A Primer on Obtaining Relief from the Automatic Stay

by Glen D. Rubin, McCurdy & Candler, L.L.C.

Appeared in American Foreclosure Network Journal – August 2003

In the ever-evolving world of bankruptcy, the ritual of the servicer referring a loan to counsel for the purpose of obtaining relief from the automatic stay remains a constant. Once referred, the servicer has the task of monitoring counsel and the events in court until the loan is released from bankruptcy. While advances in technology have automated a great deal of the referral and monitoring functions and greatly enhanced communication between the servicer and counsel, technology is no panacea. In fact, some would argue that technological advancements and the increased expectations that accompany them may have actually set our industry back in the eyes of outsiders in the bankruptcy process such as judges, trustees and the debtor bar.

The real key to mitigating losses and decreasing the amount of time a loan spends in bankruptcy is learning how to integrate technology with a working knowledge of the bankruptcy system. Think of the bankruptcy system as a game. To win this game, you must grasp the nuances, develop a good workflow process, retain key personnel and hire aggressive and competent counsel. Despite all the class actions that are being filed, there is much greater exposure to loss from common mistakes committed in the process of obtaining relief from the automatic stay.

Those who succeed and are truly efficient are not always the ones who win the race to the courthouse. It is much more important to file a motion that is impervious to objection than it is to hastily refer and file a motion that is deficient. The debtors, opposing counsel, judges and trustees have elevated the level of scrutiny motions receive. Evidence of this can be found easily in the number of motions for relief that are being dismissed or withdrawn, hearings that are being reset, sanctions that are being levied against servicers and collateral litigation that is being spawned.

Before we discuss best practices, it may be helpful to have some basic understandings about how the system actually operates. The first point that needs to be made is that bankruptcy law gives the judge a great deal of latitude when considering a motion for relief from the automatic stay. The automatic stay becomes effective at the instant a case is filed and acts as an injunction, preventing a servicer from taking any further action to collect on the debt. The law actually states that the stay may be lifted: (i) if there is no equity in the property which serves as collateral for a loan and the property is not necessary for the reorganization of a debtor, or (ii) for “cause”, including, but not limited to, a “lack of adequate protection.”

The standards are not very clear. While the concept of equity is fairly objective, we know that there are often compelling arguments from opposing counsel that can sway a judge. After all, who can forget “the house will be there in six months” or “my house is all I have.” It is not hard to see why decisions can vary not only by district or judge, but often from case-to-case in front of the same judge. This underscores a need to file motions that contain as many facts as possible, not only to sway the judge, but to provide enough ammunition to get a favorable ruling.

Additionally, it is important to note that judges and trustees have interests that do not traditionally align with mortgage servicers. The system itself is set up to assist the debtor. As such, most judges focus initially on protecting the rights of a debtor. Trustees owe a fiduciary duty to all creditors and they tend to focus on unsecured creditors because they are the most vulnerable. Add to this the fact that bankruptcy laws put mortgage servicers in the most favorable position of any creditor with respect to repayment of claims, and you can see why there is not a great deal of sympathy for a mortgage servicer.

Moreover, it is also important to note that the system gears itself toward uncontested motions. Most courts are faced with an overwhelming volume of motions seeking to have the automatic stay lifted and cannot devote time to hear the facts of each case. Consequently, both formal and informal rules and customs have developed which enable motions for relief to move through the system with minimal court resources being expended.

However, these rules and customs are beginning to erode, as debtors and trustees have felt a need to shake things up by challenging allegations and litigating issues that had previously been ignored. As a consequence, the perception of mortgage servicers has become decidedly more negative.
Given the current state of affairs, there are some things that should be considered to avoid delay and losses by making motions for relief impervious to objection. First, servicers should be proactive in learning, understanding and keeping up with the requirements and local practices that are followed in each jurisdiction. All too frequently, poor performance in a particular jurisdiction can be traced to a lack of understanding of the nuances of local practice combined, or an over-reliance on counsel to resolve all of the issues. To effectively handle this issue, you must view your relationship with counsel as a partnership. As a partner, you should leverage that relationship by having counsel in for frequent staff training and brainstorming sessions. Whenever possible, you should also assign paralegals to specific jurisdictions so that they establish a rapport with your counsel and become familiar with the local customs and nuances.

The motion process begins well before the referral is made to counsel. It is a great idea to work with counsel to compile a referral checklist for each jurisdiction. To improve your efficiency, it is also advisable to discuss different referral scenarios with counsel. This will not only firm up expectations, but it will establish what each party’s responsibilities will be under all possible scenarios. For example, if recorded documentation or a full chain of assignments is needed, you can settle on a protocol for procuring them with a built-in contingency plan.

