In re Benyamin

• Decision Date: 13 February 2019
• Docket Number: Case No. 17-12677 (MG)
• Citation: 596 B.R. 789
• Parties: IN RE: Daniel BENYAMIN a/k/a Daniel Benyaminov d/b/a Benyamin Construction & Remodeling, LLC and Lucy Benyamin d/b/a Benyamin Construction & Remodeling, LLC, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

596 B.R. 789

IN RE: Daniel BENYAMIN a/k/a Daniel Benyaminov d/b/a Benyamin Construction & Remodeling, LLC and Lucy Benyamin d/b/a Benyamin Construction & Remodeling, LLC, Debtors.

Case No. 17-12677 (MG)

United States Bankruptcy Court, S.D. New York.

Signed February 13, 2019

KORNFELD & ASSOCIATES, P.C., Attorney for Debtors Daniel Benyamin and Lucy Benyamin, 240 Madison Avenue, New York, New York 10016, By: Randy M. Kornfeld, Esq.

REED SMITH LLP, Attorneys for Ditech Financial LLC, 599 Lexington Ave., New York, New York 10022, By: Brian P. Matthews, Esq.

MEMORANDUM OPINION AND ORDER SUSTAINING DEBTORS' OBJECTION AND EXPUNGING PROOF OF CLAIM # 5-1

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Throughout this case Ditech Financial LLC ("Ditech")¹ has shown disdain for this Court and for debtors Lucy and Daniel Benyamin (the "Debtors"). Ditech's involvement with this case began when it filed a proof of claim, asserting that it was the creditor and the servicer of a note secured by an investment property (the "Property") owned by the Debtors. (See Claim No. 5-1, filed December 26, 2017.) After unsuccessfully trying for months to get Ditech to provide Debtors' counsel with documents supporting its claim, on May 3, 2018, the Debtors' counsel filed an objection to Ditech's claim for lack of standing.² ("Claim Objection," ECF Doc. # 29.) The deadline for a response to the Claim Objection was June 12, 2018, but Ditech failed to file a timely response and failed to appear at the noticed hearing on June 19, 2018. Ditech's counsel filed an untimely response to the Claim Objection on June 26, 2018.³ ("Response," ECF Doc. # 51.) On July 2, 2018, the Court issued a Memorandum Opinion and Order Sustaining Debtors' Objection to Proof of Claim # 5-1. ("Opinion," ECF Doc. # 53); In re Benyamin , 587 B.R. 243 (Bankr. S.D.N.Y. 2018). That Opinion expunged Ditech's claim.

Following the expungement of its claim, Ditech filed a motion to reconsider the order expunging the claim.⁴ ("Motion for Reconsideration," ECF Doc. # 55.) Ditech argued that the mortgage covering the Debtors' Property followed a chain of assignments ending with Ditech.⁵ Perhaps most telling of all, however, nowhere in the untimely Response filed by Robertson, Anshutz & Schneid, P.L., or in the Motion for Reconsideration filed by Ras Boriskin, did Ditech allege or offer proof that the note was owned by the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The first time that any of Ditech's counsel told the Court that Freddie Mac allegedly owned the note was during a hearing on the Motion for Reconsideration on August 28, 2018, when Ditech's counsel said that Freddie Mac was the "investor" and Ditech was the servicer.⁶ ("August 28 Transcript," ECF Doc. # 71, at 9–15.) At the hearing on August 28, 2018, Ditech's counsel showed the Court the "wet-ink" original of the note that until that hearing Ditech claimed to own but at the hearing Ditech's newest counsel stated that the note was owned by Freddie Mac.

At the end of the August 28, 2018 hearing, the Court granted the Motion for Reconsideration, directed counsel to take discovery, if necessary, and said the matter would be set down for an evidentiary hearing to determine if Ditech had standing to file the proof of claim. (Id. at 26.) Because of delays occasioned by Ditech's repeated failure to timely respond to discovery, the evidentiary hearing did not occur until February 6, 2019. In the Joint Pre-Trial Conference Order, Ditech identified a single witness, Bradford Hardwick, to testify at the hearing. (ECF Doc. # 80, entered January 31, 2019.) That order provided that "No witness not identified herein shall be permitted to testify on either party's case in chief absent good cause shown." (Id. at 3.) On February 5, 2019, the day before the evidentiary hearing, Ditech tried to substitute a different witness in place of Hardwick (who Debtors' counsel had deposed). (ECF Doc. # 85.) At the start of the February 6 evidentiary hearing the Court refused to permit Ditech to substitute a new witness for Hardwick. Both sides were permitted to designate portions of Hardwick's deposition transcript and those were admitted in evidence. (ECF Doc. ## 86, 87.) The only witness to testify at the hearing for both direct and cross-examination was Daniel Benyamin. In addition to the witness testimony, exhibits were introduced in evidence.

As explained below, Ditech failed to establish that it had standing to file the proof of claim, either as the servicer of the note or as the holder of the note. Accordingly, the Debtors' Objection is sustained and Ditech's proof of claim is EXPUNGED .

