In Re: Daniel and Lucy Benyamin

Background

Ditech Financial LLC appealed a Southern District of New York Bankruptcy Court order expunging its $455,424.72 proof of claim against Chapter 11 debtors Lucy and Daniel Benyamin. A proof of claim is a written statement asserting a creditor’s right to payment in a bankruptcy case.

The debtors obtained a loan from IndyMac Bank, F.S.B. in 2003 and secured it with a mortgage on property at 319 East 105th Street, #5E, New York, New York. Ditech filed the proof of claim in December 2017, identifying itself as both the creditor and servicer. The attached note identified IndyMac as the lender, did not identify Ditech as a party, and was endorsed in blank.

The debtors objected, arguing that Ditech lacked standing—that is, the legal ability to file and pursue the claim. Ditech initially filed an untimely response and later argued that it was the note’s holder through BNY Mellon, which allegedly acted as its custodian. Ditech also argued that it serviced the loan for Freddie Mac, which Ditech said owned the loan.

Bankruptcy Court Proceedings

The bankruptcy court first expunged Ditech’s claim because Ditech had not made an initial showing that the claim was valid and had not established standing. The bankruptcy court later granted reconsideration and held an evidentiary hearing.

At that hearing, the bankruptcy court did not allow Ditech to substitute Christy L. Christensen for its previously identified corporate witness, Bradford Hardwick. The court found that Ditech had not shown good cause for making the substitution shortly before trial. It admitted some evidence through Hardwick’s deposition testimony but excluded a purported custodial agreement because it was hearsay and Hardwick lacked personal knowledge of it.

The bankruptcy court then again expunged Ditech’s claim. It found that Ditech had not proved constructive possession of the note through BNY Mellon because the custodial agreement was inadmissible, undated, and did not refer to the note or the debtors. It also found that Ditech did not have actual possession of the note on the relevant date because Ditech acknowledged that the note was not transferred to it until the summer of 2018.

The bankruptcy court further held that Ditech had shown it was Freddie Mac’s agent but had not shown that Freddie Mac had the right to enforce the note. Ditech had not called or deposed witnesses from Freddie Mac or BNY Mellon to establish the relevant relationships or ownership.

Issues on Appeal

Ditech raised three principal arguments. First, it argued that a mortgage servicer could establish standing by showing a financial interest in the loan and that it serviced the loan, without proving that the loan owner had the right to enforce the note. Second, Ditech argued that the evidence established Freddie Mac’s ownership and enforcement rights. Third, Ditech argued that the bankruptcy court abused its discretion by refusing to let Christensen testify as a replacement corporate witness.

District Court’s Analysis

The district court held that a mortgage servicer may file a proof of claim only as the authorized agent of an entity entitled to enforce the note and mortgage. Because Ditech claimed to be servicing the loan for Freddie Mac, Ditech had to establish that Freddie Mac had the right to enforce the note. The court rejected Ditech’s reading of the cases it cited, finding that those cases did not authorize a servicer to file a claim when the entity for which it acted lacked enforcement rights.

The district court also held that the bankruptcy court did not clearly err in finding that Ditech failed to prove Freddie Mac’s enforcement rights. Hardwick’s statement that Freddie Mac was the owner was conclusory, and he did not identify documents showing that Freddie Mac acquired the loan. The district court also noted that Ditech had time to provide supporting documents or obtain testimony from Freddie Mac but did not do so. Ditech could not rely on a new argument about a declaration by the debtors’ counsel because Ditech had not made that argument in the bankruptcy court.

Finally, the district court held that the bankruptcy court acted within its discretion by refusing the last-minute witness substitution. The parties’ pretrial order identified Hardwick as Ditech’s only witness and required good cause to call an unidentified witness. The district court found that allowing Christensen to testify could have prejudiced the debtors because they had not had an opportunity to investigate or depose her. The bankruptcy court had also allowed Ditech to use Hardwick’s deposition testimony and introduce exhibits through that testimony.

Disposition

The district court affirmed the bankruptcy court’s decision expunging Ditech’s proof of claim. The clerk was directed to close the case.