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Friday, 04/29/2022 11:31:26 AM

Friday, April 29, 2022 11:31:26 AM

Post# of 386
Response on behalf of Creditors Committee Filed by Alan M. Grochal (4/25/2022)


The Official Committee of Unsecured Creditors (the “Committee”) in the abovecaptioned chapter 11 cases (the “Chapter 11 Cases”) of TMST, Inc. (f/k/a Thornburg Mortgage, Inc.) (“TMST”) and its affiliated debtors (collectively, the “Debtors”) commenced under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (as amended, the “Bankruptcy Code”), hereby submits this Statement In Support Of Trustee’s Motion For Approval Of Settlement And Compromise Of Controversy Between Trustee And JPMorgan, Citigroup, Credit Suisse And UBS Defendants [Adv. Docket No. 698] (the “Settlement Motion”) and respectfully states as follows:


Since the filing of the Chapter 11 Cases, the Committee has been “all in” on pursuing claims against the Counterparties. It promptly served Rule-2004 discovery on the Counterparties in 2009. On April 30, 2011, the Committee co-signed the complaint alongside the Trustee commencing this proceeding demanding redress for the conduct of “America’s largest money-center banks who used market disruption as a basis to initiate a collusive scheme to take control of the Debtors;” issued “a host of unjustified margin calls;” received nearly $2 billion under the various “override” agreements; and terminated those agreements, “liquidated their collateral, and left the Debtors to file a free-fall chapter 11 cases to address their remaining creditors.”1 To the Committee’s mind, no amount short of the payments coerced under the various “override agreements” can compensate creditors for the Counterparties’ overreaching. Given their conduct, the Committee’s expectations for a settlement are afield of the $38 million in cash and claims waivers in the existing settlement.

Yet, the Committee also understands the risks and realities of litigation, its expense, and the cost of delay. It has monitored the proceeding as best it could from the sidelines since the Counterparties’ objection to its intervention motion was sustained, including its myriad disputes, e.g., the Counterparties’ motions to dismiss, the Trustee’s motion to amend the Complaint, and the Trustee’s motions to compel the Counterparties to comply with their discovery obligations. The Committee’s diligence into the settlement has not uncovered any basis to dispute the Trustee’s exercise of his business judgment to settle the claims in the proceeding. Accordingly, the Committee supports the settlement and looks forward to the prompt conclusion of the Chapter 11 Cases.

Adv. Proc. ECF No. 1 (Complaint). Capitalized terms not defined herein have the meanings ascribed to them in the Complaint or the Settlement Motion.


The Committee has focused doggedly on claims against the Counterparties since its appointment on May 7, 2009. Within two weeks, on May 14, 2009, the Committee filed a motion for authority to take Rule-2004 discovery of the Counterparties.2 It also worked with the Trustee to initiate this lawsuit and signed the original Complaint in April 2011 as a purported plaintiff-intervenor. The Committee similarly moved to formally intervene as a party in the proceeding, but the Committee’s intervention motion was denied by an order dated July 7, 2011 3 after the Counterparties’ objected. Among other things, the Court was persuaded by the Counterparties’ argument that the Trustee adequately represented the Committee’s interests in prosecuting the lawsuit.


The Committee has conducted as much diligence of the Settlement as is
feasible with respect to a litigation that spanned more than a decade. The Trustee and the Counterparties cooperated fully and promptly with the Committee’s diligence requests, but the

2 See Chapter 11 ECF No. 109 (Rule 2004 Mot.) ¶ 29 (identifying areas for discovery:

“[t]he Debtors received considerable margin calls in 2008 and 2009 totaling billions of dollars. They also received notices of default from the Counterparties and executed an Override Agreement purportedly designed to restructure (or at least suspend) those obligations. Immediately after its execution, however, the Counterparties took actions the Debtors believed were inconsistent with the Override Agreement, and the Override Agreement was purportedly amended. Thereafter, and until these cases commenced, the Counterparties exercised their remedies in collateral totaling billions of dollars and now assert billions of dollars in deficiency claims. All the while, the Debtors suffered from liquidity constraints, which were exacerbated by the Counterparties’ actions. Therefore, the facts and circumstances surrounding the Securities Contracts, the Override Agreement, the Amended Override Agreement, the Forbearance Agreements, the Counterparties’ alleged exercises of remedies, collateral seizures, and the Counterparties’ deficiency claims are important areas for discovery. Similarly, the involvement of certain insiders, including MatlinPatterson, in these transactions, should be examined”); Chapter 11 ECF No. 164 (Order granting Rule 2004 Mot.).

