Constructive Notice of Bankruptcy: When Is A Mailing Address Good Enough?

In re Cunningham, 506 B.R. 334 (Bankr. E.D.N.Y. 2014)

A mortgagee continued with foreclosure of a mortgage after the debtor filed bankruptcy because it was not aware of the filing. When the debtor later sought to vacate the foreclosure and sale, the mortgagee sought retroactive relief from the stay in order to validate the foreclosure. A primary question was whether the mortgagee had constructive notice of the bankruptcy given the defects in the attempts to send it notice.

After the bankruptcy petition was filed, a state court issued a judgment of foreclosure. And after dismissal of the bankruptcy case, a foreclosure sale was held – with the property conveyed to the mortgagee, who in turn conveyed it to a third party. When the debtor sought to vacate the foreclosure sale, the state court directed the mortgagee to file a motion with the bankruptcy court to determine the applicability of the automatic stay. Procedurally, the bankruptcy case was already closed. So, the mortgagee sought to either reopen the case or obtain relief from the dismissal so that it could request the bankruptcy court to annul the automatic stay nunc pro tunc.

When the debtor filed her bankruptcy petition, she submitted a creditor matrix that she completed from memory. The mortgagee’s address was listed as “150 East 27th Street, New York, NY” instead of the correct address of “150 East 52nd Street, 27th Floor, New York, NY.” As a result, the notice of bankruptcy sent to the mortgagee was returned as undeliverable.

In an attempt to remedy the situation, the debtor placed the returned bankruptcy notice in another envelope, which she once again addressed from memory. This time she had the correct street address, but neglected to include the floor. The letter was not returned, and the debtor did not make any further effort to contact the mortgagee. In the meantime, the debtor did not advise the clerk’s office of the initial error, so it continued to send notices to the original incorrect address.

The mortgagee testified that it did not have notice of the debtor’s bankruptcy until she sought to vacate the foreclosure judgment and sale. (In particular, a specific individual was the only person who reviewed legal notices, and he did not see any bankruptcy notices.) Given the lack of notice of the bankruptcy, the mortgagee argued that there were grounds to annul the stay retroactively and validate the foreclosure.

As a general rule “mail which is properly addressed, stamped and deposited in the mail system creates a rebuttable presumption of receipt by the party to whom it has been addressed.” It takes more than a simple allegation of non-receipt to rebut the presumption. If there is a minor mistake in the address, courts have found a weakened presumption of receipt.

In determining whether a mailing with a defective address raises (1) a presumption of delivery, (2) no presumption of delivery, or (3) a weakened presumption, the courts weigh a variety of factors. Some of the results are as follows:

  • Use of 660 E. 15 Mile Rd. instead of 6600 E. 15 Mile Rd. meant that there was no presumption, even though incorrectly addressed pieces sometimes actually arrived.
  • In contrast, an address that omitted the company name, floor number and last four digits of the zip plus four still raised a presumption, in part because the creditor received a subsequent notice with the same bad address.
  • The presumption was weakened where the zip code was incorrect by one digit, but a full presumption was restored because of other factors (such as the mail was not returned as undeliverable).
  • Letters sent to a proper address but with no indication of a person or department did not provide notice because the employee who received the letter would not know where to direct it.

In this case the second notice was sent to the correct street address but did not include the suite or floor number. The mortgagee was not well known and there were ~100 other companies located at the street address. Under these circumstances, the court found a weakened presumption.

A weakened presumption of delivery can be rebutted by simple testimony of non-receipt. Based on credible mortgagee testimony, the court concluded that the mortgagee did not receive notice and had no actual notice or knowledge of the bankruptcy until after the sale.

The court then went on to determine that the situation warranted relief from the order of dismissal, and the mortgagee was entitled to have the stay retroactively annulled. (The opinion also notes at the end that even if there had been a full presumption of delivery, it would still be appropriate to annul the automatic stay even if the mortgagee was charged with constructive knowledge of the bankruptcy because other factors weighed in favor of granting relief.)

It is interesting to see the small mistakes that can have significant consequences.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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