Residential Capital, LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
RESIDENTIAL CAPITAL, LLC, et. al.
Debtors.
NOT FOR PUBLICATION
Chapter 11
Case No. 12-12020
MEMORANDUM OPINION AND ORDER SUSTAINING THE DEBTORS’
FORTY-SECOND OMNIBUS OBJECTION AS TO CLAIMS 338 AND 339
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Pending before the Court is the Debtors’ Forty-Second Omnibus Objection to Claims
(Reduce and Allow Borrower Claims) (the “Motion,” ECF Doc. # 5150). This opinion only
addresses Claim Numbers 338 and 339 filed by Jason and Jennifer Schermerhorn (the “Claims”).
In support of the Motion, the Debtors submitted the Declarations of Deanna Horst (Motion Ex.
1), Norman S. Rosenbaum (Motion Ex. 2), and Robert Nosek (Motion Ex. 3). Each of the
Claims seeks $582,662.25 as a general unsecured claim. The Debtors seek an order reducing and
allowing the Claims as general unsecured claims, each in the amount of $14,463.51. One proof
of claim asserts liability against Debtor GMAC Mortgage, LLC (“GMACM”), and the other
asserts liability against Debtor Executive Trustee Services, LLC (“ETS”). Each of the Claims
seeks $14,463.51 in costs as well as $568,198.74 in attorneys’ fees arising out of litigation
against the Debtors in California state court. The Debtors assert that the Schermerhorns (the
“Claimants”) are not entitled to attorneys’ fees because they did not obtain an award for those
fees in the California court, and their deadline to do so passed. The Claimants filed a response
(the “Response,” ECF Doc. # 5905), supported by several exhibits and the Declaration of
Michael Y. MacKinnon (the “MacKinnon Declaration,” ECF Doc. # 5909). The Debtors filed a
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reply (ECF Doc. # 6303). The Court held a hearing on the Motion on January 27, 2014 (the
“Hearing”). Because the Schermerhorns did not satisfy California’s procedural requirements for
obtaining an award of attorneys’ fees, the Objection is SUSTAINED, and the Claims are
reduced to $14,463.51 and allowed in that amount.
I. 	BACKGROUND
A. 	Procedural History
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 March 21, 2013, the Court
entered an order (the “Procedures Order”) authorizing the Debtors to file omnibus objections to
no more than 150 claims at a time, on various grounds, including those set forth in Bankruptcy
Rule 3007(d) and those additional grounds provided in the Procedures Order (ECF Doc. # 3294).
The Procedures Order also approved certain procedures to be applied in connection with
objections to Borrower Claims (the “Borrower Claim Procedures”). 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
sets forth a process for the Debtors to follow before objecting to certain categories of Borrower
Claims. For example, the Borrower Claim Procedures require that before objecting to certain
categories of Borrower Claims, the Debtors must furnish the individual Borrower with a letter,
with notice to Special Counsel, requesting additional documentation in support of the purported
claim (the “Request Letter”). (See Procedures Order at 4.)
On December 11, 2013, the Court entered an Order Confirming Second Amended Joint
Chapter11 Plan Proposed by Residential Capital, LLC, et al. and The Official Committee of
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Unsecured Creditors (the “Confirmed Plan,” ECF Doc. # 6065). The Confirmed Plan became
effective on December 17, 2013. (ECF Doc. # 6137.)
B. 	The Claims
The litigation between the Claimants and the Debtors involved a dispute over competing
interests in a California property. (See Reply Ex. 1-A at 12–16.) The Debtors initially held a
first lien on the property and claim to have inadvertently released that lien. (See id. at 31.)
Meanwhile, Bank of America, which had been the second lien holder, proceeded to sell the
property to the Claimants, who assert that they had no knowledge of the Debtors’ lien. (See id.
at 12–14.) The Debtors then attempted to rescind the release of their first lien and commenced
an action in 2009 for declaratory relief in the Superior Court for the State of California,
Riverside County. (See id. at 11.) The Debtors also recorded a lis pendens. In the California
action, the Debtors sought a ruling that their first priority lien was still valid and attached to the
property owned by the Claimants. (Id.) The Claimants filed a cross-complaint, and after a trial,
the court entered a judgment against the Debtors on January 10, 2012. 	(See id. at 52–57.)
