Residential Capital, LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK 	NOT FOR PUBLICATION
In re:
RESIDENTIAL CAPITAL, LLC, et al.
Debtors.
Case No. 12-12020 (MG)
Jointly Administered
MEMORANDUM OPINION GRANTING IN PART AND DENYING IN PART THE
TAGGART MOTION TO LIFT THE AUTOMATIC STAY
A P P E A R A N C E S:
KENNETH J. TAGGART
Pro Se
45 Heron Road
Post Office Box 730
Holland, Pennsylvania 18966
By: 	Kenneth J. Taggart
MORRISON & FOERSTER LLP
Counsel for the Debtors
1290 Avenue of the Americas
New York, New York 10104
By: 	Norman S. Rosenbaum, Esq.
MARTIN GLENN
UNITED STATES BANKRUPTCY JUDGE
Kenneth J. Taggart (“Taggart”) filed a Motion for Leave to File Motion Pursuant to Stay
& Relief (and Clarification from Bankruptcy Court) (ECF Doc. # 263) on June 8, 2012 (the
“Motion”). The Debtors opposed the Motion. (ECF Doc. # 682.) The Motion initially came on
for hearing on July 10, 2012 (the “July 10 Hearing”), but after hearing argument, the Court
adjourned the hearing, urging the parties to try consensually to resolve the issues. In the event
the matter was not resolved, the Court requested supplemental briefing concerning which of
Taggart’s counterclaims could proceed as defenses to foreclosure under Pennsylvania law. See
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Transcript of Hearing at 44-45, Case No. 12-12020 (MG) (Bankr. S.D.N.Y. July 10, 2012). The
parties were unable to resolve the issues and the Motion came back for hearing on August 14,
2012. The Debtors filed a supplemental brief with various attachments (including a
memorandum of law by Pennsylvania counsel for debtor GMAC Mortgage, LLC (“GMAC
Mortgage”)) addressing the issues raised by the Court during the July 10 Hearing.
For the reasons explained below, the Court grants the Taggart Motion in part and denies
it in part. The stay is lifted to permit the state court to determine which of Taggart’s
counterclaims may be asserted as defenses to foreclosure under applicable Pennsylvania law.
Absent further stay relief, however, Taggart may not proceed with his counterclaims to the extent
he seeks affirmative damages relief from the Debtors.
I. 	BACKGROUND
Taggart seeks “clarification” regarding which of the counts contained in his
counterclaim pleading (the “Taggart Counterclaim Pleading”) filed against Debtor GMAC
Mortgage can proceed in a state court foreclosure action initiated by GMAC Mortgage and
captioned GMAC Mortgage, LLC v. Taggart, Case No. 09-25338 (Mont. Cty. C.C.P.
2009) (the “Foreclosure Proceeding”). 	The Taggart Counterclaim Pleading alleges
thirty-two counterclaims against GMAC Mortgage including, inter alia, claims for: (i)
alleged violations of the Real Estate Settlement and Procedures Act (“RESPA”), 12 U.S.C.
§ 2601, et. seq., and related regulations, 24 C.F.R. § 350; (ii) alleged violations of the
Truth-in-Lending Act (“TILA”), 15 U.S.C. § 1601, et. seq.; (iii) alleged violations of the
Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C. § 1692, et. seq.; (iv) alleged
violations of the Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681, et. seq.; (v) the
Pennsylvania Unfair Trade Practice and Consumer Protection Act, 73 P.S. § 201-1, et.
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seq.; (vi) Regulation Z, 12 C.F.R. § 226.18(g), (h); (vii) Quiet Title, (viii) alleged
violations of the Fair Credit Extension Uniform Act, 73 P.S. § 2270.1, et. seq.; (ix) alleged
violations of the Mortgage Property Insurance Coverage Act, 7 P.S. § 6701, et. seq. (the
“Insurance Claim”); and (x) alleged violations of Taggart’s First and Fourteenth
Amendment rights of freedom of expression and due process.
