In re Benyamin
In re Benyamin
Opinion of the Court
Pending before the Court is the objection (the "Objection," ECF Doc. # 29) filed by the debtors Daniel Benyamin and Lucy Benyamin (the "Debtors") to Claim # 5-1 (the "Claim") filed by Ditech Financial LLC ("Ditech") for $455,424.72. The issue here is important and straightforward. The Debtors signed the promissory note, a New York Fixed Rate Note, on December 3, 2003, in favor of IndyMac Bank, F.S.B. ("IndyMac"), secured by a mortgage on their condominium located at 319 East 105 Street, Unit # 5E, New York, New York 10029 (the "Property"). At some time thereafter, IndyMac endorsed the note in blank. IndyMac failed on July 11, 2008 and was taken over by the Federal Deposit Insurance Corporation (the "FDIC"). The FDIC sold most of IndyMac's assets to OneWest Bank ("OneWest"), which was acquired by CIT Group ("CIT") in July 2014. No evidence has been offered that Ditech or Green Tree Servicing, LLC ("Green Tree"), with which Ditech merged in 2015, acquired assets from or had any contractual relationship with IndyMac, OneWest or CIT. No evidence has been offered to show who is in possession of the original note endorsed in blank.
New York law is clear that in order to have standing to file a proof of claim, or to foreclose on a mortgage, the holder of the note endorsed in blank must offer competent proof that it possesses the note. Ditech filed the Claim on December 26, 2017, without producing any proof that Ditech has the original note endorsed in blank. Despite multiple requests over many months by Debtors' counsel to Ditech and its counsel to provide evidence that Ditech holds the note, Ditech has failed to provide any proof thereof. Ditech's standing issue had been raised at a March 19, 2018 conference before this Court. Ditech's counsel filed a notice of appearance in this case on April 18, 2018 (ECF Doc. # 23) and filed on the same day a letter (the "Letter," ECF Doc. # 24) advising the Court "of an apparent standing dispute" with respect to Ditech's Claim, and that counsel "had requested Ditech to provide the original collateral file for the subject loan." The Debtors' counsel filed the Objection on May 3, 2018, noticed for hearing on June 19, 2018, with a response deadline of June 12, 2018. Ditech's counsel was served with notice of the Objection but did not file a timely response, and neither did Ditech's counsel appear at the June 19, 2018 hearing. The *245Court took the matter under submission.
As discussed below, the Court laid out the legal requirements for an alleged mortgagee to establish standing to file a proof of claim in In re Minbatiwalla ,
I. BACKGROUND
On September 25, 2017 (the "Petition Date"), the Debtors filed their voluntary petition under chapter 11, and have since been managing their property as debtors in possession. (Obj. ¶ 5.) The Debtors are the owners of the Property. The Debtors' Schedule A lists the value of the Property as ranging from $700,000 to $750,000. (ECF Doc. # 12-1 at 3.) According to the Debtors' Schedule D, the Property is subject to a lien held by IndyMac for a disputed claim in the amount of $400,000. (ECF Doc. # 12-3 at 1.) Schedule D lists IndyMac's claim as a contractual claim incurred in 2003. (Id. ) Schedule E/F lists "Indymac Federal Bank" as having a $410,000 disputed claim. (ECF Doc. # at 2.) Ditech is listed on the creditors' list for "notice purposes only." (Id. )
On December 26, 2017, Ditech filed a proof of claim in this case for money loaned in the amount of $455,424.72, including interest and prepetition arrears, secured by the Property. (See Claim at 1-2.) Ditech's Claim includes (i) the Debtors' loan payment history from June 2008 to November 2017 (id. at 4-15), (ii) a copy of the note, dated December 15, 2003, whereby the Debtors promised to pay the principal amount of $247,500.00 (the "Note," Claim Part 2 at 1-3), (iii) the recordation of lien on the Property (id. at 4), (iv) the mortgage (the "Mortgage," id. at 5-23), and an affidavit (id . at 25) and a certificate of merger (id. at 26) stating that Green Tree was merged into DT Holdings LLC and Ditech Mortgage Company and that such merger resulted in the entity Ditech as of August 31, 2015.
