Legal Case Summary

Good morning everyone. This is a American Home Workage Matter that was postponed from early date. Good morning. May it please the court. My name is Ben Acreley and along with Jason Harbor and Michael Buzon-Kill. We represent the appellant credit, agriculture, corporate and investment bank New York branch, which was formerly known as Callion New York branch. I'm Michael from Working. Maybe another closer to work. Yes, it is working. Get a little closer if you wouldn't mind. Before I started wanting to talk about this, hope that things went okay with your family matter. We all have children and we were all struck by your letter. Hopefully that's... Thank you very much. I wanted to thank Mr. Dorsey too for consenting to the continuum. It's a pretty awful branding and I very much appreciate that. I think that helped us keep our priorities in mind. You've moved a lot of money here. It's only money. The issue before the court is what does the phrase commercially reasonable determinants of value be? As it is used in Section 562 of the bankruptcy code. Mr. Ayrling, I'm not very sophisticated in the

... So I took you all bear with me when I ask you from a practical standpoint. What's an issue here? As I understand it, your client purchased a portfolio of mortgages. It has the portfolio of mortgages. It's getting income, stream of income from the portfolio. But it doesn't want to sell the portfolio at this time. But it wants damages. It sounds to me a little bit like it's eating its cake and still having it. How is that wrong? Well, let me address that. What's an issue here is what is known as a repurchase agreement. We understand that. We dread it. My client is the agent for a number of banks who purchased mortgages from the debtor. Under a repurchase agreement, it was kind of a warehouse arrangement where about we purchased the mortgages which enabled them to finance them. And then they were going to buy them back. And under the repurchase agreement, they had an obligation to buy them back. If they defaulted on that obligation, Kayaan had a claim for the repurchase price plus whatever interest had accrued on the repurchase price. But you haven't sold them. I mean, the market is as the bankruptcy court, as it will, is redispunctural. So you still have the mortgages. You're still getting money from the mortgages. But you want damages. The bankruptcy

. The bankruptcy court, your bankruptcy code, your honor in Section 562 mandates that the damages be measured as of a specific date. And that's to prevent speculation on the mortgages going up and down. Judge Lovita's question is, you're getting money. You're getting money from these mortgages as we sit here. Each month you're getting cash. And why isn't that good enough? Because under the... I think maybe you need to explain what your bargain was and how you're being harmed by just getting cash. And bargain, your honor, was to be paid the repurchase price plus interest. And how would... In a quick time frame. In a quick time. Are you going to have to report agreements under a year? Generally, generally. But I mean, you asked how... How are you hurt by what the situation is right now? Well, your honor, we're hurt because we're owed about $900 million. That's... That depends on what commercially reasonable

... The permanence plural of value under 562 means that... That's correct. But the repurchase... The bankruptcy code mandates that we value them on a specific date, unless there's no commercially reasonable determinant on that date. Now, what the bankruptcy court was concerned about was that we were somehow going to get a win fall because we were holding on to the mortgages. That is quite impossible. Well, because that's the question... Explain this. Explain this. The practical reality of this financing. Okay. Well, it's impossible because, first off, your honor, it assumes that we're going to hold the mortgages for the entire 30 years. Secondly, it assumes that on our deficiency cleaning, whatever that may be... And that's not your deal

. Your deal is not to hold. Your deal is to get rid of them. That's what you bargained for, correct? No. Under our contract, we had the right to hold them. We had the right under the contract to hold them, and give them a credit for the market value. That's in the repurchase agreement. We had that right. But what I'm saying is, there's no win fall here because under the bankruptcy code, under Section 559 of the bankruptcy code, which is the other one that's here, if we liquidate the mortgages and sell them, and there is an access over at the repurchase price, that belongs to the debtor. So there's no situation here where we enjoy a win fall. It's the debtor who is protected here because 562 prevents a unreasonable value being placed on the mortgages before there's a commercially reasonable value. So, in fact, as the evidence in this case was, on the 562A measuring date, which we contend is not the proper measuring date, these move which was worth somewhere between zero and ten cents on the dollar. At the time that we considered being a commercially reasonable, they were worth 50 cents on the dollar. But if you acknowledge that you can't hold on to them for the term, and the discounted cash flow is what it is, why are you being hurt? Well, we don't, for instance, acknowledge that we can't hold on to them because the repurchase agreement says we can't hold on to them if we elect to hold on to them. We, upon a default, there's been no bankruptcy here. Upon a default, we can hold on to the mortgage for the entire term. We have to give them a credit of what the market value is, if we elect to do that. We have to give them a credit of what the market value is for the term. Or we can perceive a liquidate for the mortgages. And if we liquidate them for more, then we're owed. They go back, access goes back to the debtor. If you hold on to these mortgages and you get the money over time, why is not discounted cash flow the appropriate determinant of value? John, it's not the appropriate determinant of value just because of the clear language in Section 562. It's not the right way to do that. But the debtors expert said that was the way to value it. And in fact, isn't that ordinarily the generally accepted, the discounted cash flow method? Isn't that generally accepted in the area? I think not really so

. The discounted cash flow is used in valuing mortgages, but it's used in connection with the market value as well. And here it was done with any regard to the market. Not at all. But you say that it should have said market or price. And if the discounted cash flow method isn't generally accepted way to measure the value of a mortgage portfolio, why? And the back of the judge said, listen to the testimony, the evidence and said, yep, that's a good way. What's wrong with what the back of the court did? Because the discounted cash flow, your honor, valued these mortgages at par, I mean, valued them over a billion dollars, when it couldn't be sold for that amount. That doesn't mean it's not worth paying for that amount. But then on the other hand, you're saying you could hold on to them. And if you hold on to them, the value it seems to me would be the discounted cash flow. If you hold on to them, not to realize the discounted cash flow, your honor, you hold on to them to realize an increase in value of the market so you can sell them for more. People go out into the market and what they want is a stream of income. And that's what you have, a stream of income. You would read that these mortgages are giving your fine income, right? Correct. Okay. So why isn't that a reasonable determinant of value? If I want to go out, if I had a little money and I want to go out and get something for it, then what I look for is the income that those assets will give me. Why isn't that reasonable? It's not reasonable, it's not reasonable, your honor, because in order to realize the discounted cash flow valuation of these mortgages, you have to assume there will be very few defaults and we're not in that economy. You have to wait 30 years to realize it. And banks don't typically hold them for 30 years. If you can pick whatever they you want, you'd look as if you were to four dates. But if you're holding them, you can sell them whenever you want. The market may get way off. And if we sell them the honor and we recover more than we are owed that money belongs to the better. Mr. Agrily, isn't your real answer? Maybe I'm wrong

. But isn't your answer that you're in the business of dealing in repo agreements? You're not in the business of holding mortgages. And your bargain here was to hold them and get them and send them back and that liquidity and the ability to turn these back is what your deal was. So the idea that you're holding these mortgages, the fact that you could, wouldn't it mean that you're in the business that you're not in? Am I wrong? I'm not saying either. If we're sending these back and that liquidity is important. So I was actually buying your argument. But by virtue of your saying you hold on to them, if you hold on to them, discounted cash flow works. If we hold on to them though, you're on it. We have to give them a credit for their market value. So it's just that doesn't really help you. I said, man, we understand that you're not going to get a win for and that's it. It sounds to me like you want them to guarantee your investment in the sense that you're going to end up with. It was down your way. It was down your head then for the deficiency. It goes up. You sit on the increase, but you give them the amount over the agreement. But you still end up with an insured investment. You know, I, with all due respect, I believe that argument is incorrect. No one's insuring our claim here. No, no one's insuring our claim. The Congress, I think, was very careful in 5.62 to say, you've got to measure these claims on a certain date. Whether you sell them or not, that's when you measure them. Now, let's assume for a moment that we had sold the mortgages on the acceleration date for 10 cents on the dollar. We would have had a $900 million deficiency claim in the bankruptcy

