Quoting the late Burton R. Lifland, whom he called a “renowned, former bankruptcy judge,” Bankruptcy Judge Alan S. Trust of Central Islip, N.Y., ruled that a secured creditor is not entitled to adequate protection for periods of time before filing a motion.
The debtor filed a chapter 13 petition and the district’s mandatory plan. Because the debtor was hoping the lender would agree to modify the mortgage on her home, the plan provided that she would make mortgage payments to the chapter 13 trustee in a reduced amount. The trustee was to hold the payments until the debtor began making payments under a trial loan modification.
As it turned out, the lender never agreed to a modification, the plan was not confirmed, and the trustee never made any payment to the mortgagee. Finally, 18 months after filing and nine months after denying a loan modification, the lender filed a motion for adequate protection going back to the filing date.
The plan not having been confirmed, the trustee was holding some $36,500 that the debtor had paid under the plan. After filing, the lender had paid about $9,500 for insurance and real estate taxes.
As adequate protection, the lender wanted almost all of the $36,500 held by the trustee. The outcome of the adequate protection motion was important, because the debtor would be entitled on dismissal to receive everything still in the hands of the trustee because the plan had not been confirmed.
The lender had not moved to dismiss. However, the chapter 13 trustee had filed a motion to dismiss that the debtor did not oppose.
For several reasons, the debtor argued that the lender was not entitled to retroactive adequate protection. First, the debtor argued that retroactive payments were not permitted following Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696 (2020). In Acevedo, the Supreme Court virtually banned the entry of orders nunc pro tunc. To read ABI’s report on Acevedo, click here.
In his January 14 opinion, Judge Trust nixed the Acevedo argument. He viewed the “request for retroactive adequate protection differently than a nunc pro tunc order. [The lender] is not asking for an order to be entered now to reflect relief as if granted previously. [The lender] is seeking relief that was not sought sooner in the case.”
Judge Trust next asked whether a secured creditor is entitled to adequate protection payments for periods of time before filing a motion that can entitle a creditor to adequate protection.
Judge Trust found the answer in a 1992 opinion by Judge Lifland: In re Best Prod. Co., 138 B.R. 155, 157 (Bankr. S.D.N.Y.), aff’d sub nom. In re Best Prod. Co., 149 B.R. 346 (S.D.N.Y. 1992). He quoted Judge Lifland to say that Sections 361, 362(d)(1) and 363 “suggest that a secured creditor is entitled to adequate protection only upon motion and only prospectively from the time such protection is sought.” Id. at 138 B.R. 157.
Stating the rule in his own words, Judge Trust said that “allowing adequate protection to a lender is appropriate once a lender has filed a motion seeking such relief . . . and granting retroactive relief to a time prior thereto is not appropriate, absent exceptional circumstances.”
Countering Best Products, the lender contended that it should not be penalized for negotiating with the debtor on a loan modification and withholding the filing of a lift-stay motion. Judge Trust countered by saying it was a “relatively simple chapter 13 case,” but the lender had waited nine months to file an adequate protection motion after declining to modify the loan.
Furthermore, Judge Trust said that the district’s model plan does not require turning mortgage payments over to the lender when a loan modification is pending.
On the other hand, Judge Trust said the lender “should have a reasonable expectation that, upon request, those out-of-pocket expenditures [for taxes and insurance] will be reimbursed by the Debtor.”
Judge Trust resolved the adequate protection motion by directing the trustee to pay the lender about $2,500 in monthly mortgage payments for the three months since the motion was filed, plus some $9,500 in reimbursement for insurance and taxes. The lender will be receiving a total of approximately $16,800, leaving almost $20,000 in the hands of the trustee.
Because dismissal will occur before confirmation, Section 1326(a)(2) entitles the debtor to the remainder of what the trustee holds. Presumably, the trustee is entitled to a fee on the $16,800 paid to the lender.
The courts are divided on whether a trustee is entitled to compensation based on funds returned to the debtor when dismissal occurs before confirmation.
Although Judge Trust has not opined on the question, another bankruptcy judge in Central Islip, Robert E. Grossman, recently ruled in favor of the trustee and granted compensation based on money returned to the debtor. See In re Soussis, 19-73686, 2020 BL 439963 (Bankr. E.D.N.Y. Nov. 12, 2020). To read ABI’s report on Soussis, click here.
Quoting the late Burton R. Lifland, whom he called a “renowned, former bankruptcy judge,” Bankruptcy Judge Alan S. Trust of Central Islip, N.Y., ruled that a secured creditor is not entitled to adequate protection for periods of time before filing a motion.
The debtor filed a chapter 13 petition and the district’s mandatory plan. Because the debtor was hoping the lender would agree to modify the mortgage on her home, the plan provided that she would make mortgage payments to the chapter 13 trustee in a reduced amount. The trustee was to hold the payments until the debtor began making payments under a trial loan modification.
As it turned out, the lender never agreed to a modification, the plan was not confirmed, and the trustee never made any payment to the mortgagee. Finally, 18 months after filing and nine months after denying a loan modification, the lender filed a motion for adequate protection going back to the filing date.
The plan not having been confirmed, the trustee was holding some $36,500 that the debtor had paid under the plan. After filing, the lender had paid about $9,500 for insurance and real estate taxes.
As adequate protection, the lender wanted almost all of the $36,500 held by the trustee. The outcome of the adequate protection motion was important, because the debtor would be entitled on dismissal to receive everything still in the hands of the trustee because the plan had not been confirmed.
The lender had not moved to dismiss. However, the chapter 13 trustee had filed a motion to dismiss that the debtor did not oppose.
For several reasons, the debtor argued that the lender was not entitled to retroactive adequate protection. First, the debtor argued that retroactive payments were not permitted following Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696 (2020). In Acevedo, the Supreme Court virtually banned the entry of orders nunc pro tunc. To read ABI’s report on Acevedo, click here.
In his January 14 opinion, Judge Trust nixed the Acevedo argument. He viewed the “request for retroactive adequate protection differently than a nunc pro tunc order. [The lender] is not asking for an order to be entered now to reflect relief as if granted previously. [The lender] is seeking relief that was not sought