Bankruptcy Judge Michelle M. Harner of Baltimore decided that a mortgage servicer who barred the chapter 13 debtor from using the servicer’s online payment platform had violated the automatic stay ab initio.

For the stay violation, Judge Harner imposed no monetary damages under Section 362(k), because the debtor had sought none.

In her October 30 opinion, Judge Harner conjectured whether “the system might benefit from a per se rule that mandates” use of online payment portals, but she said that “any such change must be implemented by Congress or an appropriate regulatory agency.”

Online Mortgage Payments

The debtor confirmed her chapter 13 plan. Before bankruptcy, the debtor had been using the servicer’s online platform to pay her mortgage. Under the plan, the debtor was paying mortgage arrears through the trustee but was paying the servicer directly for postpetition obligations.

After bankruptcy, the servicer barred the debtor from using the online payment platform, claiming that it was a convenience, not a right.

In testimony, a witness for the servicer said it was “policy” to prevent debtors from using the platform because it was “impossible” for the platform to be used by debtors and nondebtors. Perhaps the servicer was concerned that communications sent automatically by the platform might violate the automatic stay.

The debtor filed a motion to hold the servicer in contempt of the automatic stay. The debtor testified that the servicer had no office nearby, that she no longer had a car and that payments by telephone often took hours, because some customer service representatives believed she could not make payments since she was bankrupt. She also testified that mail was unreliable.

The difficulties occasioned by the loss of the platform caused the debtor to default on the mortgage. The servicer moved for a modification of the automatic stay, but the dispute was resolved by stipulation.

There was a separate agreement between the servicer and the debtor governing use of the online payment platform. The agreement said that the servicer could terminate the customer’s use of the platform for violation of any agreement with the servicer or the lender. The agreement also allowed the servicer to terminate a customer’s use of the platform “without notice.”

Judge Harner said that barring use of the online platform made “it more difficult and time-consuming for the debtor to make her payments and removes a commonly used payment method from the debtor’s toolkit.”

Estate Property?

Judge Harner marched through several steps to decide whether taking away the payment platform violated the automatic stay. She began with Section 362(a)(3), which provides that the filing of the petition gives effect to an automatic stay of “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” [Emphasis added.]

Before delving into whether there was a stay violation, Judge Harner was obliged to decide whether removal of the platform was done to “exercise control over property of the estate.” In other words, was use of the platform an estate asset, given the broad definition of estate property in Section 541(a)(1)?

“It is a well-established principle,” Judge Harner said, “that a debtor’s prepetition agreements (as well as her rights under those agreements) generally become property of the bankruptcy estate under section 541 of the Code.” Citing Section 541(c), she went on to say, “Those interests became property of the estate notwithstanding any provision in the agreement ‘that is conditioned on the insolvency or financial condition of the debtor, on the commencement of a case under this title.’”

Even if use of the portal were seen as a property interest of the servicer or a privilege, Judge Harner said, “Many courts have recognized such a contractual right to use as property of the bankruptcy estate under section 541(a) of the Code.” Based on the evidence, she concluded that “the Debtor had a prepetition contractual right to use the online portal” and that the “Debtor’s right to use the online portal and her interests in the Online Access Agreement came into the bankruptcy estate.”

The Stay Was Violated

Having established that there was deprivation of the use of estate property, Judge Harner turned to the question of whether the servicer had violated Section 362(a)(3). She quoted the Supreme Court for having recently said that “§ 362(a)(3) halts any affirmative acts that would alter the status quo [of estate property] as of the time of the filing of a bankruptcy petition.” City of Chicago, Illinois v. Fulton, 592 U.S. 154, 158 (2021).

Having concluded from the facts that the servicer had altered the status quo, Judge Harner next raised the question of whether the servicer’s action was an “exercise of control.” She decided that the action was “akin to a contract termination, which did in fact remove the value of the contract from the bankruptcy estate.”

Although every breach of contract is not a stay violation, Judge Harner found “more than a mere breach.” The action, she said, “effectively terminated the operative purpose of the Online Access Agreement; it was ‘tantamount to a termination.’” She therefore held that the servicer had “changed the status quo and [that the violation of] the automatic stay is void ab initio.”

Relief and Damages

In her motion, the debtor sought only injunctive relief, not monetary damages under Section 362(k). Furthermore, the record had no “discernable monetary damages to the Debtor,” Judge Harner said. In addition, she said that the debtor had not “establish[ed] that she was foreclosed from making her monthly mortgage payments, including through an ACH (Automated Clearing House) or other electronic transfer from her primary bank account to the Servicer.”

On the record, Judge Harner said that she could not make a finding of monetary damages under Section 362(k). However, she did “not foreclose the possibility that in a matter with a different factual record, an award of monetary damages under section 362(k), if requested, might be warranted.” Furthermore, the debtor’s failure “to establish monetary damages under section 362(k) of the Code does not excuse the Servicer’s violation of the stay.”

“The primary way to abate this violation,” Judge Harner said, “is for the Servicer to restore the status quo and the Debtor’s rights under the Online Access Agreement.” On the record, though, she could not “determine whether any such remedy is appropriate or warranted.” Therefore, Judge Harner called for more briefing and another hearing.

Judge Harner found herself unable to “address the underlying policy issue, namely whether and when borrowers in financial distress should lose access to online accounts and portals that they have become accustomed to using.”

“To the extent that electronic payment methods (such as the online portal) facilitate greater access to credit or success in bankruptcy,” Judge Harner said, “the system might benefit from a per se rule that mandates such access. But any such change must be implemented by Congress or an appropriate regulatory agency.”