. You would have taken the risk, but you're not taking the risk now. Now you have no risk. You're just holding on to them. You're getting the stream. And what's the risk? We may not have, I would disagree with the risk because I think this is a risky economy that we're in. Well, but we, but we contracted to be owed a certain amount of money. And we're not, we haven't been paid that amount of money. And it's too, too, we're paid that amount of money. It seems to me we've got the risk. You know, I know your brief says that Congress intended 559 and 562 to prevent ill-equity caused by the automatic state. I mean, that was the whole point behind those provisions. Isn't the ill-equity here caused by market forces? Well, I mean, if I understand your question correctly, Your Honor, I think, you know, it's our whole position in this case that the value of these things was strictly affected by market forces. And that's, that's what affected the value of these, these mortgages. Why didn't we sell? Why didn't we sell? Because we, we, we, we, we have a large deficiency claim, which would probably get paid to a three cents on the dollar. And so we decided to hold onto the mortgages until the market has improved a little bit. Is that clear that it's two or three cents on the dollar? I think it's pretty clear, Your Honor. What's the money that's at stake here? The, the money that's at stake here. If you're correct, what will the debtor have to, or at least? It would, it would have to pay us. I mean, our claim, our claim we can tend is $478 million. Right, but two, two or three cents, two or three cents on that. You know, Congress, you say that it's market or sale price that, that is what, what's addition. Congress didn't say that. I mean, Congress, you, Congress knows how to write words in a statute in the entire obligation to follow the words that Congress used, not the words that Congress didn't use, but could have. And that's a much simpler way to express what you say the statute means

. They just say, if they're, if, if market value, rather than commercially reasonable determinants, and again, that plural determinants suggest there's got to be something other than market value that Congress had in market. Your Honor respectfully disagree. Commercial reasonable determinants of value is a broader term than market value. The reason section, that's right. The reason section 559 used market value is because 559 only deals with the situation where there's an excess over the repurchased price. So it's presumably commercially reasonable when you have an excess over the purchase price. 562 only deals with the deficiency claim. And Congress was very careful to use the phrase commercially reasonable determinants of value, because if they just said market, we could have sold them for ten cents on the dollar on the acceleration date, and contended that was the market, but would that have been commercially reasonable? We did not think so because there was an issue about clear title. There was an issue about who was getting the money. We couldn't give reps in warranties. Why isn't discounted cash flow commercially reasonable? Discounted cash flow is not commercially reasonable because it has nothing to do with the market. And that's so clear in this record it's beyond dispute. It has nothing whatsoever to do with market is purely a mathematical formula. I have run way over my time and I'd like to preserve a little bit. Thank you. Did you reserve some time? Okay. Great. Thank you. Yes, more time to strike with. May it please the court. Good morning. My name is John Dorsey. I represent American Home Mortgage Holdings Inc. at all

. The debtors below and the Appleese before this court. I'm here with my colleague today. Excuse me, Michelle Budesack. I just wanted to make three quick points. I assume she did all the work. Use the works that way. The person who doesn't talk did all the work. She did do all the work in order. She did an excellent version of the first draft of this brief. I had to make very few changes to it. So she's a very good lawyer. Remember that when it comes. It's coming up very soon too. Just wanted to make three points with the guard to oral argument this morning. We're not asking this court to do anything other than what Callion itself did outside the context of this litigation. And that is to value the mortgage loans based on a discounted cash flow value. Where did it do that? The evidence below showed that when Callion was determining how to record these mortgages on its books and records. It used a discounted cash flow value. It even got a- That's a for a purpose of financing. And that's a financial measure that you can put on your books. If you don't have an appraisal, you can use that for purposes of a financial statement. But that's not probative of the market, is it? Well, I think- I don't think it's probative of the market. I think you're right, you're right, you're wrong. Because they actually asked their auditors for an opinion

. Can we use discounted cash flow to do- To put this on a book's record. Or do we have to use the market value? And their auditor said use discounted cash? The question was that goes to- I guess it's one one four bits. It's generally accounting- It's generally accounting principle that that method is consistent with. And the question suggests that the reason that was okay was because in terms of how you track this stuff on paper, under the general accepted accounting principles, it's okay. That's correct. That's correct. That I'm not sure if that goes to Mr. Ackerley's claim about whether or not under the terms of the repurchase agreement in 5-6-2, it's consistent using that generally accounting- Generally accepted accounting principles consistent with the congressional intent in drafting 5-6-2. And that's the problem here. Well, you're on our only raise that point to show that it is commercially reasonable to say- To value these mortgages based on a discounted cash flow. What did I use that for? In other words, once they put it on their books at the discounted cash flow basis, what happens? What does that then result in? Well, that results in how they carry it on their books and records, and whether they have to take a loss on those mortgage loans, which when the SNC, the shared national credit, came in and looked at these mortgage loans, and said, Calione, given all of the problems you're saying you have with these mortgage loans, you should write them off at 100%. And Calione said, no, no, no, we don't have to do that, because there really isn't any problem with these mortgage loans. Mr. George, your own expert testified, Mr. Clayton. He said, unless there's something very, very strange going on in the market, the market value of the assets and the discounted cash flow value of the assets will be very, very similar. Isn't that an admission that there's something very strange going on in the market? And when Congress said you use this other provision when there is no commercially reasonable determinant of the value, such as when there's a dysfunctional market, why isn't that so probative of what we have here, how are words out of your own expert? Well, we don't disagree, Your Honor, that there was a disruption in the marketplace. Everybody agrees it was a dysfunctional problem. And our expert testified that the disruption in the marketplace was not reflective of the actual true value of those mortgages, because if you looked at the discounted cash flow value, they still far exceeded what the market value was. But if we determine that Congress was talking about disposition, and I, well, commercially reasonable, that term, can you tell me when that's used in a context other than disposition? Well, in 562, I believe it's used in the context of just determining the value of that repo agreement at the particular time, whether it was the date of liquidation, termination, or acceleration. So it's not necessarily a disposition. And if you look at section, Hey, that's putting the rabbit in the hat. But can you give me an example of the use of the term, is the term of our commercially reasonable, in a context other than disposition of some type of asset? Other than the disposition, not off the top of my head, Your Honor. I cannot thank everyone. It comes up in the UCC when you're talking about, you have to use commercially reasonable ways to terminate, or to sell an asset once the secured party takes it back. And Congress itself said the references to commercially reasonable or intended to reflect existing state-wide standards relating to a creditor's actions. In determining damages. That's correct, Your Honor. How could that, when we're talking about creditor's actions and commercially reasonable has to do with, what a creditor does in disposing an asset? How can we then say, oh, but this theoretical calculation is what they intended? Because we've got to figure out what Congress intended. And I think it does relate to Calions' actions in this case. They chose from the very beginning, at the time they accelerated the repurchase agreement before the debtor was even in bankruptcy. They had made the decision they were going to hold these mortgage loans. That's what the evidence showed at the hearing. So, you're saying commercially reasonable means the way they put it on their books? I think the fact that they made the decisions to hold the mortgage loans and realize the income from those mortgage loans, goes to the question of what is commercially reasonable for purposes of determining what the deficiency claim against the debtors would have been. And there has to be some certainty as to what that deficiency claim is going to be. We can't wait for Calions to decide to go ahead and sell these in the marketplace at some point in time down the road. And the idea that they have to hold these for 30 years is overstates the position. The evidence showed, in fact, the stipulated facts of the hearing were that in the one-year period from August of 2007, when the debtor went into bankruptcy, in August of 2008, when Calions says that was the first time there was a commercially reasonable market value, they collected $222 million on these mortgage loans. And they continued to collect from August of 2008 until the time of the hearing in May of 2009. It's about 20% in that one-year period. Yes, Your Honor. And if you take into account what they earned after August of 2008 through the date of the hearing, that was another according to their fact witness, another $53 million. It raises that to 25% that they'd already recovered on these mortgage loans. Did Judge Sanchi talk about, I mean, what you're arguing is what's commercially reasonable is depending upon the context. Yes. And you look at what a creditor has done and then you determine based on what they're doing with the asset, what's the value to them. Judge Sanchi really didn't get into that. I mean, I think it's an interesting approach, but he didn't reason that way, do you? Trying to remember his, it was a long opinion, or I don't remember him getting into that specifically

