Opinion
23-cv-7194 (DEH) (KHP)
12-28-2023
In Re DITECH HOLDING CORPORATION, et al. Debtors.
REPORT AND RECOMMENDATION ON BANKRUPTCY APPEAL
KATHARINE H. PARKER, UNITED STATES MAGISTRATE JUDGE
TO: THE HONORABLE DALE E. HO, United States District Judge
FROM: KATHARINE H. PARKER, United States Magistrate Judge.
On January 11, 2019, Appellee Ditech Holding Corporation and certain of its affiliates, including Ditech Financial, LLC (“Ditech”) (collectively, “Debtors”), filed petitions for relief under chapter 11 of the Bankruptcy Code in the Southern District of New York Bankruptcy Court (the “Bankruptcy Court”). On October 5, 2019, Appellant Kevin L. Etter (“Etter”), acting pro se, filed two proofs of claim (collectively, the “Claims”) against Ditech. On August 2, 2023, the Bankruptcy Court issued an order dismissing the Claims, finding that Etter failed to state plausible claims for relief, that the Claims were untimely, and that the Claims were barred by the voluntary payment doctrine. In re Ditech Holding Corp., 2023 WL 4943734 (Bankr. S.D.N.Y. Aug. 2, 2023). Before the Court for a Report and Recommendation is Etter's appeal from the order dismissing the Claims. For the reasons stated below, I recommend that the Bankruptcy Court's order be AFFIRMED.
The Court takes these background facts from the underlying bankruptcy court decision and the record on appeal.
1. Etter Takes a Mortgage Loan from Bank of America and Receives a Loan Modification
On August 26, 2009, Etter executed a note in favor of Bank of America in the amount of $236,970. The note was secured by a mortgage (together with the note, the “Mortgage Loan”) executed by Etter and his wife, Christine Etter, on the Etters' property located in Florida (the “Property”). On September 9, 2011, Bank of America initiated a foreclosure action against Etter in Florida state court. On May 1, 2012, Etter executed a loan modification with Bank of America (the “BOA Loan Modification”), which provided for an interest-bearing principal balance of $209,875.00, a deferred non-interest-bearing principal balance of $35,199.83, and an interest rate of 4.625%. Etter defaulted on the BOA Loan Modification within six months.
On November 8, 2012, Etter filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code. On November 27, 2012, Bank of America voluntarily dismissed its foreclosure action against Etter without prejudice to its right to enforce the Mortgage Loan. On February 13, 2013, Etter received a discharge from bankruptcy, and his bankruptcy was closed on July 9, 2014. Although the chapter 7 discharge relieved Etter of personal liability on the Mortgage Loan, it did not extinguish the lien against the Property. See 11 U.S.C. § 524(a)(1).
2. Ditech Takes Over as Servicer of the Mortgage Loan
On April 1, 2013, Ditech (doing business as “Green Tree Servicing, LLC”) began servicing the Mortgage Loan. At the time Ditech began servicing the loan, the loan was already in default. Etter asserts that Ditech immediately raised his annual escrow charges from $1,200 to $6,000, causing an approximately $400 increase in his monthly mortgage payment, although there is no evidence in the record that the annual escrow charge was previously $1,200.
Although the Bankruptcy Court order and the parties' briefing frequently refer to “Green Tree Servicing,” the Court always refers to this entity as Ditech in an attempt to avoid confusion.
A payment history submitted by Etter shows that Etter made a payment of $1,860 on April 4, 2013, that was applied to escrow. (ECF No. 11-1 at 41.) His next payment was on June 4, 2013, in the amount of $5,841.56, which is consistent with the projected escrow charge. No further payments were made until October 30, 2013. On July 7, 2013, Etter applied for a loan modification, but Ditech denied the application on the basis of insufficient income.
On October 4, 2013, Ditech initiated a foreclosure action against Etter in Florida state court based on his delinquent account status. Ditech asserted that Etter had failed to make the payment due on October 1, 2012, and all subsequent payments. Ditech filed an affidavit declaring the total amount due under the Mortgage Loan as $269,490.69 (principal and interest). Etter did not respond to the complaint, and the court entered a default judgment against him.