On March 19, 2018, the Court held a case management conference during which the Debtors' counsel raised the issue of Ditech's standing to file the Claim. On April 18, 2018, Ditech's counsel filed a notice of appearance (ECF Doc. # 23), and a letter advising the Court "of an apparent standing dispute" with respect to Ditech's Claim (ECF Doc. # 24). The letter stated that Ditech's counsel "has requested Ditech to provide the original collateral file for the subject loan to my office." (Id. ) The letter further explained "[u]pon receipt of the file, my office is agreeable to coordinate with the Debtors' counsel to arrange a reasonable opportunity for the Debtors' counsel to review the file at our office." (Id. ) Ditech's counsel has not provided proof that Ditech has the original note endorsed in blank.
On May 3, 2018, the Debtors objected to Ditech's Claim, arguing that Ditech had "produced no documentation, be it the original note and mortgage or an assignment of same permitting them to have standing to assert its claim." (Decl. at 1.) The Debtors submit that they have no liability to Ditech, and that Ditech's Claim should be expunged. (Obj. Ex. A.)
II. LEGAL STANDARD
As explained below, New York law and bankruptcy law are clear that standing to *246file a proof of claim in the bankruptcy court, or to permit foreclosure of a borrower's property in state court, requires that the lender or its agent (usually a loan servicer) holds the promissory note on which the mortgage is based. Standing to file a proof of claim or to lift the automatic stay to permit foreclosure involve largely the same analysis.
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 that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor."
"[The] Bankruptcy Code and Fed. R. Civ. P. 17 each have liberal standing provisions, designed to allow a party to appear as long as it has a direct stake in the litigation under the particular circumstances." In re Conde-Dedonato ,
An assignee of a note and mortgage also has standing to file a proof of claim.
B. Standing to Obtain an Order Lifting the Automatic Stay
Courts require an affidavit from someone with personal knowledge establishing *247facts supporting standing, or possession of the original note and mortgage to establish standing in a state court foreclosure action and in a motion to lift the automatic stay in bankruptcy court under
New York law invariably requires possession of the original note underlying the mortgage for a claimant to assert standing to file a proof of claim in the bankruptcy court or to foreclose on a mortgage in state court. This Court has repeatedly reminded purported mortgagee that, under New York law, the mortgage follows the note, and the assignment of the mortgage without the note is not sufficient to have standing to pursue state law remedies on the note. For instance, in In re Lippold , U.S. Bank National Association ("U.S. Bank") moved to lift the stay to be allowed to proceed with foreclosure on the debtor's property.
In In re Idicula , the Court again outlined the requirements for establishing standing to foreclose on property, including where the note is endorsed in blank.
PAY TO THE ORDER OF
WITHOUT RECOURSE
AEGIS MORTGAGE CORPORATION
Trymeka McCoy
TRYMEKA McCOY
ASSISTANT SECRETARY
C. Evidence Required to Support Proofs of Claim
Unless a proof of claim is properly executed and filed in accordance with the rules, the proof of claim does not constitute prima facie evidence of the validity and amount of the claim. See FED. R. BANKR. P. 3001(f).
1. Burden of Proof of Claim
Bankruptcy Rule 3001(f) provides that "a proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim." FED. R BANKR. P. 3001(f). Bankruptcy Rule 3001 requires a claimant to attach supporting documentation to a proof of claim in a bankruptcy case. Bankruptcy Rule 3001(c) provides that
[W]hen a claim, or an interest in property of the debtor securing the claim, is based on a writing, the original or a duplicate shall be filed with the proof of claim. If the writing has been lost or *249destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim.
FED. R. BANKR. P. 3001(c)(1). "Section (c)(1) requires that, if the claim is based on a writing, that writing must be attached or the circumstances of its unavailability must be explained." In re Gorman ,
Attach redacted copies of any documents that support the claim, such as promissory notes, purchase orders, invoices, itemized statements of running accounts, contracts, judgments, mortgages, and security agreements. You may also attach a summary. Attach redacted copies of documents providing evidence of perfection of a security interest. You may also attach a summary.
