Residential Capital, LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
RESIDENTIAL CAPITAL, LLC, et al.
Debtors.
FOR PUBLICATION
Case No. 12-12020 (MG)
Jointly Administered
MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN
PART ALLY FINANCIAL INC.’S MOTION FOR AN ORDER ENFORCING THE
CHAPTER 11 PLAN INJUNCTION
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
On November 14, 2013—one month before the chapter 11 Plan of Residential Capital,
LLC, and its debtor-affiliates was confirmed—sixty-nine plaintiffs (the “California Litigation
Claimants”) filed a state court lawsuit against non-debtors Ally Financial Inc. (“AFI”), Ally
Bank, and GMAC Mortgage Group LLC (“GMAC Mortgage Group,” and together with Ally
Bank and AFI, “Ally”), based on the same claims they raised in proofs of claim filed against
Debtors in these chapter 11 cases; in February 2014, the Debtors’ objection to those claims was
sustained and the claims were expunged. 1
The confirmed Plan (defined below) includes a Third Party Release and Plan Injunction
(defined below) in favor of Ally. After confirmation of the Plan, Ally’s counsel requested that
counsel for the California Litigation Claimants dismiss the state court lawsuit against Ally
because it was precluded under the Plan; when plaintiffs’ counsel stonewalled that request, Ally
filed the current motion to (1) enforce the Plan Injunction and (2) impose sanctions. As
1 	See Memorandum Opinion and Order Sustaining Debtors’ Objections to proofs of Claim and Amended
Proofs of Claim Filed By Certain Plaintiffs in California Litigation (the “Expungement Opinion,” ECF Doc.
# 6439). The California Litigation Claimants filed claims against Debtors Executive Trustee Services, LLC, GMAC
Mortgage, LLC (“GMACM”), GMAC-RFC Holding Company, LLC, Home Connects Lending Services, LLC,
Homecomings Financial, LLC (“Homecomings”), Residential Capital, LLC (“ResCap”), Residential Funding
Company, LLC, Residential Funding Real Estate Holdings, LLC, and Residential Mortgage Real Estate Holdings,
LLC. (See id., Schedule A.)
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explained below, the Court grants the motion to enforce the Plan Injunction, but denies without
prejudice the request for sanctions.
I. 	BACKGROUND
A. 	The Motion to Enforce the Plan Injunction
Pending before the Court is Ally Financial Inc.’s Motion for an Order Enforcing the
Chapter 11 Plan Injunction (the “Motion,” ECF Doc. # 6827). Ally seeks an order enforcing the
Plan Injunction against the California Litigation Claimants, whose claims against Debtor entities
in these chapter 11 cases were expunged, and who now seek a second bite at the apple. Ally
additionally seeks attorneys’ fees and costs associated with the Motion. In support of the
Motion, Ally attaches the Declaration of Rebecca S. Saelao (the “Saelao Decl.,” Motion Ex. B).
The California Litigation Claimants did not respond.
The Court held a hearing on the Motion on May 15, 2014; counsel for the California
Litigation Claimants did not appear, and the Court took the matter under submission. After the
hearing, the Court issued an Order Requiring Additional Submissions for Ally Financial Inc.’s
Motion for an Order Enforcing the Chapter 11 Plan Injunction and Attorneys’ Fees and Costs
(the “Additional Submission Order,” ECF Doc. # 6961). Pursuant to the Additional Submission
Order, Ally’s counsel was to submit a declaration supporting Ally’s request for attorneys’ fees
and costs by May 22, 2014; counsel for the California Litigation Claimants had until May 29,
2014 to respond. Ally’s counsel filed the Declaration of Ray C. Schrock Pursuant to the Court’s
Order Requiring Additional Submissions for Ally Financial Inc.’s Motion for an Order
Enforcing the Chapter 11 Plan Injunction and Attorneys’ Fees and Costs (the “Schrock Decl.,”
ECF Doc. # 6985) on May 22, 2014. The California Litigation Claimants did not respond.
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B. 	The California Litigation Claimants and these Chapter 11 Cases
Residential Capital, LLC (“ResCap”) and numerous affiliates (the “Debtors”) filed
chapter 11 petitions on May 14, 2012 (the “Petition Date”). The general bar date for creditors to
file proofs of claim, initially set as November 9, 2012, was extended to November 16, 2012 at
5:00 p.m. (Prevailing Eastern Time) (the “General Bar Date”). (See ECF Doc. ## 1309, 2093.)
