Residential Capital, LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
RESIDENTIAL CAPITAL, LLC., et al.,
Debtors.
NOT FOR PUBLICATION
Case No. 12-12020 (MG)
Chapter 11
Jointly Administered
MEMORANDUM OPINION AND ORDER SUSTAINING OBJECTION
TO PROOFS OF CLAIM 3852, 3856, AND 3860
A P P E A R A N C E S:
MORRISON & FOERSTER LLP
Attorneys for Debtors
1290 Avenue of the Americas
New York, NY 10104
By: 	Melissa Hager, Esq.
LAW OFFICE OF LAIR J. HEAL
Attorney for Thomas James La Casse
3 Clinton Road
Sterling, MA 01564
By: 	Lair J. Heal, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Pending before the Court in the Debtors’ Objection to Proofs of Claim Filed by Thomas
La Casse against Homecomings Financial, LLC (Claim No. 3852) and Residential Funding
Company, LLC (Claim Nos. 3856 and 3860) Pursuant to Bankruptcy Code Section 502(b) and
Bankruptcy Rule 3007 (the “Motion”, ECF Doc. # 4635). The Motion is supported by the
Declaration of Lauren Graham Delehey (ECF Doc. # 4635-5). Thomas J. La Casse filed an
Opposition to the Motion (the “Opp.”, ECF Doc. # 5106), supported by the Affidavit of Donald
Brown, Esq. (ECF Doc. # 5106-1) and two Affidavits of Thomas La Casse (ECF Doc. # 5106-3,
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5106-15). The Debtors seek to disallow La Casse’s Proofs of Claim—totaling $37,078,000—
because they lack sufficient documentation and fail to state a basis for the Debtors’ supposed
liability.
For the reasons explained below, the Court SUSTAINS the Objection.
I. 	BACKGROUND
On May 14, 2012 (the “Petition Date”), each of the Debtors filed a voluntary petition in
this Court for relief under chapter 11 of the Bankruptcy Code. On August 29, 2012, the Court
entered an order establishing procedures and a deadline of November 9, 2012 for filing proofs of
claim (ECF Doc. # 1309). On November 7, 2012, the Court entered an order extending the
General Bar Date to November 16, 2012 at 5:00 p.m. (Prevailing Eastern Time) (ECF Doc.
# 2093). The Claimant filed his Proofs of Claim on November 9, 2012.
On March 21, 2013, the Court entered an order approving procedures for the Debtors to
object to proofs of claim (the “Procedures Order”, ECF Doc. # 3294). That Order approved
procedures to be applied in connection with objections to claims filed by current or former
borrowers (collectively, the “Borrower Claims”). Based on substantial input from the Creditors’
Committee and Special Counsel to the Creditors’ Committee for Borrower Issues (“Special
Counsel”), the Procedures Order includes specific protections for borrowers and provides a
process for the Debtors to follow before objecting to certain categories of Borrower Claims. The
procedures generally provide, among other things, that before objecting to Borrower Claims, the
Debtors must (i) consult with Special Counsel and provide Special Counsel with a list of the
claims at issue, and (ii) review their books and records to determine if any amounts are owed to
such Borrowers.
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A. 	The Claims
The Claimant filed one Proof of Claim against Homecomings Financial, LLC
(“Homecomings”), and two Proofs of Claim against Residential Funding Company, LLC
(“RFC”). The Homecomings Proof of Claim (number 3852) and one of the RFC Proofs of
Claim (number 3860) relate to a mortgage and note for property at 270 Park Drive,
Longmeadow, Massachusetts (the “Longmeadow Property”). The other RFC Proof of Claim
(number 3856) relates to a mortgage and note for property at 153 Valley Forge Road, Weston,
Connecticut (the “Weston Property”). The Claimant defaulted on both loans and faced
foreclosures of both properties.
1. 	The Longmeadow Property
On November 15, 2006, the Claimant entered into a $600,000 loan with Homecomings,
evidenced by a note (the “Longmeadow Note”) and secured by a mortgage for the Longmeadow
Property (the “Longmeadow Mortgage”). The Longmeadow Mortgage identified Mortgage
Electronic Registration Systems, Inc. (“MERS”) as nominee for Homecomings. The
Longmeadow Note was later transferred to RFC, which then indorsed the note in blank by an
allonge. Although the evidence is not quite clear, it appears that RFC transferred the note to
Aurora Loan Services, LLC (“Aurora”). 1 On July 31, 2009, MERS—acting as nominee for
Homecomings—assigned the mortgage to Aurora.
