Lender Alert: Billing Statement Including Pre-Petition Attorneys’ Fees May Constitute a Stay Violation

By: Michael L. Moskowitz, Esq. & Melissa A. Guseynov, Esq.

In a recent unpublished and nonprecedential memorandum opinion, the United States Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) held that a mortgage servicer’s monthly billing statement to chapter 13 debtors violated the automatic stay by including amounts owed for pre-petition attorneys’ fees with the monthly payment amount. See Orlansky v. Quicken Loans, LLC (Case No. 22-1181, April 14, 2023).  

In this case, the mortgage servicer sent chapter 13 debtors a billing statement that included $950 in pre-petition attorneys’ fees as part of the total amount the debtors had to pay. The statements all contained standard disclaimer language stating the statement was for information purposes only and was not a request for payment. Nonetheless, after paying the $950, debtors filed a motion for contempt.

The Bankruptcy Court held that the mortgage servicer did not violate the automatic stay because monthly billing statements are permitted communications that provide debtors with information. Moreover, the Bankruptcy Court noted debtors made the payment voluntarily. On appeal, however, the BAP reversed the lower court’s decision, finding the billing statements violated the automatic stay as an “act to collect a prepetition debt” pursuant to section 362(a)(6) of the Bankruptcy Code.

Importantly, the BAP noted if the mortgage servicer had listed the attorneys’ fees with pre-petition arrears in a section of the billing statement separate and apart from the section listing the regular monthly payment, it would likely have been found to be solely an information statement and not a violation of the automatic stay.

The distinction between pre- and post-petition arrears owed by borrowers is crucial for lenders to distinguish. This case underscores how important it is for lenders to consult with experienced counsel regarding collection of pre-petition arrears where a borrower has filed for bankruptcy protection. The attorneys at Falcon Rappaport & Berkman help their clients make informed decisions every day to avoid possible costly automatic stay violations.

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