. It comes up in the UCC when you're talking about, you have to use commercially reasonable ways to terminate, or to sell an asset once the secured party takes it back. And Congress itself said the references to commercially reasonable or intended to reflect existing state-wide standards relating to a creditor's actions. In determining damages. That's correct, Your Honor. How could that, when we're talking about creditor's actions and commercially reasonable has to do with, what a creditor does in disposing an asset? How can we then say, oh, but this theoretical calculation is what they intended? Because we've got to figure out what Congress intended. And I think it does relate to Calions' actions in this case. They chose from the very beginning, at the time they accelerated the repurchase agreement before the debtor was even in bankruptcy. They had made the decision they were going to hold these mortgage loans. That's what the evidence showed at the hearing. So, you're saying commercially reasonable means the way they put it on their books? I think the fact that they made the decisions to hold the mortgage loans and realize the income from those mortgage loans, goes to the question of what is commercially reasonable for purposes of determining what the deficiency claim against the debtors would have been. And there has to be some certainty as to what that deficiency claim is going to be. We can't wait for Calions to decide to go ahead and sell these in the marketplace at some point in time down the road. And the idea that they have to hold these for 30 years is overstates the position. The evidence showed, in fact, the stipulated facts of the hearing were that in the one-year period from August of 2007, when the debtor went into bankruptcy, in August of 2008, when Calions says that was the first time there was a commercially reasonable market value, they collected $222 million on these mortgage loans. And they continued to collect from August of 2008 until the time of the hearing in May of 2009. It's about 20% in that one-year period. Yes, Your Honor. And if you take into account what they earned after August of 2008 through the date of the hearing, that was another according to their fact witness, another $53 million. It raises that to 25% that they'd already recovered on these mortgage loans. Did Judge Sanchi talk about, I mean, what you're arguing is what's commercially reasonable is depending upon the context. Yes. And you look at what a creditor has done and then you determine based on what they're doing with the asset, what's the value to them. Judge Sanchi really didn't get into that. I mean, I think it's an interesting approach, but he didn't reason that way, do you? Trying to remember his, it was a long opinion, or I don't remember him getting into that specifically. A burden of proof, but he didn't look at what they actually did with the asset. And I think that's actually an interesting way of looking at it. That it's contextual. Are you saying it comes up to the same, get to the same place? Correct, Your Honor. And if you look at $559, it's clear that what Congress, and I think Your Honor was correct when you were talking with Mr. Ackerly, that Congress knows when to put market value in, when it means market value in $559 uses market value in determining how to calculate what a debtor would get back from a repo counterparty. But that deals only with the repo agreement. When you get to $562, there's a laundry list of types of property, master netting agreements, swap agreements. They may not, they may not be markets. So I mean, it would seem to me when it says if there are not any commercially reasonable determinants of value, referring to all these different kinds of things, security clearing agencies. And it seemed to me if they did say market value, you might have a problem with figuring out a market for some of these things. Well, I think some of those things, Your Honor, would only have a market value. There's no way there's not an income stream earned from those. And I'm sorry. That's all right. Let me ask you. I'm still stuck on your 20% and your 25%. 20% of, well, how are you valuing that? If you look at the total. What is the principle? The total amount that was owed under the repurchase agreement at the time of the acceleration was approximately $1.1 billion. Yeah, yeah. But then they paid off the. The Calian. They were off 70 something million and some other get cut down to 900 and something million

. A burden of proof, but he didn't look at what they actually did with the asset. And I think that's actually an interesting way of looking at it. That it's contextual. Are you saying it comes up to the same, get to the same place? Correct, Your Honor. And if you look at $559, it's clear that what Congress, and I think Your Honor was correct when you were talking with Mr. Ackerly, that Congress knows when to put market value in, when it means market value in $559 uses market value in determining how to calculate what a debtor would get back from a repo counterparty. But that deals only with the repo agreement. When you get to $562, there's a laundry list of types of property, master netting agreements, swap agreements. They may not, they may not be markets. So I mean, it would seem to me when it says if there are not any commercially reasonable determinants of value, referring to all these different kinds of things, security clearing agencies. And it seemed to me if they did say market value, you might have a problem with figuring out a market for some of these things. Well, I think some of those things, Your Honor, would only have a market value. There's no way there's not an income stream earned from those. And I'm sorry. That's all right. Let me ask you. I'm still stuck on your 20% and your 25%. 20% of, well, how are you valuing that? If you look at the total. What is the principle? The total amount that was owed under the repurchase agreement at the time of the acceleration was approximately $1.1 billion. Yeah, yeah. But then they paid off the. The Calian. They were off 70 something million and some other get cut down to 900 and something million. Yes, Your Honor, there was a period of time when the debtor was holding the income that was coming in because they were still technically. The servicer for those mortgages. So you take. So what you're doing is you're taking the. The asset. Let's say it's worth a million dollars, a billion dollars for our purposes. And you say they're getting X number of dollars each year. And that's where you got your 20% and then your 25%. No, the 20% would have been the actual amount received from August 1st. Yes, but it's 20% of what? 20% of the total 1.1 billion. Okay. All right. Now, so if you're right and they're getting in 20% the first year and 25% the next year in four years, they'll get back a whole value. That's exactly right. Now, we don't know exactly because there may be an increase in default rates and things like that. But that's the way mortgages work. We all know we all have mortgages and they're all front loaded with interest. So you pay mostly interest in the first five or six or ten years. On the default, didn't the Clayton say that he's discounting 50% for the default? He did take into account a default rate. And in fact, the evidence of the hearing and it surprised you had Sanci was that Dr. Clayton had actually performed a discounted cash flow for each and every one of the mortgages contained in the portfolio and took into account a potential default rate. So how does that work? So what is the 50% of? I don't understand the mechanics of what the total. Well, Dr

. Yes, Your Honor, there was a period of time when the debtor was holding the income that was coming in because they were still technically. The servicer for those mortgages. So you take. So what you're doing is you're taking the. The asset. Let's say it's worth a million dollars, a billion dollars for our purposes. And you say they're getting X number of dollars each year. And that's where you got your 20% and then your 25%. No, the 20% would have been the actual amount received from August 1st. Yes, but it's 20% of what? 20% of the total 1.1 billion. Okay. All right. Now, so if you're right and they're getting in 20% the first year and 25% the next year in four years, they'll get back a whole value. That's exactly right. Now, we don't know exactly because there may be an increase in default rates and things like that. But that's the way mortgages work. We all know we all have mortgages and they're all front loaded with interest. So you pay mostly interest in the first five or six or ten years. On the default, didn't the Clayton say that he's discounting 50% for the default? He did take into account a default rate. And in fact, the evidence of the hearing and it surprised you had Sanci was that Dr. Clayton had actually performed a discounted cash flow for each and every one of the mortgages contained in the portfolio and took into account a potential default rate. So how does that work? So what is the 50% of? I don't understand the mechanics of what the total. Well, Dr. Clayton couldn't know in the future what the default rate was going to be. So he had to pick a number. He hypothesized about potential. But he then used that to calculate what the discount rate would be for the cash flows associated with. So when Mr. Agarly told us that they have to worry about the default rate, that was taken into account in his testimony. He did take a default rate into account, Your Honor. Now he did testify on cross examination with Mr. Agarly that he didn't take into account the potential increase in the default rate going into the future. I mean, they would default more. Correct. But that's consistent with Section 562, which says you have to look at the value of the repo agreement on the date that they accelerated it. And as Dr. Clayton testified, the only way to do a discounted cash flow is to look at the default rate on that specific day, not looking at what might possibly happen. Well, the methodology is not really an issue. There's no tax. That's correct. Yes, they put on no evidence to read about Dr. Clayton's testimony about how did perform a discounted cash flow. And so the bankruptcy judge accepted that. Yes, Your Honor. And I was going to point out in Section 559, there is a scenario that the Congress understood could happen where you might have a liquidation without a disposition. There's language in 559 that says in the event of a liquidation, you any excess of the market prices received on liquidation of some assets. And then in a parenthetical, it says, or if any sets assets are not disposed of on the date of liquidation of such repurchase agreements, at the prices available at the time of liquidation of such repurchase agreements from generally recognized sources, or the most recent closing bid quotation from such a source