Aurora filed a summons and complaint with the Massachusetts Land Court on September
15, 2009. That court issued a judgment allowing Aurora to foreclose on the property, and on
November 22, 2010, Aurora bought the property after an auction. The Claimant then filed a
complaint against Aurora and MERS on December 8, 2010 in Connecticut State Court, even
1 	The Delehy Declaration states that Homecomings transferred the note to Aurora, but Exhibits 13 and 14 to
the Claimant’s Opp. indicate (1) an indorsement in blank from Homecomings, (2) an update to that blank
indorsement that filled in RFC as the noteholder, and (3) an indorsement in blank from RFC.
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though the property was located in Massachusetts. The Claimant did not name any Debtor entity
as a defendant in that lawsuit. Aurora and MERS filed a motion for summary judgment, and the
Connecticut court found that Aurora was the holder of the mortgage during all time periods
relevant to the foreclosure. But the court also found that Aurora had not established that it
owned the note or was authorized to act on behalf of the noteholder at the time of foreclosure.
Even though Claimant did not name any Debtor entity as a party to the Longmeadow
litigation, he still asserts that he has a viable claim against Homecomings and/or RFC for
conduct involving the Longmeadow Property. The Claimant also asserts that he may amend his
complaint to add Homecomings and RFC as “obvious defendants.” 2
2. 	The Weston Property
On January 30, 2006, the Claimant entered into a $650,000 loan with Homecomings,
evidenced by a note (the “Weston Note”) and secured by a mortgage (the “Weston Mortgage”).
The mortgage identified MERS as nominee for Homecomings. Homecomings later indorsed the
Weston Note to RFC, and RFC indorsed the note in blank. The Claimant argues that in April
2006, the mortgage was securitized, and HSBC became the owner of the Weston Note. Neither
party provided evidence indicating that HSBC had physical possession of the Weston Note or
held legal title and allowed another party to hold the note through a custodial agreement, 3 but the
Claimant produced evidence of a Debtor entity acknowledging that HSBC owned the Weston
Note as of March 30, 2012.
On May 18, 2009, RFC commenced a foreclosure action in Connecticut State Court.
Before initiating that action, RFC obtained physical possession of the Weston Note. RFC
2 	The Claimant fails to explain how he could amend his complaint at the relatively late stage of the litigation,
after the defendants filed answers and the court has entertained a summary judgment motion.
3 	The Debtors claim that Wells Fargo held the note pursuant to a custodial arrangement with RFC.
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provided the note to counsel to conduct the foreclosure. The Debtors argue that RFC proceeded
with the foreclosure as the holder of the Weston Note, which was valid irrespective of any
argument the Claimant may make about ownership of the Note.
The Connecticut court entered a default judgment against the Claimant on August 18,
2009, and RFC then filed a Motion for Judgment of Strict Foreclosure. Along with its motion,
RFC submitted an affidavit signed by Jeffrey Stephan, who was both a vice president of MERS
and an employee of GMACM, the servicer of the loan. The Claimant alleges that this affidavit
was fraudulent and that Stephan has confessed during depositions in other matters to signing
documents without having knowledge of the contents or veracity of those documents. The
Connecticut court granted RFC’s motion and entered a Judgment of Strict Foreclosure on
September 2, 2009, initiating a process in which interested parties could redeem the property on
their “law days,” and if no parties redeemed the property on their respective law day, the
property vested to the lender. The law days were scheduled to begin on October 20, 2009, but
the Claimant filed a chapter 13 bankruptcy petition on that day. The bankruptcy filing vacated
the law days and reopened the Judgment of Strict Foreclosure.
