Mortgagee Stay Relief: Wending A Path Through Adequate Protection And Dragnet Clauses

Magnolia Portfolio, LLC v. Dye (In re Dye), 502 B.R. 47 (Bankr. M.D. Pa. 2013) -

A mortgagee sought relief from the automatic stay in order to pursue its state law remedies against properties securing seven defaulted loans. The chapter 11 debtors contended that cause did not exist and the mortgagee was not entitled to relief since they had proposed a confirmable plan of reorganization under which the mortgagee's claims would be satisfied in full.

The debtors were a married couple who managed a variety of properties, including three trailer parks, a drag strip, a car wash, and several apartments. The husband also operated a septic service, and the wife was employed in her father's business.

As of the bankruptcy filing, the balance due on the seven loans was ~$1.7 million. At the time the court considered the stay motion, some of the properties securing the loans had been or were in the process of being sold, leaving the mortgagee's request for relief with respect to several emaining properties. The properties in question included a 2.5 story two-family dwelling, 3-story brick row house that had been converted into two apartments and was attached to an abandoned furniture finishing shop, a manufactured home park, a single manufactured home on a 1.23 acre parcel, and a single-family dwelling that was not habitable.

The mortgagee contended that the debtors had failed to make loan payments, failed to pay property taxes and failed to maintain casualty insurance on the properties. Further it contended that the debtors allowed the collateral to deteriorate such that they had no equity in the properties. The mortgagee also claimed that the debtors' projections confirmed that the collateral could not generate sufficient funds to cover debt service.

After conducting a detailed review of the somewhat sporadic payments by the debtors, the court concluded that four of the seven loans were in default, two appeared to be current, and it was impossible to determine the status of the final loan. Turning to the mortgagee's request, the court noted that relief could be granted for cause, which includes a lack of adequate protection of the mortgagee's interest in the collateral. Adequate protection can take various forms. Typically it is provided through periodic payments, but sometimes an "equity cushion" will be sufficient.

Before considering whether the debtors had an equity cushion, the court first considered cross-collateralization provisions in the...