. Clayton couldn't know in the future what the default rate was going to be. So he had to pick a number. He hypothesized about potential. But he then used that to calculate what the discount rate would be for the cash flows associated with. So when Mr. Agarly told us that they have to worry about the default rate, that was taken into account in his testimony. He did take a default rate into account, Your Honor. Now he did testify on cross examination with Mr. Agarly that he didn't take into account the potential increase in the default rate going into the future. I mean, they would default more. Correct. But that's consistent with Section 562, which says you have to look at the value of the repo agreement on the date that they accelerated it. And as Dr. Clayton testified, the only way to do a discounted cash flow is to look at the default rate on that specific day, not looking at what might possibly happen. Well, the methodology is not really an issue. There's no tax. That's correct. Yes, they put on no evidence to read about Dr. Clayton's testimony about how did perform a discounted cash flow. And so the bankruptcy judge accepted that. Yes, Your Honor. And I was going to point out in Section 559, there is a scenario that the Congress understood could happen where you might have a liquidation without a disposition. There's language in 559 that says in the event of a liquidation, you any excess of the market prices received on liquidation of some assets. And then in a parenthetical, it says, or if any sets assets are not disposed of on the date of liquidation of such repurchase agreements, at the prices available at the time of liquidation of such repurchase agreements from generally recognized sources, or the most recent closing bid quotation from such a source. So Congress, we don't have any closing bid quotation. We don't because the market was in disarray at the time. Well, and all this does is permit them to proceed to liquidate. I mean, that's the purpose of the section. Yes, Your Honor. True. But if it's also understood, Congress understood that there might be instances where you are liquidating, but you haven't disposed of it yet. Now, if they had liquidated and come up with a huge deficiency claim, you then argue that their liquidation was not commercially reasonable because they could have held on, should have held on to these mortgages. Absolutely, Your Honor. 562 is how you determine the deficiency claim and 562 uses the term, was there a commercially reasonable determinant value on the date of the liquidation? And if they had liquidated them at 10 cents on the dollar, when if they could have held them for four or five, six years and recovered the entire amount due, then it would be fundamentally unfair and inequitable to have. So you have no problem with reading commercially reasonable as related to a disposition, but your position is it wouldn't have been commercially reasonable. That's correct, Your Honor. Another question earlier though, the parties to these kinds of agreements are really not in the business of holding these things. The whole concern of Congress and the nature of the transaction is rapidly quittedly, you don't buy the portfolio with the idea of sitting on the mortgages in the portfolio until they mature. That's not what you're trying to do. That's the way the market was supposed to work and it may be that's why the market collapsed because what you're doing this kind of process in the marketplace all the time. You hold them, your profit rise from the cash flow with the closing of portfolio, not you're scrubbing paper back and forth. And as Mr. Ackerly correctly pointed out under the terms of the repo agreement here, they had the right to hold these loans if they made that decision. So obviously, Callion, when they drafted the contract understood there might be a situation where we don't like the market price. So we're going to hold them instead and or the eight hole and be made whole. Well, except that if you add up the income that's coming in, they're going to be made all anyway. Yes, you're absolutely. So it's not a bad deal

. So Congress, we don't have any closing bid quotation. We don't because the market was in disarray at the time. Well, and all this does is permit them to proceed to liquidate. I mean, that's the purpose of the section. Yes, Your Honor. True. But if it's also understood, Congress understood that there might be instances where you are liquidating, but you haven't disposed of it yet. Now, if they had liquidated and come up with a huge deficiency claim, you then argue that their liquidation was not commercially reasonable because they could have held on, should have held on to these mortgages. Absolutely, Your Honor. 562 is how you determine the deficiency claim and 562 uses the term, was there a commercially reasonable determinant value on the date of the liquidation? And if they had liquidated them at 10 cents on the dollar, when if they could have held them for four or five, six years and recovered the entire amount due, then it would be fundamentally unfair and inequitable to have. So you have no problem with reading commercially reasonable as related to a disposition, but your position is it wouldn't have been commercially reasonable. That's correct, Your Honor. Another question earlier though, the parties to these kinds of agreements are really not in the business of holding these things. The whole concern of Congress and the nature of the transaction is rapidly quittedly, you don't buy the portfolio with the idea of sitting on the mortgages in the portfolio until they mature. That's not what you're trying to do. That's the way the market was supposed to work and it may be that's why the market collapsed because what you're doing this kind of process in the marketplace all the time. You hold them, your profit rise from the cash flow with the closing of portfolio, not you're scrubbing paper back and forth. And as Mr. Ackerly correctly pointed out under the terms of the repo agreement here, they had the right to hold these loans if they made that decision. So obviously, Callion, when they drafted the contract understood there might be a situation where we don't like the market price. So we're going to hold them instead and or the eight hole and be made whole. Well, except that if you add up the income that's coming in, they're going to be made all anyway. Yes, you're absolutely. So it's not a bad deal. No, not for not for Callion. I'm out of time unless your your honors have any other questions. Thank you very much. Thank you very much. Let me just address some of the points which were raised by Mr. Dorsey. His definition of commercially reasonable is not consistent with the well known understanding of what commercially reasonable means. It deals with disposition in the marketplace. The phrase came from the uniform commercial code. And it's an article nine of the uniform commercial code which deals with how a secured creditor must dispose of the collateral in order to have a deficiency claim. And the disposition of the collateral must be commercially reasonable. So also the legislative history to five sixty two talks about appable state law standards for determining commercially reasonable. Now, those are two standards in my view. One is the contract standard which I talked about in my direct which which said that upon a default if we were going to liquidate the collateral, we had to we had to do it in accordance with market conditions, what the market would pay for them. And so that's a commercially reasonable standard. And of course the other commercially reasonable standard is the acceptable UCC definition of commercially reasonable. So we think we think I mean when I read this statute to begin with and saw commercially reasonable determinants of value. The first thing that came to my mind was article nine of uniform commercial code because that's been beat into our heads for about forty or fifty years. On the other hand, you said yourself that had you proceed to a disposition, you would have had a huge deficiency claim. Correct. And as we learned from Mr. Dorsey, he would have said that you say your disposition was not commercially reasonable because you would have been doing that when you had a good option. I mean there are lots of times when there are mortgage foreclosures and you can say, oh you shouldn't have foreclosed because of the cash flow because you have mortgage payments. Well of course they're all in default

