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Navigating Online Access in Bankruptcy
Key Lessons from Klemkowski v. CitiMortgage, Inc.
Below, we break down the decision in Klemkowski, compare it to another court’s ruling in In re Rolanti, and suggest practical steps for servicers moving forward.
Klemkowski: A Novel Stay Violation
Facts & Holding
In Klemkowski, the Chapter 13 debtor had an existing online access agreement with her loan servicer prepetition. The servicer unilaterally denied her access after the bankruptcy filing, which was permissible according to the online access agreement. According to the court, this denial of portal access constituted a violation of the automatic stay under 11 U.S.C. § 362(a)(3), which prohibits “any act to obtain possession of property of the estate… or to exercise control over property of the estate.”
Why Was It a Violation?
- Online Access Agreement as Property of the Estate: The court found that the debtor’s right to use the online portal—rooted in a valid prepetition agreement—qualified as property of the estate under 11 U.S.C. § 541.
- Unilateral Termination Altered the Status Quo: By cutting off access, the servicer effectively exercised control over this piece of estate property. The court viewed this as an affirmative action that violated the automatic stay.
Status:
The Bankruptcy Court left open the question of the appropriate remedy for the servicer’s violation. To date, no such ruling as been issued regarding said remedy. A status hearing is scheduled for February 12, 2025.
Comparing Klemkowski to Rolanti
A somewhat related case is In re Rolanti (Bankr. D. Mass. Apr. 2, 2015). However, the factual differences led to a different outcome:
- Chapter 7 vs. Chapter 13: In Rolanti, the debtor was in Chapter 7 and did not reaffirm the debt. Once the bankruptcy court granted a discharge, the loan was no longer the debtor’s personal obligation, and the property in question was not part of the estate.
- No Violation of Discharge Injunction: The Massachusetts court decided that denying portal access after discharge did not violate the discharge injunction because the debtor had other options to pay and no personal liability remained.
- Reason for Termination: The servicer in Rolanti sought to avoid displaying “payment due” language that could be misconstrued as debt collection. The court found that cutting off online access under these circumstances was not improper.
Practical Considerations for Servicers
- Klemkowski Court Has Not Fashioned Remedy Since the Klemkowski court has not fashioned a remedy for the stay violation, servicers may decide to continue their usual practices for now. More importantly, since Klemkowski is not binding authority in other jurisdictions, it may be best to operate BAU (“Business as Usual”)until there is a clear trend amongst other jurisdictions.
- Stay vs. Discharge The distinction between Chapter 13 (where a debtor might remain in active bankruptcy for years) and Chapter 7 (where discharge occurs relatively quickly) is significant. If the debtor remains personally liable (or is in an ongoing plan under Chapter 13), more caution is needed.
- Ensure Clear Contract Terms If a servicer’s online access agreement includes language allowing termination at any time, that may help in some scenarios (like Rolanti)—but as Klemkowski demonstrates, a court could still find a stay violation if it sees the agreement as part of the estate.
Key Takeaways
- Potential Stay Violation in Chapter 13: Klemkowski suggests that denying a Chapter 13 debtor access to an online portal could be treated as a stay violation if the agreement is deemed property of the estate. However, the court has yet to say what remedy is appropriate, thus, creating a great deal of uncertainty in the servicing world.
- Chapter 7 vs. Chapter 13 Outcomes: Courts are likely to be more protective of a debtor’s contractual rights during a Chapter 13 case than post-discharge in Chapter 7