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2.18.2 Bankruptcy-Related Fees

Many mortgage holders and servicers charge borrowers who file bankruptcy a fee for monitoring the bankruptcy case, even in chapter 7 cases in which the borrower is current on monthly mortgage payments and plans to continue to make monthly payments as they come due. These “monitoring” fees may be $250 or more and are automatically assessed to the borrower’s account as soon as the bankruptcy is filed. They may include fees for periodic inspections of the property or for broker’s price opinions.320 Mortgage holders generally assert that these fees are authorized by language in their loan notes that obligates the borrower to pay any costs incurred in defending the holder’s security interest.

Holders and servicers often claim a right to fees for filing a proof of claim. Proof-of-claim fees may be charged alone or combined with a fee for reviewing the plan in a chapter 13 case, and are generally in the range of $150 to $1000.321 Additional fees may be charged for pursuing motions for relief from stay, objections to confirmation, or responding to a debtor’s objection to claim.322 Mortgage creditors may also seek compensation for complying with postpetition disclosure requirements.323

Until recently, the first problem with such charges was discovering that they existed, because the fees were often charged to the debtor’s escrow account or to a suspense account, and were collected on a going-forward basis by adjustment to future payments rather than as elements of a proof of claim. As of 2011, holders of claims secured by the debtor’s principal residence must provide notice of postpetition payment changes, fees, expenses, and charges to the debtor, the debtor’s counsel, and the trustee, if the servicer determines that the fees are recoverable against the debtor or the debtor’s property.324 Nevertheless, clients should be alerted to report any correspondence reflecting significant escrow payment changes or fees to determine whether this problem has arisen.

Even when these fees are properly disclosed, there are several possible bases on which creditors’ bankruptcy fees can be challenged. Typically, the contract clause on which the mortgage holder relies is a general provision which does not expressly authorize the imposition of “bankruptcy monitoring fees,” but which applies more generally to attorney fees and other costs of defending the mortgage and the holder’s rights in a court action. It is clear that bankruptcy monitoring fees can never be allowed without contractual authorization for charging those fees.325

A borrower’s chapter 13 bankruptcy, because of the anti-modification provision in 11 U.S.C. § 1322(b)(2), does not affect the property or the lien and is not an action to enforce the holder’s rights.326 Therefore it should not trigger contract clauses authorizing fees related to those purposes. Undersecured creditors may not be entitled to attorney fees incurred during the postpetition, preconfirmation period, based upon an explicit prohibition in the Code.327 The terms of the mortgage or note may limit the borrower’s obligation to pay legal fees to cases in which the lender appears. In those circumstances, monitoring to determine whether an appearance is necessary would appear to be excluded.

Some mortgages contain provisions for the recovery of fees that refer to bankruptcy proceedings. For example, a common mortgage and deed of trust provision states that if “there is a legal proceeding that may significantly affect Lender’s rights in the property (such as a proceeding in bankruptcy, . . .), then Lender may do and pay whatever is reasonable or appropriate to protect the value of the Property and Lender’s rights in the Property.” Because this language refers to “a proceeding in bankruptcy,” it may be construed as applying only when an adversary proceeding within the bankruptcy case is filed against the holder rather than the filing of a bankruptcy case itself, and therefore would not generally permit the recovery of monitoring and proof-of-claim fees.328

Often mortgage provisions relating to the recovery of fees are ambiguous. It is a basic principle of contract law that any ambiguity in a contract is construed against the drafter, in this case the lender (and its assignees).329 Equally importantly, courts have strictly construed contractual provisions providing for fees and costs.330

Of course, the analysis of any particular case will depend on the language of the loan contract at issue. As the language quoted here illustrates, advocates should review the language of the contract closely to determine whether it actually says what the holder or servicer claims that it says, and whether it is ambiguous.331

If a holder or servicer attempts to collect a bankruptcy fee from property of the estate while the automatic stay is in effect by adding the fee to the debtor’s account, it has violated Code section 362(a)(3). Section 362(a)(3) prohibits “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate” while the stay is in effect. In a chapter 13 case, all property the debtor acquires during the entire time that the case is pending is property of the estate pursuant to section 1306(a). By seeking payment of this fee directly from the debtor, the lender violates the stay.332 Similarly, by diverting part of the debtor’s payment to fees not provided for by the plan, instead of crediting the full payment as required by the plan, the lender also violates section 524(i).333

