Issuing a payoff letter and commencing foreclosure after the automatic stay was lifted did not violate the automatic stay or the discharge order

In Redmond v. Fifth Third Bank, No. 08-4288 (7th Cir., October 2010), the debtor filed for Chapter 13 bankruptcy protection after he defaulted on his mortgage. In 1998 there was an agreed order under which the debtor agreed to make monthly payments for a period and then a final balloon payment. When the debtor obtained a payoff from the creditor he disputed several of the charges. He then stubbornly failed to secure a loan to cover the balloon payment causing him to default a second time. Upon the second default, the creditor initiated foreclosure proceedings in state court. The debtor moved to reopen his bankruptcy case in 2005, four years after it had been closed and three weeks before trial in the state foreclosure suit. He contended that the charges the creditor sought in the foreclosure suit were in violation of the Bankruptcy Court’s orders and the automatic stay. The motion was denied. The debtor filed a second motion to reopen the case along with a motion for sanctions against the creditor claiming that by issuing a payoff letter and commencing foreclosure the creditor was improperly seeking to collect the debt twice, once from debtor and a second time from the Chapter 13 trustee, in violation of the terms of the bankruptcy plan, automatic stay, and court orders. The Bankruptcy Court denied these motions as well and the District Court affirmed. On appeal, the Seventh Circuit held that the Bankruptcy Court’s denial of the motion to reopen was appropriate. The issuance of a payoff letter and initiating a foreclosure after the automatic stay had been lifted were not illegal attempts to collect a debt. Payoff letters are not acts of collection and therefore do not constitute violations of the automatic stay. Examining the payoff letter the Court concluded that the payoff letter was not seeking to collect pre-petition debt, as it clearly indicated that the payoff date was the date the balloon payment was due. Nor did the letter seek to collect the debt twice as it was only logical that the payoff letter reflect the entire debt, including that owed under the plan, because the debtor requested to know the outstanding balance to refinance the mortgage. In addition, the default and the second foreclosure action were filed after the automatic stay was lifted, so there was no violation there either. There was no violation of the discharge order either because the debt was never discharged. The debtor’s default under the terms of the plan was a condition of discharge.

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