3 Adv. Proc. ECF No. 21.

record in the proceeding requires a certain amount of archeology. The parties produced more than a million pages of documents. And, while the Committee has canvassed the record, it would take months if not longer to understand it as intimately as the parties. That said, the Committee has been given access to sufficient information to reach an informed decision whether to support the settlement.

The Committee’s settlement diligence started by gathering an understanding of the extent of the Trustee’s activities in prosecuting the lawsuit. The Committee requested (a) all document requests, to gain an understanding of the categories and topics the Trustee pursued; (b) all interrogatories and responses; and (c) all deposition transcripts. It also asked for the ability to review certain categories of documents, e.g., the Counterparties’ records regarding the close-out of their positions and documents the Trustee considered particularly significant. The Trustee and the Counterparties agreed to provide access to those documents after Committee counsel executed the Stipulated Protective Order Governing Production and Exchange of Confidential Information.4

The Trustee’s counsel also provided Committee counsel with, among other things, access to the following documents: (1) all key agreements (Override Agreement, Amended Override Agreement, Security Agreements, Account Control Agreements, Forbearance Agreements and legal opinions); (2) all deposition transcripts (which total 15 and include corporate designees from each of the four remaining defendants); (3) discovery responses by both the Trustee and each of the Counterparties; (4) documents produced by all parties; (5) deposition exhibits; (6) proofs of claim filed by each of the Counterparties; (7) selected pleadings the Trustee considers most relevant; (8) and a sampling of various documents
the Trustee believed were especially relevant to the Committee’s assessment of the settlement.

4 See Adv. Proc. ECF Not. 147.

In total, the Trustee (and Counterparties) provided Committee counsel with close to 500 documents comprising thousands of pages.

The Trustee and his counsel also made a presentation to the Committee on April 6, met with counsel for the Committee to coordinate diligence on April 8, and sat for an extensive interview on April 21. Additionally, the Trustee and his counsel responded to various informal information requests from Committee counsel.


The Committee’s support for the settlement is a function of its institutional understanding of the claims against the Counterparties as well as its review of the record adduced. That includes an examination of various agreements, e.g., the different override and related collateral agreements; emails and other documents; deposition transcripts; and meetings with the Trustee and his counsel.

Moreover, the Committee appreciates the applicable standard and the relatively low legal hurdle the settlement must clear. It has no interest at this point in the Chapter 11 Cases of needlessly devouring time and resources debating the Counterparties’ conduct within the context of the Settlement Motion.

The Committee will never be convinced the Counterparties acted
appropriately. For that reason, cash consideration significantly below the amounts demanded in the Complaint does not square with the Committee’s expectations. But, the Trustee and his counsel both were highly incentivized to recover as much cash from the lawsuit as possible given their contingent-fee arrangements. A larger cash recovery would afford them a larger share of the proceeds. That the Trustee is willing to accept the settlement after more than 10 years and extensive discovery given his compensation structure is a significant data point.

What is more, the settlement includes a waiver of $1.75 billion in supposed deficiency claims filed by the Counterparties. The Committee would not have supported any settlement that allowed those claims or otherwise resulted in the Counterparties getting a distribution of estate assets. The Trustee’s counsel provided Committee counsel with considerable detail with respect to the estates’ efforts to analyze the alleged deficiency claims. Vetting challenges to those claims necessarily was a significant project for the Trustee given their size and the various types of collateral involved. The Trustee’s settlement eliminates any litigation risk associated with objecting to those claims by securing the Counterparties’ agreement to a complete claims waiver.

Finally, the settlement clears the path for a chapter 11 plan and prompt conclusion to these Chapter 11 Cases. The Committee waited for more than a decade and looks forward to the Trustee’s proposal and confirmation of a chapter 11 plan.

WHEREFORE, the Committee respectfully requests that the Court enter an order approving the Settlement Motion and awarding such further, different relief as it deems appropriate.

Dated: April 25, 2022
Baltimore, Maryland
James C. Tecce
51 Madison Avenue
New York, New York 10010
Telephone No.: (212) 849-7000
Facsimile No.: (212) 849-7100

/s/ Alan M. Grochal
Alan M. Grochal, Bar No.: 01447
1 E. Pratt Street, Suite 901
Baltimore, Maryland 21202
Co-Counsel to Official Committee of
Unsecured Creditors of TMST, Inc., et al.

Source: PACER [Docket 699]

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