Judge Gives Go-Ahead To F'closing Lender Despite Lack Of Conclusive Evidence Of Standing As Ch. 11 Debtors Refuse To Make Adequate Protection Payments

A recent ruling by a U.S. Bankruptcy Court in Northern California allowed for a foreclosure action to continue, despite the lenders' failure to conclusively establish that it had standing to foreclose, where a Chapter 11 debtor/couple adamantly refused to make "adequate protection payments" as apparently required by the bankruptcy law, pending full adjudication of the standing issues. In allowing the lenders to go ahead with foreclosure actions, the court made the following comments (bold text is my emphasis, not in the original text):

• In this chapter 11 case the pro se debtors have steadfastly and repeatedly resisted motions for relief from stay, while at the same time steadfastly and repeatedly refusing to make payments pending resolution of their disputes about the standing of those secured creditors to seek such relief.

• The court is sympathetic with any debtor who finds it difficult, if not sometimes seemingly impossible, to wade through the maze of transferred notes, assigned deeds of trust, ethereal beneficiaries, and information and belief allegations about what some predecessor loan servicing agent did with the original note and deed of trust.

• But it is equally unsympathetic with debtors shedding crocodile tears about making adequate protection payments while at the same time claiming all the benefits the bankruptcy law provides them. If you want to gamble in the casino and hope to hit the jackpot, you can't expect to win by using house money. You've got to put a "little skin in the game". Because these debtors have refused to do so, relief from stay could hardly be more appropriate.

For the ruling, see In Re Aniel, Bankruptcy Case No. 09-30452DM (Bankr. N.D. Cal. April 21, 2010).

(1) The court when on to give this rationale for its ruling (bold text is my emphasis, not in the original text):

• Here, Creditor has made a colorable claim that it has standing by showing that it holds the note, endorsed in blank. Debtors do not dispute that they executed the note and deed of trust which are the subject of the MRS [motion for relief from stay]. If Debtors wish to maintain the status quo pending resolution of matters that require more plenary proceedings than relief from stay motions (e.g., adversary proceedings for declaratory relief to determine the proper holder of a note; objections to the claim of the creditor; confirmation of a Chapter 11 reorganization plan that restructures the claim of the creditor, etc.), the conventional way to do so is to make adequate protection payments in the meantime.

• Because of Debtors' adamant refusal to make such payments the court is less tolerant than the Wilhelm, Jacobson, and Hwang courts in one material respect: whether debtors should provide adequate protection payments to the Creditor until the standing issues are fully adjudicated. They have not made any payment on this note (or the notes secured by the six other properties in which Debtors assert an ownership interest) in over a year while they have been in bankruptcy. They failed to make at least five prepetition payments on the note secured by the Property. They have no equity in the Property. They have used cash collateral without permission.

• Under such circumstances, justice dictates that Debtors make adequate protection payments pending resolution of the standing issues. The court will not continue the stay with all of the risk being borne by the creditor. In circumstances where there is no doubt that the Debtors signed the note that is the subject of the motion, (and, frankly, not much doubt that ultimately Creditor will be able to "connect the dots" by showing the chain of title of the note and deed of trust), denial of relief from stay when adequate protection payments could be made would be patently unfair to Creditor and impose on it all of the risk of further deterioration of its security without protection.

• Since Debtors have no inclination to make payments, it is abundantly clear that once the Creditor (and other similarly situated secured creditors on other properties of Debtors) proves its standing, Debtors will allow the Property to be foreclosed. There is simply no point in delaying the inevitable.

• Debtors were not unprotected or left without remedy if they had made the adequate protection payments as ordered by the court. As the December 31 order provides, the adequate protection payments consist of the monthly payments due under the note undisputedly executed by them, and Creditor's counsel was to hold such payments in trust pending resolution of the standing challenge. If Debtors had ultimately prevailed, the payments (plus interest) would have been returned to Debtors. Moreover, the order granting relief from the automatic stay does not preclude Debtors from challenging in state court the legitimacy of Creditor's right to foreclose.

• Debtors chose not to comply with this court's December 31 order. They chose not to make the adequate protection payments. They must accept the consequences of their decision. Under the circumstances described in this memorandum decision, the court questions whether the Debtors' challenges to standing are made in good faith. The court therefore did not and will not vacate the order granting relief from stay.