In re Residential Capital, LLC
| Citation | 517 B.R. 462 |
| Decision Date | 06 October 2014 |
| Docket Number | Case No. 12–12020 MG Jointly Administered |
| Parties | In re: Residential Capital, LLC, et al. Debtors. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
Frank Reed, Pro Se, 817 Matlack Drive, Moorestown, New Jersey 08057, By: Frank Reed.
Reed Smith LLP, Attorneys for ResCap Borrower Claims Trust, Princeton Forrestal Village, 136 Main Street, Suite 250, Princeton, New Jersey 08540, By: Diane A. Bettino, Esq., Barbara K. Hager, Esq.
Morrison & Foerster LLP, Attorneys for ResCap Borrower Claims Trust, 250 West 55th Street, New York, New York 10019, By: Norman S. Rosenbaum, Esq., Jordan A. Wishnew, Esq., Meryl L. Rothchild, Esq.
This is a case involving, on the one hand, seemingly undeserving borrowers—who have not paid their mortgage, property taxes, or homeowners' insurance for over seven years but continue to occupy their home—and, on the other, a loan servicer that was willing to cut corners and ignore applicable law while proceeding with an improperly filed foreclosure action. Frank and Christina Reed (the “Reeds”) defaulted on their mortgage in early 2008; their default led to two related prepetition lawsuits filed in New Jersey state court: (1) a foreclosure action initiated by their then loan servicer, GMAC Mortgage, LLC (“GMACM”), on May 19, 2008 (the “Foreclosure Action”) and (2) a lawsuit filed by the Reeds against GMACM and Residential Funding Corp.1 related to the Foreclosure Action on May 10, 2010 (the “Reed Action”). The Reeds filed four claims (the “Claims”) in these bankruptcy cases: two claims against GMACM2 and two claims against Residential Capital, LLC (“ResCap”),3 based on the prepetition lawsuits.
As described below, the Foreclosure Action was dismissed because GMACM could not prove that it complied with New Jersey notice requirements before commencing its foreclosure action. Thereafter, the Reeds filed the Reed Action against GMACM for wrongful foreclosure, negligence, breach of contract, and estoppel. The Reeds were permitted to amend their original complaint (the “Reed Complaint”), and filed an amended complaint (the “Amended Complaint”) on January 6, 2012, adding claims for economic and non-economic losses stemming from the Foreclosure Action, punitive damages, and consumer fraud. The Reeds voluntarily dismissed the Reed Action on February 9, 2012, to participate in the Federal Reserve Board's Independent Foreclosure Review. On May 14, 2012 (the “Petition Date”), ResCap and various related entities (collectively, the “Debtors”) filed chapter 11 bankruptcy petitions, and the Reeds filed the Claims, seeking relief for the following: violation of the New Jersey Fair Foreclosure Act (the “FFA”) (Claim No. 1); negligence (Claim No. 2); breach of contract (Claim No. 3); punitive damages related to actual malice (Claim No. 4); violation of the New Jersey Consumer Fraud Act (the “CFA”) (Claim No. 5); and malicious use of process (Claim No. 6). Additionally, the Reeds sought to establish a constructive trust to avoid alleged unjust enrichment (Claim No. 7) and to be “made whole” under the Consent Order (defined below) (Claim No. 8).
The ResCap Borrower Claims Trust (the “Trust”), successor in interest to the Debtors for the purpose of resolving borrower claims, filed an objection to the Reeds' Claims on May 29, 2014.4 After a hearing on the Objection on July 9, 2014, the Court sustained the Objection in part and overruled the Objection without prejudice in part. (See “Preliminary Reed Order,” ECF Doc. # 7246.) The Court additionally set an evidentiary hearing (the “Evidentiary Hearing”) for September 15–16, 2014, for claims 2 (negligence), 3 (breach of contract), 4 (punitive damages based upon actual malice), and 5 (the Reeds' CFA claim) (collectively, the “Surviving Claims”); the Trust's Objection to the Reeds' other claims was sustained.5 (See id. ) The purpose of the Evidentiary Hearing was to determine whether the Trust is liable for any of the Reeds' Surviving Claims and, if so, the amount of damages incurred by the Reeds as a result.
At the Evidentiary Hearing,6 the Reeds called four witnesses: (1) Mr. Reed;7 (2) Christy Donati, a New Jersey attorney who testified regarding foreclosure custom and practice in New Jersey; (3) Evan Hendricks, who testified regarding the effect of a lis pendens on refinancing a mortgage loan; and (4) Drew Murdock, a friend of the Reeds. The Trust called one witness, Lauren Graham Delehey, Chief Litigation Counsel of the Trust and, formerly, of the Debtors (after the Petition Date) and ResCap (before the Petition Date). In addition to the testimony from these witnesses, each of the parties submitted documentary evidence over the course of the two-day Evidentiary Hearing.