Etter asserts that he tried to make payments toward the mortgage, but Ditech sometimes rejected his payments without reason and applied payments inconsistently, and that his account incorrectly showed his status as delinquent because of Ditech's misapplication of his payments. However, Etter does not provide detail about when he was making payments and in what amount, and the payment history does not reflect that he was making payments toward the Mortgage Loan, but only toward escrow. Etter asserts that Ditech “eventually” corrected the escrow and refunded his overpayments. It is unclear exactly when or how Ditech refunded any payments, but Etter appears to cite an escrow refund check dated February 3, 2016, in the amount of $2,008.26 as evidence that Ditech refunded his overpayments.
On October 30, 2013, Etter made a payment in the amount of $1,975 that was partially applied to the principal, partially to interest, and partially to escrow. (Id.) He made another payment on October 31, 2013 in the amount of $14,215.12 that was applied to escrow. (Id.) No further payments were made in 2013.
On January 24, 2014, Ditech provided a statement to Etter that showed the payoff balance as $273,645.69. This amount consisted of the unpaid principal balance of $207,572.39; deferred interest free principal balance of $35,199.83; accrued interest of $12,789.60; unpaid escrow amounts of $14,215.12; and foreclosure costs of $4,155.00, minus a Suspense Balance or Unapplied Funds of $286.25.
On March 6, 2014, Etter made a payment in the amount of $1,976.94. Etter made additional payments in the amount of $1,976.94 on April 1, 2014, and April 28, 2014. (Id.)
In June 2014, the foreclosure action was dismissed without prejudice. The parties disagree as to why the action was dismissed. Etter asserts that by June 2014, he had brought the Mortgage Loan current. Ditech asserts that on May 27, 2014, Etter executed a loan modification agreement with Ditech (the “Ditech Loan Modification”), and as a result of this agreement, Ditech filed an ex parte motion to dismiss the foreclosure action, which was granted. Ditech asserts that it offered the Loan Modification to Etter pursuant to a policy implemented by the Federal Housing Finance Agency (“FHFA”) on July 1, 2013, that required servicers of certain loans to offer eligible, delinquent borrowers a streamlined modification process to lower their monthly payments. Under this policy, borrowers were not required to submit a loan modification application, and servicers were permitted to pre-approve borrowers for a modification by offering a trial period payment plan. It is unclear to the Court from the record or the briefs why the loan modification was offered to Etter several months after the FHFA policy went into effect.
A copy of the Ditech Loan Modification agreement is available on the docket at ECF No. 11-2 at pages 118-121. Although this document includes what appears to be Etter's signature and a notary's stamp, Etter denies signing the document and asserts that he did not learn of the Ditech Loan Modification until 2019. However, the three payments in the amount of $1,976.94 made on March 6, April 1, and April 28, 2014, just prior to the loan modification effective date of May 1, 2014, are consistent with the trial payments necessary for the plan. Thereafter, Etter continued to make mortgage payments consistent with the Ditech Loan Modification until January 2019.
Etter asserts that according to his own research, there is no notary with the commission number listed on the document and the Ditech representative listed on the document was not employed by Ditech at the relevant time, nor did the Ditech representative sign the agreement. He further notes that this document has missing pages and was never recorded with the appropriate county.
Etter asserts that these payments were consistent with the amounts due according to the 2012 Bank of America Loan Modification agreement, plus unspecified late fees. (Reply 4.)
3. The Etters Stop Making Payments on the Mortgage and Ditech Files for Bankruptcy
In the fall of 2018, the Etters decided to move to California. Etter contends that at this point, the mortgage payoff amount seemed too high, and “something wasn't adding up,” but he received no assistance from Ditech in determining the correct mortgage payoff amount. Consequently, in January 2019, he decided to stop paying the mortgage.
On February 11, 2019, Ditech assigned the Mortgage Loan to New Residential Mortgage, LLC (“New Residential”). On the same day, Ditech and the other Debtors filed for bankruptcy.