On June 6, 2012, the Debtors filed in the Foreclosure Proceeding a Notice of Bankruptcy
and Effect of Automatic Stay & Interim Order Granting Limited Relief to Borrowers in
Foreclosure Proceedings (“Notice of Bankruptcy”). In the Notice of Bankruptcy, the Debtors
indicated their position that each of Taggart’s counterclaims, with the exception of the Insurance
Claim, was stayed under this Court’s Supplemental Order for Interim Relief Under Bankruptcy
Code Sections 105(a), 362, 363, 502, 1107(a), and 1108 and Bankruptcy Rule 9019 (I)
Authorizing the Debtors to Continue Implementing Loss Mitigation Programs; (II) Approving
Procedures for Compromise and Settlement of Certain Claims, Litigations and Causes of Action;
(III) Granting Limited Stay Relief to Permit Foreclosure and Eviction Proceedings, Borrower
Bankruptcy Cases, and Title Disputes to Proceed; and (IV) Authorizing and Directing the
Debtors to Pay Securitization Trustee Fees and Expenses (the “Interim Supplemental Servicing
Order”). (ECF Doc. # 391.)
On June 11, 2012, Taggart filed in the Foreclosure Proceeding his Amended “Motion for
Stay” Pursuant to Bankruptcy of GMAC Mortgage, LLC (the “Motion for Stay”) seeking to stay
the entire Foreclosure Proceeding until this Court clarified the Interim Supplemental Servicing
Order. On June 15, 2012, the state court presiding over the Foreclosure Proceeding entered an
order summarily denying Taggart’s Motion for Stay.
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On July 3, 2012, the Debtors filed their Omnibus Objection to Motions for Relief from the
Automatic Stay Scheduled for Hearing on July 10, 2012. (ECF Doc. # 682.)
At the July 10 Hearing, Taggart indicated that he believed all of his counterclaims should
be permitted to proceed under the Interim Supplemental Servicing Order.
On July 13, 2012, the Court entered the Final Supplemental Order Under Bankruptcy
Code Sections 105(a), 362, 363, 502, 1107(a), and 1108 and Bankruptcy Rule 9019
(I) Authorizing the Debtors to Continue Implementing Loss Mitigation Programs; (II) Approving
Procedures for Compromise and Settlement of Certain Claims, Litigations and Causes of Action;
(III) Granting Limited Stay Relief to Permit Foreclosure and Eviction Proceedings, Borrower
Bankruptcy Cases, and Title Disputes to Proceed; and (IV) Authorizing and Directing the
Debtors to Pay Securitization Trustee Fees and Expenses (the “Supplemental Servicing Order”).
(ECF Doc. # 774.)
The Supplemental Servicing Order is primarily designed to allow the Debtors to continue
prosecuting numerous state court foreclosure actions around the country. While the automatic
stay does not apply to the foreclosure actions that the Debtors commenced prepetition, the
Supplemental Servicing Order permits defendants in state court foreclosure actions to assert and
prosecute claims and counterclaims that are defenses to foreclosure under applicable state law.
The automatic stay was not lifted, however, to permit borrowers to assert and prosecute claims
against the Debtors seeking to recover monetary damages. 1 The Court has already denied
motions to lift the automatic stay in precisely such circumstances. See Memorandum Opinion
1 The Supplemental Servicing Order permits borrowers to continue to “prosecute direct claims and counter-
claims relating exclusively to the property that is the subject of the loan owned or serviced by a Debtor for
the purposes of defending, unwinding, or otherwise enjoining or precluding any foreclosure,” but prevents any
claims (i) for monetary relief against the Debtors “except where a monetary claim must be plead in order for an
Interested Party to assert a claim to defend against or otherwise enjoin or preclude a foreclosure” (each a
“Mandatory Monetary Claim”) and (ii) “for relief that if granted, would not terminate or preclude the
prosecution and completion of a foreclosure or eviction . . . .”
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Denying the Gilbert Motion to Dismiss or to Vacate the Automatic Stay, In re Residential
Capital, LLC, No. 12-12020 (Bankr. S.D.N.Y. Aug. 8, 2012) (ECF Doc. # 1054) (denying
Gilbert motion to lift the automatic stay with respect to damages claims against the Debtors).
