Bankruptcy Court Grants Secured Lender’s Motion For Adequate Protection Payments During Time When The Parties Participated In The Court’s Loss Mitigation Program

On January 14, 2021, Chief Judge Trust of the United States Bankruptcy Court for the Eastern District of New York in In re Sandra Velasco-Rodriguez a/k/a Sandra M. Velasco, directed the chapter 13 trustee to release to the lender certain pre-confirmation payments that the Chapter 13 trustee was holding. The Court held that awarding the lender adequate protection payments for reimbursement of taxes and insurance that the lender advanced post-petition was appropriate.

The decision arose from the motion filed by the senior secured lender, Select Portfolio Servicing Inc. seeking pre-confirmation adequate protection payments during the time that the debtor was seeking a loan modification.  Importantly, during the pendency of the bankruptcy case, since the debtor was not making mortgage payments, the lender advanced real estate taxes and insurance premiums to protect its secured interest in the property. When the lender declined to offer a loan modification, the debtor consented to dismissal of her case.  However, the lender petitioned the Court to direct the Chapter 13 trustee to pay the lender for adequate protection regarding (i) post-petition payments that accrued; (ii) real estate taxes advanced post-petition; and (iii) insurance premiums advanced post-petition.  If the Court disagreed, the pre-confirmation payments held by the Chapter 13 trustee would be returned to the debtor upon dismissal.

In directing the Chapter 13 Trustee to pay the lender for its expenses as “adequate protection” from pre-confirmation payments, the Court made clear that the secured lender is entitled to adequate protection (only after the motion is made-not retroactively) during the pendency of a chapter 13 debtor’s bankruptcy case and if the case is dismissed before the debtor’s plan is confirmed, the Chapter 13 trustee can be directed to turnover funds that he/she is holding to provide the lender with adequate protection.

This decision certainly puts secured lenders on notice that they should be proactive in bankruptcy cases where a debtor seeks a loan modification (which process can be lengthy) to quickly move for adequate protection so the lender can recoup any post-petition payments and advances that it is required to make to protect its collateral.  This decision also points out that the motion for adequate protection should be made as soon as possible because retroactive relief is unavailable.

A copy of the Court’s decision is attached: Chapter 13 Adequate Protection

For further information, contact attorney Randy J. Schaefer.