I. BACKGROUND⁷

In 2003, the Debtors signed a promissory note in favor of IndyMac Bank, F.S.B. ("IndyMac") that was secured by the Property (the "Note"). Benyamin , 587 B.R. at 244. At some point thereafter, IndyMac initiated a foreclosure action in New York State Court against the Debtors. (ECF Doc. # 63 ¶ 7.) On September 25, 2017 ("Petition Date"), while the foreclosure action was pending, the Debtors filed a voluntary petition (the "Petition") under Chapter 11. Benyamin , 587 B.R. at 245. According to the schedules filed with the Petition, the Debtors owned the Property and the Property was subject to a lien held by IndyMac Bank. The schedules list Ditech on the creditor's list for "notice purposes only." ( Id. )

On December 26, 2017, Ditech filed a proof of claim in this case allegedly secured by the Property. The proof of claim states that Ditech is the current creditor and servicer of the Note, and that the claim has not been acquired from someone else. ("Proof of Claim," Claim 5-1, at 1 and 4.) Ditech's Proof of Claim also attaches, inter alia , a copy of the Note with an endorsement in blank. (Id. ) The Proof of Claim is self-contradictory in the sense that it states that Ditech did not acquire its claim from someone else even though Ditech is not a party to the attached Note (IndyMac is identified in the Note as the lender) and the Note was endorsed in blank. Also, as explained further below, the Proof of Claim is inconsistent with Ditech's ultimate view of the case. At trial Ditech claimed that the Note was owned by the Freddie Mac and that Ditech was the servicer of the Note.

On May 3, 2018, the Debtors objected to Ditech's Proof of Claim, arguing that it lacked standing to file the Proof of Claim. The Debtors' Claim Objection to Ditech's Proof of Claim set a response deadline of June 12, 2018 and a hearing date of June 19, 2018. (ECF doc. # 29.) Ditech did not file a timely response and did not appear at the June 19, 2018 hearing. Benyamin , 587 B.R. at 244.

Ditech filed an untimely response to the Debtors' objection on June 26, 2018. (The "Response," ECF Doc. # 51). It purported to attach assignments of the mortgage (but not of the Note ) from OneWest to Ocwen, from Ocwen to Residential Capital Solutions, Inc. ("Residential Capital"), and from Residential Capital to Ditech. (Id. ¶ 8-10.) Each assignment was dated in either March or April of 2017. (Id. ) The Response also attached a Possession Statement by a Ditech Employee, stating that Ditech's document custodian came into possession of the original Note on December 7, 2015. (Response, Ex. D.) That so-called Possession Statement is based on inadmissible hearsay.

On July 2, 2018, this Court issued its Opinion and Order expunging Proof of Claim # 5-1 because Ditech failed to establish standing. Benyamin , 587 B.R. at 253. The Opinion provided that Ditech could seek relief from the Order expunging the Proof of Claim if it promptly sought relief under 11 U.S.C. 502(j). Id.

Two weeks after the Opinion was issued, Ditech moved the Court to reconsider. (Motion for Reconsideration.) The Court held a hearing on the Motion for Reconsideration on August 28, 2018. At the hearing, even though the Proof of Claim stated that Ditech was the creditor, and the Response attached documentation showing that Ditech was the owner of the mortgage, Ditech's counsel argued that Freddie Mac, not Ditech, is the "investor" in the Note. (August 28 Transcript, at 8:1-2.) Counsel described Ditech as the servicer and the holder of the Note. (Id. at 10:2-3). Ditech's counsel, for the first time, showed the Court the "wet-ink" original of the Note. (Id. at 20:5-14.) Counsel stated that "physically the note was held by BNY Mellon as a custodian." (Id. at 10:9-10.)

The day after the hearing, the Court issued an order granting the Motion for Reconsideration. (ECF Doc. # 68.) After numerous delays occasioned by Ditech's failure to timely respond to discovery, the Court scheduled an evidentiary hearing for February 6, 2019 to determine whether Ditech had standing to file the Proof of Claim. In a letter and then in the Joint Pre-Trial Order, Ditech identified Bradford Hardwick as its sole witness and Mr. Hardwick was deposed. (ECF Doc. ## 75, 80.) Two days before the scheduled trial, however, Ditech's counsel claimed that Mr. Hardwick was no longer available to testify at trial and attempted to substitute another witness. (ECF Doc. # 85.) The substitution was not allowed by the Court. In lieu of live testimony from Hardwick, both parties designated portions of Mr. Hardwick's deposition transcript which were admitted in evidence. (ECF doc. ## 86, 87.)

While the Debtors' Claim Objection was pending, the Debtors filed an application to sell the Property free and clear of all liens and encumbrances pursuant to section 363 of the Bankruptcy Code. (ECF Doc. # 49.) The Court granted the application, found that the purchasers of the Property constituted good faith purchasers within the meaning of section 363(m) of the Bankruptcy Code, but ordered that the sale proceeds be held in escrow by Debtors' counsel until further order of the Court. (Id. )

II. LEGAL STANDARD

A. Standing to File A Proof of Claim

To file a proof of claim, a claimant must be a "creditor or the creditor's authorized agent." FED. R. BANKR. P. 3001(b). A "creditor" is an "entity...