On July 18, 2012, without seeking a modification of the automatic stay, Taggart
commenced another action against the debtor GMAC Mortgage in the United States District
Court for the Eastern District of Pennsylvania, captioned Taggart v. GMAC Mortgage LLC, Case
No. CV-12-4077 (E.D. Pa.) (the “Postpetition Federal Action”). The Debtors argue that the
filing of this action was a violation of the automatic stay, but the Debtors have not yet filed a
motion seeking to impose sanctions for violation of the automatic stay. The complaint in the
Postpetition Federal Action asserts claims for damages in excess of $46 million and to “Quiet
Title” against GMAC Mortgage, several GMAC Mortgage employees and GMAC Mortgage’s
attorneys in the Foreclosure Proceeding related to the same allegedly wrongful foreclosure at
issue in the Foreclosure Proceeding.
On July 23, 2012, Taggart filed still another motion, styled a Motion for Leave to File
Motion Pursuant Stay & Relief Oral Argument & Hearing Requested. (ECF Doc. # 882.) That
motion sought authority to proceed with the Postpetition Federal Action and a separate action
pending in the United States District Court for the Eastern District of Pennsylvania, captioned
Taggart v. GMAC Mortgage, LLC, Case No. 2:2012-cv-00415 (E.D. Pa.) (the “Prepetition
Federal Action”), which also seeks damages and certain declaratory relief in response to the
Debtors’ allegedly wrongful foreclosure. On August 14, 2012, Taggart withdrew this motion. 2
2 	At the hearing on August 14, 2012, Taggart confirmed that he withdrew the motion and the Debtors
consented to the withdrawal, leaving open the question of what happens to the Postpetition Federal Action filed in
violation of the stay. Taggart stated that he is not prepared to dismiss the action. The Court directed Taggart and
Debtors’ counsel to see if they can consensually resolve the issue; otherwise Debtors’ counsel stated that they will
seek appropriate relief for violation of the stay.
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On August 1, 2012, the Debtors filed Debtors’ Supplement in Further Opposition to
Motion of Kenneth Taggart for Leave to File Motion Pursuant Stay & Relief (and Clarification
from Bankruptcy Court. (“Debtors’ Supplement in Further Opposition,” ECF Doc. # 968.)
II. 	DISCUSSION
At the heart of the matter in the Taggart Motion is whether any of the 32 counterclaims
asserted by Taggart in the GMAC Mortgage Pennsylvania state court foreclosure action may
properly be asserted as defenses to foreclosure. To the extent any of the counterclaims are
defenses to foreclosure, the Supplemental Servicing Order lifts the automatic stay and permits
those defenses to be adjudicated in the state court action. The stay has not been lifted to permit
claims for affirmative damages relief to be resolved outside of the bankruptcy court claims
allowance process. State law determines what claims or counterclaims may be asserted as
defenses to foreclosure.
A. 	Pennsylvania Law Determines What Is a Defense to Foreclosure
GMAC Mortgage’s Pennsylvania counsel has filed a lengthy memorandum of law
addressing each of the counterclaims and whether under Pennsylvania law they can be asserted
as defenses to foreclosure. See Debtors’ Memorandum of Law Regarding Counterclaims
Asserted by Kenneth Taggart in State Court Foreclosure Proceedings, dated August 1, 2012.
(ECF Doc. # 969.)
As GMAC Mortgage argues, it is well established that a foreclosure action in
Pennsylvania is an in rem proceeding. “An action in mortgage foreclosure is strictly an in rem
action and may not include an in personam action to enforce personal liability.” 	Insilco Corp.
v. Rayburn, 543 A.2d 120, 123 (Pa. Super. 1988) (citing the definition in Rule 1141 of the
Pennsylvania Rules of Civil Procedure of a foreclosure action as one not including an action
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to enforce a personal liability). “The very definition of a mortgage foreclosure action under
[231 Pa. Code] Rule 1141(a) excludes ‘an action to enforce a personal liability’; this restriction
is essential to preserve the ‘de terris’ identity of a mortgage foreclosure action and is equally
binding on a mortgagee-plaintiff and a mortgagor-defendant.” 	Signal Consumer Disc. Co. v.
Babuscio, 390 A.2d 266, 270 (Pa. Super. 1978); see also N.Y. Guardian Mort. Corp. v. Dietzel,
524 A.2d 951, 953 (Pa. Super. 1987) (recognizing that foreclosure actions in Pennsylvania are in
rem only and disallowing pursuit of TILA damages asserted by counterclaim); Birchall v.
