McNerney v. Rescap Borrower Claims Trust (In re Residential Capital, LLC)

• Decision Date: 30 November 2016
• Docket Number: 16 Civ. 1955 (PAE)
• Citation: 563 B.R. 477
• Parties: IN RE: RESIDENTIAL CAPITAL, LLC, et al., Debtors. Patricia J. Mcnerney and Susan M. Gray, Appellants, v. Rescap Borrower Claims Trust, Appellee.
• Court: U.S. District Court — Southern District of New York

563 B.R. 477

IN RE: RESIDENTIAL CAPITAL, LLC, et al., Debtors.

Patricia J. Mcnerney and Susan M. Gray, Appellants,
v.
Rescap Borrower Claims Trust, Appellee.

16 Civ. 1955 (PAE)

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

Signed November 30, 2016

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Susan Marie Gray, Susan Marie Gray, Attorney at Law, Rocky River, OH, for Appellants.

Jessica Arett, Jordan Aaron Wishnew, Norman S. Rosenbaum, Morrison & Foerster LLP, New York, NY, for Appellee.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge.

This decision resolves claims against a bankruptcy estate first made by a homeowner, Patricia J. McNerney, as counterclaims to a foreclosure action brought against her by the bankruptcy debtor after she failed to repay a $108,000 home mortgage refinance loan for her Ohio house. In a February 29, 2016 decision, the United States Bankruptcy Court in this District (Hon. Martin Glenn) disallowed, for failure to state a claim, McNerney's claims against the estate, as well as the claims for attorney's fees made by McNerney's lawyer, Susan M. Gray, and sustained the objection to those claims¹ made by the ResCap Borrower Claims Trust (the "Trust"). Dkt. 1, at *4–36 ("Decision"). For the reasons that follow, the Court agrees with the bankruptcy court's well-reasoned decision, and affirms.

I. Background²

A. Procedural Background

On May 14, 2012, the debtors, including Residential Capital, LLC ("ResCap"), filed a voluntary petition in the bankruptcy court in this District for relief under chapter 11 of the Bankruptcy Code. On November 14, 2012, McNerney and Gray filed proofs of claim against debtors Homecomings Financial LLC ("Homecomings") and GMAC Mortgage ("GMACM"). Both debtors are entities for which the Trust, established pursuant to the December 11, 2013, chapter 11 plan, effective December 17, 2013, is the successor in interest with respect to borrower claims. McNerney sought $600,000 against each of Homecomings and GMACM, and Gray sought $122,481.59 in attorneys' fees from each arising out of her representation of McNerney.

On October 23, 2015, the Trust filed an objection to these claims in bankruptcy court, for failure to state a claim. On November 16, 2015, McNerney filed an opposition, and, on December 9, 2015, the Trust filed a reply. On December 16, 2015, the bankruptcy court held a hearing on the objection. Its February 29, 2016 Decision sustained the Trust's objection. See Decision at 2–8.

On March 16, 2016, McNerney filed a notice of appeal in this Court. Dkt. 1. On May 4, 2016, she filed an opening appellate brief, Dkt. 8 ("McNerney Br."); on June 6, 2016, the Trust filed an opposition, Dkt. 9; and, on July 11, 2016, McNerney filed a

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reply, Dkt. 17 ("McNerney Reply Br."). On August 30, 2016, the Court heard argument.

B. Factual Background

McNerney's claims were made as counterclaims in a foreclosure proceeding against her after she failed to repay a $108,000 home mortgage refinance loan from Homecomings made in connection with her Lakewood, Ohio house (the "Property"). McNerney had obtained the loan, secured by a mortgage on the Property, on December 27, 2002.³ Homecomings serviced the loan until January 1, 2003, at which time servicing was transferred to GMACM. See Servicing Transfer Letter, Lathrop Decl., Bnkr. Dkt. 9280–2, Ex. E, at 1–2. GMACM serviced the loan until February 16, 2013.

The loan was a refinance of an earlier loan McNerney and her husband had with Household Realty Corporation, which carried a 13% interest rate and required a $1,245.81 monthly payment. See Ohio District Court Counterclaims, Declaration of David Wallace ("Wallace Decl."), Bnkr. Dkt. 9280–4, Ex. I, ("District Court Counterclaims"), at ¶ 66 (monthly payment of $985, escrow payment for insurance of $30, and property tax liability payment of $230.81). When McNerney divorced, the divorce decree required her to refinance the earlier loan. See Ohio State Court Trial Transcript, November 10, 2008, Wallace Decl., Ex. A, at 227–28. McNerney retained a local mortgage broker, Ohio Mortgage Company ("OMC"), to obtain the loan on her behalf. See id. at 196–97. Under a broker agreement between OMC and Homecomings, OMC served as an independent contractor for Homecomings, except that, when it delivered notices, it served as Homecomings' agent. See Broker/Lender Agreement, Lathrop Decl., Bnkr. Dkt. 9280–2, Ex. G, at ¶ 1. OMC submitted the application to Homecomings, which assessed the application using an automated underwriting program. It calculated McNerney's loan to income ratio (34%) and debt to income ratio (46%) as within approved limits. See Lathrop Decl., Bnkr. Dkt. 9280–2, at ¶ 8 & Ex. H. At the closing, Homecomings gave McNerney a Truth in Lending Statement, a Notice of the Right to Cancel, a HUD–1 Settlement Statement, a First Payment Notice, and a disclosure regarding private mortgage insurance. See Exs. I, J, K, L, and M, respectively, Lathrop Decl., Bnkr. Dkt. 9280–2. Each document was dated December 27, 2002 and signed by McNerney. See id. ; see generally Decision at 2–4.

