In re Ditech Holding Corp.
| Decision Date | 03 December 2021 |
| Docket Number | 19-10412 (JLG) |
| Parties | In re: Ditech Holding Corporation, et al., Debtors.[1] |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
WEIL GOTSHAL & MANGES LLP Attorneys for the Plan Administrator By: Ray C. Schrock, P.C., Richard W. Slack, Esq., Sunny Singh, Esq.
JENNER & BLOCK LLP Attorneys for the Consumer Claims Representative By: Richard Levin, Esq. Ms. Cynthia Settles Appearing Pro Se.
HON JAMES L. GARRITY, JR. U.S. BANKRUPTCY JUDGE.
Introduction[2]
Cynthia Settles (the "Claimant") filed Proof of Claim No 511 (the "Claim") against Ditech Financial LLC ("Ditech") in these Chapter 11 Cases. The Claim recites that it is a secured claim in an unspecified amount based upon the claims she is asserting in Settles v OneWest Bank, F.S.B., et al., Index No. SU-2015-001317 (the "State Court Action"), an action that is pending in the New York State Supreme Court, Rockland County (the "State Court"). As support for the Claim, the Claimant attached a copy of the complaint in the State Court Action (the "Complaint"). The litigation relates to the Claimant's alleged rights in real property that she acquired with the proceeds of a loan from IndyMac Bank, F.S.B. ("Indy Mac") secured by a mortgage on the property. Ditech was not a party to the loan transaction. It appeared in the State Court Action as the successor-in-interest to certain of the defendants named in the Complaint.
In their Thirty-Second Omnibus Claims Objection (the "Objection"), [3] the Plan Administrator and the Consumer Claims Representative (collectively, the "Estate Representatives") seek to disallow and expunge the Claim. The Claimant, acting pro se, responded to the Objection (the "Response")[4] and the Estate Representatives submitted a joint reply to the Response (the Reply").[5] The Estate Representatives contend that the Court should expunge the Claim because, for a host of reasons, it fails to state a claim for relief against Ditech. Pursuant to the Claims Procedures Order, [6] the Court conducted a Sufficiency Hearing on the Claim. At the hearing, the Estate Representatives were represented by counsel, and the Claimant appeared pro se. The legal standard of review at a Sufficiency Hearing is equivalent to the standard applied to a motion to dismiss for failure to state a claim upon which relief may be granted under Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)").[7] See Claims Procedures Order ¶ 3(iv)(a).
Under Rule 12(b)(6), it is appropriate to dismiss a claim on res judicata and/or collateral estoppel grounds when the elements of those affirmative defenses are apparent on the face of the claim. As explained below, that is the case here. For that reason, the Court sustains the Objection and disallows and expunges the Claim.
The Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Reference dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b).
Background[8]
On May 12, 2003, Claimant executed a promissory note in the sum of $196, 000.00 in favor of Indy Mac secured by a mortgage on the real property located at 37 Ossman Court, Garnerville, New York (the "Property"). See Response at 101. On May 27, 2003, the mortgage was recorded in the Rockland County Clerk's Office. Id. at 187. Mortgage Electronic Registration Systems Inc. ("MERS") is named as nominee for IndyMac, as the beneficiary. Id. On June 11, 2007, Claimant executed a Consolidation, Extension and Modification Agreement, which modified the unpaid principal balance under the note to $239, 000.00. Id. at 187. Claimant defaulted on her payments under the terms of the mortgage. Id. On July 19, 2010, One West Bank, FSB ("One West") commenced a foreclosure action (Index No. 7992/2010) (the "Foreclosure Action") against the Property in the State Court. Id. The State Court granted One West's motion for leave to enter a default judgment against Claimant, and entered an Order Of Reference In Foreclosure, appointing a referee to compute the amount due to One West on the note and mortgage and to determine whether the Property could be sold in parcels. Id.[9] On August 2, 2013, Claimant filed a Motion to Vacate Plaintiff's Order of Reference and Default Judgment. Id. at 187-188. On October 11, 2013, the State Court denied the motion. Id. at 188. On October 17, 2013, over Claimant's objection, the State Court entered a Judgment of Foreclosure and Sale. Id.[10] The Claimant moved by Order to Show Cause, pursuant to N.Y. C.P.L.R. 5015(a)(1) and/or (a)(3) to vacate the Judgment of Foreclosure and Sale. On January 23, 2014, the State Court issued an Order denying the motion. Id. at 188.[11] On October 24, 2014, the Property was sold and the winning bid was assigned to Federal Home Loan Mortgage Corporation ("Freddie Mac"). Id. Thereafter, the referee's deed in foreclosure (the "Referee's Deed") was recorded in the Rockland County Clerk's Office. Id.