In addition, it is an unfair and deceptive practice to state that a fee is authorized by the contract when it is not.334 It is also unfair and deceptive to impose a fee that is not authorized.335 Relying on confusing, ambiguous, or misleading contract clauses (which the above-quoted contract clause certainly is) may also be an unfair or deceptive act or practice violation.336

There may also be questions about whether the monitoring, plan review, or proof-of-claim fee represents a charge for the provision of legal services. If all the attorney for the holder is doing is “monitoring” the bankruptcy—that is, receiving court notices, reading them, keeping them, and so forth—then these activities do not constitute the practice of law and should not be compensable as an attorney fee.337 These routine administrative services are generally not compensable under any reading of typical mortgage provisions.338 Moreover, while proof-of-claim preparation in many cases has been outsourced to large national firms that purport to be law firms, the actual work is often not performed by paralegals or other legal professionals, or done under the supervision of an attorney.339

Several holders and servicers charge a flat-rate monitoring fee to all borrowers in bankruptcy. This uniform charge is obviously not based on actual costs or expenses in “monitoring” the borrower’s bankruptcy. Instead, it is an attempt to spread costs among all borrowers who file bankruptcy. Contract provisions providing for attorney fees are only enforceable “to the extent that it is shown that the creditor has been damaged by having to pay, or assume the payment of attorney fees or other collection expenses.”340 These provisions often allow the holder or servicer to recover only fees and costs that have been actually “disbursed” to a third party to protect the collateral or the holder’s rights.341 Similarly, if a holder or servicer is charging for other costs based on a contract provision, it should be required to justify the costs and show that they were actually incurred.342

In addition to being actually incurred by the holder or servicer, the fee must be reasonable and properly documented.343 If the servicer cannot document the basis for a charge after a debtor’s good faith request to do so through formal discovery or other informal means, the court should disallow the charge.344 If the fee is for services that are unnecessary, then it is not reasonable.345 In most cases it is not necessary for the mortgage holder to do anything to protect its interest in a bankruptcy case.346 A holder can adequately monitor a case simply by making sure that it continues to receive payments (which is what the lender does in any event). The Bankruptcy Code and Rules expressly provide for notice if any action is taken which affects a mortgage.347 A creditor can rely on receiving those notices without any affirmative action to monitor the case.

The fee also may be unreasonable if it exceeds the cost of the services performed.348 Unreasonable or excessive charges may also violate the requirement of good faith and fair dealing implied in any contractual relationship.349

Some state debt collection statutes or regulations apply to creditors as well as to debt collectors.350 (The federal Fair Debt Collection Practices Act applies only to third-party collectors.351) Most debt collection statutes and regulations prohibit the collection of any amount not authorized by contract or applicable law.352 In addition, a state statute may limit the extent of the creditor’s attorney fees that may be shifted under contract terms. This state law limitation will be binding upon the creditor in bankruptcy court, as well.353

Footnotes

  • 320 {311} See §§ 2.10.2, 2.10.3, supra.

  • 321 {312} In re Simoukdalay, 557 B.R. 597 (E.D. Tenn. 2016) (allowing over $6000 to creditor for preparing proof of claim, attending first meeting of creditors, responding to objections, and preparing amended claim); In re Yotis, 2016 WL 502006 (N.D. Ill. Feb. 5, 2016) (allowing $941 for filing a proof of claim); In re Lightly, 513 B.R. 489 (Bankr. D.S.C. 2014) (permitting proof of claim to include $425 charge for filing the proof of claim and plan review); In re Collins, 2009 WL 1607737 (Bankr. S.D. Tex. June 8, 2009) ($250 fee charged for initial set up work, including both internal administrative tasks and filing of the initial proof of claim), aff’d, 437 Fed. Appx. 314 (5th Cir. 2011) (per curiam). But see In re Herman, 2016 WL 520306 (Bankr. S.D. Tex. Feb. 9, 2016) (denying flat proof-of-claim fee when creditor did not establish that fees were for services rendered that were necessary, that the fees were actually incurred, and the amounts charged were reasonable).