After considering all of the evidence and arguments, the Court determines pursuant to section 502(b) of the Bankruptcy Code that the Reeds are entitled to one allowed unsecured claim against GMACM in the amount of $17,469.00, on one of their claims under the New Jersey Consumer Fraud Act—the amount of attorneys' fees they incurred ($5,823) in defending against the Foreclosure Action, trebled.8 The Reeds have not demonstrated that any other damages are recoverable from GMACM on any of the theories asserted in their Claims.
On the Petition Date, each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. The General Bar Date to file proofs of claim was originally set for November 9, 2012, and was extended to November 16, 2012 at 5:00 p.m. (Prevailing Eastern Time) (ECF Doc. # 2093). All of the Claims were timely filed.
On March 21, 2013, the Court entered the Procedures Order, approving, among other things, procedures to be applied for objections to claims filed by current or former Borrowers (the “Borrower Claims Procedures”) (ECF Doc. # 3294). The Procedures Order includes specific protections for Borrowers and sets forth a process for the Debtors (and now the Trust) before objecting to certain categories of Borrower Claims. The Borrower Claims Procedures require that before objecting to certain Borrower Claims, the Trust must send the Borrower a letter (a “Request Letter”) requesting additional documentation in support of the purported claim. (See Procedures Order at 4.)
On December 11, 2013, the Court entered an Order Confirming Second Amended Joint Chapter 11 Plan Proposed by Residential Capital, LLC, et al. and The Official Committee of Unsecured Creditors (the “Confirmed Plan,” ECF Doc. # 6065). The Confirmed Plan became effective on December 17, 2013 (the “Effective Date”). (ECF Doc. # 6137.) On the Effective Date, the Trust and the ResCap Liquidating Trust were established as successors in interest to the Debtors; the Trust is the successor in interest specifically with respect to Borrower Claims. (Id. ) The Trust was established to, among other things, “(i) direct the processing, liquidation and payment of the Allowed Borrower Claims in accordance with the Plan, and the distribution procedures established under the Borrower Claims Trust Agreement, and (ii) preserve, hold, and manage the assets of the Borrower Claims Trust for use in satisfying the Allowed Borrower Claims.” (Confirmed Plan, Art. IV.F.) The Trust is empowered to object to borrower claims that it believes do not reflect liability of the Debtors. The Trust filed its Objection to the Claims on May 29, 2014.
On May 31, 2006, the Reeds borrowed $1,000,000 (the “Loan”) from Metrocities Mortgage, LLC (“Metrocities Mortgage”), evidenced by a note (the “Note”) secured by a mortgage (the “Mortgage”) on real property located at 817 Matlack Drive, Moorestown, New Jersey (the “Property”).10 GMACM began servicing the Loan on June 27, 2006 but never owned the Note. GMACM continued servicing the Loan until servicing was transferred to Ocwen Loan Servicing, LLC (“Ocwen”) on February 15, 2013. Ocwen thereafter transferred servicing to 21st Mortgage Corp. on October 1, 2013. RFC acquired the Loan on December 30, 2009 from non-debtor GMAC Bank (which, in turn, acquired the Loan from the originator, Metrocities Mortgage); RFC transferred the Note to 21st Mortgage Corp. on February 6, 2013. 21st Mortgage Corp. currently owns and services the Reed Loan; it filed a foreclosure complaint against the Reeds on March 5, 2014. (See Ex. UU.)
The Reeds made their last monthly payment on the Loan on January 4, 2008. (See Ex. A (Servicing Notes), entry for 1/4/2008.) But, according to the Servicing Notes, the Reeds had not paid property taxes on the Property since the third quarter of 2006. On October 18, 2007, Moorestown Township informed GMACM that the Property was going to be sold in a tax sale; unpaid property taxes totaled $1,892.44 for 2006, and $32,683.61 for 2007 through October 18, 2007. (See id., entry for 10/18/2007; see also Sept. 16, 2014 Tr. 133:17–25.) Prior to the notice of tax sale, the Reeds' monthly payments did not include an escrow for taxes and insurance. (See Sept. 16, 2014 Tr. 135:12–14.) GMACM then altered the monthly payments, as it was permitted to do, establishing an escrow for property taxes and insurance premiums, with GMACM making those payments directly. (Id. 135:19–24 (referencing Servicing Notes, entry for 10/18/2007).) The altered monthly payment became effective beginning February 1, 2008, but the Reeds never made the February Mortgage payment. The Reeds have not made any monthly Mortgage payments for the period February 1, 2008 through July 1, 2014. (See Trust's Request for Admissions Directed to Claimants ¶¶ 9–25.) The Reeds have not made any property tax payments for the period June 1, 2008 through July 1, 2014. (Id. ¶¶ 28–33.) Finally, the Reeds have not made any insurance premiums on the Property for the period June 1, 2008 through July 1, 2014. (Id. ¶¶ 34–39.)
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