Less than one month later, the Claimant’s chapter 13 filing was dismissed for failure to
comply with a court order and failure to timely file all required documents. The Claimant then
filed a chapter 7 petition in Massachusetts on January 19, 2010. Later that year, the
Massachusetts Bankruptcy Court granted RFC relief from the automatic stay, effective
December 4, 2010, so RFC could proceed with the foreclosure action. On November 30, 2010,
RFC filed a motion to reset the law days and reenter the judgment against the Claimant in
Connecticut State Court. 4 Accompanying its motion, RFC filed an affidavit signed by Douglas
4 	The Claimant argues that this filing violated the automatic stay, which was not set to be lifted until
December 4, 2010.
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Wilson attesting to his personal review of RFC’s records and his findings regarding the
Claimant’s debts. There is no evidence that this motion was ever granted.
The case remained dormant for nearly one year, when on November 11, 2011, the
Claimant filed a motion to vacate judgment and dismiss RFC’s action with prejudice. The
Claimant argued that MERS could not legally transfer the mortgage, that RFC lacked standing to
foreclose, and that RFC committed fraud on the court by submitting the Stephan affidavit and
purporting to be the noteholder. RFC objected to the motion to vacate on January 23, 2012, and
the Claimant filed a reply on February 7, 2012.
After the Debtors filed for chapter 11 protection, the Connecticut State Court requested
that RFC obtain an order for relief from the stay to allow its action involving the Weston
Property to proceed. On April 30, 2013, this Court entered an order lifting the automatic stay to
allow the Claimant to prosecute his claims to the extent they constitute defenses to the
foreclosure. RFC filed this Court’s relief from stay order with the Connecticut State Court on
May 14, 2013, but the proceedings have not progressed since that date.
In his Opposition, the Claimant states that he is seeking damages for civil RICO
violations because RFC entered the Weston Property and “left it in ruins.” (Opp. at 15.) The
Claimant asserts that “[a]nything of value was stolen, and what was too large or not valuable
enough was vandalized.” (Id.)
3. 	The Claimant’s Expert Report
During the Weston Property litigation, the Claimant engaged an expert to perform a
forensic analysis of the property’s chain of title. That expert filed a report with the Connecticut
Court stating that the Weston Mortgage is currently listed as a receivable in a publicly-offered
Luminent Mortgage Trust, with HSBC serving as trustee and Wells Fargo serving as the
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Securities Administrator for the trust. The closing date for the trust was on or about April 28,
2006, or within the following ninety days. As part of the securitization, the mortgage was
transferred at least four times. Thus, the Claimant’s expert asserts that MERS could not have
any right, title, or interest to the mortgage to assign to RFC on July 25, 2009. According to the
Claimant’s expert, the mortgage assignment that RFC submitted in Connecticut State Court is a
false document purposely prepared to create the appearance in the public record that RFC had
the authority to foreclose.
II. 	DISCUSSION
Section 501(a) of the Bankruptcy Code provides that “[a] creditor . . . may file a proof of
claim” to claim an interest in a debtor’s bankruptcy estate. 11 U.S.C. § 501(a). “The proof of
claim, if filed in accordance with section 501 and the pertinent Bankruptcy Rules, constitutes
prima facie evidence of the validity and amount of the claim under Federal Rule of Bankruptcy
3001(f) and Code section 502(a).” 4 C OLLIER ON BANKRUPTCY ¶ 502.02[3][f] (Alan N. Resnick
& Henry J. Sommer eds., 16th ed. 2011). Section 502(a) provides that a claim or interest,
properly filed, “is deemed allowed, unless a party in interest . . . objects.” 11 U.S.C. § 502(a).
Under section 502, if an objection is made, the court shall determine the amount of such claim
“as of the filing date.” In re Solutia, Inc., 379 B.R. 473, 483 (Bankr. S.D.N.Y. 2007) (citation
omitted).
Claims objections have a shifting burden of proof. Pursuant to Federal Rule of
Bankruptcy Procedure 3001(f), a claimant establishes a prima facie case against a debtor upon
filing a proof of claim. The objecting party is thereafter required to produce evidence equal in
force to that provided by the claimant to rebut the presumption of the claimant’s prima facie
case. In re Allegheny Int’l, Inc., 954 F.2d 167, 173–74 (3d Cir. 1992) (“In practice, the objector
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must produce evidence which, if believed, would refute at least one of the allegations that is
essential to the claim’s legal sufficiency.”). If the objecting party satisfies that requirement, the
burden then shifts back to the claimant to produce additional evidence to prove the validity of the
claim by a preponderance of the evidence. Id. at 174.