Failure to attach the documentation required by Bankruptcy Rule 3001 will result in the loss of the prima facie validity of the claim. In re Lundberg ,
2. Level of Documentation Required of Creditor for Prima Facie Validity of a Claim
This Court's opinion in Minbatiwalla ,
[I]n the mortgage context, the creditor may initially attach only a summary of its claim, containing the debtor's name, account number, the prepetition account balance, interest rate, and a breakdown of the interest charges, finance charges and other fees that make up the balance of the debt. If the creditor is an assignee, it must also provide an affidavit attesting to the assignment of the note and mortgage. Upon request of the debtor, the creditor has an obligation to provide an additional documentation underlying its summary and affidavit (such as the original note and mortgage, or a written assignment), within two weeks after dispatch or communication of such *250a request, or the debtor can file an objection based on a lack of adequate documentation.
D. Effect of a Claim Lacking Prima Facie Validity
Minbatiwalla also thoroughly examined the legal effect of a claimant's failure to attach appropriate documentation to its proof of claim and failure to respond to a debtor's request for information.
Bankruptcy Code § 502(b) prescribes nine categories of claims which will be disallowed, including that '(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.' Section 502(b) does not identify 'insufficient documentation' as a basis to disallow a claim.
This Court agrees with the rationale of Judge Weil in Porter ,374 B.R. 471 , that in certain circumstances claims can be disallowed for failure to support the claim with sufficient evidence, even if this is not a specifically enumerated reason for disallowance under11 U.S.C. § 502 (b), because absent adequate documentation, the proof of claim is not sufficient for the objector to concede the validity of a claim.
Even where the claimant fails to attach sufficient documentation to its proof of claim, where the debtor schedules a claim that is substantially similar to the claim at issue by the purported assignee but to the benefit of a different creditor, courts have used the debtor's acknowledgment in schedules that a lien exists against the property to sustain a lack of sufficient documentation objection, but have permitted the filing of new proofs of claim. In re Parrish ,
III. DISCUSSION
In this case, Ditech has known for months that its proof of claim was deficient *251in failing to attach proof that it holds the Note. It has had ample time to provide proof but it has failed to do so. As a result, Ditech failed to make a prima facie showing of the validity of its Claim, and it failed to demonstrate that it has standing to assert the Claim against the Debtors. For these reasons, the Debtors' Objection is sustained and Ditech's Claim is expunged.
A. Ditech Has Not Demonstrated Its Standing to Bring the Claim
Ditech has not demonstrated that it has standing to assert its Claim against the Debtors. Ditech's Claim asserts a claim against the Debtors for money loaned in the amount of $455,424.72, including interest and prepetition arrears, secured by the Property. (See Claim at 1-2.) Ditech's Claim attached the Debtors' loan payment history, the Note, endorsed in blank, the recordation of lien on the Property, and the Mortgage. The original payee of the Note was IndyMac. Because Ditech is not the original holder of the Note, to establish its standing as an assignee, Ditech was required under New York law to provide proof of an assignment, or by demonstrating that it has physical possession of the Note endorsed in blank. See, e.g. , Conde-Dedonato ,
But Ditech failed to satisfy any of these requirements. Ditech failed to produce either the original Note, an assignment thereof, or any affidavit supporting its standing; and any effort by Ditech to prove standing through proof of assignment of the Mortgage alone would similarly fail. "[F]oreclosure of a mortgage may not be brought by one who has no title to it and absent transfer of the debt, the assignment of the mortgage is a nullity." Lippold , 457 B.R. at 297 (omitting citation). Instead, the Note shows an assignment in blank from IndyMac as follows:
PAY TO THE ORDER
WITHOUT RECOURSE
INDYMAC BANK F.S.B.