Before the Petition Date, on May 9, 2012, Brookstone Law, PC (“Brookstone”), on
behalf of 41 plaintiffs, filed a complaint (the “Original Complaint”) in California state court
against a number of Debtor entities and non-debtor Ally. (Saelao Decl. ¶¶ 3–4.) The Original
Complaint challenged the securitization, servicing, and foreclosure of residential mortgages
originated and serviced by the Debtor entities, including GMACM and Homecomings. (Id.) The
Original Complaint alleged that Ally was (1) liable as a successor-in-interest, both directly and
through the actions of its subsidiaries, and (2) jointly and severally liable as an “alter ego” or as a
“single, greater unified whole.” (Orig. Compl. ¶ 28.) The action (the “District Court Litigation”)
was removed to the United States District Court, Central District of California – Western
Division (the “District Court”) on June 8, 2012. (Saelao Decl. ¶ 6.) Brookstone was thereafter
notified of (1) the bankruptcy filing on June 12, 2012 2 and (2) the General Bar Date on
September 7, 2012. 3
On October 31, 2012, the California Litigation Claimants filed an amended complaint
(the “Amended Complaint”), adding additional parties for a total of 62 named plaintiffs. (Id.
¶ 7.) Other than omitting a Truth in Lending Act claim, the claims asserted in the Amended
Complaint remained the same. (Id.)
2 	See Affidavit of Service of Melissa Loomis Regarding Notice of Chapter 11 Bankruptcy Cases, Meeting of
Creditors, and Deadlines, Ex. C. p. 616 (ECF Doc. # 336) (listing Brookstone on the Creditor Matrix).
3 	See Affidavit of Service of Clarissa D. Cu Regarding Notice of Deadlines for Filing Proofs of Claim, Ex. I,
pp. 1189, 1522 (ECF Doc. # 1412).
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On November 9, 2012, the California Litigation Claimants filed claims (the “Original
Claims”) against a number of Debtor entities, based on the Amended Complaint. (See ECF Doc.
# 4200, Schedule A.) Each of the Original Claims asserted an unsecured claim in the amount of
$1,300,000 for “Contingent Fraud Claim in litigation,” referring to ongoing litigation and the
following causes of action: (1) fraudulent concealment pursuant to California Civil Code (“Civil
Code”) sections 1572, 1709, and 1710; (2) intentional misrepresentations pursuant to Civil Code
sections 1572, 1709, and 1710; (3) negligent misrepresentations pursuant to Civil Code sections
1572, 1709, and 1710; (4) unfair competition pursuant to California Business and Professions
Code section 17200; (5) wrongful foreclosure pursuant to Civil Code section 2924; and (6)
improper influence over appraiser pursuant to Civil Code section 1090.5.
The Debtors filed an objection to the Original Claims on July 10, 2013, asserting that the
Original Claims failed to state any basis of Debtor liability. (See generally “First Objection,”
ECF Doc. # 4200. 4 ) The Debtors argued in the First Objection that the Amended Complaint—
the basis for the Original Claims—failed to: (1) satisfy basic federal pleading standards,
(2) plead a basis for derivative liability, (3) state any fraud-based claim, and (4) sufficiently
allege claims for wrongful foreclosure and improper influence over an appraiser. The deadline
to respond to the First Objection was August 9, 2013 (the “Response Deadline”).
None of the California Litigation Claimants filed a timely response to the First Objection,
but on August 9, 2013—the day of the Response Deadline—fifty-eight of the California
Litigation Claimants filed proofs of claim (the “Amended Claims”) solely against Residential
Capital, LLC (“ResCap”), each in the amount of $1,300,000. (Claim Nos. 6893–950.) The
stated basis for each of the Amended Claims is: “Claims, including fraud related to mortgage
4 	Debtors’ Objection to Proofs of Claim filed by Certain Plaintiffs in California Litigation (ECF Doc.
# 4200).
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origination.” In support of the Amended Claims, the California Litigation Claimants attached a
250-page Amended Complaint in Support of Amended Proof of Claim (the “Second Amended
Complaint”), which was never filed in state or federal court. The Second Amended Complaint
asserts five causes of action, divided into twenty-four “counts,” including: (1) fraudulent
concealment, (2) intentional misrepresentation, (3) negligent misrepresentation, (4) negligence,
(5) unfair, unlawful, and fraudulent business practices, (6) price fixing in violation of the
Sherman Act, (7) improper collection of debt after electing to foreclose, (8) rescission of contract
and/or restitution based on grounds of fraud and/or unconscionability, (9) breach of contract,
(10) breach of the Crier Rule under California law, (11) unfair debt collection practices, and
(12) wrongful foreclosure. Although the Second Amended Complaint appears to raise new legal
theories for recovery, the claims are based on the same set of facts as the Original Claims, and
counsel for the California Litigation Claimants represented to the Court that the nature of the two
sets of claims are the same. (See Aug. 28, 2013 Tr. at 25:10–15.)
On August 20, 2013—eleven days after the Response Deadline—counsel for the
California Litigation Claimants filed the Hairston, et al. Creditors’ Opposition to Debtors’
Objection to Proofs of Claim Filed by Certain Plaintiffs in California Litigation (the
“Response,” ECF Doc. # 4758). In the Response, the California Litigation Claimants’ counsel
asserted that the Debtors’ First Objection was rendered moot upon the filing of the Amended
Claims and the Second Amended Complaint in support.
