In re Residential Capital, LLC

• Decision Date: 12 November 2013
• Docket Number: Case No. 12–12020 (MG)
• Citation: 501 B.R. 531
• Parties: In re: Residential Capital, LLC, et. al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

501 B.R. 531

In re: Residential Capital, LLC, et. al., Debtors.

Case No. 12–12020 (MG)

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

November 12, 2013

Morrison & Foerster, 1290 Avenue of the Americas, New York, N.Y. 10104, By: Gary S. Lee, Esq., Norman S. Rosenbaum, Esq., Jordan A. Wishnew, Esq., Counsel for Residential Capital, LLC, et al.

Bradley Arant Boult Cummings LLP, Bank of America Corporate Center, 100 N. Tryon Street, Suite 2690, Charlotte, NC 28202, By: Christian W. Hancock, Special Litigation and Compliance Counsel for Residential Capital, LLC, et al.

Katherine S. Parker–Lowe, 35 Miss Elecia Lane, Suite 101, Post Office Box 730, Ocracoke, North Carolina 27960, Attorney for Rex T. Gilbert, Jr. and Daniela L. Gilbert

MEMORANDUM OPINION AND ORDER SUSTAINING IN PART AND OVERRULING IN PART DEBTORS' OBJECTION TO PROOF OF CLAIM NO. 1984 FILED BY KATHERINE PARKER–LOWE AND PROOF OF CLAIM NO.1991 FILED BY REX AND DANIELA GILBERT

MARTIN GLENN, UNITED STATED BANKRUPTCY JUDGE:

Pending before the Court is the Debtors' Objection to Proofs of Claim Filed by Rex and Daniela Gilbert and Katherine Parker–Lowe (the “Objection”) (ECF Doc. # 4767). Residential Capital, LLC (“ResCap”) and its affiliated debtors in the above captioned chapter 11 cases (the “Chapter 11 Cases”), as debtors and debtors in possession (collectively, the “Debtors”) seek an order to disallow and expunge in their entirety Proof of Claim No.1991 filed by Rex and Daniela Gilbert (the “Gilberts”) and Proof of Claim No.1984 filed by Katherine Parker–Lowe (“Parker–Lowe,” together with the Gilberts, the “Claimants”). In support of their objection, the Debtors filed the Declaration of Lauren Graham Delehey (the “Delehey Decl.,” ECF Doc. # 4767 Ex. 2). Claimants filed a response (the “Claimants' Response,” ECF Doc. # 5004), which included an amended version of the Gilberts' proof of claim (Response, Ex. A). The Debtors filed a reply (the “Debtors' Reply,” ECF Doc. # 5129) along with a supporting Declaration of Christian W. Hancock (ECF.Doc. # 5129–1). The Court held a hearing regarding this motion on September 24, 2013.

The Debtors seek to disallow the Gilberts' unsecured litigation claim because the Gilberts' lawsuit lacks merit. The Debtors seek to disallow Parker–Lowe's unsecured claim for attorneys' fees because Parker–Lowe may only recover attorneys' fees if her clients had achieved a judgment, which they have not.

For the reasons explained below, the Court SUSTAINS the Debtors' Objection in part and OVERRULES the Debtors' Objection in part.

I. BACKGROUND

On May 14, 2012 (the “Petition Date”), ResCap and certain subsidiaries, including GMAC Mortgage, LLC (“GMACM”), filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code and the Court authorized joint administration of the cases. The Debtors are managing and operating their businesses as debtors in possession pursuant to Bankruptcy Code sections 1107(a) and 1108. On March 21, 2013, the Court entered an order approving the procedures for the filing of objections to proofs of claim filed in these Chapter 11 Cases (the “Procedures Order,” ECF Doc. # 3294).

The Gilberts' unsecured claim stems from litigation involving a home loan secured by a house and lot they own in Ocracoke, North Carolina (the “Property”). As explained below, the litigation was initially filed in state court and then removed by the defendants to the federal district court. On May 5, 2006, the Gilberts refinanced their existing home loan with a loan for $525,000.00 from the First National Bank of Arizona (the “Loan”), secured by their Property. Gilbert v. Residential Funding LLC, 678 F.3d 271, 274 (4th Cir.2012).

According to the district court's opinion, First National Bank of Arizona thereafter assigned its interest in the mortgage to First National Bank of Nevada, which subsequently transferred its interest to Residential Funding Corporation (“RFC”). Id. Finally, RFC transferred its interest to Deutsche Bank Trust Company Americas (“Deutsche Bank”) as trustee for Residential Accredit Loans, Inc. Series 2006–AQ6 (“RAL”). Id. It appears that Deutsche Bank, as trustee for RAL, is the current holder of the note. Id. RFC is the master servicer and GMACM is the subservicer. Id.