  • 322 {313} See National Consumer Law Center, Consumer Bankruptcy Law and Practice § 11.6.2.7.1 (12th ed. 2020), updated at www.nclc.org/library.

  • 323 {314} See In re Carr, 468 B.R. 806 (Bankr. E.D. Va. 2012) (rejecting creditor’s claim for fees related to its response to the chapter 13 trustee’s notice of final cure payment).

  • 324 {315} See Fed. R. Bankr. P. 3002.1 (effective Dec. 1, 2011); National Consumer Law Center, Home Foreclosures § 9.4.6.1 (2019), updated at www.nclc.org.

  • 325 {316} See In re Hatcher, 208 B.R. 959 (B.A.P. 10th Cir. 1997) (no postpetition attorney fees allowed absent mortgage provision authorizing fees); Wells Fargo Bank v. Collins, 2010 WL 3303663 (S.D. Tex. Aug. 19, 2010) (fee did not protect lender’s interest in property and therefore was not authorized by the contract), aff’d, 437 Fed. Appx. 314 (5th Cir. 2011) (per curiam); In re LaRoche, 115 B.R. 93 (Bankr. N.D. Ohio 1990).

  • 326 {317} In re Thomas, 186 B.R. 470 (Bankr. W.D. Mo. 1995).

    Even if there is a default, and a case is brought under chapter 13, the bankruptcy arguably does not affect the lender’s rights, if the Code protects the lender’s claim from being modified under 11 U.S.C. § 1322(b)(2). In re Rangel, 408 B.R. 650 (Bankr. S.D. Tex. 2009) (chapter 13 case is not a proceeding that might substantially affect mortgage holder’s security interest because section 1322(b)(2) preserves holder’s rights); In re Romano, 174 B.R. 342 (Bankr. M.D. Fla. 1994). But see In re Holland, 374 B.R. 409 (Bankr. D. Mass. 2007) (similar language unambiguously permitted lender to assess postpetition attorney fees against the debtor).

  • 327 {318} 11 U.S.C. § 506(b). See In re Fuentes, 509 B.R. 832 (Bankr. S.D. Tex. 2014) (disallowing $475 in “bankruptcy fees” incurred after the filing of the petition and prior to confirmation, notwithstanding the anti-modification language of section 1322(b)(2)).

  • 328 {319} In re Rangel, 408 B.R. 650 (Bankr. S.D. Tex. 2009) (deed of trust language construed as applying to proceeding brought within bankruptcy case).

  • 329 {320} In re Stark, 242 B.R. 866 (Bankr. W.D.N.C. 1999) (bankruptcy monitoring fees disallowed as ambiguous mortgage contract construed against lender). See also In re Williams, 1998 WL 372656 (Bankr. N.D. Ohio June 10, 1998).

  • 330 {321} See, e.g., In re Sublett 895 F.2d 1381 (11th Cir. 1990); First Brandon Nat’l Bank v. Kerwin-White, 109 B.R. 626 (D. Vt. 1990). See also In re Williams, 1998 WL 372656 (Bankr. N.D. Ohio June 10, 1998) (ambiguous contract term inadequate basis to support creditor’s request for fees in motion for relief from stay); In re Romano, 174 B.R. 342 (Bankr. M.D. Fla. 1994) (interpreting loan note’s ambiguous attorney fee provision against the lender/drafter). Cf. In re Majchrowski, 6 F. Supp. 2d 946 (N.D. Ill. 1998) (standard form mortgage provision allows lender to charge a fee for filing proof of claim and is not ambiguous so as to require construction against the drafter).

  • 331 {322} See In re Hatala, 295 B.R. 62 (Bankr. D.N.J. 2003) (mortgage provided for fees only in foreclosure and not for fees incurred after foreclosure judgment; fees limited to those permitted by state rules); In re Woodham, 174 B.R. 346 (Bankr. M.D. Fla. 1994) (analysis of provision which does not specifically provide for attorney fees in bankruptcy).