On August 26, 2013, the Debtors sent a letter to the Court asserting that the Amended
Claims were improper post-bar date amendments and that they should therefore be disallowed
and expunged. On August 28, 2013, the Court held a hearing on the First Objection and directed
that the parties agree to a scheduling order with respect to briefing whether the Amended Claims
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were proper amendments and addressing the underlying merits of the Amended Claims. On
November 27, 2013, the Court entered the Scheduling Order For Objection to California
Litigation Claims (ECF Doc. # 5965) requiring: (1) the Debtors to file any objection to the
Amended Claims on or before December 17, 2013, (2) the California Litigation Claimants to
respond on or before January 23, 2014, and (3) the Debtors to file a reply on or before February
6, 2014, with a hearing to be held on February 20, 2014.
The Debtors filed the Second Objection 5 on December 16, 2013, arguing that (1) the
Amended Claims should be disallowed as improper post-bar date amendments to the Original
Claims, and (2) even if the Amended Claims are not expunged as untimely amendments, the
Amended Claims fail to state a basis for liability on the part of ResCap, largely for the same
reasons set forth in the First Objection, and also because ResCap neither originated nor serviced
any of the California Litigation Claimants’ loans. The California Litigation Claimants did not
file a response to the Second Objection. The Second Objection raised sufficient legal arguments
to rebut the presumptive validity of the Amended Claims; the California Litigation Claimants
failed to respond and therefore failed to carry their burden of proving the validity of their claims
by a preponderance of the evidence. On February 6, 2014, the Court sustained the Second
Objection and disallowed the California Litigation Claims with prejudice. (ECF Doc. # 6439.)
The California Litigation Claimants did not appeal the order expunging their claims, and the time
to do so has expired.
5 	Debtors’ Objection to Amended Proofs of Claim Filed by Certain Plaintiffs in California Litigation (ECF
Doc. # 6130).
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C. 	ResCap Bankruptcy Plan Confirmation and Third Party Release
On December 11, 2013, the Court confirmed ResCap’s Second Amended Joint Chapter
11 Plan Proposed by Residential Capital, LLC, et al. and the Official Committee of Unsecured
Creditors (the “Plan,” ECF Doc. # 6065-1). (See ECF Doc. # 6065.) Included in the Plan was a
third-party release (the “Third Party Release”) of Ally, the Debtors’ parent company, in
exchange for a contribution of $2.1 billion to the Debtors’ estates (the “Ally Contribution”). The
Third Party Release provides:
On and as of the Effective Date of the Plan, the holders of Claims and
Equity Interests, shall be deemed to provide a full and complete discharge
and release to the Ally Released Parties and their respective property from
any and all Causes of Action whatsoever, whether known or unknown,
asserted 	or 	unasserted, 	derivative 	or 	direct, 	foreseen 	or 	unforeseen,
existing or hereinafter arising, in law, equity, or otherwise, whether for
tort, fraud, contract, violations of federal or state securities laws, veil
piercing or alto-ego theories of liability, contribution, indemnification,
joint liability, or otherwise, arising from or related in any way related to
RMBS issued and/or sold by the Debtors or their affiliates and/or the
Chapter 11 Cases of the Plan, and any obligations under the DOJ/AG
Settlement, the Consent Order and the Order of Assessment.
(Plan Art. IX.D.) 6 The Plan Injunction “permanently enjoined and precluded” the continuation
of claims subject to the Third Party Release. (Id. Art. IX.I.)
D. 	California Litigation Claimants’ Action Against Ally and Non-Debtor
Entities
On November 14, 2013, before the Plan was confirmed, the California Litigation
Claimants filed a separate action in California state court against Ally and other non-Debtor
entities (the “Ally Complaint”). (See Saelao Decl. ¶ 9.) The Ally Complaint, like the complaints
before it, alleges fraudulent concealment, intentional misrepresentation, negligent
misrepresentation, negligence, unfair business practices, price fixing in violation of the Sherman
