The United States Court of Appeals for the Tenth Circuit recently decided Johnson v. Smith, No. 05-8089 and, in doing so, set out nicely the requirements for finding a violation of the automatic stay in bankruptcy.

The case arose when M&M Auto Outlet-Wyoming, Inc. repossessed the debtor’s pickup truck after a Chapter 13 bankruptcy petition had been filed.

The court held that in order to demonstrate a violation of an automatic stay of 11 U.S.C. 362(k)(1) the debtor bears the burden of establishing, by a preponderance of the evidence, that the creditor knew of the automatic stay and intended the actions that constituted the violation; no specific intent is required.

In other words, all that need be proven is that the creditor knew of the bankruptcy and acted in the face of it. The debtor need not prove that there was an intent to violate the automatic stay, merely that there was an intent to take the act. Period. End of story.

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Ride the Lightning is the new blog from Sharon Nelson, President of Sensei Enteprises, Inc. Sesei Enterprises is an electronic discovery and computer forensics firm known as experts in computer forensics.

The recent post on dealing with leaks of confidential data is proof positive that Sharon knows what she’s talking about. And her discussion of one of the citizens of Atlantic City assures me that this will never be a boring read.

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You’ve heard it all before - a creditor continues to send dunning notices to a debtor after the filing of a bankruptcy case. You call to notify of the bankruptcy case information and are told that they never got notice.

Another case of a misplaced court notice, or stonewalling?

You guessed it, folks - you’re being stonewalled. The problem, however, is that most bankruptcy courts don’t know it, either. They take sides with the creditor or debt collector without any further inquiry.

They don’t know about Banko. Or Banko’s new cousin, Notify Solutions.

Banko, offered by our friends as Lexis-Nexis, consolidates and updates bankruptcy cases daily from all fifty states, the District of Columbia, and Puerto Rico. Banko automatically supplies comprehensive, timely bankruptcy data to subscribers. That’s right, Banko does this all automatically.

Banko’s national bankruptcy database contains complete information on all bankruptcy filings, discharges, dismissals and conversions in the United States. Banko® gathers complete bankruptcy information from all Federal Bankruptcy Districts daily and then pushes that information to the debt collector into a single bankruptcy database. Each bankruptcy filed is tracked on a case-by-case basis in order to collect all filings, 341 dates, discharges, dismissals and conversions. And the information always contains the debtor’s name, address and social security number.

This week Banko got competition from First Data Corp., an electronic transaction processor serving over 1,900 cards issuers and 5 million merchants. The Notify Solutions product compiles public records from 7,000 federal, county and local courthouses nationwide in addition Guam, Puerto Rico, and the U.S. Virgin Islands. The bankruptcy database is updated daily and allows users to remove the account from their collections efforts and stop all mailings and other attempts to communicate with the account.

So next time a creditor takes action post-filing (or worse, post-discharge) don’t take their word for it that they made an innocent mistake - chances are, they knew about the bankruptcy filing before the trustee was assigned.

And when there is a willful and intentional violation of the automatic stay or discharge order, there is a cause of action for damages and legal fees.

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The case of In re Sanchez, 2007 WL 2137790 (Bkrtcy.S.D.Tex. 2007) is the latest case in which a mortgage company got slammed for using Chapter 13 Plan payments to pay for unapproved and undisclosed post-petition fees and costs.

The Court in Sanchez held that post-petition, pre-confirmation attorney fees, costs and property inspection fees charged by the mortgage servicer had to be regarded as per se unreasonable, where the servicer, by failing to disclose that it was charging such fees pursuant to terms of mortgage documents, and by simply applying payments that it received from trustee to these undisclosed charges, acted in manner antithetical to spirit of the Bankruptcy Code, and deprived the court of the opportunity to assess reasonableness of charges as required by § 506(b).

This decision is, in my opinion, a pretty good one because it not only lays out the fact that a mortgage servicer must disclose all post-petition fees and obtain approval from the bankruptcy court pursuant to Rule 2016, but also that the Court looks to the argument that the protections of Section 1322(b)(2), which allows a mortgage creditor to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims,” allows the servicer to do an end run around § 506(b) as well as Rule 2016.

In rejecting this argument, the Court notes that Section 1322(b)(2) does not give the holders of secured homestead interests carte blanche to charge any fees that follow the letter of the contract. In addressing this issue, the Court notes:

It is not difficult to harmonize § 506(b) and Rule 2016 with § 1322(b)(2), and the Defendant has not provided any case law to the contrary. Requiring a creditor to file a Rule 2016 application with the bankruptcy court in order to collect fees from the estate does not modify that creditor’s right to collect those fees. Similarly, requiring a creditor to affirmatively demonstrate that its fees are reasonable does not modify that creditor’s right to collect such fees. Creditors have a panoply of contractual rights under § 1322(b)(2), but the right to charge unreasonable fees has never been among them. Thus, the Defendant’s rights to collect fees pursuant to § 1322(b)(2) are not modified by having to file a Rule 2016 application with the Court, nor by having to make an affirmative showing that its fees are reasonable under § 506(b).

As I continue to advocate for my clients on issues such as these, I am pleased to see that courts around the country are beginning to see the mortgage servicing industry for what it is rather than as the benevolent entities that are looking out to help their customers and comply with the law.

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