Back

CLIENT ADVISORY - February 5, 2008

Court Closely Scrutinizes Motion For Relief From Stay and Lender's Payment Acceptance Procedures
 
by Laura R. Faulkner, Esq.

A judge for the Bankruptcy Court in the Southern District of New York recently raised issue with a lender's procedure for accepting payments during the course of a Chapter 7 Bankruptcy proceeding and for its conduct when filing a motion for relief from stay.

The lender's motion stated that debtors were delinquent on mortgage payments and included an affidavit by one of the lender's bankruptcy representatives setting forth the amount of the default. The debtors filed a response, stating that the account was delinquent only because the lender refused to accept a payment at a local branch. The lender explained that it accepts payments on bankrupt accounts via mail or telephone, but it does not accept payments at local branches to protect debtors against unauthorized communications or improper application of payments.

The figures listed in the motion for relief from stay indicated that there was equity in the property; however, the motion stated that there was no equity and that the lender was being irreparably harmed by the delinquent payments and not adequately protected.

The lender attempted to withdraw the motion, but the judge issued an order for the lender to show cause why it should not be sanctioned. The judge stated that it appeared the lender created the default by denying the payment. She took issue with the lender creating the default and then filing a motion for relief from stay with inaccurate information. Specifically, she noted the information in the supporting affidavit and representations of equity were inaccurate, based on the debtors' response. It is interesting to note that the trustee filed a report stating there were no assets prior to the lender filing the motion for relief from stay.

Although the outcome of this case has not yet been determined, it is another example of how courts are closely scrutinizing the allegations made in motions for relief from stay and even raising issues as to value, which have historically been left to the trustee. Lenders must ensure that the arrears information provided to the courts is accurate and verifiable. Further, the outcome of this case may invoke internal changes on how lenders accept and reject payments from their bankrupt customers.

If you have any questions on this information, please contact Ms. Laura R. Faulkner, Esq. 

Laura is an associate in the Bankruptcy department of the Cincinnati office of Weltman, Weinberg & Reis Co., L.P.A.  She can be reached at (513) 723-2210 or via e-mail at lfaulkner@weltman.com.

Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A., an organization providing comprehensive creditor representation.  The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship.  Contact any of our offices or visit our website at www.weltman.com for more information, company facts and attorney profiles. ©2008