6 	Capitalized terms used but not defined herein have the meanings given to such terms in the Plan.
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Act, unfair and deceptive debt collection practices, breach of contract, and wrongful foreclosure,
all related to the securitization, origination, and servicing of residential mortgages. No Debtor
defendants were named in the Ally Complaint “due to the automatic stay.” (Ally Compl. ¶¶ 29–
33.) Despite not naming Debtor defendants, however, the Ally Complaint contains a list of
Debtor entities, including ResCap, GMAC-RFC Holding Company, LLC (“GMAC-RFC”),
Residential Funding Company (“RFC”), Homecomings, Home Connects Lending Services, LLC
(“HCLS”), and Executive Trustee Services (“ETS”). The California Litigation Claimants assert,
as to each Debtor, that they “reserve the right to name” each respective entity “as an additional
defendant in this action” as they “believe [each entity] to have engaged in the coordinated
conspiracy with the other named Defendants as alleged throughout this Complaint.” (Id. ¶¶ 29–
33, 35.) The Ally Complaint describes ResCap as a subsidiary of nondebtor GMAC Mortgage
Group, Inc. (“GMACM Group”) that “originate[d], service[d], and securitize[d] mortgage loans”
(id. ¶ 29); GMAC-RFC as “a wholly-owned subsidiary of Rescap [that] acquire[d] residential
mortgages and loans, which it then package[d] as mortgage-backed securities and [sold] to
institutional investors” (id. ¶ 30); RFC as “a wholly-owned subsidiary of GMAC-RFC” and the
“parent and sole owner of Homecomings . . . , the originator of loans underlying some of the
Plaintiffs in this complaint” (id. ¶ 31); Homecomings as “a wholly-owned subsidiary of RFC”
and the “originator of some of the Plaintiffs[’] loans included in this complaint” (id. ¶ 32); HCLS
as a “wholly-owned subsidiary of [AFI]” that conducted appraisals for AFI and “was a necessary
and integral element of Defendants’ fraud” because it “artificially inflated and manipulated
values of properties throughout California, including the properties of the Plaintiffs” at AFI’s
direction (id. ¶ 33); and ETS as “a wholly-owned subsidiary of [AFI]” that acted as the
“foreclosing trustee on behalf of the other Defendants” named in the Ally Complaint (id. ¶ 35).
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Indeed, the alleged facts in the Ally Complaint are tied to the actions of Debtor entities because
the Ally Complaint charges violations of the law related to the origination, servicing, and
foreclosure practices in which Ally took no part.
Counsel to the California Litigation Claimants at Brookstone was served with notice of
the Confirmation Hearing and a copy of the proposed Plan, including the Third Party Release
and Plan Injunction, but did not object to the Plan or the Third Party Release. 7 After the Plan
was confirmed, Brookstone received notice of the entry of the Confirmation Order. 8
On January 30, 2014, Ally’s counsel sent a letter to Brookstone to inform it that the Court
had entered the Confirmation Order. (Saelao Decl. ¶ 10.) Attached to the letter were copies of
the Plan and Confirmation Order. (Id.) The letter explained Ally’s position that the claims
alleged by the California Litigation Claimants in the Ally Complaint fall within the Plan’s Third
Party Release, and that the Plan Injunction enjoins the California Litigation Claimants from
pursuing their claims against Ally. (Id.) Brookstone did not respond. (Id.) On February 24,
2014,Ally’s counsel sent a second letter reiterating its arguments concerning the Ally Complaint.
(Id. ¶ 11.) On March 4, 2014, Brookstone contacted Ally’s counsel, claiming that the Ally
Complaint was not barred by the Third Party Release or Plan Injunction provisions, and
requested additional time to confer with bankruptcy colleagues about the issues. (Id. ¶ 12.) Ally
agreed but, after two weeks without a response, once again reached out to Brookstone on March
19, 2014. (Id. ¶ 13.) Brookstone did not respond. (Id.) Ally’s counsel sent Brookstone a third
7 	See Affidavit of Service of P. Joseph Morrow IV Regarding Order (I) Approving Disclosure Statement,
(II) Establishing Procedures for Solicitation and Tabulation of Votes to Accept or Reject the Plan Proponents’ Joint
Chapter 11 Plan, (III) Approving the Form of Ballots, (IV) Scheduling a Hearing on Confirmation of the Plan,
(V) Approving Procedures for Notice of the Confirmation Hearing and for Filing Objections to Confirmation of
Plan, and (VI) Granting Related Relief, Ex. G, Exh. L (ECF Doc. # 5196).
8 	See Affidavit of Service of Clarissa D. Cu Regarding Notice of Entry of Confirmation Order Confirming the
Second Amended Joint Chapter 11 Plan Proposed by Residential Capital, LLC, et al. and the Official Committee of
Unsecured Creditors and Occurrence of Effective Date, and Notice of Deadline and Procedures for Filing Certain
Administrative Claims, Ex. E, pp. 649, 1085, 2626, 2631, 3441 (ECF Doc. # 6187).
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and final letter on April 24, 2014, again with no response. (Id. ¶¶ 14–15.) The California
Litigation Claimants have not dismissed their claims against Ally, prompting Ally to file the
Motion.
II. 	DISCUSSION
A. 	Enforcement of Third Party Release and Plan Injunction
1. 	The Third Party Release and Plan Injunction are Appropriate in these
Cases
In the Second Circuit, non-debtor releases are permissible under certain circumstances.
“[A] bankruptcy court only has jurisdiction to enjoin third party non-debtor claims that directly
affect the res of the bankruptcy estate.” In re Johns-Manville Corp., 600 F.3d 135, 152 (2d Cir.
2010) (citation omitted). Because AFI filed proofs of claim for indemnification against the
Debtors, and because AFI and the Debtors shared insurance policies, third-party claims such as
the ones asserted by the California Litigation Claimants would affect the res of the estate,
satisfying the jurisdictional underpinnings for the third-party release approved by the Court.