Countrywide Home Loans, Inc., No. 08-2447, 2009 WL 3822201, a t * 6 (E.D. Pa. Nov. 12,
2009) (stating that “a mortgage foreclosure action, as an action in rem, does not allow either
party to pursue an action in personam, such as an action for damages”); Kondour Capital Corp.
v. Marshall L. Williams, Civ. No. 2011-0235, 2011 WL 4352214 (Pa. Com. Pl. Sept. 1,
2011) (concluding that mortgagor’s counterclaims impermissibly sought monetary damages and
indemnification or contribution); Rocco v. J.P. Morgan Chase Bank, 255 Fed. App’x. 638, 643
(3d Cir. 2007) (“Claims for money damages, including recoupment claims . . . cannot be brought
in a foreclosure action.”) (citing N.Y. Guardian, 524 A.2d at 953). Any defense must go to the
existence and validity of the mortgage because the viability of a mortgage foreclosure action
depends upon the existence of a valid mortgage. See Straker v. Deutsche Bank Nat’l Trust,
No. 3:CV-09-0338, 2010 WL 500412, at *3 (M.D. Pa. Feb. 5, 2010) (quoting In re Madera,
586 F.3d 228, 232 (3d Cir. 2009)); In re Calabria, 418 B.R. 862, 866-867 (W.D. Pa. 2009)
(“In Pennsylvania, actions in mortgage foreclosure are dependent on the existence of a valid
mortgage.”).
Applying these legal principles, the Debtors argue that most of Taggart’s thirty-two
counterclaims may not be asserted as defenses to foreclosure; but Debtors acknowledge that one
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or more counterclaims might properly be asserted as a defense to foreclosure to the extent it
challenges the existence and validity of the mortgage. Analyzing each claim would require a
lengthy analysis by this Court.
Recognizing the difficulty of such a claim-by-claim analysis of the thirty-two
counterclaims, the Debtors have offered to consent to limited stay relief as follows:
[T]he parties may proceed through any dispositive motions
practice in the Foreclosure Proceeding, by which the trial court
will determine the viability of Mr. Taggart’s alleged defenses to
foreclosure in the Foreclosure Proceeding. Thereafter, Mr. Taggart
would have the opportunity to renew his Motion by filing a notice
of hearing fourteen days in advance of the next available omnibus
hearing to the extent that any of Mr. Taggart’s Counterclaims
remain that would otherwise be stayed by the Supplemental
Servicing Order.
See Debtors’ Supplement in Further Opposition at 5. This proposal would leave the decision of
what is a valid defense to foreclosure under Pennsylvania law to the Pennsylvania court which is
in the best position to resolve the issues. The Court agrees with the Debtors that lifting the stay
to the extent proposed is the appropriate disposition of the pending Motion. It is possible, of
course, that after the state court rules on which counterclaims may be permitted to proceed in
state court as defenses to foreclosure that Taggart would be entitled to broader stay relief to the
extent that those same counterclaims would support affirmative damages relief and the state
court would necessarily have to resolve many of the legal and factual issues necessary to a
decision.
B. Policies Underlying the Automatic Stay Favor Giving the Debtors a Breathing
Spell
Section 362(a)(1) of the Bankruptcy Code provides, in pertinent part, that the filing of a
bankruptcy petition:
operates as a stay, applicable to all entities, of –
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(1) 	the 	commencement 	or 	continuation, 	including 	the
issuance 	of 	employment 	of 	process, 	of 	a 	judicial,
administrative, or other action or proceeding against the
debtor that was or could have been commenced before the
commencement of the case under this title, or to recover a
claim 	against 	the 	debtor 	that 	arose 	before 	the
commencement of the case under this title.
11 U.S.C. § 362(a)(1).
The automatic stay affords “one of the fundamental debtor protections provided by the
bankruptcy laws.” Midlantic Nat’l Bank v. N.J. Dep’t of Envtl. Prot., 474 U.S. 494, 503 (1986).
It maintains the status quo and protects the debtor’s ability to formulate a plan for the sale or
other disposition of property of the estate. 3 COLLIER ON BANKRUPTCY ¶ 362.03 (Alan N.