. No, not for not for Callion. I'm out of time unless your your honors have any other questions. Thank you very much. Thank you very much. Let me just address some of the points which were raised by Mr. Dorsey. His definition of commercially reasonable is not consistent with the well known understanding of what commercially reasonable means. It deals with disposition in the marketplace. The phrase came from the uniform commercial code. And it's an article nine of the uniform commercial code which deals with how a secured creditor must dispose of the collateral in order to have a deficiency claim. And the disposition of the collateral must be commercially reasonable. So also the legislative history to five sixty two talks about appable state law standards for determining commercially reasonable. Now, those are two standards in my view. One is the contract standard which I talked about in my direct which which said that upon a default if we were going to liquidate the collateral, we had to we had to do it in accordance with market conditions, what the market would pay for them. And so that's a commercially reasonable standard. And of course the other commercially reasonable standard is the acceptable UCC definition of commercially reasonable. So we think we think I mean when I read this statute to begin with and saw commercially reasonable determinants of value. The first thing that came to my mind was article nine of uniform commercial code because that's been beat into our heads for about forty or fifty years. On the other hand, you said yourself that had you proceed to a disposition, you would have had a huge deficiency claim. Correct. And as we learned from Mr. Dorsey, he would have said that you say your disposition was not commercially reasonable because you would have been doing that when you had a good option. I mean there are lots of times when there are mortgage foreclosures and you can say, oh you shouldn't have foreclosed because of the cash flow because you have mortgage payments. Well of course they're all in default. So the only commercially reasonable thing to do is to foreclose. But here where you didn't attack the methodology of the expert as to what the discounted cash flow really is, you know you're kind of backing yourself into the thought that auctioning off as compared to this discounted cash flow was not commercially reasonable. Judge the reason we didn't attack the experts methodology is our clear reading of the statute was that this Congress was looking at market. What you could sell the mortgages for not a discounted cash flow and there is absolutely no dispute. You could have sold. Yes. You could have sold. And it's Mr. Dorsey. What if you would have it would have been really low. You could have sold. There was a market correct. Our expert test that they might be worth as much as ten cents on the dollar. We could have sold your honor but the sale would not have been commercially reasonable because it was so. Okay. Under the UCC. That's right. So if we had sold a ten cents on the dollar and Mr. Dorsey had objected and we were standing here today arguing about it, you would have said ten cents on the dollar is not commercially reasonable. So but you made a choice. The point is that you had a choice to make and you made a choice which is to put to use the asset to deliver a stream of income. That's commercially reasonable and that's what the expert said. The expert said, well, a generally exception that if you have assets and you get money for them, then go ahead and do it. If you read Dr

. So the only commercially reasonable thing to do is to foreclose. But here where you didn't attack the methodology of the expert as to what the discounted cash flow really is, you know you're kind of backing yourself into the thought that auctioning off as compared to this discounted cash flow was not commercially reasonable. Judge the reason we didn't attack the experts methodology is our clear reading of the statute was that this Congress was looking at market. What you could sell the mortgages for not a discounted cash flow and there is absolutely no dispute. You could have sold. Yes. You could have sold. And it's Mr. Dorsey. What if you would have it would have been really low. You could have sold. There was a market correct. Our expert test that they might be worth as much as ten cents on the dollar. We could have sold your honor but the sale would not have been commercially reasonable because it was so. Okay. Under the UCC. That's right. So if we had sold a ten cents on the dollar and Mr. Dorsey had objected and we were standing here today arguing about it, you would have said ten cents on the dollar is not commercially reasonable. So but you made a choice. The point is that you had a choice to make and you made a choice which is to put to use the asset to deliver a stream of income. That's commercially reasonable and that's what the expert said. The expert said, well, a generally exception that if you have assets and you get money for them, then go ahead and do it. If you read Dr. Clayton's testimony start to finish. He said very clearly and Judge Rendell recognized this. He said very clearly that if you've got a dysfunctional market, you hold. You hold the mortgages and his value is premised on holding mortgages to a charity. I can't say it enough, Your Honor, but it is undisputed in this case that a discounted cash flow valuation will give you a value on these mortgages if there are atomic bombs going off in Philadelphia. Okay. It might not be commercially reasonable depending on what you're getting. Now these mortgages even do agree by the way that the expert used a 50% default rate in evaluating. He took the mortgages that were then delinquent. That were then delinquent, the ones that were delinquent and apply to a 50% default rate. In fact, we've experienced much higher default rates since August of 2007. And some property may have gone up in value too. Not where I'm from, Your Honor. Well, but we don't have any figures on that. We don't. That's not in the evidence. I mean fundamentally, our argument to you all is that if you all accept the discounted cash flow value as Judge Sonsi accepted it, I.e. you use the discounted cash flow when the market is dysfunctional and you can't sell the mortgages, then you are writing out of existence sections B and C of 562 with respect to mortgage agreements. And is it any other doc any or sort of payment document that's covered under 562 that has regular monthly payments. You're simply writing it out of existence. You're making the statute because that will always be the case always gives you a valid discounted cash flow always gives you a value not defeated such that Sonsi didn't dispute it. They don't dispute it. Their expert doesn't dispute it

. Clayton's testimony start to finish. He said very clearly and Judge Rendell recognized this. He said very clearly that if you've got a dysfunctional market, you hold. You hold the mortgages and his value is premised on holding mortgages to a charity. I can't say it enough, Your Honor, but it is undisputed in this case that a discounted cash flow valuation will give you a value on these mortgages if there are atomic bombs going off in Philadelphia. Okay. It might not be commercially reasonable depending on what you're getting. Now these mortgages even do agree by the way that the expert used a 50% default rate in evaluating. He took the mortgages that were then delinquent. That were then delinquent, the ones that were delinquent and apply to a 50% default rate. In fact, we've experienced much higher default rates since August of 2007. And some property may have gone up in value too. Not where I'm from, Your Honor. Well, but we don't have any figures on that. We don't. That's not in the evidence. I mean fundamentally, our argument to you all is that if you all accept the discounted cash flow value as Judge Sonsi accepted it, I.e. you use the discounted cash flow when the market is dysfunctional and you can't sell the mortgages, then you are writing out of existence sections B and C of 562 with respect to mortgage agreements. And is it any other doc any or sort of payment document that's covered under 562 that has regular monthly payments. You're simply writing it out of existence. You're making the statute because that will always be the case always gives you a valid discounted cash flow always gives you a value not defeated such that Sonsi didn't dispute it. They don't dispute it. Their expert doesn't dispute it. That might be the result. But why isn't that a commercially reasonable between because it should be very close tomorrow. It should but their experts said when the market is dysfunctional, it's not. But this function is different from. Or perhaps. Well, my time is up and I think our briefs make the case and I hope we helped you. Thank you very much. Thank you. Thank you. We think both sides for very interesting. Very interesting. If we can say that if they're fake freaky like this. It was interesting. And very interesting. Thank you very much for your argument and your briefing will take the matter under advise. Thank you. Thank you.