  • 332 {323} Wells Fargo Bank v. Jones, 391 B.R. 577 (E.D. La. 2008) (mortgage creditor’s assessment and collection of undisclosed and improper postpetition inspection fees and other charges violated automatic stay); In re Stark, 242 B.R. 866 (W.D.N.C. 1999) (sanctions imposed for violating stay by attempting to collect inspection and monitoring fees); In re Patterson, 444 B.R. 564 (Bankr. E.D. Wis. 2011) (stating claim for stay violation when servicer, without notice or approval, applied funds to postpetition, preconfirmation charge); In re Sanchez, 372 B.R. 289 (Bankr. S.D. Tex. 2007) (creditor’s failure to disclose postconfirmation fees charged to the debtor and to file fee application under rule 2016 violated automatic stay); In re Banks, 31 B.R. 173 (Bankr. N.D. Ala. 1982). See also In re Myles, 395 B.R. 599 (Bankr. M.D. La. 2008) (allowing debtor to proceed with claims for violation of stay and breach of contract based on creditor’s misapplication of debtor’s postpetition payments to undisclosed fees and charges); In re Payne, 387 B.R. 614 (Bankr. D. Kan. 2008) (servicer violated stay and plan confirmation order by applying postpetition payments to late fees, excessive interest, legal costs, and escrow deficiencies during pendency of confirmed plan). But see Jacks v. Wells Fargo Bank, 462 F.3d 1323 (11th Cir. 2011) (recordation of fees in internal records with attempt to collect fees did not violate the automatic stay); Mann v. Chase Manhattan Mortg. Corp., 316 F.3d 1 (1st Cir. 2003) (mortgage company did not violate automatic stay by adding fees to debtor’s account if it never attempted to collect those fees from debtor; court glossed over fact that addition of fees increased lien on debtor’s property).

    In order to avoid unknown charges being assessed against a debtor’s mortgage account, it may be advisable to file a motion at the end of a chapter 13 case seeking an order that the mortgage default has been cured and the mortgage is current. An example of such a motion can be found in National Consumer Law Center, Consumer Bankruptcy Law and Practice Appx. G.12, Form 150 (12th ed. 2020), updated at www.nclc.org/library. If the debtor does not discover improper charges until after they have been paid, the debtor should still be able to challenge the fees. See In re Staggie, 255 B.R. 48 (Bankr. N.D. Idaho 2000) (bankruptcy court has authority under § 506 to review attorney fees of secured creditor even if the collateral has been sold and the fees paid by debtor).

    In an opinion that was wrongly decided, and may be avoided by counsel through careful drafting of the chapter 13 plan, the Eleventh Circuit rejected a debtor’s challenge to a mortgage lender’s collection of attorney fees and expenses from mortgage payments made outside the plan because it held that such payments were not property of the estate protected by the automatic stay after confirmation. Telfair v. First Union Mortg. Corp., 216 F.3d 1333 (11th Cir. 2000).

  • 333 {324} See National Consumer Law Center, Home Foreclosures § 9.4.7 (2019), updated at www.nclc.org. Section 524(i) applies to cases filed on or after October 17, 2005.

  • 334 {325} See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices § 5.6.4.2 (9th ed. 2016), updated at www.nclc.org/library.

  • 335 {326} See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices § 6.10.7 (9th ed. 2016), updated at www.nclc.org/library.

  • 336 {327} See Michaels v. Amway Corp., 522 N.W.2d 703 (Mich. Ct. App. 1994).

  • 337 {328} In re Thomas, 186 B.R. 470 (Bankr. W.D. Mo. 1995) (lender that filed proof of claim without attorney assistance not entitled to attorney fee). See State Unauthorized Practice of Law Comm. v. Paul Mason, 46 F.3d 469 (5th Cir. 1995). See also In re Porter, 399 B.R. 113 (Bankr. D.N.H. 2008) (no special legal knowledge required for routine reviews of debtors’ schedules and financial qualifications to determine whether reaffirmation agreements were appropriate; denying claim for attorney fees related to this work).