But the Claimants were not awarded a money judgment against the Debtors in the
California action. (See Reply Ex. 2 at 5.) Instead, the California court allowed the Claimants to
seek costs and attorneys’ fees through post-judgment proceedings. (See Reply Ex. 1-A at 57.)
The Claimants submitted a memorandum of costs on February 16, 2012 (see id. at 60–66), but
they did not file a motion seeking attorneys’ fees until May 24, 2012. (See Response Ex. 4-1.)
Ordinarily, a party in California may only seek attorneys’ fees within sixty days of service of
entry of a judgment. (See infra, section II.B.) 	Here, the Claimants were served with notice of
entry of the judgment on the same day the judgment was issued: January 10, 2012. (See Reply
Ex. 1-A at 58.) At the Hearing in this Court, the Claimants’ attorney asserted that at a September
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2011 hearing in the California action, the judge indicated that the issues of attorneys’ fees and
withdrawal of the lis pendens would be dealt with at the same time. (Jan. 27, 2014 Tr. at 35:1–
36:3.) Presumably, this would have allowed the Claimants to seek any attorneys’ fees incurred
in securing the withdrawal of the lis pendens. But the California court’s January 2012 judgment
expunged the lis pendens, seemingly obviating the need for a later hearing to address the lis
pendens and attorneys’ fees concurrently. (See Reply Ex. 1-A at 57.) And the judgment did not
provide for any modifications of California rules governing motions for attorneys’ fees.
II. 	DISCUSSION
A. 	Claims Objections
Federal Rule of Bankruptcy Procedure 3007 permits a debtor to make omnibus objections
to disallow up to 100 claims per motion. Parties making omnibus objections may object to
proofs of claim on the following grounds:
1) 	they duplicate other claims;
2) 	they have been filed in the wrong case;
3) 	they have been amended by subsequently filed proofs of claim;
4) 	they were not timely filed;
5) 	they have been satisfied or released during the case in accordance with the
Code, applicable rules, or a court order;
6) 	they were presented in a form that does not comply with applicable rules, and
the objection states that the objector is unable to determine the validity of the
claim because of the noncompliance;
7) 	they are interests, rather than claims; or
8) 	they assert priority in an amount that exceeds the maximum amount under
§ 507 of the Code.
FED. R. BANKR. P. 3007(d). Pursuant to the Procedures Order, the Debtors may object to proofs
of claim on the following additional grounds:
1) 	the amount claimed contradicts the Debtors’ books and records;
2) 	the Claims were incorrectly classified;
3) 	the Claims seek recovery of amounts for which the Debtors’ estates are not
liable;
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4) 	the Claims do not include sufficient documentation to ascertain the validity of
the Claims;
5) 	the Claims are objectionable under Bankruptcy Code section 502(e)(1);
6) 	the Claims are filed against more than one Debtor entity;
7) 	the Claims have not specified the Debtor against whom the Claim has been
filed;
8) 	the Claims do not specify any amount of Claim (other than Claims explicitly
asserted as “unliquidated”); and
9) 	the Claims are facially defective.
(Procedures Order at 2–3.)
Rule 3007(e) also requires omnibus objections to conform to procedural requirements.
Specifically, an omnibus objection must:
1) 	state in a conspicuous space that claimants receiving the objection should
locate their names and claims in the objection;
2) 	list claimants alphabetically, provide a cross-reference to claim numbers, and,
if appropriate, list claimants by category of claims;
3) 	state the grounds for objection and a cross-reference to the pages in the
motion supporting those grounds;
4) 	state in the title the identity of the objector;
5) 	be numbered consecutively with other omnibus objections; and
6) 	contain objections to no more than 100 claims.
FED. R. BANKR. P. 3007(e).
Correctly filed proof of claims “constitute prima facie evidence of the validity and
amount of the claim . . . . To overcome this prima facie evidence, an objecting party must come
forth with evidence which, if believed, would refute at least one of the allegations essential to the
claim.” Sherman v. Novak (In re Reilly), 245 B.R. 768, 773 (2d Cir. B.A.P. 2000). By
producing “evidence equal in force to the prima facie case,” an objector can negate a claim’s
presumptive legal validity, thereby shifting the burden back to the claimant to “prove by a
preponderance of the evidence that under applicable law the claim should be allowed.” Creamer
v. Motors Liquidation Co. GUC Trust (In re Motors Liquidation Co.), No. 12 Civ. 6074 (RJS),
2013 U.S. Dist. LEXIS 143957, at *12–13 (S.D.N.Y. Sept. 26, 2013) (internal quotation marks
omitted). If the objector does not “introduce[] evidence as to the invalidity of the claim or the
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excessiveness of its amount, the claimant need offer no further proof of the merits of the claim.”