In In re Drexel Burnham Lambert Grp., Inc., 960 F.2d 285, 293 (2d Cir. 1992), the
Second Circuit noted that “[i]n bankruptcy cases, a court may enjoin a creditor from suing a third
party, provided the injunction plays an important part in the debtor’s reorganization plan.” In its
decision in In re Metromedia Fiber Network Inc., 416 F.3d 136 (2d Cir. 2005), the Second
Circuit further clarified the standard under which it is appropriate to grant non-debtor releases.
The court identified two factors that are necessary for court approval of a non-debtor release:
(1) the release must itself be important to the plan; and (2) the scope of the release must be
necessary to the plan. Id. at 143. Thus, a non-debtor release is not justifiable simply on the
ground that it was offered in exchange for a monetary contribution. Id.
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During the Plan confirmation hearing, the Court considered all of the factors under
Metromedia and Johns-Manville and their progeny and determined that the Court had the
jurisdiction to enter the third party non-debtor release in favor of AFI. (See ECF Doc. # 6065,
Order Confirming Second Amended Joint Chapter 11 Plan Proposed by Residential Capital,
LLC, et al. and the Official Committee of Unsecured Creditors (the “Confirmation Order”),
¶ UU.) The Court found that the Metromedia factors, which establish a high burden before a
court will grant non-debtor releases, were satisfied in this case. The AFI Contribution was the
“lynchpin of the Plan, without which the cases would devolve into endless litigation, the Plan
would not be confirmable or feasible, and the recoveries currently contemplated by the Plan
would not exist.” (Id. ¶ RR.) As stated in the Plan, the Third Party Release was “an essential
component and critical to the success of the Plan.” (Plan Art. IX.D.) The Court found that
“[t]hese facts are unprecedented and justify the approval of the Third Party Releases.”
(Confirmation Order ¶ RR.)
2. 	The Court Has Authority to Enforce the Third Party Release and Plan
Injunction Against the California Litigation Claimants
“All courts retain the jurisdiction to interpret and enforce their own orders.” In re
Charter Commc’ns, No. 09-11435, 2010 WL 502764, at *4 (Bankr. S.D.N.Y. Feb. 8, 2010); see
also Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151 (2009) (“[A]s the Second Circuit
recognized . . . the Bankruptcy Court plainly had jurisdiction to interpret and enforce its own
prior orders.”). While a bankruptcy court’s jurisdiction diminishes in importance following plan
confirmation, In re General Media, Inc., 335 B.R. 66 (S.D.N.Y. 2005), the action in this case is
“sufficiently close in time to confirmation of the Plan and sufficiently critical to the integrity of
the Plan’s structure that it is proper for this Court to take firm control and decide” the Motion.
Charter Commc’ns, 2010 WL 502764, at *4.
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“As the court explained in Charter Communications, where a motion seeks to ‘prevent
the prosecution of causes of action expressly prohibited by the confirmation order,’ it would be
‘difficult to identify judicial acts that are any more critical to the orderly functioning of the
bankruptcy process or more closely tethered to core bankruptcy jurisdiction.’” In re Residential
Capital, LLC, 508 B.R. 838, 849–50 (Bankr. S.D.N.Y. 2014) (citing In re Petrie Retail, Inc., 304
F.3d 223, 230 (2d Cir.2002) (finding that bankruptcy court retained core jurisdiction post-
confirmation ‘to interpret and enforce its own orders, particularly when disputes arise over a
bankruptcy plan of reorganization’)). The bankruptcy court and the state court may rule on the
application of the Plan Injunction and Third Party Release, but the “bankruptcy court is more
closely connected to the current dispute and is the proper forum to rule with respect to”
enforcement of third party releases pursuant to the Plan.” Id. at 850 n.8 (quoting Charter
Commc’ns, 2010 WL 502764, at *3). The bankruptcy court is the most familiar with the record
of the confirmation hearing; and there is a much smaller risk of erosion of its provisions and the
injunction due to inconsistent interpretations across courts. Id.
The $2.1 billion AFI Contribution to the successful Plan in this case was a significant
factor to achieving Plan confirmation and a global resolution of the Debtors’ bankruptcies. A
key component of Ally’s willingness to provide the Contribution was the Plan Injunction and
Third Party Release. The Court carefully considered the record and weighed the relevant factors.
Initially, the U.S. Trustee, which rigorously enforces the law with respect to third party non-
debtor releases, had objected to the Third Party Release; based on the record developed in the
case, that objection was withdrawn. By the time of confirmation, there were no objections to the
non-debtor release included in the Plan. After considering the applicable case law and the U.S.
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Trustee’s withdrawal of its objection, the Court approved the Plan, which included the Third
Party Release and Injunction.
The California Litigation Claimants filed timely proofs of claim in these chapter 11 cases
and those proofs of claim were expunged in February 2014. (ECF Doc. # 6439.) Despite having
notice of these chapter 11 cases, the Plan, and the confirmation hearing, the California Litigation
Claimants did not object to the Third Party Release or Injunction contained in the Plan.