Vincent Dombrowski
VINCENT DOMBROWSKI
[illegible ]
(Note at 3.) The assignment in blank (as a result of the blank space between "PAY TO THE ORDER OF" and "WITHOUT RECOURSE") from IndyMac required Ditech to prove it had possession and was the holder of the Note. See, e.g. , Idicula ,
Moreover, Ditech filed its Claim as "Ditech Financial LLC fka Green Tree Servicing LLC"; the Claim includes a certificate of merger stating that Green Tree was merged into DT Holdings LLC and Ditech Mortgage Company, and the merger resulted in the entity Ditech. But no evidence was provided of any relationship between IndyMac (the original payee on the Note), OneWest, which acquired most of IndyMac's assets from the FDIC, or CIT, which acquired OneWest, on the one hand, and Ditech or Green Tree, on the other hand. IndyMac endorsed the Note in blank, but no evidence has been provided as to what happened to the Note after IndyMac endorsed it in blank.
*252Ditech's counsel learned about the standing dispute no later than March or April 2018. One thing that is clear is Ditech has not provided any proof of what happened to the Note, or that Ditech ever owned it. Therefore, Ditech has failed to present evidence to demonstrate that it has standing to assert its Claim.
B. Ditech Has Not Satisfied Its Prima Facie Burden to Support Its Proof of Claim
Ditech has not met its evidentiary burden under the Bankruptcy Code and Rules to substantiate its Claim. Only properly prepared and supported proofs of claim constitute prima facie evidence of the validity and amount of a claim. See FED. R. BANKR. P. 3001(f). Bankruptcy Rule 3001(c) required that Ditech attach either the original or the duplicate of the Note. See FED. R. BANKR. P. 3001(c) ; see also Lundberg ,
Upon request of the debtor, the creditor has an obligation to provide an additional documentation underlying its summary and affidavit (such as the original note and mortgage, or a written assignment), within two weeks after dispatch or communication of such a request, or the debtor can file an objection based on a lack of adequate documentation.
Debtors' counsel repeatedly requested that Ditech produce documentation establishing its standing. As discussed above, the standing issue was raised with the Court in March and April 2018, and Ditech's counsel filed a letter stating that it had requested Ditech to provide the collateral file. (ECF Doc. # 24.) Ditech's counsel represented that it would file such documentation on the docket.
C. The Debtors' Claim Objection is Sustained and the Claim is Expunged
Because Ditech has not satisfied its burden demonstrating that it has standing to assert its Claim, and did not make a prima facie showing that it is the holder of the Note, the Debtors' Objection is sustained. See Minbatiwalla ,
However, it appears that a lien exists on the Property. Although Ditech does not demonstrate that it holds the Note, the original Mortgage was recorded against the Property. The Debtors' schedules list the Property as being subject to a lien held by IndyMac for a disputed claim of $400,000 (ECF Doc. # 12-3 at 1); and IndyMac is listed as having a disputed contractual claim incurred in 2003. (Id. ) The Debtors signed the Note to IndyMac in 2003. Ditech asserts the Claim for approximately the same amount as IndyMac's disputed claim listed by the Debtors. See Parrish ,
IV. CONCLUSION
For the reasons explained above, the Debtors' Objection to the Claim is SUSTAINED and the Claim is EXPUNGED .
IT IS SO ORDERED.
On June 26, 2018, Ditech's counsel filed an untimely response (the "Response," ECF Doc. # 51), which will be disregarded by the Court, other than to note that the Response still offers no proof that Ditech holds the original note endorsed in blank.
Remedies exist under New York law for a claimant who is unable to produce the instrument on which its claim is based. New York State's lost note provision provides a means of recovery on instruments that are lost, destroyed, or stolen. Section 3-804 of the New York Uniform Commercial Code states:
The owner of an instrument which is lost, ... may maintain an action in his own name and recover from any party liable thereon upon due proof of his ownership, the facts which prevent his production of the instrument and its terms. The court shall require security, in an amount fixed by the court not less than twice the amount allegedly unpaid on the instrument, indemnifying the defendant, his heirs, personal representatives, successors and assigns against loss, including costs and expenses, by reason of further claims on the instrument, but this provision does not apply where an action is prosecuted or defended by the state or by a public officer in its behalf.
Reference
- Full Case Name
- 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.
- Cited By
- 7 cases
- Status
- Published