In re Ditech Holding Corp.
| Decision Date | 22 December 2022 |
| 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 |
NOT FOR PUBLICATION
APPEARANCES: [2]
WEIL GOTSHAL & MANGES, LLP Attorneys for Plan Administrator Ray C. Schrock, P.C., Esq. Sunny Singh, Esq.
JENNER & BLOCK, LLP Attorneys for the Consumer Representative 919 Third Avenue Richard Levin, Esq. Mr. Michael J. Kelsey Appearing Pro Se
On January 18, 2019, the Superior Court of New Jersey, Chancery Division, Morris County (the "State Court") awarded Ditech Financial LLC f/k/a Green Tree Servicing LLC ("Ditech") summary judgment in its action (the "Foreclosure Action") to foreclose on the Property securing its Mortgage Loan to Michael J. Kelsey (the "Claimant"). In doing so, the State Court dismissed, with prejudice, the affirmative defenses and Counterclaims that the Claimant asserted in his Answer to the State Court Complaint. On April 28, 2019, Mr. Kelsey filed Proof of Claim No. 1620 (the "Claim")[4] against Ditech in these Chapter 11 Cases as a secured claim in the sum of approximately $465,849. In substance, as support for the Claim, the Claimant relies on the Counterclaims that the State Court dismissed, with prejudice, in the Foreclosure Action.
In their Forty-Third Omnibus Claims Objection (the "Objection"),[5] the Plan Administrator and the Consumer Claims Representative (the "Consumer Representative") seek to disallow and expunge the Claim. The Claimant, appearing pro se, submitted a response to the Objection (the "Response").[6] The Plan Administrator and Consumer Representative submitted a joint reply to the Response (the "Reply").[7]
In their Objection, the Plan Administrator and Consumer Representative challenge the legal sufficiency of the Claim. See Objection at 25. Pursuant to the Claims Procedures Order,[8]the filing of the Response caused an adjournment of the Objection so that the Court may conduct a Sufficiency Hearing (as defined in the Claims Procedure Order). Under that order, 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)").[9] See Claims Procedures Order ¶ 3(iv)(a).
The Court scheduled a telephonic Sufficiency Hearing on the Claim for July 29, 2021.[10]At the Claimant's request and to accommodate his medical condition, the Court rescheduled the Sufficiency Hearing from July 29, 2021 to August 24, 2021.[11] Thereafter, at the Claimant's request and with the consent of the Plan Administrator and Consumer Representative, the Court adjourned and rescheduled the telephonic Sufficiency Hearing several times. In November 2022, the Plan Administrator requested a status conference with the Claimant and the Court, seeking direction on scheduling the Sufficiency Hearing, given the Claimant's continued inability to attend any such hearing.[12] On November 17, 2022, the Court conducted a telephonic status conference. Mr. Kelsey's caretaker attended the conference on his behalf. At the conference, the caretaker advised the Court that Mr. Kelsey remains ill and is unable to attend a telephonic Sufficiency Hearing.[13] She also inquired about the status of an offer to settle the Claim that she understood the Consumer Representative had made to Mr. Kelsey.[14] At the Court's request, the Consumer Representative agreed to resubmit the settlement offer to Mr. Kelsey, through the caretaker, who agreed to help facilitate the settlement discussions among the parties. The Court directed the Plan Administrator to provide a letter to the Court on or before December 9, 2022, setting forth the status of the settlement discussions.[15] The Court also advised the parties that if they were not able to resolve the Objection, the Court would consider the matter fully submitted and issue a written ruling on the Objection, without hearing argument on the Objection.[16] On December 9, 2022, the Plan Administrator reported that, while the parties exchanged multiple offers of settlement, they were unable to resolve the Objection.[17] The Plan Administrator requested that the Court issue a ruling on the Objection, which it now does.
Construing the Claim in the light most favorable to the Claimant, and drawing all inferences in his favor, the Claim fails to state a claim for relief against Ditech. As explained below, the Claim is barred by application of the doctrine of res judicata under New Jersey state law because the Claimant is asserting the same claims against Ditech that the State Court dismissed, with prejudice, in granting Ditech summary judgment in the Foreclosure Action. Moreover, in any event, none of the causes of action that the Claimant asserts in support of the Claim state claims for relief under applicable non-bankruptcy law. Accordingly, the Court sustains the Objection and disallows and expunges the Claim.[18]
The Court has jurisdiction to consider this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York, dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b).
