IN RE: Residential Capital, LLC

Background

The dispute concerned insurance policies issued to General Motors Corporation and covering claims made against General Motors or its subsidiaries from December 15, 2000, through December 15, 2003. One covered subsidiary was Residential Funding Company, LLC, which filed for bankruptcy protection in May 2012.

Between 2000 and 2003, Residential Funding was sued in class actions involving alleged violations of state and federal lending laws arising from fees paid to banks that originated second-mortgage loans. Residential Funding sought insurance coverage for liability and defense costs. It paid $15.6 million in compensatory damages and related attorneys’ fees to one group of plaintiffs and later settled a punitive-damages claim for $14.5 million. A second group received a $300 million allowed claim against Residential Funding’s bankruptcy estate.

As part of the bankruptcy settlements and plan, rights under the insurance policies were assigned to settlement plaintiffs and to the ResCap Liquidating Trust. The plaintiffs sought coverage for their settlement claims, while the Liquidating Trust sought coverage for amounts Residential Funding paid and for defense costs. The Defendant Insurers argued that two policy exclusions barred coverage.

Bankruptcy Court Ruling and Appeal Request

The parties filed cross-motions for partial summary judgment on whether the two exclusions applied. The Bankruptcy Court held that neither exclusion barred the plaintiffs’ claims. It granted the plaintiffs’ partial motions for summary judgment and denied the Defendant Insurers’ partial motion for summary judgment. The Bankruptcy Court did not decide the separate dispute over defense costs.

The Defendant Insurers asked the District Court for permission to bring an immediate appeal from that ruling under 28 U.S.C. § 158(a)(3). The District Court applied the standards generally used for interlocutory appeals under 28 U.S.C. § 1292(b). Those standards require a controlling legal question, substantial grounds for disagreement about that question, and an immediate appeal that may materially advance the end of the litigation. The party seeking permission must satisfy all three requirements and show exceptional circumstances supporting an appeal before final judgment.

District Court’s Analysis

The District Court held that the Defendant Insurers did not meet any of the three requirements.

First, the court concluded that the appeal involved contract interpretation. Although contract meaning is generally a legal issue, the court stated that contract interpretation ordinarily is not the type of controlling legal question that supports an interlocutory appeal.

Second, the court found no substantial ground for a difference of opinion. The Bankruptcy Court had applied standard principles of insurance-contract interpretation to the policy language. The Defendant Insurers disagreed with how those principles were applied, but the District Court stated that this disagreement did not create substantial reason to doubt the Bankruptcy Court’s legal analysis. The District Court expressly left for a later time whether the Bankruptcy Court’s rulings were definitively correct.

Third, the court found that an immediate appeal would not materially advance the end of the litigation. Other coverage defenses could eliminate the need to resolve the policy-interpretation issues, and the dispute over defense costs would continue even if the Defendant Insurers prevailed on appeal.

Disposition

Judge Lewis J. Liman denied the Defendant Insurers’ motion for leave to appeal. The order addressed only permission for an immediate appeal; it did not finally resolve the underlying insurance-coverage dispute or determine whether the Bankruptcy Court’s interpretation was correct.