By PatrickHruby, Esq.

Brock& Scott, PLLC *

USFN Member (AL, CT, FL, GA, KY, ME, MD, MA, MI, NH, NJ, NC, OH, PA, RI, SC, TN, VT, VA)

After this article was submitted for publication, the servicer appealed the bankruptcy court’s decision. Stay tuned for the outcome of the appeal and further developments in this case.

A recent decision from the U.S. Bankruptcy Court for the District of Maryland sheds light on a significant issue for mortgage servicers and bankruptcy practitioners: whether denying a debtor access to an online payment portal after a bankruptcy filing violates the automatic stay under 11 U.S.C. § 362. The ruling emphasizes the potential legal risks for servicers when discontinuing certain payment methods for borrowers who file bankruptcy cases.

In re Klemkowski, Bankr. D. Md. Case No. 22-10257-MMH (October 30, 2024), 2024 WL 4625644, a Chapter 13 debtor sought to compel her mortgage servicer, CitiMortgage, Inc., and its agent, Cenlar FSB, to restore her access to an online portal used to make mortgage payments. Prior to filing for bankruptcy, the debtor had relied on the portal to make her payments. However, once she filed her petition, the servicer blocked her access, citing its policy of restricting portal use for borrowers in bankruptcy. The debtor argued that this change created unnecessary barriers, increasing the likelihood of payment delays and defaults. The debtor argued that this caused her to miss payments and required her to defend a motion for relief from stay after falling behind. Meanwhile, the servicer claimed the restriction was necessary for compliance with bankruptcy protocols.

The bankruptcy court ruled that the servicer’s action violated the automatic stay. The court reasoned that access to the online portal was part of the debtor’s contractual relationship with the servicer before bankruptcy, based on the debtor’s right to use the online portal under the servicer’s Online Access Agreement. This right, as a prepetition contractual interest, became part of the bankruptcy estate under § 541(a). By unilaterally restricting access to the portal, the servicer effectively altered the debtor’s rights, thereby exercising control over estate property in violation of § 362(a)(3).

The servicer defended its policy by asserting that its systems were unable to differentiate between borrowers in bankruptcy and those who were not, making it “impossible” to allow portal access without risking errors or violations of the automatic stay. However, the court found this explanation insufficient, describing it as a business decision rather than a legitimate technical limitation. The court noted that the servicer’s witness, while professional and knowledgeable about internal procedures, was not a technical expert and did not provide evidence that these claimed limitations could not be fixed within the servicer’s system.

The court also highlighted the practical impact of the restriction on the debtor. Without portal access, the debtor faced considerable challenges in making timely payments. She testified about difficulties with alternative methods, including long delays when making phone payments, issues with mail reliability, the fact that she had no car, and limited access to branch offices. These barriers, the court noted, increased the risk of default under her Chapter 13 plan, potentially undermining her ability to complete the bankruptcy process successfully.

Judge Harner emphasized that bankruptcy is designed to give debtors a fair chance to rehabilitate their finances, not to create new hurdles that could jeopardize their repayment plans. The court noted that the servicer’s actions were contrary to the broader goals of bankruptcy law, which aim to make it easier—not harder—for debtors to comply with their obligations.

Although the court determined that the servicer’s actions violated the automatic stay, it did not award monetary damages. The debtor had not provided sufficient evidence to support a claim for damages under § 362(k). Notably, the debtor did not present the issue to the court as a stay violation, but under a motion to compel access to the online portal. The court noted that a case with different facts may warrant an award of damages under § 362(k).

The court explained that even though monetary damages were not warranted, the automatic stay issue remained. Namely, the servicer’s actions to effectively terminate the Online Access Agreement violated the automatic stay and were void ab initio. The court explained that “the primary way to abate this violation is for the Servicer to restore the status quo and the Debtor’s rights under the Online Access Agreement[,]” but could not determine whether that remedy was proper or available. Accordingly, the court is allowing the parties to offer further briefing on those issues.

While this decision may not gain traction outside of the District of Maryland, it highlights the need for mortgage servicers to carefully evaluate how their policies align with bankruptcy law. Many servicers restrict online payment access for borrowers in bankruptcy, which could result in those servicers inadvertently violating the automatic stay. The author intends to write on the outcome of the additional briefing and the court’s final ruling. In the meantime, servicers may want to consider reviewing their procedures to ensure that borrowers’ rights under prepetition contracts are protected during bankruptcy and reach out to their bankruptcy counsel to discuss.

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USFNews - Dec. 18

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