The Gilberts stopped making payments on the loan in 2008. Id. In the summer of 2008, the Gilberts corresponded with GMACM in an attempt to modify their loan. Gilberts' State Court Complaint (hereinafter, the “Complaint”), ECF Doc. # 4767, Ex. 3, ¶¶ 48–52. In September 2008, the Gilberts were approved for a loan modification but failed to make the initial lump sum payment required to qualify for the modification. Id. ¶ 53–56. In an effort to negotiate with GMACM through counsel, the Gilberts faxed GMACM an authorization to discuss their account with counsel on October 14, 2008. Id. ¶ 57–58. On November 14, 2008, GMACM told the Gilberts' counsel that the loan modification had been denied because of the failure to make the lump sum payment. Id. ¶ 62–63. In January and February of 2009, the Gilberts' counsel twice more attempted to negotiate a modification, but GMACM sent them a letter on February 20 refusing to speak with the Gilberts' counsel until they received written permission from the Gilberts. Id. ¶ 62.

On March 12, 2009, David A. Simpson (“Simpson”), acting as substitute trustee for Deutsche Bank Trust Company Americas, filed a foreclosure action against the Gilberts in Hyde County Superior Court (the “Foreclosure Action”). Gilbert v. Residential Funding, 678 F.3d at 274. On April 5, 2009, the Gilberts' counsel mailed a notice addressed to “Holder of Loan # xxxxxx2713,” sent care of the counsel for Simpson, declaring that the Gilberts were rescinding the loan under the Truth in Lending Act (“TILA”) due to deficiencies in the loan disclosures. Response ¶ 8. Counsel for GMAC ResCap responded with a letter stating counsel was “writing in response to [their] letter to GMAC Mortgage, LLC[.]” Objection at 305 (April 24, 2009 Letter, Kathy Priore, Assoc. Counsel, GMAC ResCap, to Katherine Parker–Lowe). In the letter, GMACM refused to rescind the transaction, stating that, based on a review of the Gilberts' file, there was “no basis to conclude that there were any material disclosure errors that would give rise to an extended right of rescission.” Gilbert, 678 F.3d at 274.

On June 17, 2009, the Clerk of the Hyde County Superior Court entered an order holding that Deutsche Bank had the right to proceed with the foreclosure sale. Id. The Gilberts unsuccessfully appealed in the Hyde County Superior Court. Id. They then appealed to the North Carolina Court of Appeals. Id. On May 3, 2011, the appellate court reversed the lower court's ruling on the foreclosure sale. In re David A. Simpson, P.C., 211 N.C.App. 483, 711 S.E.2d 165 (2011). In reversing the foreclosure order, the court held that the foreclosure trustee did not prove that Deutsche Bank, as the party seeking foreclosure, was the holder of the note. Id. at 171–175. The court held that the foreclosure trustee failed to establish that it had physical possession of the note at the time of trial. Id. The court also held that the affidavits submitted by GMACM employees were inadequate to establish that Residential Accredit Loans, Inc., for whom Deutsche Bank purported to be acting as trustee, was the noteholder. Id. Although a GMACM employee submitted an affidavit in the proceeding, no debtor entities, including GMACM, were a party to the Foreclosure Action.

On September 14, 2009, during the pendency of the foreclosure appeal, the Gilberts brought an action against Deutsche Bank, Simpson, Residential Funding, LLC and GMACM (collectively, the “Defendants”) in the General Court of Justice for the County of Hyde, North Carolina (the “Gilbert Litigation”). Gilbert, 678 F.3d at 274–75. The complaint alleged disclosure violations and improper refusal of rescission under TILA, usury, unfair and deceptive trade practices, improper debt collection practices, and breach of contract. See Complaint ¶¶ 65–114. The Gilberts sought, inter alia, an injunction against the foreclosure, rescission of the mortgage, attorneys fees, and damages for the TILA violations and unfair trade practices. Gilbert, 678 F.3d at 274–75, 280

In October 2009, the Defendants removed the Gilbert Litigation to the United States District Court for the Eastern District of North Carolina, and immediately filed a motion to dismiss the case for failure to state a claim. Id. at 275. On July 7, 2010, the district court granted the Defendants' motion to dismiss. Id.

The Gilberts appealed to the United States Court of Appeals for the Fourth Circuit. On May 3, 2012, the Fourth Circuit reversed the district court's dismissal and reinstated all but one of the Gilberts' claims. Id. at 275–81. The court affirmed dismissal of the Gilberts' claims regarding disclosure violations under TILA because they were time-barred. Id. at 278. But the court reinstated the Gilberts' claims for rescission and rescissionary damages under TILA finding that those claims were not time-barred. Id. at 278–79. The court found that the usury claim was ripe for adjudication and adequately pled. Id. at 279–80. Additionally, court permitted the claims under the North Carolina Unfair and Deceptive Trade Practices Act (“UDTPA”) stemming from the Defendants' conduct to proceed, but dismissed the UDTPA claims based on the original creditor's conduct. Id. at 280. The court also found that the Gilberts could raise issues related to the allonge endorsements since they were no longer barred by res judicata following the North Carolina Court of Appeals' reversal of the foreclosure order. Id. at 280–281.

Before the Fourth Circuit issued the mandate, the Debtors filed their Chapter 11 petitions. As a result, the Fourth Circuit stayed the mandate as to GMACM and Residential Funding, LLC while issuing it as to the non-debtor parties. At present, the Gilberts' lawsuit...