Resnick & Henry J. Somme reds., 16th ed. 2011). The automatic stay is intended to “allow the
bankruptcy court to centralize all disputes concerning property of the debtor’s estate so that
reorganization can proceed efficiently, unimpeded by uncoordinated proceedings in other
arenas.” SEC v. Brennan, 230 F.3d 65, 71 (2d Cir. 2000) (internal quotation omitted). In this
regard, the automatic stay “promot[es] equal creditor treatment and giv[es] the debtor a breathing
spell.” In re Pioneer Commercial Funding Corp., 114 B.R. 45, 48 (Bankr. S.D.N.Y. 1990).
The automatic stay is critical to debtors because it allows them to focus on their
reorganization instead of ligation. Id. at 48. Here, the Debtors have already obtained an order
modifying the automatic stay allowing claims asserted as defenses to foreclosure actions being
prosecuted by or on behalf of the Debtors to continue outside of the bankruptcy court. In this
case, the decision about which counterclaims may be asserted as defenses to foreclosure will be
left to the state court that is in the best position to make that determination. The stay remains in
place with respect to Taggart’s affirmative claims against the Debtors seeking to recover
damages. Claims for damages against the Debtors are the usual grist for the bankruptcy claims
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allowance process and absent unusual circumstances the bankruptcy court remains the
appropriate forum to resolve such claims. Permitting courts around the country to adjudicate
claims risks diverting the attention of Debtors’ personnel from pressing issues in the chapter 11
case and increases the risk of inconsistent decisions affecting similarly situated creditors.
C. 	The Automatic Stay Should Not Be Lifted to Permit the Taggart Counterclaims
to Proceed
Section 362(d)(1) of the Bankruptcy Code provides, in relevant part, that “[o]n request of
a party in interest and after notice and a hearing, the court shall grant relief from the stay . . . (1)
for cause, including the lack of adequate protection of an interest in property of such party in
interest . . . .” 11 U.S.C. § 362(d)(1). The Bankruptcy Code does not, however, define the
phrase “for cause.” In determining whether “cause” exists to lift the stay for prepetition
litigation, courts consider the following factors (the “Sonnax Factors”):
(1) 	whether relief would result in a partial or complete resolution of
the issues,
(2) 	the lack of any connection with or interference with the bankruptcy
case,
(3) 	whether the other proceeding involves the debtor as a fiduciary,
(4) 	whether a specialized tribunal with the necessary expertise has
been established to hear the cause of action,
(5) 	whether the debtor’s insurer has assumed full responsibility for
defending the action,
(6) 	whether the action primarily involves third parties,
(7) 	whether litigation in another forum would prejudice the interests of
other creditors,
(8) 	whether the judgment claim arising from the other action is subject
to equitable subordination,
(9) 	whether movant’s success in the other proceeding would result in a
judicial lien avoidable by the debtor,
(10) the interests of judicial economy and the expeditious and
economical resolution of litigation,
(11) whether the parties are ready for trial in the other proceeding, and
(12) the impact of the stay on the parties and the balance of harms.
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Sonnax Indus., Inc. v. Tri Component Prods. Corp. (In re Sonnax Indus., Inc.), 907 F.2d 1280,
1286 (2d Cir. 1990); In re N.Y. Med. Grp., PC, 265 B.R. 408, 413 (Bankr. S.D.N.Y. 2001). Not
all of the Sonnax Factors are relevant in every case, and “cause” is a broad and flexible concept
that must be determined on a case-by-case basis. Spencer v. Bogdanovich (In re Bogdanovich),
292 F.3d 104, 110 (2d Cir. 2002) (citing Mazzeo v. Lenhart (In re Mazzeo), 167 F.3d 139, 143
(2d Cir. 1999)).
In a request for stay relief, the moving party bears the initial burden to demonstrate that
“cause” exists to lift the stay. See Sonnax, 907 F.2d at 1285; Capital Comm. Fed. Credit Union
v. Boodrow (In re Boodrow), 126 F.3d 43, 48 (2d Cir. 1997) (“We have emphasized that a
bankruptcy court should deny relief from the stay if the movant fails to make an initial showing
of cause.”) (internal quotation marks omitted).
