In the Chapter 13 case of In re Sandra Velasco- Rodriguez aka Sandra M. Velasco Judge Alan S. Trust of the United States Bankruptcy Court for the Eastern District of New York ruled that a secured creditor is not entitled to adequate protection for periods of time prior to the time of filing a motion seeking adequate protection.
In or around May 2019, the debtor, the owner of a property in New York which was subject to a mortgage owned by Select Portfolio Servicing Inc. (“SPS”), filed a chapter 13 petition. Simultaneously with the filing of the petition, the debtor submitted a chapter 13 plan which called for reduced post-confirmation payments to be made to SPS based on an anticipated loan modification. Under the plan, monthly mortgage payments were to be paid by the debtor directly to the chapter 13 trustee (the “Trustee”) and these payments were in fact paid.
The Trustee filed a motion to dismiss the debtor’s case and the debtor filed opposition which was then withdrawn. Three months later and over seventeen months from the petition date, SPS filed a motion for pre-confirmation adequate protection payments for the months of June 2019 through October 2020 with respect to the debtor’s property based on the debtor’s proposed mortgage payments set forth in the debtor’s plan. The debtor opposed SPS’ motion and argued that if adequate protection payments were to be required, such payments should only be warranted from the filing date of SPS’ motion rather than retroactively. From August 2019 through August 2020 (post-petition), SPS had received no payments from the debtor, advanced significant sums for real estate taxes and insurance premiums for the property and the debtor’s request for a loan modification had been denied. The debtor’s plan was not confirmed but the trustee was holding approximately $36,500 that the debtor had paid under the proposed plan for the anticipated loan modification.
The debtor argued that retroactive payments to SPS were not permitted based on the Supreme Court’s decision in Roman Catholic Archdiocese of San Juan, Puerto Rico v. Acevedo Feliciano, 140 S. Ct. 696 (2020), where the Supreme Court virtually banned the entry of orders nunc pro tunc. In interpreting Acevedo Judge Robert E. Grossman of the United States Bankruptcy Court for the Eastern District of New York, held that the utilization of nunc pro tunc orders to approve the retention of estate professionals retroactively to some date prior to the actual date of court approval of such retention would be inappropriate. In re Benitez, No. 8-19-70230-REG, 2020 WL 1272258, at *1 (Bankr. E.D.N.Y. Mar. 13, 2020). The issue in the debtor’s case was different to that addressed by the Supreme Court in Acevedo and Judge Grossman in Benitez as SPS sought retroactive adequate protection not a nunc pro tunc order. In other words, SPS was not asking for an order to be entered immediately to reflect relief that was granted by the Court at an earlier time, instead SPS was looking for adequate protection payments that predated its request for such payments.
Judge Trust examined several sections of the Bankruptcy Code including sections 361, 362 and 363 as well as a 1992 opinion by Judge Lifland which established that “a secured creditor is entitled to adequate protection only upon motion and only prospectively from the time such protection is sought.” 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). While Best Product was decided in the context of a motion seeking adequate protection filed after a lease had been allowed to be rejected, Judge Lifland acknowledged that motions seeking adequate protection give debtors the option to surrender property to entities making such requests, or provide adequate protection to such entities for debtors’ continued use of collateral. Judge Trust accepted Judge Lifland’s analysis stating that “allowing adequate protection to a lender is appropriate once a lender has filed a motion seeking such relief under sections 361, 362 and/ or 363 [of the Bankruptcy Code], and granting retroactive relief to a time prior thereto is not appropriate absent exceptional circumstances.”
SPS attempted to distinguish its position from the lender in Best Products, indicating that it should not be penalized for negotiating with the debtor to modify the loan and not rushing to seek stay relief. To this point, Judge Trust emphasized that the debtor’s case was relatively simple yet SPS chose to wait over 17 months from the petition date to file the motion for adequate protection and over nine months after denying the loan modification. Even though the United States Bankruptcy Court for the Eastern District of New York’s mandatory chapter 13 plan requires debtors to make mortgage payments to the Trustee while seeking loan modification, there is no directive that such payments should be automatically given to lenders. Lenders, however, should have a reasonable expectation that upon request, out of pocket post-petition payments and expenditures made for debtors’ real estate tax obligations and property insurance will be reimbursed by the debtors.
Judge Trust ultimately held that SPS was entitled to receive adequate protection payments for three months of mortgage payments from when SPS filed its motion for adequate protection, plus reimbursements for insurance and taxes that SPS had paid on the debtor’s behalf. This case emphasizes the importance for lenders and creditors to seek adequate protection at the earliest point possible to ensure that rights and payments related to debtor collateral are maximized. As the likelihood of financial hardship will continue to increase for many Americans, lenders involved in chapter 13 cases will need to navigate similar issues to mitigate losses.