Lender Representation

Florida's Bankruptcy Courts and Adequate Protection of Mortgagees

By: Mark A. Glitto

 

The filing of bankruptcy automatically imposes a stay on most litigation involving the debtor, including a foreclosure action on the debtor's residence.(1) Therefore, many individuals facing a foreclosure action against their residence will file bankruptcy in order to delay the foreclosure process. To proceed with the foreclosure, the mortgage company needs the assistance of the bankruptcy court.

Adequate Protection

The bankruptcy's automatic stay continues until real estate is no longer property of the estate, the case is closed, or, in chapter 7 and 13 cases, until a discharge is granted or denied. The bankruptcy court, however, is required to grant relief from the stay on request of a mortgagee under certain circumstances. These circumstances require "cause," including a lack of adequate protection of the mortgagee's interest in the property, or the debtor's lack of equity when the property is not necessary for an effective reorganization.

The mortgagee has the burden of proof by a preponderance of the evidence on the issue of equity. The party opposing relief from the stay has the burden of proof on all other issues, including the issue of adequate protection. Thus the mortgagee should proceed with its proof only when it bases its motion for relief on lack of equity in the property. If the mortgagee's motion is based upon a lack of adequate protection, the debtor or trustee as appropriate must proceed with proof. The stay is terminated 30 days after requested, unless the court, following notice and hearing, orders the stay continued pending the conclusion of a final hearing. The court may conduct a preliminary hearing, or consolidate the preliminary hearing with the final hearing. The court must order the stay continued pending the conclusion of the final hearing if there is a reasonable likelihood that the party opposing relief from the stay will prevail at the conclusion of the hearing. The final hearing must be commenced not later than 30 days after the conclusion of the preliminary hearing.

The court must terminate the stay unless the interest of the mortgagee is adequately protected by circumstance or by court order. Adequate protection should maintain the status quo. Thus, the mortgagee's secured position should not bee eroded. The Bankruptcy Code provides that Adequate protection may consist of making a cash payment or periodic cash payments to compensate for any decrease in value of the property securing the claim of the mortgagee making the request for adequate protection caused by the stay. So the court may condition the continuation of the stay on the recommencement of mortgage payments. Although the code does not expressly mention the existence of an equity cushion in real estate or other secured property, such a cushion is also commonly considered a form of adequate protection.

At a minimum adequate protection consists of requiring the debtor to insure the property against casualty, pay the taxes, and keep the property in reasonable repair. Since the bankruptcy court is a court of equity, it must consider the impact of the stay on the parties and consider the "balance of hurt" in fashioning adequate protection.

Mortgagee Concerns

The mortgagee may be required to prove lack of equity in the property in order to have the stay terminated, regardless of the status of payments on the mortgage. This requires the mortgagee to present evidence of indebtedness owed to the mortgagee as well as evidence on the value of the property. Because some bankruptcy courts in Florida do not require that the mortgagor or the trustee affirmatively appear to oppose a motion for relief from stay, mortgagor's often receive "free rent" until the stay expires of its own accord under the Bankruptcy Code. This is not consistent with the purpose of the Bankruptcy Code, which is to provide the debtor a fresh start, not a free ride. Generally, this problem arises only when the court does not implement the judicial concept of default by requiring some affirmative act by the mortgagor or trustee to oppose relief from the stay. The court can require an affirmative act by setting a preliminary hearing or requiring written responses from the debtor and trustee prior to scheduling a hearing. A default occurs when neither the debtor nor the trustee appears at the preliminary hearing or does not file a written objection to the motion in response to the court's order. A default by the debtor and trustee is deemed to be an admission of allegations of a motion for relief from the stay.