If the movant is an unsecured creditor, the policies of the automatic stay weigh against
granting the relief requested. “[T]he general rule is that claims that are not viewed as secured in
the context of § 362(d)(1) should not be granted relief from the stay unless extraordinary
circumstances are established to justify such relief.” In re Leibowitz, 147 B.R. 341, 345 (Bankr.
S.D.N.Y. 1992); see also Lawrence v. Motors Liquidation Co. (In re Motors Liquidation Co.),
No. 10 Civ. 36 (RJH), 2010 WL 4966018, at *4 (S.D.N.Y. Nov. 17, 2010).
Under section 362(d)(1), Taggart bears the initial burden of showing “cause” to lift the
stay. In re Mazzeo, 167 F.3d at 142. “If the movant fails to make an initial showing of cause,
however, the court should deny relief without requiring any showing from the debtor that it is
entitled to continued protection.” In re Sonnax, 907 F.2d at 1285. Not all of the Sonnax Factors
apply in Taggart’s case, but the relevant Sonnax Factors weigh strongly in favor of maintaining
the automatic stay.
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1. 	Relief Might Not Result in a Partial or Complete Resolution of the Issues (Sonnax
Factor No. 1)
While relief may eventually result in partial or complete resolution of the issue at hand,
the resolution may not be immediate. Prior to the bankruptcy filing, Taggart’s litigation was in
its early stages. Motion practice addressed to the pleadings, discovery, trial preparation and,
absent a settlement, trial all remain to be done. Therefore, the first Sonnax Factor weighs against
lifting the stay.
2. 	Lifting the Automatic Stay Is Connected to and Will Interfere with the Debtors’
Chapter 11 Cases (Sonnax Factor No. 2)
Lifting the stay to the extent requested by Taggart would allow him to proceed with his
claims for damages against the Debtors, open the floodgates for other movants seeking stay
relief, and force the Debtors to litigate in other courts. Such litigation in non-bankruptcy courts
would hinder the Debtors’ attempts to reorganize by forcing the Debtors to utilize time and
resources that would otherwise be spent in resolution of these chapter 11 cases. Accordingly, the
second Sonnax factor does not support relief from the stay; lifting the stay will interfere with the
Debtors’ chapter 11 cases.
3. 	The Other Proceeding Does Not Involve the Debtors as Fiduciaries (Sonnax
Factor No. 3)
Taggart does not assert that the Debtors are liable as fiduciaries. Even if he did, however,
that alone would not be a basis for lifting the stay in this matter. “[G]enerally, proceedings in
which the debtor is a fiduciary . . . need not be stayed because they bear no relationship to the
purpose of the automatic stay, which is debtor protection from his creditors.” In re Curtis, 40
B.R. 795, 799 (Bankr. D. Utah 1984) (internal citation omitted). The Motion did not include any
evidentiary showing that GMAC Mortgage was acting as a fiduciary. Therefore, the third
Sonnax Factor weighs against lifting the stay.
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4. 	The State Court Hearing the Foreclosure Action Is Best Situated to Address State
Law Defenses to Foreclosure (Sonnax Factor No. 4)
With respect to the fourth Sonnax Factor, the pendency of the state court foreclosure
action in which GMAC Mortgage is seeking relief supports lifting the stay to the extent that
Taggart’s counterclaims are properly asserted as defenses to foreclosure. In proposing to
partially lift the automatic stay, the Debtors essentially agree with this position. While this Court
may interpret and apply state law in resolving claims through the bankruptcy process, see, e.g.,
In re Bally Total Fitness of Greater N.Y., Inc., 402 B.R. 616, 624 (Bankr. S.D.N.Y. 2009) (“This
Court has significant experience in applying state law . . . .”), a defendant in a state court action
brought by the Debtors should be able to assert defenses to the relief sought by the Debtors. The
state court is in the best position to determine whether a counterclaim is properly asserted as a
defense to the foreclosure claim under applicable state law. Accordingly, the fourth Sonnax
Factor weighs in favor of granting relief from the automatic stay to the extent provided herein.
5. 	No Insurer Has Assumed Responsibility for the Action (Sonnax Factor No. 5)
No insurer has assumed responsibility for the action here, and the Debtors would
therefore need to pay all expenses in litigating the action with out-of-pocket funds from the
bankruptcy estate. See Declaration of Jennifer Scoliard ¶ 12 (ECF Doc. # 1022, Exhibit 1.) As a
result, the fifth Sonnax Factor does not support relief from the stay.