The California Litigation Claimants’ claims against Ally in the Ally Complaint relate to
the origination, servicing, securitization, and attempts to foreclose upon mortgages in California.
None of the actions alleged in the Ally Complaint were taken by Ally or Ally’s nondebtor
subsidiaries. Instead, the Ally Complaint alleges claims against Ally on alter ego theories of
liability. The Ally Complaint additionally charges that “[AFI]’s public disclosures, as reflected
in its filings with the SEC, make clear that [AFI] considers itself both a common enterprise
operating as a greater whole and without meaningful distinctions as to its operating units, and the
successor to GMAC Mortgage[ 9 ], Homecomings, RFC and its subsidiaries.” (Ally Compl. ¶
27(a).) These claims fall squarely within the Plan’s Third Party Release, which releases Ally
from claims “arising from or related in any way to the Debtors.” (Plan Art. IX.D.)
Consequently, the California Litigation Claimants are bound by the Third Party Release
and are therefore “permanently enjoin[ed] and preclude[ed]” from continuing their lawsuit
against Ally. (See Plan Art. IX.I (enjoining all entities who hold “Claims . . . from:
(a) commencing or continuing in any manner or action or other proceeding of any kind against
any Released Party whether directly, derivatively or otherwise, on account of or in connection
9 	It is unclear whether the “GMAC Mortgage” named in this portion of the Ally Complaint is GMAC
Mortgage, LLC (a Debtor entity) or GMAC Mortgage Group, Inc. (a nondebtor entity referred to elsewhere in the
Complaint as “GMACM” and described as “a wholly-owned subsidiary and the mortgage arm of Ally”). (Ally
Compl. ¶ 28.) Several of the California Litigation Claimants filed proofs of claim against GMAC Mortgage, LLC in
these chapter 11 cases. (See Expungement Opinion at 10.)
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with or with respect to any Released Claims; . . . [and] (e) commencing or continuing in any
manner or action or other proceeding of any kind against any Released Party on account of or in
connection with or with respect to any Released Claims”).)
After the Plan was confirmed, Ally’s counsel served counsel to the California Litigation
Claimants with copies of the Plan and Confirmation Order (which the Claimants had previously
received during these chapter 11 cases, before Plan confirmation), as well as letters explaining
the Plan’s Third Party Release and Injunction. The California Litigation Claimants have failed
to dismiss their action against Ally. As “holders of Claims . . . arising from or related in any way
to the Debtors,” the California Litigation Claimants are bound by the Plan’s Third Party Release.
Therefore, Court GRANTS Ally’s Motion and ORDERS the California Litigation Claimants to
dismiss their action against Ally with prejudice within 14 days. Should the California Litigation
Claimants fail to do so, Ally may seek an order from the Court holding them in contempt. This
result should come as no surprise to counsel for the California Litigation Claimants as this Court
has enforced the Plan injunction in similar circumstances. See, e.g., In re Residential Capital,
LLC, 508 B.R. 838 (Bankr. S.D.N.Y. 2014).
B. 	Attorneys’ Fees and Costs
In addition to an order enforcing the Plan’s Third Party Release and Injunction, Ally
seeks attorneys’ fees and costs related to filing the Motion under Bankruptcy Code section
105(a) 10 and 28 U.S.C. § 1927. 11 Section 1927 provides in pertinent part:
10 	11 U.S.C. § 105(a) provides:
The court may issue any order, process, or judgment that is necessary or appropriate to
carry out the provisions of this title. No provision of this title providing for the raising of
an issue by a party in interest shall be construed to preclude the court from, sua sponte,
taking any action or making any determination necessary or appropriate to enforce or
implement court orders or rules, or to prevent an abuse of process.
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Any attorney or other person admitted to conduct cases in any court of the
United States or any Territory thereof who so multiplies the proceedings
in any case unreasonably and vexatiously may be required by the court to
satisfy 	personally 	the 	excess 	costs, 	expenses, 	and 	attorneys’ 	fees
reasonably incurred because of such conduct.
28 U.S.C. § 1927. Section 1927 “looks to unreasonable and vexatious multiplications of
proceedings; and it imposes an obligation on attorneys throughout the entire litigation process to
avoid dilatory tactics.” U.S. v. Int’l Bhd. of Teamsters, 928 F.2d 1338, 1345 (2d Cir. 1991).
“Bad faith is the touchstone of an award under this statute.” Id. “Section 1927 authorizes the
imposition of sanctions only when there is a finding of conduct constituting or akin to bad faith.”
State Bank & Trust Co. v. Inversiones Errazuriz Limitada, 374 F.3d 158, 180 (2d Cir. 2004).
