by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

Here are three cases involving "lender stumbles" - situations in which more careful conduct by the lender might have avoided costs or worse. The Reporter for these cases is Jim Stillman of Murphy, Weir & Butler, San Francisco.

BANKRUPTCY; AUTOMATIC STAY: A bank violates the automatic stay by docketing, in the state court records, a deficiency judgment obtained following a foreclosure sale authorized by a lift-stay order in bankruptcy.

In re Ferrante, 195 B.R. 990 (Bankr. N.D.N.Y. 1996).

The Bankruptcy Court expected that "the right to any deficiency judgment and the amount of the same will be fixed as part of the applicable state court mortgage foreclosure proceedings." However, docketing of the deficiency judgment was an enforcement act with the object of encumbering the debtor's other assets, and such a step violated the stay. The Bankruptcy Court ordered the lien created as a result of the filing of said judgment be deemed void.

Reporter's Comment: This case gives clear (and correct) instruction to the foreclosing creditor who holds relief from stay to foreclose and wishes to obtain a deficiency judgment; under most circumstances, the creditor is entitled to determine the allowability and proper measurement of the judgment under state law, but must return to the Bankruptcy Court before taking any enforcement step.

BANKRUPTCY; CHAPTER 13; REINSTATEMENT OF HOME MORTGAGE: Where the mortgagee accepts monthly payments from the debtor for eight months during his chapter 13 case, the creditor is deemed to have "waived the forfeiture" effected by its pre-bankruptcy foreclosure sale.

In re Parks, 193 B.R. 361 (Bankr. N.D.Ala. 1995).

The home mortgage, therefore, could be reinstated in bankruptcy. The creditor in this case had gone so far as to file a claim representing "the Debtors' payment arrearage plus some late fees and interest." The filing of this claim was fundamentally inconsistent with the position of one who had already foreclosed and acquired the subject property by credit bid purchase.

Reporter's Comment: It sometimes happens, particularly in larger lending institutions, that various departments follow separate procedures manuals and do not always know what each other is doing. Another recent example of waiver by acceptance of post-forfeiture payments is In re Sorrento's I., Inc., 195 B.R. 502 (Bankr. M.D. Fla. 1996), involving the question whether a lease had been lawfully terminated under state law prepetition.

BANKRUPTCY; CLAIMS: A claim which becomes fully secured during the pendency of the case may be amplified by post-petition interest and allowed attorney's fees and costs.

In re Tarkio College, 195 B.R. 424 (Bankr. W.D.Mo. 1996).

During the bankruptcy proceeding, the debtor experienced an unexpected windfall in the form of a settlemetn of an accountancy malpractice claim resulting in ample funds. Unfortunately for the lender, the record did not support either default rate interest or the allowance of in-house counsel fees in this case. The lender had not unequivocally accelerated in the manner required by the loan documents prepetition so as to be entitled to default rate interest under the loan documents, nor had it ever requested default rate interest prior to the settlement with the accountants. While in-house counsel fees may be allowable if the contract so provides, such fees in any event must be the subject of a detailed fee application for allowance purposes, and no such application was made here.

Reporter's Comments: The holdings about default rate interest and attorney's fees seem correct, however, this opinion may have its highest value in the holding it makes virtually in passim (p. 426): that is, that bankruptcy law allows a claim undersecured at the petition date to become fully secured at confirmation due to post-petition events.

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