Maryland Bankruptcy Update – Restricting Access to Post-Petition Online Payments Can Be a Stay Violation

The United States Bankruptcy Court for the District of Maryland recently held that prohibiting Borrowers from making online mortgage payments after bankruptcy filing – when those Borrowers were able to make online payments prior to filing – is an automatic stay violation.  In In re Klemkowski (664 B.R. 681 (D.MD. 2024)), a mortgage servicer cut off a Chapter 13 Debtor’s access to make online mortgage payments when the Debtor had the ability to make online payments prior to filing.  The Debtor filed a Motion to Require Creditor to Accept Electronic Payments.  The Court held that the Debtor’s post-petition payment methods are governed by the parties’ pre-petition agreements;  and that the servicer’s revocation of Debtor’s ability to make online payments was “akin to a contract termination.”  The Court utilized its authority under Section 105(a) to issue an Order appropriate to carry out the provisions of the Code;  which under Section 362(a)(3) includes a stay of exercise of control over the estate.  Specifically, the Court held that pursuant to Section 541(a), upon filing, the Debtor’s legal and equitable interests in the Note and the Online Access Agreement permitting online mortgage payments became property of the bankruptcy estate;  and thus the Debtor’s pre-petition agreements – including the right to make online mortgage payments – were protected by the automatic stay of Section 362(a)(3).  The Court definitively held that the servicer’s refusal to accept post-petition online payments was a stay violation.

Monetary damages in this case have not yet been determined, and Creditor’s request for an interlocutory appeal was recently denied.  Friedman Vartolo continues to monitor the proceedings.  Servicers should consider auditing the capabilities of their online payment systems to determine if they are able to track post-petition bankruptcy payments while simultaneously displaying regulatory compliant account information;  and weigh the risks of incompatible technologies.