Good morning everyone. This is a American Home Workage Matter that was postponed from early date. Good morning. May it please the court. My name is Ben Acreley and along with Jason Harbor and Michael Buzon-Kill. We represent the appellant credit, agriculture, corporate and investment bank New York branch, which was formerly known as Callion New York branch. I'm Michael from Working. Maybe another closer to work. Yes, it is working. Get a little closer if you wouldn't mind. Before I started wanting to talk about this, hope that things went okay with your family matter. We all have children and we were all struck by your letter. Hopefully that's... Thank you very much. I wanted to thank Mr. Dorsey too for consenting to the continuum. It's a pretty awful branding and I very much appreciate that. I think that helped us keep our priorities in mind. You've moved a lot of money here. It's only money. The issue before the court is what does the phrase commercially reasonable determinants of value be? As it is used in Section 562 of the bankruptcy code. Mr. Ayrling, I'm not very sophisticated in the... So I took you all bear with me when I ask you from a practical standpoint. What's an issue here? As I understand it, your client purchased a portfolio of mortgages. It has the portfolio of mortgages. It's getting income, stream of income from the portfolio. But it doesn't want to sell the portfolio at this time. But it wants damages. It sounds to me a little bit like it's eating its cake and still having it. How is that wrong? Well, let me address that. What's an issue here is what is known as a repurchase agreement. We understand that. We dread it. My client is the agent for a number of banks who purchased mortgages from the debtor. Under a repurchase agreement, it was kind of a warehouse arrangement where about we purchased the mortgages which enabled them to finance them. And then they were going to buy them back. And under the repurchase agreement, they had an obligation to buy them back. If they defaulted on that obligation, Kayaan had a claim for the repurchase price plus whatever interest had accrued on the repurchase price. But you haven't sold them. I mean, the market is as the bankruptcy court, as it will, is redispunctural. So you still have the mortgages. You're still getting money from the mortgages. But you want damages. The bankruptcy. The bankruptcy court, your bankruptcy code, your honor in Section 562 mandates that the damages be measured as of a specific date. And that's to prevent speculation on the mortgages going up and down. Judge Lovita's question is, you're getting money. You're getting money from these mortgages as we sit here. Each month you're getting cash. And why isn't that good enough? Because under the... I think maybe you need to explain what your bargain was and how you're being harmed by just getting cash. And bargain, your honor, was to be paid the repurchase price plus interest. And how would... In a quick time frame. In a quick time. Are you going to have to report agreements under a year? Generally, generally. But I mean, you asked how... How are you hurt by what the situation is right now? Well, your honor, we're hurt because we're owed about $900 million. That's... That depends on what commercially reasonable... The permanence plural of value under 562 means that... That's correct. But the repurchase... The bankruptcy code mandates that we value them on a specific date, unless there's no commercially reasonable determinant on that date. Now, what the bankruptcy court was concerned about was that we were somehow going to get a win fall because we were holding on to the mortgages. That is quite impossible. Well, because that's the question... Explain this. Explain this. The practical reality of this financing. Okay. Well, it's impossible because, first off, your honor, it assumes that we're going to hold the mortgages for the entire 30 years. Secondly, it assumes that on our deficiency cleaning, whatever that may be... And that's not your deal. Your deal is not to hold. Your deal is to get rid of them. That's what you bargained for, correct? No. Under our contract, we had the right to hold them. We had the right under the contract to hold them, and give them a credit for the market value. That's in the repurchase agreement. We had that right. But what I'm saying is, there's no win fall here because under the bankruptcy code, under Section 559 of the bankruptcy code, which is the other one that's here, if we liquidate the mortgages and sell them, and there is an access over at the repurchase price, that belongs to the debtor. So there's no situation here where we enjoy a win fall. It's the debtor who is protected here because 562 prevents a unreasonable value being placed on the mortgages before there's a commercially reasonable value. So, in fact, as the evidence in this case was, on the 562A measuring date, which we contend is not the proper measuring date, these move which was worth somewhere between zero and ten cents on the dollar. At the time that we considered being a commercially reasonable, they were worth 50 cents on the dollar. But if you acknowledge that you can't hold on to them for the term, and the discounted cash flow is what it is, why are you being hurt? Well, we don't, for instance, acknowledge that we can't hold on to them because the repurchase agreement says we can't hold on to them if we elect to hold on to them. We, upon a default, there's been no bankruptcy here. Upon a default, we can hold on to the mortgage for the entire term. We have to give them a credit of what the market value is, if we elect to do that. We have to give them a credit of what the market value is for the term. Or we can perceive a liquidate for the mortgages. And if we liquidate them for more, then we're owed. They go back, access goes back to the debtor. If you hold on to these mortgages and you get the money over time, why is not discounted cash flow the appropriate determinant of value? John, it's not the appropriate determinant of value just because of the clear language in Section 562. It's not the right way to do that. But the debtors expert said that was the way to value it. And in fact, isn't that ordinarily the generally accepted, the discounted cash flow method? Isn't that generally accepted in the area? I think not really so. The discounted cash flow is used in valuing mortgages, but it's used in connection with the market value as well. And here it was done with any regard to the market. Not at all. But you say that it should have said market or price. And if the discounted cash flow method isn't generally accepted way to measure the value of a mortgage portfolio, why? And the back of the judge said, listen to the testimony, the evidence and said, yep, that's a good way. What's wrong with what the back of the court did? Because the discounted cash flow, your honor, valued these mortgages at par, I mean, valued them over a billion dollars, when it couldn't be sold for that amount. That doesn't mean it's not worth paying for that amount. But then on the other hand, you're saying you could hold on to them. And if you hold on to them, the value it seems to me would be the discounted cash flow. If you hold on to them, not to realize the discounted cash flow, your honor, you hold on to them to realize an increase in value of the market so you can sell them for more. People go out into the market and what they want is a stream of income. And that's what you have, a stream of income. You would read that these mortgages are giving your fine income, right? Correct. Okay. So why isn't that a reasonable determinant of value? If I want to go out, if I had a little money and I want to go out and get something for it, then what I look for is the income that those assets will give me. Why isn't that reasonable? It's not reasonable, it's not reasonable, your honor, because in order to realize the discounted cash flow valuation of these mortgages, you have to assume there will be very few defaults and we're not in that economy. You have to wait 30 years to realize it. And banks don't typically hold them for 30 years. If you can pick whatever they you want, you'd look as if you were to four dates. But if you're holding them, you can sell them whenever you want. The market may get way off. And if we sell them the honor and we recover more than we are owed that money belongs to the better. Mr. Agrily, isn't your real answer? Maybe I'm wrong. But isn't your answer that you're in the business of dealing in repo agreements? You're not in the business of holding mortgages. And your bargain here was to hold them and get them and send them back and that liquidity and the ability to turn these back is what your deal was. So the idea that you're holding these mortgages, the fact that you could, wouldn't it mean that you're in the business that you're not in? Am I wrong? I'm not saying either. If we're sending these back and that liquidity is important. So I was actually buying your argument. But by virtue of your saying you hold on to them, if you hold on to them, discounted cash flow works. If we hold on to them though, you're on it. We have to give them a credit for their market value. So it's just that doesn't really help you. I said, man, we understand that you're not going to get a win for and that's it. It sounds to me like you want them to guarantee your investment in the sense that you're going to end up with. It was down your way. It was down your head then for the deficiency. It goes up. You sit on the increase, but you give them the amount over the agreement. But you still end up with an insured investment. You know, I, with all due respect, I believe that argument is incorrect. No one's insuring our claim here. No, no one's insuring our claim. The Congress, I think, was very careful in 5.62 to say, you've got to measure these claims on a certain date. Whether you sell them or not, that's when you measure them. Now, let's assume for a moment that we had sold the mortgages on the acceleration date for 10 cents on the dollar. We would have had a $900 million deficiency claim in the bankruptcy. You would have taken the risk, but you're not taking the risk now. Now you have no risk. You're just holding on to them. You're getting the stream. And what's the risk? We may not have, I would disagree with the risk because I think this is a risky economy that we're in. Well, but we, but we contracted to be owed a certain amount of money. And we're not, we haven't been paid that amount of money. And it's too, too, we're paid that amount of money. It seems to me we've got the risk. You know, I know your brief says that Congress intended 559 and 562 to prevent ill-equity caused by the automatic state. I mean, that was the whole point behind those provisions. Isn't the ill-equity here caused by market forces? Well, I mean, if I understand your question correctly, Your Honor, I think, you know, it's our whole position in this case that the value of these things was strictly affected by market forces. And that's, that's what affected the value of these, these mortgages. Why didn't we sell? Why didn't we sell? Because we, we, we, we, we have a large deficiency claim, which would probably get paid to a three cents on the dollar. And so we decided to hold onto the mortgages until the market has improved a little bit. Is that clear that it's two or three cents on the dollar? I think it's pretty clear, Your Honor. What's the money that's at stake here? The, the money that's at stake here. If you're correct, what will the debtor have to, or at least? It would, it would have to pay us. I mean, our claim, our claim we can tend is $478 million. Right, but two, two or three cents, two or three cents on that. You know, Congress, you say that it's market or sale price that, that is what, what's addition. Congress didn't say that. I mean, Congress, you, Congress knows how to write words in a statute in the entire obligation to follow the words that Congress used, not the words that Congress didn't use, but could have. And that's a much simpler way to express what you say the statute means. They just say, if they're, if, if market value, rather than commercially reasonable determinants, and again, that plural determinants suggest there's got to be something other than market value that Congress had in market. Your Honor respectfully disagree. Commercial reasonable determinants of value is a broader term than market value. The reason section, that's right. The reason section 559 used market value is because 559 only deals with the situation where there's an excess over the repurchased price. So it's presumably commercially reasonable when you have an excess over the purchase price. 