ankruptcy courts in Florida are not consistent in using the default concept regarding motions to lift the stay. Some Florida courts set preliminary hearings upon the filing of a motion for relief from the stay. Other courts set final evidentiary hearings, while still others require the filing of a written response before setting a hearing. Thus, the mortgagee's attorney must be familiar with the varying procedural requirements in all three federal districts in Florida (Northern, Middle and Southern) and in all three divisions (Jacksonville, Orlando and Tampa) of the Middle District. Currently there is one judge in the northern district which is located in Tallahassee. There are eight judges in the middle district, which is divided up into three divisions; two judges are located in the Jacksonville division, two in the Orlando division and four in the Tampa division. The southern district has five judges all within one division; three are located in Miami, and one each in Ft. Lauderdale and Palm Beach. In order to save lenders time and expenses, Florida counsel must be familiar with practice before all Florida's Bankruptcy judges.

Florida Bankruptcy Courts

Northern District

The Northern District of Florida holds preliminary hearings, conducts them by telephone, and implements the default concept in its procedure. Proof at the preliminary hearing is restricted to pleadings, affidavits, documents of record and argument of counsel. The mortgagee must file an affidavit of indebtedness, copies of documents to establish its secured status, an appraisal or other evidence of value, and an affidavit showing facts sufficient to demonstrate the mortgagee's right to relief from stay.

The trustee and debtor are then required to file responses which must be accompanied by such appraisals and affidavits as may be necessary to demonstrate that the mortgagee is not entitled to relief. 22 If neither the trustee nor the debtor files these documents or appears in opposition, the court will grant the motion.

Middle District

Rule 507 of the Local Rules of the Bankruptcy Court for the Middle District of Florida provides that the initial hearing on the motion for relief from stay shall be evidentiary if so noted in the notice of hearing. Otherwise, it will be non evidentiary. This language is different from the language of Local Rule 507 in the Northern District. In light of the fact that both the Orlando and Tampa divisions conduct preliminary hearings rather than initial evidentiary hearings, this language appears to be a concession to the Jacksonville Division where the court schedules individual evidentiary hearings.

Rule 507 also provides that if a hearing is to be non evidentiary, the movant must file an affidavit of indebtedness, copies of any documents establishing secured status and the perfection of that status, and an appraisal or other evidence of value, together with an affidavit showing facts necessary to demonstrate the movant's right to relief from stay. 23 The debtor or trustee must respond within 10 days after the service of the motion or affidavit. 24

Jacksonville

The Jacksonville Division conducts initial hearings as evidentiary hearings and does not conduct telephone hearings. The court does not recognize a default by the debtor and trustee when they do not appear at the evidentiary hearing, but instead requires the mortgagee to establish by evidence a prima facia case of entitlement to relief from the stay or adequate protection. In Chapter 7 cases, the Jacksonville Division requires the mortgagee to present evidence of lack of equity even if the debtor has claimed the property exempt, does not appear in opposition to the motion, and has filed schedules showing no equity in the property. Likewise, if the debtor no longer has any interest in the property by not having claimed it as exempt and the trustee consents to relief from the stay, the Jacksonville division still requires the mortgagee to present evidence establishing lack of equity, unless the mortgagee obtains the consent of the debtor to the motion.

the courts failure to implement the default concept is made worse by its refusal to consider the value set out by the debtor in schedules to support a showing a lack of equity. 25 The mortgagee, however, might offer a recent appraisal without testimony as well as a copy of the current property tax assessment as evidence of value, together with as affidavit of indebtedness. The court will admit these documents unless there is an objection. 26

In Chapter 13 bankruptcies, the Jacksonville Division will not lift the stay or require the debtor to make post-petition mortgage payments directly to the mortgagee or trustee prior to confirmation, unless the debtor does not appear in opposition to the motion to require adequate protection payments.

The courts failure to implement the default concept gives an unfair advantage to the debtor. The debtor has the burden of proof on adequate protection. Consequently, the debtor's failure to appear should result in an award of adequate protection to the mortgagee, if not termination of the stay, even without presentation of evidence by the mortgagee. Under the Jacksonville procedure, however, the debtor can simply refuse to consent and continue to use the property without payment until the confirmation hearing, unless the mortgagee incurs the expense providing that it is not adequately protected.