Claimant contends that, notwithstanding the sale of the Property in October 2014, she rescinded the loan and mortgage on the Property effective March 17, 2015, by giving proper notice under the Truth in Lending Act ("TILA") in a letter to One West. Id. at 14. On July 29, 2015, Claimant commenced the State Court Action against One West, MersCorp Holdings Inc., MERS, Freddie Mac, Sara Z. Boriskin, Esq., RAS Boriskin LLC (with Sara Boriskin, "Boriskin") and others. Id. at 25-27. The Complaint[12] includes the following nine causes of action: (Count 1) Quiet Title (RPAPL Article 15), (Count 2) CPLR Article 30, (Count 3) Fraud, (Count 4) Fraudulent Conveyance, (Count 5) Nullification and Cancellation of Referee's Deed, the Mortgage From the Public Record, as Each are of No Effect, and Have Clouded Plaintiff's Title, (Count 6) Slander of Title, (Count 7) Aiding and Abetting, (Count 8) Intentional Infliction of Emotional Distress, and (Count 9) Rescissory Damages. Id. at 45-63.
One West and Freddie Mac requested an extension of time to respond to the Complaint. The Claimant rejected the request. One West and Freddie Mac filed an Answer to the Complaint approximately two months after the time to do so expired. See id. at 112-148, 190. On November 5, 2015, the Claimant filed a motion for default judgment against them. At or about the same time, Boriskin filed a motion to dismiss the Complaint. See id. at 188. Ditech, in its capacity as successor-in-interest to One West and Freddie Mac moved by Order to Show Cause for an order denying the Claimant's motion for a default judgment against One West and Freddie Mac and compelling the Claimant to accept One West's and Freddie Mac's late-served Answer. Id. at 179-198. On February 2, 2017, the State Court issued its Decision and Order[13] in which it: (i) granted the motion to dismiss Boriskin from the Complaint, (ii) denied the Claimant's motion for default judgments against One West and Freddie Mac, (iii) granted Ditech's motion to vacate the default judgments against One West and Freddie Mac, and (iv) directed Claimant to accept the late-served Answer of One West and Freddie Mac. Id. at 15-16. In dismissing Boriskin from the Complaint, the State Court found that the Claimant failed to state a claim for rescission of the loan and mortgage under TILA because the Claimant had failed to demonstrate that she could tender the principal of the loan. Id. at 15.[14] In granting Ditech's motion to vacate One West's and Freddie Mac's defaults, the State Court held, among other things, that Ditech had stated reasonable excuses for their defaults and two potential defenses to the underlying claims: (a) the claims asserted in the Complaint were already litigated in the Foreclosure Action and thus barred under the doctrine of res judicata and collateral estoppel, and (b) the claims fail on the merits. As to the latter, the State Court reasoned that its determination that the Claimant failed to state a cause of action for rescission of the loan and mortgage was dispositive of the merits of the balance of the claims at issue in the State Court Action, because each such claim was premised on the alleged fact that Claimant had properly rescinded the loan and mortgage. Id. at 16. On March 15, 2017, the Claimant filed an interlocutory appeal of the Decision and Order with the Appellate Division of the Supreme Court of the State of New York, Second Judicial Department (the "Appellate Division"). Id. at 12. On December 4, 2018, the Appellate Division affirmed the decision. See Appellate Division Decision and Order.[15] There has been no additional activity in the State Court Action.
On February 11, 2019, Ditech Holding Corporation (f/k/a Walter Investment Management Corp.) and certain of its affiliates ("Debtors") filed petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in this Court. The Debtors remained in possession of their business and assets as debtors and debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On February 22 2019, the Court entered an order fixing April 1, 2019 at 5:00 p.m. (prevailing Eastern Time) as the deadline for each person or entity, not including governmental units (as defined in section 101(27) of the Bankruptcy Code) to file a proof of claim in the Chapter 11 Cases (the "General Bar Date").[16] Thereafter, the Court extended the General Bar Date for consumer borrowers, twice, and ultimately to June 3, 2019 at 5:00 p.m. (prevailing Eastern Time).[17]
On September 26, 2019, the Debtors confirmed their Third...
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