562 only deals with the deficiency claim. And Congress was very careful to use the phrase commercially reasonable determinants of value, because if they just said market, we could have sold them for ten cents on the dollar on the acceleration date, and contended that was the market, but would that have been commercially reasonable? We did not think so because there was an issue about clear title. There was an issue about who was getting the money. We couldn't give reps in warranties. Why isn't discounted cash flow commercially reasonable? Discounted cash flow is not commercially reasonable because it has nothing to do with the market. And that's so clear in this record it's beyond dispute. It has nothing whatsoever to do with market is purely a mathematical formula. I have run way over my time and I'd like to preserve a little bit. Thank you. Did you reserve some time? Okay. Great. Thank you. Yes, more time to strike with. May it please the court. Good morning. My name is John Dorsey. I represent American Home Mortgage Holdings Inc. at all. The debtors below and the Appleese before this court. I'm here with my colleague today. Excuse me, Michelle Budesack. I just wanted to make three quick points. I assume she did all the work. Use the works that way. The person who doesn't talk did all the work. She did do all the work in order. She did an excellent version of the first draft of this brief. I had to make very few changes to it. So she's a very good lawyer. Remember that when it comes. It's coming up very soon too. Just wanted to make three points with the guard to oral argument this morning. We're not asking this court to do anything other than what Callion itself did outside the context of this litigation. And that is to value the mortgage loans based on a discounted cash flow value. Where did it do that? The evidence below showed that when Callion was determining how to record these mortgages on its books and records. It used a discounted cash flow value. It even got a- That's a for a purpose of financing. And that's a financial measure that you can put on your books. If you don't have an appraisal, you can use that for purposes of a financial statement. But that's not probative of the market, is it? Well, I think- I don't think it's probative of the market. I think you're right, you're right, you're wrong. Because they actually asked their auditors for an opinion. Can we use discounted cash flow to do- To put this on a book's record. Or do we have to use the market value? And their auditor said use discounted cash? The question was that goes to- I guess it's one one four bits. It's generally accounting- It's generally accounting principle that that method is consistent with. And the question suggests that the reason that was okay was because in terms of how you track this stuff on paper, under the general accepted accounting principles, it's okay. That's correct. That's correct. That I'm not sure if that goes to Mr. Ackerley's claim about whether or not under the terms of the repurchase agreement in 5-6-2, it's consistent using that generally accounting- Generally accepted accounting principles consistent with the congressional intent in drafting 5-6-2. And that's the problem here. Well, you're on our only raise that point to show that it is commercially reasonable to say- To value these mortgages based on a discounted cash flow. What did I use that for? In other words, once they put it on their books at the discounted cash flow basis, what happens? What does that then result in? Well, that results in how they carry it on their books and records, and whether they have to take a loss on those mortgage loans, which when the SNC, the shared national credit, came in and looked at these mortgage loans, and said, Calione, given all of the problems you're saying you have with these mortgage loans, you should write them off at 100%. And Calione said, no, no, no, we don't have to do that, because there really isn't any problem with these mortgage loans. Mr. George, your own expert testified, Mr. Clayton. He said, unless there's something very, very strange going on in the market, the market value of the assets and the discounted cash flow value of the assets will be very, very similar. Isn't that an admission that there's something very strange going on in the market? And when Congress said you use this other provision when there is no commercially reasonable determinant of the value, such as when there's a dysfunctional market, why isn't that so probative of what we have here, how are words out of your own expert? Well, we don't disagree, Your Honor, that there was a disruption in the marketplace. Everybody agrees it was a dysfunctional problem. And our expert testified that the disruption in the marketplace was not reflective of the actual true value of those mortgages, because if you looked at the discounted cash flow value, they still far exceeded what the market value was. But if we determine that Congress was talking about disposition, and I, well, commercially reasonable, that term, can you tell me when that's used in a context other than disposition? Well, in 562, I believe it's used in the context of just determining the value of that repo agreement at the particular time, whether it was the date of liquidation, termination, or acceleration. So it's not necessarily a disposition. And if you look at section, Hey, that's putting the rabbit in the hat. But can you give me an example of the use of the term, is the term of our commercially reasonable, in a context other than disposition of some type of asset? Other than the disposition, not off the top of my head, Your Honor. I cannot thank everyone. It comes up in the UCC when you're talking about, you have to use commercially reasonable ways to terminate, or to sell an asset once the secured party takes it back. And Congress itself said the references to commercially reasonable or intended to reflect existing state-wide standards relating to a creditor's actions. In determining damages. That's correct, Your Honor. How could that, when we're talking about creditor's actions and commercially reasonable has to do with, what a creditor does in disposing an asset? How can we then say, oh, but this theoretical calculation is what they intended? Because we've got to figure out what Congress intended. And I think it does relate to Calions' actions in this case. They chose from the very beginning, at the time they accelerated the repurchase agreement before the debtor was even in bankruptcy. They had made the decision they were going to hold these mortgage loans. That's what the evidence showed at the hearing. So, you're saying commercially reasonable means the way they put it on their books? I think the fact that they made the decisions to hold the mortgage loans and realize the income from those mortgage loans, goes to the question of what is commercially reasonable for purposes of determining what the deficiency claim against the debtors would have been. And there has to be some certainty as to what that deficiency claim is going to be. We can't wait for Calions to decide to go ahead and sell these in the marketplace at some point in time down the road. And the idea that they have to hold these for 30 years is overstates the position. The evidence showed, in fact, the stipulated facts of the hearing were that in the one-year period from August of 2007, when the debtor went into bankruptcy, in August of 2008, when Calions says that was the first time there was a commercially reasonable market value, they collected $222 million on these mortgage loans. And they continued to collect from August of 2008 until the time of the hearing in May of 2009. It's about 20% in that one-year period. Yes, Your Honor. And if you take into account what they earned after August of 2008 through the date of the hearing, that was another according to their fact witness, another $53 million. It raises that to 25% that they'd already recovered on these mortgage loans. Did Judge Sanchi talk about, I mean, what you're arguing is what's commercially reasonable is depending upon the context. Yes. And you look at what a creditor has done and then you determine based on what they're doing with the asset, what's the value to them. Judge Sanchi really didn't get into that. I mean, I think it's an interesting approach, but he didn't reason that way, do you? Trying to remember his, it was a long opinion, or I don't remember him getting into that specifically. A burden of proof, but he didn't look at what they actually did with the asset. And I think that's actually an interesting way of looking at it. That it's contextual. Are you saying it comes up to the same, get to the same place? Correct, Your Honor. And if you look at $559, it's clear that what Congress, and I think Your Honor was correct when you were talking with Mr. Ackerly, that Congress knows when to put market value in, when it means market value in $559 uses market value in determining how to calculate what a debtor would get back from a repo counterparty. But that deals only with the repo agreement. When you get to $562, there's a laundry list of types of property, master netting agreements, swap agreements. They may not, they may not be markets. So I mean, it would seem to me when it says if there are not any commercially reasonable determinants of value, referring to all these different kinds of things, security clearing agencies. And it seemed to me if they did say market value, you might have a problem with figuring out a market for some of these things. Well, I think some of those things, Your Honor, would only have a market value. There's no way there's not an income stream earned from those. And I'm sorry. That's all right. Let me ask you. I'm still stuck on your 20% and your 25%. 