The debtor was a lender. Certain mortgagors and the debtor agreed to a loan modification, and the mortgagors fulfilled their obligations under the modification. Later, the debtor filed for Chapter 11 bankruptcy. The debtor’s bankruptcy plan set deadlines for consumer creditor claims to be made, and the court appointed a Consumer Claims Trustee (the “trustee”). Over two years past the deadline, the mortgagors filed a claim stating that the debtor did not “recast their loan as required when they completed the terms of their… loan modification,” resulting in significant monetary losses. Before bringing this claim in bankruptcy court, the mortgagors had reported the debtor to the Consumer Financial Protection Bureau (CFPB) seeking relief. When that proved fruitless, the mortgagors attempted to file their late claim with the consumer claims trustee (the “trustee”). The trustee objected to the claim, stating it was untimely and did not state a “legal claim for relief.” The mortgagors responded by asking the court to excuse their late filing because they did not know whether it was appropriate to file a claim with the bankruptcy court while awaiting adjudication of their pending CFPB claim. The trustee replied again, arguing that the claim was untimely and stating that the mortgagors did not meet the excusable neglect standard under the case law. The court conducted a sufficiency hearing to determine whether “the contested claim states a claim for relief against the debtors under the legal standard employed on a Rule 12(b)(6) motion to dismiss.”
In In re Ditech Holding Corp., No. 19-10412 (JLG), 2024 WL 3561822, 2024 Bankr. LEXIS 1735 (Bankr. S.D.N.Y. July 26, 2024) (unpublished opinion), the court denied the contested claim because the mortgagors failed to show a sufficient reason for their late filing. The court stated that the mortgagors were given actual notice of the applicable claims deadline and failed to meet it. The court next addressed the mortgagors’ argument of excusable neglect. The factors for determining excusable neglect include (1) prejudice to the debtor, (2) length of delay, (3) the reason for the delay, and (4) whether the movant acted in good faith. Pioneer Inv. Serv. Co. v. Brunswick Assocs. L.P., 507 U.S. 380, 395 (1993). The court determined that the reason for the delay is given the most weight. The mortgagors’ reasoning for their untimeliness was that there was a pending claim against the debtor with the CFPB, and the mortgagors were unsure if it would be proper to file a claim in bankruptcy court at the same time. The court stated that “misunderstanding of the claims process is not a valid basis for finding excusable neglect.” The court next found that the danger of prejudice weighed against the mortgagors because allowing their late claim would establish a precedent for more late claims to be submitted, prejudicing the trustee. Additionally, allowing late claims would disrupt the current reorganization plan and deplete funds available for creditors and other mortgagors. Next, the court found that the length of delay weighed against the mortgagors because they sought out their claim more than two years after the deadline. Finally, the court stated that the mortgagors likely acted in good faith, but “the good faith factor is rarely determinative.” Therefore, the court denied the mortgagors’ claim.
By Pablo Aun: [email protected]
Edited By Maycee Redfearn: [email protected]
Edited By Kristin Meurer: [email protected]
Edited By Hayden Mariott: [email protected]