On February 22, 2019, the Bankruptcy Court entered an order setting the deadline (i.e., the “Bar Date”) for filing a proof of claim involving Ditech and/or the other Debtors as April 1, 2019. The Bankruptcy Court directed the Debtors to serve a notice of the Bar Date on all creditors and other known holders of potential claims and to publish the notice in The New York Times and USA Today. Thereafter, the Court extended the Bar Date for consumer borrowers (the “Consumer Claims Bar Date”) to June 3, 2019. Ditech asserts that in May 2019, it used a Noticing Coordinator to serve the Bar Date notice by mail and email on numerous individuals, including Etter. Ditech also complied with the requirement to publish the Bar Date notice in The New York Times and USA Today.
4. The Etters Pay Off the Mortgage
On April 1, 2019, the subservicing of the Mortgage Loan was transferred to LoanCare. On April 20, 2019, LoanCare sent a written debt validation request to Etter, who through counsel, lodged a written dispute of the debt. In response to the written dispute, LoanCare directed Etter to Lakeview Loan Servicing and to Fannie Mae, who each directed Etter back to LoanCare. Etter asserts that LoanCare was threatening to foreclose on the Property.
In mid-June 2019, Etter located a purchaser for the Property. Etter contacted Fannie Mae in an attempt to ascertain the correct dollar amount needed to pay off the Mortgage Loan to clear title for the buyer. Etter asserts that he learned for the first time through Fannie Mae's response about the Ditech Loan Modification that was implemented in 2014.
On August 12, 2019, even though he believed that the Mortgage Loan payoff amount was “WAY too high,” Etter paid the Mortgage Loan in full to clear title for the new owners and sold the Property. Specifically, Etter paid $273,505.50 to LoanCare to pay off the Mortgage Loan. Etter asserts that he was unable to determine what the correct payoff amount should have been, because he received no assistance from Ditech or LoanCare in getting “to the bottom of” why the payoff amount was so high. At a case management conference before the Undersigned on November 16, 2023, Etter asserted that he believes he overpaid by about $100,000.
5. The Debtors Confirm a Bankruptcy Plan and Etter Files Claims in the Bankruptcy Cases
On September 25, 2019, Ditech entered into a Memorandum of Understanding (“MOU”) with the Department of Justice in which Ditech acknowledged certain errors in the servicing of the accounts of borrowers in bankruptcy pursuant to chapter 13. (See Opp. Br. 11). Although Etter was a debtor in bankruptcy, his bankruptcy was filed under chapter 7, not chapter 13, and thus Ditech asserts that the MOU is inapplicable to him.
On September 26, 2019, the Debtors confirmed their Third Amended Plan. The Court set November 11, 2019, as the Bar Date for administrative expense claims (“Administrative Expense Bar Date”).
On October 5, 2019, Etter filed proof of claim number 24280 (“Claim 24280”) as an administrative expense claim in the amount of $273,505.50 against Ditech and filed proof of claim number 24281 (“Claim 24281”) as an unsecured claim in the amount of $273,505.50 against Ditech. The Claims are identical, except for the different classifications.
The Claims asserted that Ditech engaged in improper and fraudulent behavior in connection with the Mortgage Loan, including improperly raising the annual escrow charges by about $400/month, rejecting and misapplying payments, failing to include principal payoff information on monthly statements, failing to clarify the payoff amount, implementing the Ditech Loan Modification agreement without Etter's knowledge or consent, and sending him confusing notifications as to the assignment of the Mortgage Loan. Etter also contended that although he made all his Mortgage Loan payments during the period from January 1, 2014, to May 1, 2018, the payoff amount on the Mortgage Loan improperly increased by $56,300.26 during that period. Etter asserted that Ditech's fraudulent and misleading conduct caused the mortgage payoff amount to be much higher than it should have been. As damages, Etter sought a return of the $273,505.50 remitted to LoanCare at the time of the sale of the Property, along with accrued interest, treble damages, and attorney's fees.
The Plan Administrator and Consumer Claims Trustee (“Trustee”) objected to the Claims as meritless. In his response, Etter, through counsel, asserted new claims for violations of the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) and wrongful foreclosure. He further alleged that the Ditech Loan Modification was based on a stale loan modification application that he neither authorized nor executed, and that it unfairly added $64,173 in interest-bearing principal to the account. He further argued that the Ditech Loan Modification nullified the BOA Loan Modification and voided the Mortgage Loan, thus entitling him to the full payoff amount that he paid to LoanCare when he sold the Property. Etter also asserted that the transfer of servicing rights from Ditech to LoanCare was invalid because the transfer did not reference the Ditech Loan Modification.