20% of, well, how are you valuing that? If you look at the total. What is the principle? The total amount that was owed under the repurchase agreement at the time of the acceleration was approximately $1.1 billion. Yeah, yeah. But then they paid off the. The Calian. They were off 70 something million and some other get cut down to 900 and something million. Yes, Your Honor, there was a period of time when the debtor was holding the income that was coming in because they were still technically. The servicer for those mortgages. So you take. So what you're doing is you're taking the. The asset. Let's say it's worth a million dollars, a billion dollars for our purposes. And you say they're getting X number of dollars each year. And that's where you got your 20% and then your 25%. No, the 20% would have been the actual amount received from August 1st. Yes, but it's 20% of what? 20% of the total 1.1 billion. Okay. All right. Now, so if you're right and they're getting in 20% the first year and 25% the next year in four years, they'll get back a whole value. That's exactly right. Now, we don't know exactly because there may be an increase in default rates and things like that. But that's the way mortgages work. We all know we all have mortgages and they're all front loaded with interest. So you pay mostly interest in the first five or six or ten years. On the default, didn't the Clayton say that he's discounting 50% for the default? He did take into account a default rate. And in fact, the evidence of the hearing and it surprised you had Sanci was that Dr. Clayton had actually performed a discounted cash flow for each and every one of the mortgages contained in the portfolio and took into account a potential default rate. So how does that work? So what is the 50% of? I don't understand the mechanics of what the total. Well, Dr. Clayton couldn't know in the future what the default rate was going to be. So he had to pick a number. He hypothesized about potential. But he then used that to calculate what the discount rate would be for the cash flows associated with. So when Mr. Agarly told us that they have to worry about the default rate, that was taken into account in his testimony. He did take a default rate into account, Your Honor. Now he did testify on cross examination with Mr. Agarly that he didn't take into account the potential increase in the default rate going into the future. I mean, they would default more. Correct. But that's consistent with Section 562, which says you have to look at the value of the repo agreement on the date that they accelerated it. And as Dr. Clayton testified, the only way to do a discounted cash flow is to look at the default rate on that specific day, not looking at what might possibly happen. Well, the methodology is not really an issue. There's no tax. That's correct. Yes, they put on no evidence to read about Dr. Clayton's testimony about how did perform a discounted cash flow. And so the bankruptcy judge accepted that. Yes, Your Honor. And I was going to point out in Section 559, there is a scenario that the Congress understood could happen where you might have a liquidation without a disposition. There's language in 559 that says in the event of a liquidation, you any excess of the market prices received on liquidation of some assets. And then in a parenthetical, it says, or if any sets assets are not disposed of on the date of liquidation of such repurchase agreements, at the prices available at the time of liquidation of such repurchase agreements from generally recognized sources, or the most recent closing bid quotation from such a source. So Congress, we don't have any closing bid quotation. We don't because the market was in disarray at the time. Well, and all this does is permit them to proceed to liquidate. I mean, that's the purpose of the section. Yes, Your Honor. True. But if it's also understood, Congress understood that there might be instances where you are liquidating, but you haven't disposed of it yet. Now, if they had liquidated and come up with a huge deficiency claim, you then argue that their liquidation was not commercially reasonable because they could have held on, should have held on to these mortgages. Absolutely, Your Honor. 562 is how you determine the deficiency claim and 562 uses the term, was there a commercially reasonable determinant value on the date of the liquidation? And if they had liquidated them at 10 cents on the dollar, when if they could have held them for four or five, six years and recovered the entire amount due, then it would be fundamentally unfair and inequitable to have. So you have no problem with reading commercially reasonable as related to a disposition, but your position is it wouldn't have been commercially reasonable. That's correct, Your Honor. Another question earlier though, the parties to these kinds of agreements are really not in the business of holding these things. The whole concern of Congress and the nature of the transaction is rapidly quittedly, you don't buy the portfolio with the idea of sitting on the mortgages in the portfolio until they mature. That's not what you're trying to do. That's the way the market was supposed to work and it may be that's why the market collapsed because what you're doing this kind of process in the marketplace all the time. You hold them, your profit rise from the cash flow with the closing of portfolio, not you're scrubbing paper back and forth. And as Mr. Ackerly correctly pointed out under the terms of the repo agreement here, they had the right to hold these loans if they made that decision. So obviously, Callion, when they drafted the contract understood there might be a situation where we don't like the market price. So we're going to hold them instead and or the eight hole and be made whole. Well, except that if you add up the income that's coming in, they're going to be made all anyway. Yes, you're absolutely. So it's not a bad deal. No, not for not for Callion. I'm out of time unless your your honors have any other questions. Thank you very much. Thank you very much. Let me just address some of the points which were raised by Mr. Dorsey. His definition of commercially reasonable is not consistent with the well known understanding of what commercially reasonable means. It deals with disposition in the marketplace. The phrase came from the uniform commercial code. And it's an article nine of the uniform commercial code which deals with how a secured creditor must dispose of the collateral in order to have a deficiency claim. And the disposition of the collateral must be commercially reasonable. So also the legislative history to five sixty two talks about appable state law standards for determining commercially reasonable. Now, those are two standards in my view. One is the contract standard which I talked about in my direct which which said that upon a default if we were going to liquidate the collateral, we had to we had to do it in accordance with market conditions, what the market would pay for them. And so that's a commercially reasonable standard. And of course the other commercially reasonable standard is the acceptable UCC definition of commercially reasonable. So we think we think I mean when I read this statute to begin with and saw commercially reasonable determinants of value. The first thing that came to my mind was article nine of uniform commercial code because that's been beat into our heads for about forty or fifty years. On the other hand, you said yourself that had you proceed to a disposition, you would have had a huge deficiency claim. Correct. And as we learned from Mr. Dorsey, he would have said that you say your disposition was not commercially reasonable because you would have been doing that when you had a good option. I mean there are lots of times when there are mortgage foreclosures and you can say, oh you shouldn't have foreclosed because of the cash flow because you have mortgage payments. Well of course they're all in default. So the only commercially reasonable thing to do is to foreclose. But here where you didn't attack the methodology of the expert as to what the discounted cash flow really is, you know you're kind of backing yourself into the thought that auctioning off as compared to this discounted cash flow was not commercially reasonable. Judge the reason we didn't attack the experts methodology is our clear reading of the statute was that this Congress was looking at market. What you could sell the mortgages for not a discounted cash flow and there is absolutely no dispute. You could have sold. Yes. You could have sold. And it's Mr. Dorsey. What if you would have it would have been really low. You could have sold. There was a market correct. Our expert test that they might be worth as much as ten cents on the dollar. We could have sold your honor but the sale would not have been commercially reasonable because it was so. Okay. Under the UCC. That's right. So if we had sold a ten cents on the dollar and Mr. Dorsey had objected and we were standing here today arguing about it, you would have said ten cents on the dollar is not commercially reasonable. So but you made a choice. The point is that you had a choice to make and you made a choice which is to put to use the asset to deliver a stream of income. That's commercially reasonable and that's what the expert said. The expert said, well, a generally exception that if you have assets and you get money for them, then go ahead and do it. If you read Dr. Clayton's testimony start to finish. He said very clearly and Judge Rendell recognized this. He said very clearly that if you've got a dysfunctional market, you hold. You hold the mortgages and his value is premised on holding mortgages to a charity. I can't say it enough, Your Honor, but it is undisputed in this case that a discounted cash flow valuation will give you a value on these mortgages if there are atomic bombs going off in Philadelphia. Okay. It might not be commercially reasonable depending on what you're getting. Now these mortgages even do agree by the way that the expert used a 50% default rate in evaluating. He took the mortgages that were then delinquent. That were then delinquent, the ones that were delinquent and apply to a 50% default rate. In fact, we've experienced much higher default rates since August of 2007. And some property may have gone up in value too. Not where I'm from, Your Honor. Well, but we don't have any figures on that. We don't. That's not in the evidence. I mean fundamentally, our argument to you all is that if you all accept the discounted cash flow value as Judge Sonsi accepted it, I.e. you use the discounted cash flow when the market is dysfunctional and you can't sell the mortgages, then you are writing out of existence sections B and C of 562 with respect to mortgage agreements. And is it any other doc any or sort of payment document that's covered under 562 that has regular monthly payments. You're simply writing it out of existence. You're making the statute because that will always be the case always gives you a valid discounted cash flow always gives you a value not defeated such that Sonsi didn't dispute it. They don't dispute it. Their expert doesn't dispute it. That might be the result. But why isn't that a commercially reasonable between because it should be very close tomorrow. It should but their experts said when the market is dysfunctional, it's not. But this function is different from. Or perhaps. Well, my time is up and I think our briefs make the case and I hope we helped you. Thank you very much. Thank you. Thank you. We think both sides for very interesting. Very interesting. If we can say that if they're fake freaky like this. It was interesting. And very interesting. Thank you very much for your argument and your briefing will take the matter under advise. Thank you. Thank you