Bankruptcy Code section 502(b)(1) provides that claims may be disallowed if
“unenforceable against the debtor and property of the debtor, under any agreement or applicable
law.” To determine whether a claim is allowable by law, bankruptcy courts look to “applicable
nonbankruptcy law.” In re W.R. Grace & Co., 346 B.R. 672, 674 (Bankr. D. Del. 2006).
A. 	The Claimant’s Proofs of Claim do not support any liability by
Homecomings or RFC related to the Longmeadow Property.
To support the claims against Homecomings and RFC relating to the Longmeadow
Property, the Claimant attached a list of asserted damages, a copy of the Longmeadow Mortgage
and Note, and a copy of the complaint filed against MERS and Aurora. The Debtors argue that
any claim involving the Longmeadow Property is unenforceable against them under section
502(b)(1) since the Debtors are not parties to the complaint against MERS and Aurora, and they
were not involved in the foreclosure of that property. The Proofs of Claim assert damages for
the value of the property, emotional distress, attorneys’ fees, punitive damages, costs, liquidated
damages, consequential damages, and loss of reputation.
The Longmeadow Proofs of Claim raise two questions: Can attaching a complaint
against two non-debtor entities support a claim against the Debtors? And if the Debtors were
somehow added as defendants, would the complaint suffice to state a claim against the Debtors?
The answer to both questions is no. The Court must assess proofs of claim based on what is
presented in the four corners of the attached documents. The Claimant argues that the complaint
suffices as documentation supporting the Longmeadow Property Claims because Homecomings
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and RFC are “obvious defendants” to that action. But the complaint does not name those
entities, nor does the Claimant explain how he could amend the complaint at this stage,
considering that it appears that the period for an amendment as of right has already expired, and
the Claimant has not sought to amend his complaint pursuant to section 10-60 of the Connecticut
Rules of the Court. 5 CONN . PRACTICE BOOK § 10-60 (2013).
Even assuming the Claimant could somehow name Debtor entities to the Longmeadow
lawsuit, the complaint fails on its face to indicate any potential Debtor liability. There is nothing
in the complaint indicating that the Debtors could be liable for any damages to the Claimant.
The Debtors were not servicers or noteholders during the relevant time period, and they were not
involved in the foreclosure.
The Claimant argues that the note may have been doctored, which would then raise
questions about proper parties in interest to the foreclosure, but the fact remains that the
Claimant himself produced evidence that the Longmeadow Note was indorsed in blank by RFC.
Thus, if Aurora later held that note, it would be the proper noteholder and would be entitled to
foreclose. Even if Aurora was not the proper noteholder when it foreclosed on the Longmeadow
Property, that would not establish Debtor liability—only liability for Aurora.
Since the documentation attached to the proofs of claim against Homecomings and RFC
related to the Longmeadow Property fails to indicate any Debtor liability, the Debtors’ objection
to Proofs of Claim 3852 and 3860 is SUSTAINED.
5 	Rule 10-60 would allow the Claimant to amend his complaint with permission of the court, permission of
the adverse parties, or by filing a request for leave to amend with the amendment attached and waiting fifteen days
to see if any parties object.
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B. 	The Claimant has not provided any basis for Debtor liability relating to the
Weston Property.
The claim against RFC relating to the Weston Property hinges on two arguments that the
Claimant asserts in his motion to vacate the foreclosure judgment for that property, which the
Claimant attached to Proof of Claim 3856. First, the Claimant argues that the assignment of the
Weston Mortgage by MERS is void. Second, the Claimant asserts that RFC did not have
standing to foreclose on the Weston Property. The documentary evidence undermines the
Claimant’s arguments in his motion to vacate.
As for the first argument, the Claimant posits that MERS generally does not have the
legal authority or ability to transfer mortgages as a nominee, and even if it did, the transfer to
RFC was void here because the mortgage had already been securitized and transferred to other
parties before the purported MERS/RFC assignment. Connecticut courts have already rejected
arguments that MERS lacks authority to act as a nominee of a lender and transfer mortgages.