  • 338 {329} See In re Madison, 337 B.R. 99 (Bankr. N.D. Miss. 2006) (no attorney fee should be allowed for preparation of proof of claim or for “additional legal services such as file setup, attorney review of loan documents, or attorney review of bankruptcy plan as those servicers are unnecessary for preparation and filing of a proof of claim, which is basically a mathematical computation”); In re Thomas, 186 B.R. 470 (W.D. Mo. 1995); In re Banks, 31 B.R. 173 (Bankr. N.D. Ala. 1982); In re Cipriano, 8 B.R. 697 (Bankr. D.R.I. 1981). But see In re Majchrowski, 6 F. Supp. 2d 946 (N.D. Ill. 1998) (standard form mortgage provision allows lender to charge a fee for filing proof of claim and for property inspections associated with foreclosure).

    The latter court appears to have been hostile to pursuit of these claims in this case as a RICO class action. Incredibly, the court states that the contract authorizes fees even if they are not “reasonable, economical or fair to the borrower.”

  • 339 {330} In re Taylor, 407 B.R. 618 (Bankr. E.D. Pa. 2009) (proofs of claim filed by national firm were prepared by clerks who are not legally trained and are not paralegals, and attorney for firm reviews only a random sample of 10% of claims filed), aff’d in part, rev’d in part, 655 F.3d 274 (3d Cir. 2011).

    Courts have not permitted mortgage creditors to charge attorney fees for notices they are required to file under rule 3002.1, because such notices are administrative in nature and do not require an attorney to make the computations required. See, e.g., In re Roife, 2013 WL 6185025 (Bankr. S.D. Tex. Nov. 26, 2013) (disallowing $125 legal fee for filing notice of postpetition mortgage fees, expenses, and charges); In re Carr, 468 B.R. 806 (Bankr. E.D. Va. 2012) (response statement under Rule 3002.1(g) is not a pleading and its preparation does not involve the practice of law); In re Adams 2012 WL 1570054 (Bankr. E.D.N.C. May 3, 2012) (disallowing $50 charge for filing a notice of mortgage payment change).

  • 340 {331} In re Banks, 31 B.R. 173, 178 (Bankr. N.D. Ala. 1982) (citing Annotation, 17 A.L.R.2d 288 § 8, at 298 (1951)).

  • 341 {332} In re Rangel, 408 B.R. 650, 670 n.11 (Bankr. S.D. Tex. 2009) (proof-of-claim fee disallowed because servicer did not produce any evidence that fee was actually disbursed to law firm and fee application merely stated that it had been invoiced), rev’d on other grounds sub nom. In re Velazquez, 660 F.3d 893 (5th Cir. 2011).

  • 342 {333} See Korea First Bank v. Lee, 14 F. Supp. 2d 530 (S.D.N.Y. 1998) (lender can collect no more than it agreed to pay its counsel).

  • 343 {334} In re Yotis, 2016 WL 502006 (N.D. Ill. Feb. 5, 2016) (disallowing $21,329 in creditor’s postpetition attorney fees, which represented over half of the amount creditor asserted was due); In re Pittman, 2015 WL 1262837 (Bankr. D.S.C. Mar. 16, 2015) (disallowing $650 in postpetition fees vaguely described as “bankruptcy/POC fee”; Rule 3002.1 notices, unlike proofs of claim, are not prima facie valid); In re Good, 207 B.R. 686 (Bankr. D. Idaho 1997) (assessing reasonableness of fees charged by mortgage lender). See In re Williams, 1998 WL 372656 (Bankr. N.D. Ohio June 10, 1998) (bank failed to meet burden of proving its fees are reasonable, by failing to provide adequate documentation). Cf. In re Maywood, Inc., 210 B.R. 91 (Bankr. N.D. Tex. 1997) (fees disallowed for lender’s bankruptcy monitoring in chapter 11 case when the monitor spent the bulk of his time playing games on his laptop computer, reading the newspaper, and practicing his putting).

    If fees or expenses are to be collected from property of the estate, they should be itemized and requested in an application filed pursuant to Fed. R. Bankr. P. 2016.