The Trustee argued in reply that Etter failed to state a claim for relief under the FDUTPA or for wrongful foreclosure, that Florida's voluntary payment doctrine barred his damage claims, and that any relief from LoanCare was not available through the bankruptcy process.
6. The Bankruptcy Court Denies the Claims
On July 27, 2023, the Bankruptcy Court held a sufficiency hearing to address whether the Claims stated a claim for relief. On August 2, 2023, the Bankruptcy Court issued an opinion and order dismissing the Claims on several bases.
As to Claim 24280, the Court held that Etter had failed to plead any facts that would support his contention that he held an administrative expense claim against Ditech. Specifically, Section 503 of the Bankruptcy Code establishes an “administrative expense priority” for certain enumerated categories of estate expenses, but Etter failed to plausibly assert that Claim 24280 fell within any of the enumerated categories. The Bankruptcy Court explained that even though this claim was filed before the Bar Date for administrative expense claims, the Claim was not an administrative expense but rather was simply a consumer claim like Claim 24281 and is subject to the Consumer Claims Bar Date. 2023 WL 4943734, at *19-20.
The Bankruptcy Court then held that both Claims were untimely because they were filed several months after the Consumer Claims Bar Date. The Bankruptcy Court declined to excuse the untimeliness because it found, based on evidence in the record, that Etter had received timely notice of the Ditech bankruptcy by mail and email, and in any event, that Etter was only entitled to constructive notice. Id. at *20.
Despite the Claims' procedural deficiencies, the Bankruptcy Court also performed a merits analysis and found that Etter had failed to state a claim under Rule 12(b)(6) for fraud, under the FDUTPA, for wrongful foreclosure, or for breach of contract. The Bankruptcy Court thus dismissed the Claims for failure to state a claim under the same standard that applies in civil cases.
As to the fraud claim, the Bankruptcy Court held that Etter had failed to plead with sufficient particularity facts demonstrating any of the elements of a fraud claim. Most notably, the Court held that Etter could not plausibly allege that he had relied on the Ditech Loan Modification to his detriment, which is required to state a claim for fraud, because at the time the Loan Modification went into effect, Etter had already defaulted on the BOA Loan Modification and was in the middle of defending a foreclosure action. Thus, it was clear that the source of Etter's problems “was his own chronic deficiency.” Id. at *10. The Court also rejected Etter's contention that he didn't know about the Ditech Loan Modification because Etter's notarized signature appeared on the face of the Ditech Loan Modification agreement and because Etter made payments consistent with the Ditech Loan Modification. Id. at *11.
Similarly, the Bankruptcy Court held that Etter had failed to state a claim under the FDUTPA, which requires a claimant to allege facts demonstrating a deceptive act or unfair practice; causation; and actual damages. Id. at *11. The Court explained that Etter did not articulate the elements of a FDUTPA claim but rather asserted a list of complaints regarding Ditech's purportedly deceptive acts. The Court ran through the list of complaints and explained why, in each instance, Etter failed to allege facts sufficient to lead to a plausible inference that Ditech had engaged in any deceptive practice that caused Etter damages.
As to Etter's allegation that Ditech raised the yearly escrow charge for insurance from $1,200 to $6,000 per year, the Bankruptcy Court found that the evidence suggested that Etter's escrow payments were never $1,200, and it was implausible that an escrow overcharge caused him to fall behind on payments because the loan was already in default at the time the charge was raised. The Bankruptcy Court similarly rejected the argument that the principal on the loan improperly increased over four years by $56,300, finding that Etter had misstated the January 2014 payoff amount. It also held that Ditech's mistakes on the escrow (if any) account did not amount to a FDUTPA violation because as discussed above, Etter acknowledged that Ditech corrected the mistakes and refunded the overpayments. The Bankruptcy Court similarly found that any failure by Ditech to provide periodic statements did not support a FDUTPA claim because Ditech was not required to provide such statements due to Etter's personal bankruptcy discharge. As to Etter's assertion that Ditech improperly relied on a loan modification application he submitted in 2013 to implement the Ditech Loan Modification, the Court found that this was not plausible in light of the FHFA policy requiring Ditech to offer this loan modification. The Court similarly found no support for the contention that Ditech's assignment of the Mortgage Loan to New Residential was inherently fraudulent.
