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.