  • 344 {335} In re Prevo, 394 B.R. 847 (Bankr. S.D. Tex. 2008) (disallowing foreclosure fees and costs, late charges, and BPO fees when servicer did not comply with basic supporting documentation requirements of Official Form B10 and Bankr. Rule 3001); In re Sacko, 394 B.R. 90 (Bankr. E.D. Pa. 2008) (disallowing servicer’s charges for property inspections, property preservation costs, and escrow advances, and limiting the assessment of sheriff’s sale costs and attorney fees due to servicer’s failure to meet burden of production in documenting need for the charges).

  • 345 {336} See In re Dalessio, 74 B.R. 721 (B.A.P. 9th Cir. 1987); Wells Fargo Bank v. Jones, 391 B.R. 577 (E.D. La. 2008) (mortgage creditor failed to show that monthly property inspections during chapter 13 case were necessary and reasonable); In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008) (finding no reasonable basis for assessing multiple drive-by inspection charges and paying for broker price opinion when borrower was current in long-term chapter 13 case and servicer was regularly in contact with borrower); In re Payne, 387 B.R. 614 (Bankr. D. Kan. 2008) (rejecting servicer’s attempt to charge debtor for twenty-three drive-by inspections made during period when debtor was in open and clear occupancy of home and in constant contact with servicer).

  • 346 {337} In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008) (finding no reasonable basis for assessing multiple drive-by inspection charges and paying for broker’s price opinion when borrower was current in long-term chapter 13 case and servicer was regularly in contact with borrower); In re Payne, 387 B.R. 614 (Bankr. D. Kan. 2008) (rejecting servicer’s attempt to charge debtor for twenty-three drive-by inspections made during period when debtor was in open and clear occupancy of home and in constant contact with servicer).

  • 347 {338} Fed. R. Bankr. P. 3015, 7004, 9014.

  • 348 {339} See In re Stewart, 391 B.R. 327, 346 (Bankr. E.D. La. 2008) (servicer falsely represented broker price opinion as pass-through of a charge between $90 and $125, when it actually paid $50 for each opinion; servicer also improperly compounded late fees to charge $360.23 over thirteen months for one $554.11 missed payment). See generally Franks v. Associated Air Ctr. Inc., 663 F.2d 583 (5th Cir. 1982) (gross overcharges violate UDAP); Bakko v. Quicken Loans, Inc., 358 F. Supp. 3d 800 (D. Minn. 2018) (consumer stated claim for violation of RESPA violation and state law when alleging that servicer charged excessive $125 attorney fee for routine bankruptcy reaffirmation agreement form); In re Staggie, 255 B.R. 48 (Bankr. D. Idaho 2000) (excessive attorney fees sought under section 506(b) disallowed as not reasonable); Russell v. Fid. Consumer Discount Co., 72 B.R. 855 (Bankr. E.D. Pa. 1987) (grossly excessive fee was unconscionable).

  • 349 {340} Burnham v. Mark IV Homes, Inc., 441 N.E.2d 1027, 1031 (Mass. 1982). See U.C.C. § 1-203.

  • 350 {341} See National Consumer Law Center, Collection Actions Ch. 12 (5th ed. 2020), updated at www.nclc.org/library.

  • 351 {342} However, the FDCPA does apply if the debt was acquired by the debt collector or mortgage lender (or servicer) at a time when the debt was in default. See National Consumer Law Center, Fair Debt Collection (9th ed. 2018), updated at www.nclc.org/library.

  • 352 {343} See, e.g., Martinez v. Albuquerque Collection Services, 867 F. Supp. 1495 (D.N.M. 1994) (collection agency violated FDCPA by collecting inflated charges for attorney fees); West v. Costen, 558 F. Supp. 564 (W.D. Va. 1983) (imposition of service charge on bad check violated FDCPA because no contract or statute permitted charge).

  • 353 {344} See, e.g., In re Doty, 2008 WL 4104485 (Bankr. D. Mont. Aug. 28, 2008) (applying Montana statute limiting attorney fees to 1% of amount due on obligation at time of default, reducing fees from creditor’s claim of $7843.75 to $456).