Mirick O'Connell E-Alert

Banks and Creditors Beware

BANKRUPTCY | WORKOUT

Loan servicers are a bit like indoor plumbing. What was once considered a convenience has become a necessity, usually because lenders require borrowers to use servicers for valid business reasons, particularly the cost-savings produced by outsourcing this function.

The flip side is that while borrowers may find dealing with a new (and often unrelated) servicer to be cumbersome at first, over time many come to appreciate the efficiency that a loan servicer provides, especially if its platform is more technologically advanced than the bank’s.

One such borrower was Arlene Klemkowski, whose loan with CitiMortgage was serviced by Cenlar FSB. When Klemkowski filed for protection under Chapter 13, Cenlar terminated her access to its online portal, which she alleged made it difficult to make her mortgage payments.

The issues cited by the debtor were personal to her, however; there was no CitiMortgage branch office near her, she had problems with mail delivery before, and she no longer owned a car. While these may strike some as trivial, the court noted that there were real world consequences to Cenlar’s actions; a single missed payment to CitiMortgage would require Klemkowski to make future payments in cash or cash equivalents, such as a certified check.

CORNELIUS "CON" CHAPMAN

cchapman@miricklaw.com

We are pleased to announce that Cornelius ‘Con’ Chapman has joined the Firm as Of Counsel in the Business Group, based in our Boston office.

Con has extensive experience in commercial lending; banking and consumer finance regulation; loan “workouts” and bankruptcies; tax-exempt bonds; commercial contract drafting and negotiation; and non-profit governance.

> LEARN MORE ABOUT CON

Cenlar pleaded its own case of inconvenience; its policy was to deny borrowers online access once they filed for bankruptcy because its “system” can’t “manage accounts for both borrowers who have, and those who have not, filed for bankruptcy.” In a non sequitur that must have had Bankruptcy Judge Michelle Harner scratching her head, Cenlar also claimed it terminated bankrupt borrowers’ access “to avoid potential violations of the automatic stay.”

The court sided with the borrower on grounds predictable by anyone familiar with bankruptcy law; Klemkowski couldn’t be denied access to Cenlar’s platform just because she’d filed for bankruptcy protection since this would undermine the goal of reorganization that the Bankruptcy Code was designed to foster. In her case, the judge was able to hang her hat on §541(c), which says that a debtor’s rights can’t be terminated based on “the insolvency or financial condition of the debtor” or “the commencement” of a bankruptcy case.

Why should this case matter to businesses that aren’t mortgage servicers? Cenlar wasn’t even a creditor of Klemkowski, but the actions it took in cutting her off violated the automatic stay that goes into effect at the commencement of every bankruptcy case, individual or business. While the Maryland Bankruptcy Court declined to award damages to Klemkowski, it left open the possibility that it would do so given what it called Cenlar’s “troubling” conduct.

The moral of the story? Even if you aren’t owed any money by a bankrupt, you may still become involved in its case.

Please contact any member of our Banking and Finance Group if you have any questions about this decision.

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