4-502 COLLIER ON BANKRUPTCY ¶ 502.02 (16th rev. ed. 2013).
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).
B. 	The Motion
The Debtors argue that since the Claimants did not seek attorneys’ fees within the
timeframe provided by California rules, and since the California court never awarded attorneys’
fees, the Claimants may not assert a right to those fees now. In California, a party must request
attorneys’ fees by motion, see CAL . CODE CIV. P ROC. § 1033.5(c)(d), within sixty days of service
of a judgment. See CAL . RULES OF COURT 3.1702(b)(1), 8.104(a)(1). Here, the Claimants were
served with a copy of the judgment on January 10, 2012. (Reply Ex. 1-A at 58.) The Claimants
did not make a motion seeking attorneys’ fees until after that sixty-day deadline passed—and
until after the Petition Date. (See Response Ex. 4-1; Reply Ex. 3.)
Rule 3.1702(d) of the California Rules of Court provides that a trial judge may extend the
time for filing a motion for attorneys’ fees “for good cause.” At the Hearing, the Claimants’
counsel asserted that the trial judge had extended the attorneys’ fee motion deadline for good
cause until the hearing regarding withdrawal of the lis pendens. (July 27, 2014 Tr. at 35:1–36:3.)
That extension would allow any attorneys’ fee request to include expenses incurred up to and
including the expungement of the lis pendens. (Id. at 35:22–36:1.) But the Court finds two
problems with the Claimants’ position.
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First, the Claimants did not provide a transcript of the hearing where this extension was
purportedly granted. This presents a problem because the Claimants assert that the California
judge intended to deal with attorneys’ fees and the lis pendens at a later hearing, but the Court’s
judgment in favor of the Claimants explicitly expunged the lis pendens and left open the issue of
attorneys’ fees. (See Reply Ex. 1-A at 57 (“The lis pendens filed by Plaintiffs with respect to the
subject property is hereby expunged.”).) Thus, the Claimants are asking the Court to disregard
what is indicated by the judgment in favor of a supposed understanding reflected in a transcript
that the Court does not have.
Second, the judgment also provides that costs and attorneys’ fees should be “adjudicated
via post-judgment proceedings.” (Id.) But the judgment did not say that California’s ordinary
rules governing post-judgment proceedings, including the timing of requests for costs and
attorneys’ fees, did not apply. Moreover, the Claimants actually sought their costs within the
sixty-day limit; they simply did not submit a timely application for their attorneys’ fees. While
the Claimants assert that they delayed filing their motion for attorneys’ fees because they wanted
those fees to include any further work performed in getting the Debtors to remove the lis
pendens, the Claimants still could have complied with California rules. That is, the Claimants
could have filed a timely request for attorneys’ fees within the sixty-day limit for all fees
incurred to that date, and then if they incurred further fees in getting the Debtors to remove the
lis pendens, they could have sought recovery of those additional fees in any further motion
practice regarding the lis pendens. Nothing submitted to the Court indicates that the Claimants
had a license to ignore California rules.
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III. 	CONCLUSION
The parties agree that the Claimants did not seek attorneys’ fees within California’s
ordinary sixty-day limit. Instead, the Claimants assert that they were permitted to exceed that
limit so their fees could include work performed to secure removal of the lis pendens. But the
Claimants do not adequately support this supposed permission, nor do they explain why they
failed to seek any attorneys’ fees at all within the time limit. Their argument that the California
court intended to deal with attorneys’ fees at the same hearing it dealt with the lis pendens is
belied by the fact that the judgment the Claimants obtained from the California court expressly
expunged the lis pendens. Under the applicable California rules, the Claimants did not timely
assert a request for attorneys’ fees and the California court never awarded such fees. The
Claimants are not entitled to such an award from this Court.
Therefore, the Debtors’ objection to the Claims is SUSTAINED, and the Claims are
REDUCED to two $14,463.51 general unsecured claims and ALLOWED in that amount.
IT IS SO ORDERED.
Dated: February 18, 2014
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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