All referrals should be as complete as possible. Use that checklist and attempt to have all the information counsel needs delivered at once. You will maximize efficiency by eliminating the need for successive communications. As an example, if a broker's price opinion or appraisal is needed in a particular jurisdiction, it can be procured in-house by the servicer so that it arrives in time to go out with, or simultaneous to, the motion referral. If an affidavit of default must accompany the motion in a particular jurisdiction, counsel can work with the servicer and provide them with access to an acceptable form, which they can complete and provide with the referral in each case. Even if there is some information that will have to be supplied by counsel, this is still preferable to having the affidavit faxed or mailed back and forth after the motion is referred. Many servicers are transmitting referrals to counsel via the internet or other electronic means. Since documentary evidence always will be an integral part of the motion for relief, it is imperative that a referral delivery system have the capability to deliver images as well as loan data.

Establish policies about what to do with payments that come in after a motion has been referred. This is a huge dilemma and drain on resources for many servicers, but it can be resolved easily by developing and maintaining a jurisdictional matrix that answers the question of whether or not the money can be retained and applied, sent to bankruptcy counsel, or returned to the debtor. The only hitch here is that there must be a protocol set-up for notifying counsel before any hearing if money is applied or returned to the debtor.

Be ready to fend off any challenge. Sometimes, no matter how well crafted a motion for relief may be, you will still draw an objection. Most often, there is a dispute over payments alleged to have been made by a debtor that do not show as being applied. Very often, the dispute occurs in a Chapter 13 case, where a servicer is expected to maintain a post-petition account history as well as a contractual account history. All servicers should have the ability to track post-petition payments separately in Chapter 13 cases, whether those payments are coming directly from a borrower or through a bankruptcy trustee. Servicers must also be able to produce post-petition accounting in any case. The accounting should be easy to read and free from any extraneous information such as codes, fees and charges that can be questioned and become the source of collateral litigation. Remember, you should approach every case where a motion is referred as though the court, the debtor and the trustee will be challenging your assertions. An easy-to-read accounting provided to the opposing party can usually diffuse most payment objections. By contrast, a hard to read accounting containing lots of extraneous information raises concern, is a potential liability risk and will often affect your credibility.

Concerns about the reliability of servicer accountings have led to many jurisdictions around the country to begin requiring the inclusion of some form of payment history in motions. One recent court opinion that took note of this issue was the case of In re Gorshtein, 285 B.R. 118 (Bankr. S.D.N.Y. 2002). Gorshtein is actually a compilation of three (3) different cases, each involving a different servicer, where the Court determined the factual allegations contained in motions for relief from the automatic stay factually incorrect. The allegations were set forth in affirmations prepared by counsel based upon information received in the motion referral. The Court admonished lenders and their counsel to exercise due care before moving for stay relief and then promptly sanctioned them.

Concerns about servicer accountings have also led to proposed legislation. Section 202 of the proposed amendments to bankruptcy law being debated in Congress provide that Section 524 of the Bankruptcy Code be amended as follows:

[t]he willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor...

This demonstrates that the intent of Congress is to foster litigation and awards of damages against servicers for something as simple as a debtor being able to show that a loan was actually post-petition current when a motion was filed in a Chapter 13 case.

Be ready to litigate motions for relief with gusto. Although you will be ready with your accounting for each motion, it also may be helpful to have counsel remind the Court of the law. The law (Section 362(g)) provides that in the case of a motion to lift the automatic stay, a debtor has the burden of proof on the issue of payment. To effectively carry this burden, a debtor must do more than testify that they made the payments. They must produce demonstrative proof of payment, such as cancelled checks, etc. This is a great point to make at hearings and dispose of a motion before the issue is tried, since many debtors will be unable to produce sufficient documentation.

You can now litigate from the comfort of your own office. Traditionally, if a dispute on a motion for relief could not be resolved after negotiation or exchange of information by the parties, the judge ordered that a representative from the lender be present to testify in Court. The reason behind this was the thought that the debtor will not have an opportunity to cross-examine anyone from the servicer regarding the facts alleged in the motion or affidavit. The person called to attend the hearing had to be someone who is familiar with the account and the overall business practices of the servicer or a “qualified witness.” They would typically have to study the account history, travel many miles to jurisdiction at least a day before the hearing to be prepared by counsel, spend the better part of a day testifying and being cross-examined in Court, and then travel home. Often, the costs exceeded the benefits for a servicer. The good news is that there now may be a viable alternative to having to produce a representative in Court. The law (Federal Rules of Evidence 803(6) and 902(11)) was recently amended to permit an account history to be introduced into evidence without a live witness being present to be questioned. The new law allows the account history into evidence if it is accompanied by a sworn statement of a qualified witness who provides an explanation of its facts. All that the law requires is that the opposing party be provided advance written notice of the intent to submit the document, so that they may challenge it.

With a renewed focus and understanding of the motion for relief process, most servicers should experience far fewer delays and losses.