Orlando

The Orlando Division does not conduct telephone hearings. The Orlando Division schedules a preliminary non-evidentiary hearing of a motion for relief from stay which is heard before a clerk of the court by way of its Order Scheduling Preliminary Stay Litigation Procedure. The order sets out the procedures, which are summarized below, by which the court will dispose of the motion for relief. Failure of the debtor or trustee to appear constitutes a default, and the court will enter an order terminating the stay. A proposed order is taken to the preliminary hearing. In most cases the debtor and trustee do not appear at the hearing.

If the mortgagee can obtain the consents of the debtor and the trustee prior to the hearing, however, the consents together with a proposed order can be submitted to the court, and attendance at the hearing is not necessary. The preliminary hearing will be canceled only if both consents are filed by 4:30 p.m. on the Thursday before the preliminary hearing. Attendance at the hearing is required unless both consents are obtained, regardless of whether the property is claimed exempt. If the motion is contested, the court will schedule it for final evidentiary hearing. The trustee or debtor must file an answer to the motion not later than five days after the preliminary hearing.

In Chapter 13 bankruptcies, the Orlando Division enters its Order Establishing Duties of Debtor, Ordering Debtor's Compliance, Permitting Use of Property, Allowing Administrative Expenses, and Ordering Adequate Protection Payments as a matter of course upon the filing of the case. 28 This order permits the debtor to use property of the state, including the homestead. 29

Tampa

The Tampa Division does not conduct telephone hearings. The Tampa Division is the only court that requires that in Chapter 7 cases an affidavit of indebtedness supporting the motion for relief from the automatic stay be filed with the motion. 32 In Tampa, motions for relief from stay must also state whether the property is exempt and whether the trustee has abandoned the property. 33 When a motion for relief from stay is filed in a Chapter 7 case the Tampa court enters an order directing the debtor and the trustee to file written responses within 10 days of the order. This is required whether or not the property is claimed as exempt or not. Failure to file a response constitutes a default. The court terminates the stay without hearing at the end of the 10 day period. The proposed order lifting the stay is submitted by the mortgagee's attorney with the motion to lift stay.

In chapter 13 bankruptcies the Tampa Division sets all motions for relief from stay for a preliminary hearing. If this hearing indicates that there are genuine issues of material fact, the court will schedule a final evidentiary hearing. The court will terminate the stay for post-petition mortgage arrearage only upon the consent of the debtor. The court will permit the debtor to cure the port-petition monthly mortgage arrearage by combining a partial monthly payment with the regular post-petition payment until the post-petition arrearage are cured. However, where the debtor is in default by a substantial number of post-petition payments, however, the court may order a deadline, typically 30 days, within which the debtor must cure all post-petition arrearage.

The Tampa Court's standard adequate protection order also permits the mortgagee too inspect the property upon 24 hours' notice and requires the debtor to provide the mortgagee with a copy of the hazard insurance policy on the property. If the debtor fails to comply with any provision of the adequate protection order, including the payment provision, the court will terminate the automatic stay without further notice or hearing after the mortgagee gives telephonic notice of default to the debtor's attorney and gives the debtor 48 hours within which to cure the default.

Southern District

There are five judges in the Southern District, each has there own different procedures. Some provide written procedures on motions for relief from the automatic stay. Initial hearings are conducted as evidentiary hearings, and does permit participation by telephone. Counsel representing lenders in the southern district must get copies on each judge's instructions. Usually the instructions dictate specific language to be contained in motions. For example, Judge Carol requires the Notice of Filing of Motion for Stay Relief contains the following language:

The creditor's purpose in filling this Motion for Relief from Stay is to OBTAIN PERMISSION TO START OR CONTINUE THE ACTION DESCRIBED IN THE MOTION. UNLESS A RESPONSE IN WRITING OBJECTING TO THE GRANTING OF STAY RELIEF AND REQUESTING A HEARING IS FILED WITH THE COURT AND A COPY DELIVERED TO THE PERSON SIGNING THIS NOTICE WITHIN TEN DAYS (10) DAYS, FROM THE DATE OF YOUR RECEIPT OF THIS NOTICE, AN EX PARTE ORDER WILL BE ENTERED GRANTING THE MOTION WITHOUT FURTHER HEARING BEFORE THE COURT.