See RMS Residential Props., LLC v. Miller, 32 A.3d 307, 317 (Conn. 2011) (finding that since
MERS was named as nominee, true nature of transaction was sufficiently disclosed, and
preventing MERS from transferring mortgage would “frustrate the intentions of both mortgagors
and mortgagees”). Further, even if the transfer to RFC was somehow void because the Weston
Mortgage had already been securitized and transferred to other parties, that fact does not
preclude RFC from foreclosing on the property so long as it was the noteholder. See Id. at 312
(holding that the mortgage follows the note, so the “rightful owner of the note has the right to
enforce the mortgage”).
Further, Connecticut law allows parties to receive legal title to property upon foreclosure
even if the “legal title to the mortgaged premises has never been conveyed” to the foreclosing
party, so long as that party is “entitled to receive the money secured” by the mortgage. CONN.
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GEN. STAT . § 49-17. Here, RFC held the note when it proceeded with the foreclosure, and the
note was indorsed in blank. (See Delehy Decl. ¶ 10.) The Debtors submitted evidence of the
Weston Note indorsed in blank. (See Motion Ex. H.) Even if the Claimant could somehow
demonstrate that despite the note’s blank indorsement, RFC was not the proper owner of the
note, RFC was entitled to enforce the note merely by virtue of holding the note. See Miller, 32
A.3d at 313 (finding that noteholder could enforce note even without ownership); see also
Bankers Trust of Cal., N.A. v. Vaneck, 899 A.2d 41, 42 (Conn. App. Ct. 2006) (holding that
Connecticut law “permits the holder of a negotiable instrument that is secured by a mortgage to
foreclose on the mortgage”). Thus, RFC has provided sufficient evidence demonstrating that it
had standing to foreclose on the Weston Property.
Aside from asserting damages for the value of the Weston Property and the insurance
coverage for that property, the Claimant asserts an entitlement to civil RICO damages. But the
Claimant’s documentation falls woefully short of supporting a civil RICO violation. None of the
documents that the Claimant submitted would support a civil RICO claim. To bring a civil
RICO claim in the Second Circuit, a plaintiff must allege “(1) that the defendant (2) through the
commission of two or more acts (3) constituting a pattern (4) of racketeering activity 6 (5)
directly or indirectly invests in, or maintains an interest in, or participates in (6) an enterprise (7)
the activities of which affect interstate or foreign commerce.” Zavalidroga v. Cote, 395 Fed.
App’x 737, 740–41 (2d Cir. 2010) (internal quotation marks omitted). Even if a plaintiff can
demonstrate a substantive RICO violation, the plaintiff must also show “injury to the plaintiff’s
business or property” and “that such injury was by reason of the substantive RICO violation.”
Catholic Health Care W. v. US Foodserv. (In re US FoodServ. Pricing Litig.), 729 F.3d 108, 117
6 	Racketeering activity is defined under 18 U.S.C. § 1961 to include dozens of predicate offenses, including
extortion, bribery, counterfeiting, and mail fraud.
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(2d Cir. 2013). The “enterprise” complained of in a civil RICO action must be “distinct from
those persons or entities who stand accused of conducting that racketeering activity.” Allstate
Ins. Co. v. Rozenberg, 590 F. Supp. 2d 384, 390 (E.D.N.Y. 2008). Here, the Proof of Claim
relating to the Weston Property provides no allegations necessary to support a civil RICO claim,
or any evidence of a pattern of racketeering activity, nor does it define any enterprise.
To the extent any portion of the Claimant’s Weston Property claim relates to the Stephan
affidavit, the Claimant’s argument is moot because RFC filed a superseding affidavit replacing
the Stephan affidavit in Connecticut State Court.
Since the evidence submitted by the parties indicates that RFC was the noteholder at the
time of foreclosure and therefore had standing to foreclose under Connecticut law, and since the
Claimant’s proof of claim relating to the Weston Property does not support a civil RICO claim,
the Debtors’ objection to Proof of Claim 3856 is SUSTAINED.
III. 	CONCLUSION
For the reasons stated above, the Debtors objection to Proofs of Claim 3852, 3856, and
3860 is SUSTAINED. Those claims are disallowed and expunged in their entirety.
IT IS SO ORDERED.
Dated: November 7, 2013
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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