 2012, minutes before the Board approved the settlement. The Debtors did not produce the balance of the withheld documents, which included presentations made to the ResCap Board concerning representation and warranty (“R & W”) claims in general or communications between individual ResCap Board members and counsel with respect to the RMBS Trust Settlement itself.

The Committee also asserts that, on the basis of privilege, it was denied opportunities to inquire into the substance of attorney-client communications during the depositions of the Debtors’ witnesses. At a hearing on September 19, 2012, the Debtors strongly objected to depositions of their outside counsel who were participants in the negotiations, representing to the Court that their internal business people, including their in-house counsel, had been “substantially involved” in the negotiation of the RMBS Trust Settlement. As a result, the Court did not permit the depositions of outside counsel in connection with the negotiations of the settlement; the parties were free to and did depose other participants in the negotiations (including in-house counsel). With respect to the issue of the Debtors’ assertion of attorney-client privilege, the Court told the Debtors’ counsel during the September 19, 2012 hearing that “You’re going to have a real problem if you’re going to assert privilege with respect to communications from counsel that form any part of the basis for directors approving the settlement.” Sept. 19, 2012 Hr’g Tr. at 28 (ECF Doc. # 1616).

During the deposition of Thomas Mara-ño, the Chairman and Chief Executive Officer of Residential Capital, LLC, Debtors’ counsel consistently invoked the attorney-client privilege, instructing the witness not to answer numerous questions about legal advice he received regarding the negotiation and drafting of the RMBS Trust Settlement. Mot. Ex. E. Despite Marano’s testimony that he “relied” on the advice of counsel in approving the settlement (Mot. Ex. E at 188-89), Maraño was repeatedly instructed not to reveal the substance of any of his communications with counsel concerning the RMBS Trust Settlement, including specifically:

• His understanding of the legal defenses available to defeat the R & W claims encompassed by the settlement;
• His communications with counsel concerning ResCap’s potential liability for the R & W claims;
• His knowledge concerning the extent to which the Plan Support Agreements were integral to the RMBS Settlement;
• The legal advice given to the ResCap Board concerning the Debtors’ potential claims against Ally Financial, Inc. (“AFI”); and
• His communications with counsel concerning his experience as ResCap’s CEO with transactions between Res-Cap and AFI during the period leading up to the RMBS Trust Settlement.

Mot. ¶ 9.

Despite producing a “mere handful” of documents pursuant to the Limited Waiver, and repeatedly instructing witnesses not to answer on the basis of attorney-client privilege during depositions, the Debtors’ February 1, 2018 reply briefs to the RMBS Trust Settlement objections (“RMBS Reply Briefs,” ECF Doc. ## 2808 and 2804) contain numerous statements that the Debtors relied on the advice of counsel in approving the RMBS Trust Settlement. Among the examples:

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In re Residential Capital, LLC, 491 B.R. 63, 2013 Bankr. LEXIS 1507, 2013 WL 1497203 (N.Y. 2013).

491 B.R. 63 (In re Residential Capital, LLC) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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