6. 	The State Court Action does not Primarily Involve Third Parties (Sonnax Factor
No. 6)
GMAC Mortgage, a Debtor in this Court, is the defendant on Taggart’s counterclaims.
The foreclosure action and Taggart’s counterclaims do not primarily involve third parties. The
court should not grant relief from the stay under the sixth Sonnax Factor if the debtor is the main
party to the litigation. See City Ins. Co. v. Mego Int’l Inc. (In re Mego Int’l Inc.), 28 B.R. 324,
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326 (Bankr. S.D.N.Y. 1983) (denying motion to lift the automatic stay where the debtor was
more than a mere conduit for the flow of proceeds and the action impacted the “property and
administration of [the debtor’s] estate, suggesting that continuance of the stay was proper”).
Thus, the sixth Sonnax Factor does not support granting relief from the stay.
7. 	Litigation of the Counterclaims to the Extent that Taggart Seeks to Recover
Damages in Another Forum Would Prejudice the Interests of Other Creditors
(Sonnax Factor No. 7)
Requiring the Debtors to defend Taggart’s damages claims in other forums would upend
the “strong bankruptcy code policy that favors centralized and efficient administration of all
claims in the bankruptcy court . . . .” Public Indus. Inc. v. United States (In re Cuyahoga Equip.
Corp.), 980 F.2d 110, 117 (2d Cir. 1992). Allowing Taggart to bring his damages claims now, in
a different forum, would be unfair to other creditors who must bring their claims in this Court at
a later date. Any litigation costs would diminish the bankruptcy estate. Taggart must be treated
as any other unsecured creditor and litigate his claims in this Court along with the Debtors’ other
similarly situated creditors. The seventh Sonnax Factor thus weighs against relief from stay.
8. 	The Interests of Judicial Economy and Economical Resolution of the Actions Are
Best Served by Maintaining the Automatic Stay Except to the Extent Provided
Herein (Sonnax Factor No. 10)
The Debtors recognize that Taggart should be permitted to proceed with his
counterclaims to the extent they may properly be asserted as defenses to the foreclosure action
that GMAC Mortgage commenced against Taggart in Pennsylvania state court. After the state
court determines which, if any, counterclaims may be adjudicated by the state court as defenses
to foreclosure, it is possible that judicial economy will favor permitting that court to fix the
amount of the damages claim as well. It is premature to reach that issue however. Accordingly,
the tenth Sonnax Factor supports granting relief from the stay to the extent provided herein.
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9. 	The Movant’s Case is Not Ready for Trial (Sonnax Factor No. 11)
Taggart’s counterclaims are clearly not ready for trial. If the Pennsylvania court agrees
with the Debtors that the counterclaims may not be asserted as defenses to the state court in rem
foreclosure proceeding, Taggart will have to return to this Court to have his claims resolved as
part of the claims allowance process. If the state court concludes that any of the counterclaims
may properly be asserted as defenses to foreclosure, it is possible that the state court will provide
the most appropriate forum to fix the amount of the claims. It is premature at this time to assess
the eleventh Sonnax Factor.
10. The Balance of Harms Favors Maintaining the Automatic Stay (Sonnax Factor
No. 12)
The twelfth Sonnax Factor, the balance of the harms, weighs in favor of lifting the
automatic stay only to the extent provided herein, but not to the extent sought by Taggart.
* * * * * * * * * * * * * * * *
Application of the Sonnax factors weigh strongly against the scope of the relief sought by
Taggart. Taggart should be able to defend the state court foreclosure action to the extent that
Pennsylvania law recognizes any of Taggart’s counterclaims as defenses to foreclosure. On the
other hand, Taggart, like all other unsecured creditors of the Debtors, should not be permitted to
litigate his affirmative claims for damages outside of the bankruptcy court.
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III. 	CONCLUSION
For the foregoing reasons, the Taggart Motion to lift the automatic stay is GRANTED to
the extent provided herein, but is otherwise DENIED. Debtors’ counsel is directed to prepare an
Order consistent with this Opinion.
Dated: 	August 14, 2012
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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