This language implements the default concept and eliminates the need for hearings on most motions for relief from stay.

Some Southern District judges also require the mortgagee to contact the debtor, the debtor in possession or debtor's attorney, and the trustee or trustee's attorney before filing the motion to determine if any of them consent to the motion. If not, the motion shall be submitted as agreed or stipulated together with an order granting relief. If the motion is agreed or stipulated and is so marked, it can be submitted without the filing fee, and the order granting relief will be entered at once.

If the debtor or trustee consents to the motion, the attorney's must meet two business days before the hearing date. Each must disclose all documents and exhibits to be introduced at the hearing, including any appraisals the mortgagee intends to use. In addition, witness lists (including a brief summary of testimony) must be exchanged. Any party intending to use an expert valuation witness must make the expert available for deposition at least two business days before the hearing. Otherwise, the appraisal and witness cannot be used at hearing.

The mortgagee's counsel may also be required to prepare a pre-hearing stipulation stating the uncontested facts, contested issues and facts to be tried. This stipulation is to be read into evidence. All discovery must be completed two business days before the hearing, except depositions of out-of-town witnesses which may be taken in Miami the day before the hearing. The attorney must bring to the hearing an exhibit list, a witness list, the stipulation, a concise statement of both the factual basis and statutory basis for the stay relief. If the motion is settled before hearing the attorneys must deliver an agreed order to the calander clerk before the hearing or be prepared to proceed with the hearing.

Other judges in this district do not have written procedures. They require live testimony rather than testimony by affidavit. In this case the initial hearing is evidentiary and the court will reschedule only if there is not sufficient time to hear the testimony.

Some of the judges conduct telephone hearings for out-of-town counsel but not for local counsel, while others permit telephone hearings only in emergencies. Mortgagee's counsel must track each case in this division and apply the procedures individual judges utilize. Unfortunately, until uniform procedures are adopted by the Southern District, there is little else attorney's practicing in this district can do.

Improvements Needed - the Default Principle

The Florida bankruptcy courts can improve their efficiency by incorporating the default concept in their procedures on motions for relief from stay. Standardizing procedure would also go a long way in improving the system. The district courts can properly incorporate the default concept because the bankruptcy rules recognize the default concept.

Bankruptcy Rule 9014 provides that reasonable notice and opportunity for hearing shall be afforded the debtor and the trustee. This rule states that no response to a motion is required unless the court orders an answer. The failure to file a required answer constitutes a default. Bankruptcy Rule 9014 also provides that Bankruptcy Rule 7055 and thus Federal rule of Civil Procedure 55 apply to motions for relief from stay. Federal Rule of Civil Procedure 55 relates to default and puts the burden of responding on the party against whom a judgement or affirmative relief is sought. The rule states in part:

When a party against whom a judgement for affirmative relief is sought has failed to....defend as provided by these rules and that fact is made to appear by affidavit or otherwise, the clerk shall enter the party's default.

Rule 55 goes on to provide that the clerk may enter judgement for a sum certain if the defendant has been defaulted or fails to appear. The debtor or trustee's failure to appear at the hearing on the motion for relief from stay or failure to file a response to the motion as directed by the court constitutes a default. The default admits all the allegations of the motion. Thus, if the debtor and the trustee do not appear either in person or by written response in opposition to the motion, the court should not require the mortgage to prove a prima facie case for relief but should grant the motion for default.

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