The Bankruptcy Court also held that Etter failed to state a claim for wrongful foreclosure, which under Florida law requires a showing that a foreclosure sale occurred, and that the plaintiff was not in default. See Jallali v. Christiana Tr., 297 So.3d 580, 584 (Fla. Dist. Ct. App. 2014). The Bankruptcy Court held that it was clear from the Claims both that there was no foreclosure sale of the Property, and that Etter was in default under the Mortgage. The Court similarly held that Etter failed to state a claim for breach of contract on the theory that Ditech erroneously raised his monthly payments, because it was clear from the Claims that Etter did not perform his obligations under the contract but rather breached the terms of the BOA Loan Modification by failing to make payments under that contract.
As an alternative basis for dismissal, the Bankruptcy Court found that Etter's claim for damages was barred under Florida's voluntary payment doctrine, which provides that “where one makes a payment of any sum under a claim of right with knowledge of the facts, such a payment is voluntary and cannot be recovered.” Id. at *16-17 (citing Ruiz v. Brink's Home Sec., Inc., 777 So.2d 1062, 1064 (Fla. Dist. Ct. App. 2001)). The Bankruptcy Court concluded that Etter freely elected to pay off the Mortgage Loan in full when he sold the Property.
Finally, the Bankruptcy Court held that it lacked jurisdiction to hear any claims asserted against LoanCare, the successor-servicer, because those claims had no nexus to the Third Amended Plan, and the Bankruptcy Court had not retained jurisdiction over LoanCare.
7. Etter Files the Instant Appeal
Etter timely filed the instant appeal on August 15, 2023. In the statement of issues presented on appeal (ECF No. 2), Etter argues that the Bankruptcy Court erroneously concluded that he failed to state an administrative expense claim because the court overlooked the fact that Section 523 of the bankruptcy code provides for an exception to the discharge of debts obtained by fraud. Etter further argues that the Bankruptcy Court erred in finding that the Claims were untimely because it erroneously relied on a forged exhibit provided by Ditech that purported to demonstrate that Etter was timely served.
As to the Bankruptcy Court's finding that Etter failed to state a claim under Rule 12(b)(6), Etter asserts that the Court relied on an erroneous finding that Etter had signed the 2014 Ditech Loan Modification agreement, and thus based its decision on the improper finding that Etter was aware of the Ditech Loan Modification. He also argues that the Bankruptcy Court overlooked various other issues with the Ditech Loan Modification proving that the modification was fraudulent, including that he was not given a copy of the agreement and that the agreement was never recorded as required by Florida law. Etter also argues that Ditech's motion to dismiss the foreclosure action, filed ex parte on June 16, 2014, misrepresented the terms of the resolution and itself constituted fraud by Ditech.
Etter also argues that the Bankruptcy Court failed to fully grasp his FDUTPA claims. Etter's statement of the issues discusses each purportedly misleading activity that Ditech engaged in and attempts to explain why the activities constitute FDUTPA violations. Additionally, Etter argues that the MOU established between Ditech and the Department of Justice, in which Ditech acknowledged certain servicing errors, constitutes proof that Ditech violated the FDUTPA.
Etter also argues that the Bankruptcy Court erred in finding his claims were barred by the voluntary payment doctrine, because it disregarded the fact that, at the time Etter paid off the Mortgage Loan, he had not seen the Ditech Loan Modification in full, and thus lacked knowledge of all relevant facts. He also argues he did not pay off the Mortgage Loan voluntarily but instead did so under the looming threat of foreclosure.
LEGAL STANDARD
On an appeal of an order by the bankruptcy court, the district court reviews the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. In re Lehal Realty Assocs., 101 F.3d 272, 276 (2d Cir. 1996). Clear error is present only when “upon review of the entire record, [the court is] left with the definite and firm conviction that a mistake has been committed.” United States v. Snow, 462 F.3d 55, 72 (2d Cir. 2006) (quotation marks and citation omitted). Any arguments not raised in the bankruptcy court are generally considered waived. In re Robbins Int'l, Inc., 56 Fed.Appx. 55, 56 (2d Cir. 2003).
