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In re Residential Capital, LLC

United States District Court, S.D. New York

February 13, 2015

In re: RESIDENTIAL CAPITAL, LLC, et al., Debtors.
v.
RESIDENTIAL CAPITAL, LLC, Appellee. PHILLIP SCOTT, Appellant,

OPINION AND ORDER

EDGARDO RAMOS, District Judge.

Phillip Scott ("Scott" or "Appellant") appeals from an order of the United States Bankruptcy Court for the Southern District of New York (the "Order") denying the motion he filed in the underlying Chapter 11 bankruptcy proceeding to, inter alia, enjoin further prosecution of the foreclosure action against his residence as a violation of the Automatic Stay. Doc. 1.[1] The Bankruptcy Court denied the motion on the basis of standing. Bankr. Doc. 6154. For the reasons set forth below, the Bankruptcy Court's Order is AFFIRMED.

I. Background

a. The Underlying Bankruptcy Proceeding

Residential Capital, LLC and certain of its subsidiaries and affiliates (collectively, "Debtors") filed for Chapter 11 bankruptcy protection on May 14, 2012. Bankr. Doc. 1. At a hearing held on November 19, 2012, the Court approved the Debtors' motion to sell their loan servicing and origination platform (the "Platform Assets") to Ocwen Servicing, LLC ("Ocwen"). On November 21, 2012, the Court entered an order approving the sale to Ocwen. Bankr. Doc. 2246. The sale closed on February 15, 2013.

On December 11, 2013, following a hearing, the Bankruptcy Court entered an order approving the terms of the Chapter 11 plan (the "Plan"). Bankr. Doc. 6065. The Plan became effective on December 17, 2013.

b. Appellant's Purported Connection to the Bankruptcy Proceeding

On June 16, 2005, Barbara Campbell, Marlene Gaethers Langley, and Scott (collectively, the "Defendants" in the state court foreclosure action) signed a $725, 000.00 note and mortgage (the "Mortgage") secured by the property at 12 Inverness Road, Scarsdale, New York 10583 (the "Property"). Declaration of Lauren Graham Delehey In Support of Debtors' Objection to Phillip Scott's Motion, ¶ 3. Finance America, LLC originated the Mortgage and subsequently conveyed it to one of the Debtors, Residential Asset Mortgage Products, Inc., as Depositor, which then assigned the Mortgage to JPMorgan Chase as trustee for the residential mortgage-backed securities trust, RAMP 2005 RZ3, pursuant to a Pooling and Servicing Agreement dated September 1, 2005. Id. The Bank of New York Trust Company, N.A. ("BNY") has served as trustee of the trust since May 2008. Id. The Mortgage was serviced by Debtor Residential Funding Corporation, and subserviced by Debtor GMAC Mortgage, LLC, before the servicing rights were transferred to Ocwen as part of the sale of the Platform Assets. Id. ¶ 4.

On July 29, 2008, after Defendants defaulted on their loan, BNY filed a foreclosure complaint in the Supreme Court of New York, Westchester County (the "Foreclosure Action"). Id. ¶ 5. Defendants were served with the summons and complaint, but failed to appear. Id. On March 25, 2009, the court entered a judgment of foreclosure. Id. Scott then brought three orders to show cause seeking to vacate the judgment of foreclosure, all of which were denied. Id.

On May 6, 2013, Scott filed a borrower notice ("Borrower Notice") with the state court, which stated that a foreclosure sale of the Property would constitute enforcement against property of the estate. Borrower Notice ¶ 11. The Borrower Notice further stated that if the foreclosure sale proceeded, Scott would move to void the sale in the bankruptcy court as a violation of the automatic stay. Id. ¶ 19.

On August 9, 2013, Scott filed a motion in the Bankruptcy Court ("Motion"), which claimed that the Mortgage was owned by RAMP 2005 RZ3, a "subsidiary of Debtor, " whose assets passed into the bankruptcy estate. Motion at ¶¶ 6-7.[2] Scott argued that the Mortgage was property of the estate and that BNY's prosecution of the Foreclosure Action therefore violated the automatic stay. See id. ¶¶ 21-22, 25.

In an October 9, 2013 hearing in the Bankruptcy Court, Appellant's counsel attempted to clarify that Scott had standing to bring the motion because Scott represented RAMP's interest as a creditor, and because third parties with "unique" knowledge of fraud have standing in bankruptcy cases as long as they indicate the nature of the fraud. Oct. 9, 2013 Hr'g Tr. 24:7, 26:5, 26:11-12. The Court took the Motion under advisement.

On December 19, 2013, the Bankruptcy Court held that Scott lacked standing to assert a violation of the automatic stay. In particular, the court determined that in order to be a party in interest under Section 1109(b) of the Bankruptcy Code, the person or entity must have some type of direct relationship with the debtor, its property, or the process of administering the bankruptcy estate. Order at 7. The Bankruptcy Court dismissed any notion that Scott so qualified:

Scott concedes he is not a creditor in this case. He does not contest that he defaulted on the underlying note and mortgage. The note and mortgage are not owned or serviced by any of the Debtors. Yet Scott is attempting to use this bankruptcy case and this Court to block a foreclosure action properly pending in state court, filed by the trustee for the trust that owns the note and mortgage. None of the Debtors is a ...

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