Insight Denial of the Debtor’s Access to the Online Payment Portal Transports the Creditor to an Automatic Stay Violation

The automatic stay is the powerful, self-executing stop sign for all creditors upon their debtor’s bankruptcy filing. Upon filing the bankruptcy petition the automatic stay goes into effect to stop all acts and proceedings against the debtor and the debtor’s property, among other things. See 11 U.S.C. § 362(a). Actions in violation of the automatic stay are void—not voidable—and a disregard for the automatic stay can bring the offending party liability for damages the debtor incurred, including attorney fees incurred to fix the violation, and, possibly even, punitive damages. See 11 U.S.C. § 362(k). The automatic stay is a complex statute (it has over 6,000 words).  It is also frequently litigated with far reaching implications for debtors and creditors alike. And it is not always clear when a creditor is crossing the line into a stay violation.

A recent case demonstrates how a creditor can wander into a stay violation, which case has been ably reported by Bill Rochelle in his Rochelle’s Daily Wire for the American Bankruptcy Institute at: https://www.abi.org/newsroom/daily-wire/barring-use-of-an-online-payment-platform-was-an-automatic-stay-violation (subscription required).

In In re Klemkowski, Case No. 22-10257-MMH, 2024 WL 4625644 (Bankr. D. Md. Oct. 30, 2024), the Bankruptcy Court held that postpetition denial of a chapter 13 debtor’s ability to pay her mortgage through the servicer’s website and online payment portal violated the automatic stay.

Relevant Facts and Procedural History

In summary of the facts, the debtor, pre-bankruptcy, was able to use the servicer’s online payment portal to make payments on her mortgage debt. The agreement that the debtor signed pre-bankruptcy with respect to use of the online portal access stated expressly that the servicer can suspend or terminate the debtor’s access to the online portal if the debtor was in default under her loan or was otherwise were in default under the terms and conditions of the online agreement.

The debtor appears to have not been in default under the loan agreements or the terms and conditions of the online portal payment system at the time of filing her chapter 13 case; but in any event, the servicer had not, at the time of the bankruptcy, terminated the debtor’s access to the online portal system. After the bankruptcy filing, the servicer cut off the debtor’s access to the online portal because of the debtor’s bankruptcy case, based on a policy it had with respect to bankruptcy filings, which policy may have been driven by the legitimate concern that the system would send notices or communications to the debtor that too could be claimed to be an automatic stay violation. The debtor confirmed her chapter 13 plan and was making payments as required. The debtor thereafter had issues making payments to the servicer of the mortgage debt, which trouble she attributed to lack of access to the online portal and defaulted under the mortgage during the chapter 13 case.

The debtor ultimately filed a motion to require the servicer to accept online payments, arguing that the creditor’s denial of access to this system violated the automatic stay. The Bankruptcy Court agreed with the debtor by finding that the debtor’s pre-bankruptcy right to use the portal was property of the bankruptcy estate.

Law and Analysis by the Bankruptcy Court

The Bankruptcy Court first determined that the debtor’s “right to use” the online portal was property of the bankruptcy estate under 11 U.S.C. § 541, which section lays out what is included in property of the bankruptcy estate. The Court concluded that because the debtor was not cut off pre-bankruptcy, the debtor’s “right to use” the portal became property of the estate, citing cases, including ones finding a debtor’s right to use a particular phone number was estate property. One issue the Court highlighted on this finding is that, apparently, the terms and conditions or other agreement among the debtor and the servicer allowed the servicer to cut off the debtor’s access solely because the debtor had filed bankruptcy. The Court had no trouble invalidating that provision of the pre-bankruptcy agreement based on 11 U.S.C. § 541(c), which section invalidates any such provision based only on the insolvency or the filing of a bankruptcy by the debtor.

Having found that the “right to use” the portal was property of the bankruptcy estate, the Bankruptcy Court then focused on 11 U.S.C. § 362(a)(3), which in relevant part provides when a debtor files for bankruptcy, it “operates as a stay . . . of . . . any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.” The Court found that the denial of access to the online payment portal by the servicer “effectively terminated” the pre-bankruptcy agreement. As such, the Court determined that the servicer violated the automatic stay by taking away this right held by the debtor, which right is property of the estate.

While violation of the automatic stay can come with damages, up to and including punitive damages (see 11 U.S.C. § 362(k)), the Court in In re Klemkowski was not presented with any evidence of damages incurred by the debtor. Instead, the Court was asked for injunctive relief to effectively restore the debtor’s ability to use the payment portal. Also, the Court noted that it was not convinced that the debtor did not have other viable means to make her payments to the servicer, not through the portal. Based on the lack of evidence of damages, and the fact that the debtor could have made payments otherwise, the Court declined to award damages. The Court was quick to note, however, that in an appropriate case in the future, the Court would consider damages to be awarded to the debtor in these circumstances where damages are articulated and proven. In the end, the Court determined that the servicer’s actions were violations of the automatic stay, and it ordered further hearings as to what to do about this conclusion.

Takeaways

In re Klemkowski has ramifications for mortgage servicers and other creditors that allow access for a debtor to make payments online. This “right to use” may become property of the bankruptcy estate that cannot be taken away post-bankruptcy without risk of a similar claim that the creditor violated the automatic stay. Notably, in In re Klemkowski the servicer had not terminated this right before the bankruptcy was filed.  Had it done so, in compliance with the agreement among the parties, such “right to use” would likely not have become property of the estate, thus invalidating any issues for the servicer taking away that right.

Creditors in similar circumstances should be aware of this case and its attendant implications. These creditors would be well advised to review the terms and conditions of the online payment portal to ensure it has rights to terminate the debtor’s access to such portal, which right to terminate is not based solely on insolvency or a bankruptcy filing. Capable bankruptcy counsel should be consulted in the event of a bankruptcy filing if there is any question the actions taken may be a violation of the automatic stay.

This article is provided by Hawley Troxell Ennis & Hawley LLP for educational and information purposes only. It is intended to notify our clients and friends of certain events or issues. It is not intended to be, nor should it be, used as a substitute for legal advice regarding specific factual circumstances.