In reviewing a bankruptcy appeal by a pro se litigant, the Court must construe the litigant's pleadings “liberally” and read the litigant's papers “to raise the strongest arguments that they suggest.” In re Tronox Inc., 2023 WL 2744136, at *3 (S.D.N.Y. Mar. 31, 2023) (citing Triestman v. Fed. Bureau of Prisons, 470 F.3d 471, 474 (2d Cir. 2006)).
APPLICATION
1. The Bankruptcy Court Correctly Held Etter is Not Entitled to Administrative Priority
Under the Bankruptcy Code, a debtor's administrative expenses receive highest priority in corporate bankruptcy proceedings. “The burden of proving entitlement to priority payment as an administrative expense ... rests with the party requesting it.” In re Bethlehem Steel Corp., 479 F.3d 167, 172 (2d Cir. 2007). Administrative expenses are defined as “actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b). Section 503 of the Bankruptcy Code establishes an administrative expense priority for certain enumerated categories of estate expenses. Etter filed Claim 24280 as an administrative expense claim under section 503(b)(9) of the Bankruptcy Code, which provides that administrative expenses include “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor's business.” 11 U.S.C. § 503(b)(9). Thus, a claimant seeking allowance and payment of an administrative expense claim under section 503(b)(9) must show that the claim arises from the sale of goods by the claimant to the debtor, that the claimant sold the debtor goods in the ordinary course of the debtor's business, and that the goods were received by the debtor within twenty days of the bankruptcy filing.
The Bankruptcy Court held that Etter failed to allege any facts demonstrating that he sold goods to Ditech, much less that he sold such goods in the ordinary course of his business or within twenty days of the commencement of the bankruptcy. Thus, the Bankruptcy Court held that Etter failed to allege facts to support his contention that he holds an administrative expense claim against Ditech. This was a conclusion of law that the District Court reviews de novo. See In re Bethlehem Steel Corp., 479 F.3d at 172 (“The bankruptcy court's determination in this case that the payment at issue does not constitute an administrative expense is a conclusion of law.”).
On review, it is clear that the facts as alleged by Etter are nowhere in the ballpark of the definition of an administrative expense. This is no tricky legal issue; Claim 24280 plainly fall outside the definition of an administrative expense claim under 11 U.S.C. § 503(b)(9) or any of the other enumerated categories. Claim 24280 is not an administrative expense claim, but is simply an unsecured claim, identical to Claim 24281 in every respect. Etter's characterization of his claim as an administrative expense appears to be an improper attempt to circumvent dismissal of his claim as untimely, because although the Consumer Claims Bar Date had passed at the time Etter brought his Claims, the Administrative Claims Bar Date had not yet passed. However, Etter cannot save an untimely claim by characterizing it as an administrative expense.
Etter argues on appeal that the Bankruptcy Court incorrectly held that he was not entitled to administrative priority because it failed to apply an exception to discharge for debts obtained by fraud, as provided in 11 U.S.C. § 523(a)(2). However, the question of whether § 523(a)(2) applies here as an exception to discharge is a separate issue from whether Etter properly asserted an administrative claim. See, e.g. In re Exide Techs., 601 B.R. 271, 280 (Bankr. D. Del. 2019), aff'd, 613 B.R. 79 (D. Del. 2020) (separately considering the applicability of § 523(a)(2) from the question of whether the claimant stated a valid administrative expense claim). Thus, I address this argument separately, below.
Accordingly, I respectfully recommend that the Court affirm the Bankruptcy Court's finding that Claim 24280 is not entitled to administrative priority status.
2. The Bankruptcy Court Correctly Dismissed Claims 24280 and 24281 as Untimely
Federal Rule of Bankruptcy Procedure 3003(c) requires the bankruptcy court to set a bar date after which proofs of claim may not be filed. Bar dates are “critically important to the administration of a successful chapter 11 case.” In re Musicland Holding Corp., 356 B.R. 603, 607 (Bankr. S.D.N.Y. 2006). They are not merely “a procedural gauntlet” but rather serve “as an integral part of the reorganization process” and the efficient administration of bankruptcy cases. In re Hooker Invs., Inc., 937 F.2d 833, 840 (2d Cir. 1991). “If individual creditors were permitted to postpone indefinitely the effect of a bar order ... the institutional means of ensuring the sound administration of the bankruptcy estate would be undermined.” Id.