On September 23, 2013, Claimant executed a note in the sum of $355,550 (the "Note") secured by a mortgage ("Mortgage Loan") in favor of Mortgage Electronic Registration Systems Inc. ("MERS") as nominee for Green Tree Servicing LLC. See Dismissal Order, Statement of Reasons at 1.[20] The Mortgage Loan was secured by the real property located at 67 Grove Avenue, East Hanover, New Jersey (the "Property"). See id. On December 7, 2015, MERS assigned the Mortgage Loan to Ditech, as successor in interest to Green Tree Servicing, LLC. Id.
In October 2017, the Claimant entered into a loan modification agreement with Ditech (the "Loan Modification Agreement"). See id. The Mortgage Loan, as modified (the "Modified Mortgage Loan"), incorporated the default terms of the Mortgage Loan and provided that "[a]ll the rights and remedies, stipulations, and conditions contained in the Security Instrument relating to default in the making of payments under the Security Instrument shall also apply to default in the making of the modified payments hereunder." See Loan Modification Agreement ¶ 8(a) (). The Loan Modification Agreement called for the Claimant to make his first payment of $1,525.20 on or before December 1, 2017. Id. ¶ 8. Claimant failed to make this payment, and the Modified Mortgage Loan went into arrears. See Dismissal Order, Statement of Reasons at 1. By letter to the Claimant dated February 20, 2018 (the "Notice of Default") Ditech advised him that he was in default under the Loan Modification Agreement and demanded that he cure the deficiency by March 27, 2018. Claim at 127 (Notice of Default). Claimant did not make any payment on account of the Modified Mortgage Loan until May 2018. Dismissal Order, Statement of Reasons at 4-5.
On June 19, 2018, Ditech sought to exercise its rights under the Modified Mortgage Loan to foreclose on the Property and filed a complaint (the "State Court Complaint") in the State Court, commencing the Foreclosure Action.[21] On August 15, 2018, Claimant filed an answer to the State Court Complaint (the "Answer"). See Claim at 6-66 (copy of the Answer).[22] In the Answer, among other things, he challenged whether Ditech processed the Loan Modification Agreement. He asserted that Ditech has not provided a verification of the debt necessary to rightfully commence foreclosure proceedings against the Property and that Ditech did not properly credit his loan payments, and therefore he was not in default under the Mortgage Loan. See Answer ¶ 1 (Claim at 8). In the Answer, the Claimant asserted counterclaims against Ditech (the "Counterclaims") for negligence, fraud, predatory lending, and unjust enrichment, as well as violations of the Truth in Lending Act ("TILA"), the New Jersey Consumer Fraud Act ("CFA"), and the Fair Debt Collection Practices Act ("FDCPA"). See Answer ¶ 10 (Claim at 53); see also Dismissal Order, Statement of Reasons at 2 (summarizing the Claimant's Counterclaims). On October 12, 2018, Ditech moved for summary judgment in the Foreclosure Action. Claimant did not assert a Counterclaim against Ditech under the Real Estate Settlement Procedures Act ("RESPA") and included his RESPA claims only in his opposition to summary judgment and in the failed attempt to amend his answer. See id. at 8. The State Court held that Ditech established that it held the Note, that the Note was valid, that the Claimant was in default under the Modified Mortgage Loan, and that Ditech had the right to foreclose on the Property. The State Court granted the summary judgment motion and dismissed the Counterclaims with prejudice. See id. at 1, 8. On April 1, 2019, Ditech transferred its servicing rights under the Mortgage Loan to LoanCare, LLC ("Loan Care"). Shortly thereafter, Loan Care was substituted as plaintiff in the Foreclosure Action in place of Ditech. See Reply, Ex. B (Order Substituting Plaintiff).
Claimant sought to have the State Court reconsider its decision in favor of Ditech and moved, inter alia, to vacate the order granting summary judgment, for a temporary restraining order to reinstate defendant's answer, for...
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