The loan's proceeds were used to pay off the $98,349.94 balance of the prior loan, past due taxes of $5,847.18, and $4,533.16 of credit card debt. See HUD–1 Settlement Statement, Lathrop Decl., Bnkr. Dkt. 9280–2, Ex. K, at ¶¶ 1303–09. The new loan required McNerney to make a $1,232.28 monthly payment, which reflected principal and interest payments totaling $792.47, based on an interest rate of 8%, see Note, Lathrop Decl., Bnkr. Dkt. 9280–2, Ex. B, at 1, with the balance reflecting other costs, such as escrow payments for real estate taxes, property insurance, and private mortgage insurance, see District Court Counterclaims ¶ 66.

McNerney defaulted on the loan almost immediately—failing to make a first payment. In November 2003, MERS brought a foreclosure action against McNerney in Ohio state court, and McNerney brought

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statutory and tort counterclaims. However, in September 2009, after years of litigation, MERS's state-court action was dismissed without prejudice for lack of standing.⁴

On October 14, 2009, Homecomings filed a new foreclosure action—the one relevant here—in federal district court in the Northern District of Ohio. See 09–cv–2383–LW (N.D. Ohio). On January 18, 2010, McNerney moved to dismiss. On September 24, 2010, the court denied that motion. On January 23, 2011, McNerney filed an answer and statutory and tort-law counterclaims (the "District Court Counterclaims"). Homecomings moved for judgment on the pleadings and summary judgment, which McNerney opposed. These motions were pending when, on August 7, 2012, Homecomings, which had filed for bankruptcy on May 4, 2012, filed a notice of bankruptcy in the District Court. The following day, August 8, 2012, the district court stayed the case pursuant to 11 U.S.C. § 362(a), the bankruptcy code's automatic stay provision.

The underlying foreclosure claims against McNerney were dismissed in August 2013, essentially due to McNerney's abandonment of the Property.⁵ As to McNerney and Gray's counterclaims against the debtors, on November 14, 2012, they each filed proofs of claim in the bankruptcy court against Homecomings and GMACM. McNerney's claims (numbers 4762 and 4764), based on the 12 District Court Counterclaims⁶ , were each for

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$600,000; Gray's (numbers 4757 and 4758), for legal fees, were each for $122,481.59. See Claims, Designated Record Tab 2.

As noted, on February 29, 2016, the bankruptcy court disallowed McNerney's claims. The Court reviews the bankruptcy court's reasoning, as relevant, in the course of addressing each claim. Relevant here, McNerney pursues only six of her 12 counterclaims in this appeal.⁷ The six claims she pursues assert: (1) violations of the Truth in Lending Act ("TILA"); (2) negligence and improvident lending; (3) intentional and negligent misrepresentation; (4) civil conspiracy; (5) violations of the Ohio Consumer Sales Practices Act ("CSPA"); and (6) breach of privacy. Id. In addition to reviewing these claims, the Court also considers McNerney's November 16, 2015, motion in the bankruptcy court to strike the declaration of Sara Lathrop, Bnkr. Dkt. 9334, which the bankruptcy court did not rule on and which McNerney's treats as having been denied by implication.

II. Discussion

A. Jurisdiction and Standard of Review

The district court has jurisdiction to hear appeals from rulings of the bankruptcy court, including to disallow claims against the bankruptcy estate. 28 U.S.C. § 158(a). Final orders of the bankruptcy court, including orders such as that here disallowing claims, are appealable to the district court. Id. ; see Morse v. Rescap Borrower Claims Tr. , No. 14 Civ. 5800 (GHW), 2015 WL 353931, at *3 (S.D.N.Y. Jan. 26, 2015).

In reviewing such judgments by the bankruptcy court, the district court functions as an appellate court. See In re CBI Holding Co., Inc. , 529 F.3d 432, 448–49 (2d Cir. 2008). Thus, the district court reviews the bankruptcy court's findings of fact for clear...