Former Thornburg Mortgage trustee's Liberty Mutual settlement approved

By Caroline Salls

Pittsburgh, Aug. 27 - TMST, Inc. Chapter 11 trustee Joel I. Sher received court approval of a settlement with Liberty Mutual Insurance Co., according to an Aug. 27 filing with the U.S. Bankruptcy Court for the District of Maryland.

Sher said the settlement deals with surety bonds that were jointly issued by Thornburg Mortgage Home Loans, Inc. (TMHL) as principal and Liberty Mutual as surety to support TMHL's mortgage origination business.

Before the surety bonds were issued, TMST and TMHL executed an indemnity agreement in favor of Liberty Mutual, agreeing to indemnify it for payments it made on the surety bonds.

As security for their obligations, TMST and TMHL posted more than $3 million in collateral with Liberty Mutual.

The trustee said Liberty Mutual agreed that its liability on a number of these surety bonds has expired, or is set to expire on agreed upon future dates and, as a result, it will return more than $2 million of the proceeds of the collateral it is holding, equal to the penal sums of the expired surety bonds, and will return additional proceeds on specified future dates.

Sher said the settlement also addresses the proofs of claim Liberty Mutual has filed, as well as other matters arising out of the surety bonds and the indemnity agreement executed by TMST and TMHL.

Settlement details

The specific terms of the settlement include the following:

• Liberty Mutual will pay $2.28 million to the trustee, representing the sum of the penal sums of 15 of the surety bonds, less $99,613 in attorney's fees and costs incurred by Liberty Mutual to date;

• Liberty Mutual may reimburse itself from a collateral account for up to $100,000 in attorney's fees and costs it may incur in connection with the surety bonds and indemnity agreement;

• Liberty Mutual agrees that its liability on 16 of the surety bonds will expire on June 30, 2014, Sept. 30, 2016 and June 30, 2018, provided that no claims are made against those surety bonds by those dates;

• Liberty Mutual will return collateral corresponding to the penal sums of these penal bonds as they expire, less the amount that Liberty Mutual has paid on any claim against that bond and the amount of any pending demand made against the bond, provided that upon final resolution of each pending demand, Liberty Mutual will pay to the trustee the difference between the amount of the pending demand and the amount actually paid by Liberty Mutual upon final resolution of each pending demand;

• The parties will continue to negotiate on the five surety bonds for which they have been unable to agree on a claims deadline; and

• The parties agree that proof of claim for any claim that Liberty Mutual may have under the surety bonds will be disallowed as a claim in the TMST debtors' bankruptcy cases on the grounds that they are claims for reimbursement that is contingent at the time of allowance or disallowance.

TMST was formerly Thornburg Mortgage, Inc., a Santa Fe, N.M.-based lender specializing in jumbo mortgages. Thornburg filed for bankruptcy on May 1, 2009 under Chapter 11 case number 09-17787.

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