1. 	The Court Has Authority To Impose Sanctions Against Brookstone
The Court has the power to sanction Brookstone pursuant to (1) its inherent power and
(2) 28 U.S.C. § 1927. “Bankruptcy courts, like Article III courts, enjoy inherent power to
sanction parties for improper conduct.” Mapother & Mapother, P.S.C. v. Cooper (In re Downs),
103 F.3d 472, 477 (6th Cir. 1996); In re 680 Fifth Ave. Assoc., 218 B.R. 305, 323 (Bankr.
S.D.N.Y. 1998) (“Bankruptcy courts have the same inherent sanction authority as district
courts . . . .”). Additionally, “bankruptcy courts may sanction attorneys who unreasonably and
vexatiously multiply court proceedings pursuant to 28 U.S.C. § 1927.” In re Green, 422 B.R.
469, 474 (Bankr. S.D.N.Y. 2010) (citing In re Cohoes Indus. Terminal, Inc., 931 B.R. 305, 323
(Bankr. S.D.N.Y. 1998); In re Truong, No. 07-12194, 2008 WL 1776227, at *5 (Bankr.
S.D.N.Y. Apr. 14, 2008)); see also In re Saint Vincents Catholic Med. Ctrs. of New York, 506
11 	The difference between an award made under Bankruptcy Code § 105(a) and 28 U.S.C. § 1927 is “that
awards under § 1927 are made only against attorneys or other persons authorized to practice before the courts while
an award made under [§ 105(a)] may be made against an attorney, a party, or both.” Oliveri v. Thompson, 803 F.2d
1265, 1273 (2d Cir.1986).
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B.R. 387, 401 (Bankr. S.D.N.Y. 2014) (“A bankruptcy court may exercise the power to sanction
pursuant to § 1927.”).
If an attorney takes actions on behalf of a client in the course of litigation, and those
actions are taken in bad faith, courts may use their inherent power to sanction attorneys for those
actions. See Wilder v. GL Bus Lines, 258 F.3d 126, 130 (2d Cir. 2001) (sanctions are appropriate
under the court’s inherent power “whether the attorney has acted in bad faith in the actions that
led to the lawsuit or in the conduct of the litigation); U.S. v. Seltzer, 227 F.3d 36, 41–42 (2d Cir.
2000); Lubit v. Chase (In re Chase), 372 B.R. 142, 154–55 (Bankr. S.D.N.Y. 2007).
Additionally, “[a] bankruptcy court may impose sanctions pursuant to 28 U.S.C. § 1927 if it
finds that ‘[an] attorney’s actions are so completely without merit as to require the conclusion
that they must have been taken for some improper purpose such as delay.” In re Cohoes Indus.
Terminal, Inc., 931 F.2d 222, 230 (2d Cir. 1991) (citing Oliveri, 803 F.2d at 1273).
The same standard for imposition of sanctions applies to both the court’s inherent powers
and section 1927. Oliveri, 308 F.2d at 1273 (stating that “we hold today that an award made
under § 1927 must be supported by a finding of bad faith similar to that necessary to involve the
court’s inherent power”); In re Truong, 2008 WL 1776227, at 5 (“There is no meaningful
difference between the type of conduct that is sanctionable under the Court’s inherent power and
under 28 U.S.C. § 1927 because both require a similar finding of bad faith.”). “To impose
sanctions under either authority, a court must find clear evidence that (1) the offending party’s
claims were entirely without color, and (2) the claims were brought in bad faith—that is,
‘motivated by improper purposes such as harassment or delay.’” Eisemann v. Greene, 204 F.3d
393, 395–96 (2d Cir.2000) (quoting Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323,
336 (2d Cir.1999)). Courts must find clear evidence of bad faith. Revson v. Cinque & Cinque,
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221 F.3d 71, 79 (2d Cir. 2000) (“[T]o impose sanctions under either authority, the trial court
must find clear evidence that (1) the offending party’s claims were entirely meritless and (2) the
party acted for improper purposes.”).
Ally argues that the California Litigation Claimants’ counsel in this case, Brookstone,
failed to acknowledge the Third Party Release and Plan Injunction, forcing Ally to “expend
valuable time and effort communicating with Brookstone—both in writing and telephonically—
and ultimately filing this motion.” (Motion at 10.) It is clear that the California Litigation
Claimants’ claims “aris[e] from” and are “related in any way to the Debtors”; they are based on
conduct by the Debtors, rather than by Ally or Ally’s nondebtor subsidiaries. There was no
colorable reason for Brookstone to continue litigating against Ally in California, given the clear
language of the Plan. Brookstone’s failure to dismiss the Ally Complaint or respond in any way
to Ally’s letters or calls, or to this Motion, is indicative of the way that the California Litigation
Claimants behaved when the Debtors objected to their proofs of claim in these chapter 11 cases.
Both during the claims resolution process and during this dispute, Brookstone displayed a pattern
of failing to respond to communications and missing deadlines. Brookstone’s actions since Ally
first sent notice explaining the effect of the Third Party Release and Plan Injunction can only be
explained as delay tactics. This is an “improper purpose” identified by the Second Circuit as an
appropriate grounds on which a bankruptcy court may impose sanctions pursuant to 28 U.S.C.
§ 1927. See Oliveri, 803 F.2d at 1273.