Bankruptcy Rule 9006(b)(1) gives the court the discretion to enlarge the time to file claims “where the failure to act was the result of excusable neglect.” The determination of whether a claimant has shown “excusable neglect” is “at bottom an equitable one” that must take “account of all relevant circumstances surrounding the party's omission.” Pioneer Inv. Servs. Co. v. Brunswick Assocs. L.P., 507 U.S. 380, 395 (1993). In analyzing excusable neglect, courts consider four factors set forth by the U.S. Supreme Court in Pioneer Investment Services, namely: the danger of prejudice to the debtor, the length of the delay and its potential impact on judicial proceedings, the reason for the delay, and whether the movant acted in good faith. Id. at 385. The party seeking an extension of time bears the burden of proving excusable neglect. In re Enron Corp., 419 F.3d 115, 121 (2d Cir. 2005). In the Second Circuit, “the equities will rarely if ever favor a party who fails to follow the clear dictates of a court rule, and ... a party claiming excusable neglect will, in the ordinary course, lose under the Pioneer test.” Silivanch v. Celebrity Cruises, Inc., 333 F.3d 355, 366-67 (2d Cir. 2003).
Here, the Extended General Bar Date for the filing of unsecured claims was June 3, 2019. Etter filed his Claims on October 5, 2019, which was over four months past the deadline. As discussed above, both Claims constitute unsecured claims that are subject to the Bar Date for consumer claims. Etter argued below that his lateness should be excused because he never received notice of the Underlying Bankruptcy Cases. The Bankruptcy Court rejected this argument. Relying on records of service of process, including an affidavit of service, the Bankruptcy Court found that Etter had been timely served by mail and email. Etter argued that the affidavit of service relied on by the Bankruptcy Court was a forgery. He noted that the affidavit referenced by the Trustee at the sufficiency hearing and attached to its briefing was different from the affidavit of service that was filed on the public docket. The Bankruptcy Court found that there was no merit to Etter's assertion that the affidavit of service was forged.
The Bankruptcy Court did not err in finding that the affidavit of service was authentic. Plaintiff is correct that the affidavit of service initially filed on the docket is slightly different from the affidavit of service that the Trustee submitted in connection with its objection to Etter's claims. However, the Trustee provides a reasonable explanation for the differences. It asserts that the affidavit filed at ECF No. 586 was a general affidavit attesting to service on over a million different parties, whereas the document submitted in connection with Etter's claims specifically concerned service on Etter. Notably, the differences between the two documents are entirely innocuous and do not suggest that Ditech changed any meaningful information in an effort to trick the Court. As such, Etter's allegation of forgery lacks merit.
In any event, the Bankruptcy Court also correctly found that Etter was not entitled to service by mail or email because he was an “unknown creditor” and thus required only publication notice, which was provided. A “known creditor” is one that is known or “reasonably ascertainable by the debtor.” Tulsa Prof'l Collection Serv., Inc. v. Pope, 485 U.S. 478, 490 (1988). A creditor is “reasonably ascertainable” if that creditor can be identified with “due diligence,” without resorting to “impracticable and extended searches.” Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 318 (1950). An “unknown” creditor is a claimant whose identity or claim is not “reasonably ascertainable” or is merely “conceivable, conjectural or speculative.” In re XO Commc'ns, Inc., 301 B.R. 782, 793 (Bankr. S.D.N.Y. 2003), aff'd, 2004 WL 2414815 (S.D.N.Y. June 14, 2004). “Actual notice is required for ‘known' creditors, while constructive notice is sufficient for ‘unknown' creditors.” In re Ritchie Risk-Linked Strategies Trading (Ireland), Ltd., 471 B.R. 331, 339 (Bankr. S.D.N.Y. 2012) (citing Weigner v. City of New York, 852 F.2d 646, 649 (2d Cir. 1988)).