2. 	The Court Does Not Have Sufficient Information to Calculate Sanctions
Having found sanctionable conduct under section 1927, the Court must calculate the
amount of sanctions to impose. “Section 1927 expressly permits courts to require attorneys ‘to
satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of
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[their] conduct.’” In re Green, 422 B.R. at 477 (quoting 28 U.S.C. § 1927). “Courts may also
award attorneys’ fees pursuant to their inherent power to sanction for bad faith conduct.” Id.
(citing Chambers v. NASCO, Inc., 501 U.S. 32, 45–46 (1991) (courts have the inherent power to
award attorneys’ fees for a party’s bad faith conduct)).
“The same standards of compensation and reimbursement apply whether sanctions are
awarded under [Rule 11], 28 U.S.C. § 1927, or the Court’s inherent power.” In re Spectee Grp.,
Inc., 185 B.R. 146, 160 (Bankr. S.D.N.Y. 1995). An injured party may recover attorneys’ fees
attributable to “investigating, researching and fighting” meritless claims and those incurred to
“‘research, prepare and prosecute’ its sanctions motion.” Id. (quoting PaineWebber, Inc. v. Can
Am Fin. Grp., Ltd., 121 F.R.D. 324, 334 (N.D. Ill. 1988)). Only fees that are directly caused by
the sanctionable conduct may be awarded. Id. “The party seeking the sanction must provide the
Court with contemporaneous time and expense records that specify, for each attorney, the date,
amount of time, and nature of the work performed, and must also show that the fees and
expenses were reasonable and necessary.” Id. (citing Wood v. Brosse, U.S.A., Inc., 149 F.R.D.
44, 52 (S.D.N.Y. 1993)). “But, courts retain discretion over the final amount awarded and
typically require the submission of detailed time records to determine whether the fees incurred
are reasonable.” In re Green, 422 B.R. at 477 (citing In re Spectee Grp., 185 B.R. at 160).
Here, by refusing to acknowledge the Third Party Release and Plan Injunction,
Brookstone forced Ally to seek relief in this Court through the Motion. Therefore, it is
appropriate that the Court order Brookstone to compensate Ally for those attorneys’ fees
incurred preparing the Motion.
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In the Schrock Declaration, Ally’s counsel laid out its fee computation as follows:
Attorney 	Position with
K&E 12 and Year
Admitted
Department 	Hourly
Billing
Rate
Total
Billed
Hours
Total Cost
Justin Bernbrock 	Associate 	2012 	Restructuring 	$520.00 	5.7 	$2,964.00
Judson Brown 	Partner 	2004 	Litigation 	$840.00 	5.0 	$4,200.00
Jacob Goldfinger 	Paralegal 	N/A 	Restructuring 	$320.00 	5.8 	$1,856.00
Ray C. Schrock, P.C. 	Partner 	1998 	Restructuring 	$1,060.00 	1.0 	$1,060.00
Jodi Wu 	Associate 	2011 	Litigation 	$665.00 	4.7 	$3,125.50
Total 	22.2 	$13,205.50
(Schrock Decl. ¶ 4.) Additionally, Ally incurred legal fees from Severson & Werson, Ally’s
litigation counsel in the underlying lawsuit, in the amount of $163.20 in connection with
preparing the Motion. (Id. ¶ 5.)
These records are not sufficiently detailed for the Court to make a determination of the
reasonableness of the fees. Though the Schrock Declaration asserts that these fees are directly
attributable to the time spent preparing the Motion—and the Court has no reason to believe that
these entries are not attributable to work on the Motion—it does not attach the
“contemporaneous time and expense records that specify, for each attorney, the date, amount of
time, and nature of the work performed” necessary for the Court to make a determination as to
the reasonableness and necessity of the work performed. See In re Spectee Grp., 185 B.R. at
160. Consequently, the Court does not currently have the necessary information to calculate
sanctions under section 1927, and the Motion to impose sanctions against Brookstone is
DENIED without prejudice.
12 	Kirkland & Ellis LLP.
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III. 	CONCLUSION
For all of the foregoing reasons, the Motion is GRANTED in part and DENIED without
prejudice in part. The California Litigation Claimants are ORDERED to dismiss their action
against Ally with prejudice within 14 days of the date of this Order. Should the California
Litigation Claimants fail to do so, Ally may seek an order from the Court holding them in
contempt. See FED. R. B ANKR . P. 9020, 9014. Ally may renew its motion for sanctions,
supported by an appropriate declaration attaching sufficient detail for the Court to make a
determination as to the reasonableness and necessity of its requested sanction amount, within 21
days of the date of this Order. In determining the amount of fees to award the Court will be
guided, in part, by whether Brookstone complies with this Order without the necessity for further
action by Ally. Ally is ORDERED to serve a copy of this Order on Brookstone and to file an
affidavit of such service on the Court’s Electronic Case Filing System.
IT IS SO ORDERED.
Dated: June 20, 2014
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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