On appeal, Etter argues that it was improper for the Bankruptcy Court to find that he was an “unknown creditor.” Specifically, he asserts that the only reason he was classified as an “unknown creditor” was because Ditech improperly transferred his mortgage to another servicer on the same day it filed for bankruptcy. This argument is without merit. As of the Petition Date, there was no pending action by Etter against the Debtors, and Ditech had no reason to suspect that Etter had a legal claim against it. Even if Ditech had not assigned the Mortgage Loan prior to filing for bankruptcy, Etter still was not a creditor of Ditech at that time, but rather was Ditech's debtor. See, e.g. In re: Credit-Based Asset Servicing & Securitization LLC, 2014 WL 7177629, at *2 (Bankr. S.D.N.Y. Dec. 9, 2014) (finding mortgagor was an unknown creditor); In re New Century TRS Holdings, Inc., 465 B.R. 38 (Bankr. D. Del. 2012) (mortgagor was an unknown creditor and, therefore, not entitled to actual notice). The prior relationship between Etter and Ditech does not by itself make Etter a known creditor. In re XO Commc'ns, Inc., 301 B.R. at 794-95 (prior relationship is insufficient to render someone a known creditor).
Accordingly, Etter has not met his burden to show excusable neglect for his late filing. As such, I respectfully recommend that the Bankruptcy Court's dismissal of both Claims as untimely be affirmed.
3. No Exception to Discharge Applies Pursuant to 11 U.S.C. § 523
On appeal, Etter appears to argue that the Bankruptcy Court erred by failing to apply an exception to discharge for debts obtained by fraud. Specifically, 11 U.S.C. § 523(a)(2)(A) provides that a bankruptcy discharge does not discharge an individual debtor from any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by--(A) false pretenses, a false representation, or actual fraud.”
Etter's argument about the applicability of this provision, which by its terms prohibits individual debtors from discharging debts obtained by fraud, is waived on appeal because he did not raise this argument before the Bankruptcy Court. See In re Robbins Int'l, Inc., 56 Fed.Appx. at 56 (arguments raised for the first time on appeal are generally considered waived). Further and in any event, the fraud exception to discharge is inapplicable here, because § 523(a)(2)(A) “only applies to individual debtors,” and not to corporate debtors like Ditech. In re MF Glob. Holdings, Ltd, 2012 WL 734175, at *3 (Bankr. S.D.N.Y. Mar. 6, 2012); see also In re Ditech Holding Corp., 2021 WL 28072, at *9 (Bankr. S.D.N.Y. Jan. 2, 2021) (collecting cases).
Notably, in 2005, Congress extended § 523(a)(2)(A) to apply to corporate debtors when the debts in question are owed to a governmental unit or when they are owed to an individual as the result of a claim against the government. See 11 U.S.C. § 1141(d)(6); In re Fusion Connect, Inc., 634 B.R. 22, 26 (S.D.N.Y. 2021). This exception is inapplicable here.
Accordingly, the Bankruptcy Court did not err in failing to apply § 523(a)(2)(A) when it dismissed the Claims.
CONCLUSION
For the reasons stated above, I respectfully recommend affirming the Bankruptcy Court's decision to disallow and expunge the Claims on the grounds that (1) Etter failed to assert an administrative priority claim and (2) any consumer claims are untimely. Because these grounds are sufficient for disallowing and expunging the Claims in their entirety, I do not discuss the remaining arguments raised by the parties.
NOTICE
Appellant shall have seventeen days and Appellee shall have fourteen days from the service of this Report and Recommendation to file written objections to the Report and Recommendation, pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure. See also Fed.R.Civ.P. 6(a), (d) (adding three additional days only when service is made under Fed.R.Civ.P. 5(b)(2)(C) (mail), (D) (leaving with the clerk), or (F) (other means consented to by the parties)).
A party may respond to another party's objections after being served with a copy. Fed.R.Civ.P. 72(b)(2). If Appellee files written objections to this Report and Recommendation, Appellant shall have seventeen days to serve and file a response. If Appellant files written objections, Appellee shall have fourteen days to serve and file any response. Such objections shall be filed with the Clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Dale E. Ho at the Thurgood Marshall United States Courthouse, 40 Foley Square, New York, New York 10007, and to any opposing parties. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(d), 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Ho. The failure to file these timely objections will result in a waiver of those objections for purposes of appeal. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 6(a), 6(d), 72(b); Thomas v. Arn , 474 U.S. 140 (1985).