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Parties Involved:
Karen A. McCormick
Appellee
Stephen D. McCormick
Appellee
Starion Financial
Appellant

Document Text:

United States Bankruptcy Appellate Panel

For the Eighth Circuit

___________________________ 

No. 14-6008 

___________________________ 

In re: Stephen D. McCormick, also known as Steve D. McCormick; Karen A. 

McCormick 

lllllllllllllllllllllDebtors 

------------------------------ 

Starion Financial 

lllllllllllllllllllllMovant - Appellant

v. 

Stephen D. McCormick; Karen A. McCormick 

lllllllllllllllllllllDebtors - Appellees

____________ 

Appeal from United States Bankruptcy Court 

for the District of North Dakota - Fargo 

____________ 

 Submitted: October 28, 2014

Filed: December 24, 2014

____________ 

Before FEDERMAN, Chief Judge, SALADINO and SHODEEN, Bankruptcy 

Judges. 

____________ 

SHODEEN, Bankruptcy Judge

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2 

Starion Financial appeals from the bankruptcy court’s order denying its 

Motion to Compel Payment of Fees Under the Confirmed Plan of Reorganization 

and granting the Debtors’ Motion to Disallow Attorneys’ Fees and Costs Claimed 

by Starion Financial. We have jurisdiction of this appeal from entry of the 

bankruptcy court’s final order pursuant to 28 U.S.C. section 158(b). For the 

reasons set forth below, we reverse and remand for further proceedings. 

BACKGROUND 

Over the course of several years the Debtors and Starion entered into a series 

of loan transactions. Pursuant to the various promissory notes and mortgages dated 

December 23, 2004, January 25, 2006, June 13, 2007 and June 30, 2009 the 

Debtors were liable for payment of Starion’s attorney fees and costs for collection 

of the indebtedness. The Debtors also executed personal guarantees, in differing 

amounts, related to the promissory notes and mortgages given to Starion by entities 

owned by the Debtors. Defaults under the loans resulted in a Workout Agreement 

dated July 26, 2012 between Starion and the Debtors. As part of that agreement, 

the Debtors consented to the entry of judgments against them to secure their 

personal guarantees. On July 27, 2012, based upon two properly filed confessions 

of judgment which were executed as part of the Workout Agreement, a North 

Dakota state court entered judgments against Debtors in the respective amounts of 

$2,078,034.26 and $1,000,000.00, plus interest. 

Debtors filed a voluntary chapter 11 petition on August 29, 2012. Preconfirmation modifications to the Debtors’ Second Amended Plan of 

Reorganization (“Plan”) were accomplished by a series of filed addendums. One 

such addendum was filed to resolve and define the payment terms for Starion’s 

claim (“Starion Addendum”). Specifically that addendum stated: 

Collection Costs. Debtors agree to pay Starion’s 

allowable attorney’s fees and costs associated with both 

Debtors’ bankruptcy proceedings including but not 

limited to reasonable attorneys’ fees, consulting, 

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appraisal, filing fees, late fees, etc. (collectively referred 

to as “Fees”) through the Plan. The procedure for 

allowance of such attorneys’ fees and costs will be as 

provided in the Plan. 

On September 13, 2013 the Debtors’ Plan, incorporating the Starion Addendum, 

was confirmed by the bankruptcy court. Section 8.01(c) of the confirmed plan 

defines “Allowable Attorneys’ Fees and Costs” as “a claim against the debtors for 

an oversecured creditor’s attorney’s fees and costs incurred in connection with the 

creditor’s secured claim.” That section goes on to describe the procedure for 

allowance of the fees and costs as follows: 

Any Allowable Fees and Costs must be approved by 

Debtors before payment is disbursed. At least ten days 

prior to the Effective Date of the Plan, the creditor and/or 

its counsel, shall submit an itemized statement (reflecting 

date, a description of the services, increments of time 

spent, and hourly rate being charged), to the Debtors and 

their counsel, for approval. If the parties cannot come to 

an agreement or resolution as to the amount of the 

Allowable Attorneys’ Fees and Costs to be paid, the 

matter shall be determined by the Bankruptcy Court, 

upon notice and hearing. No payment of Allowable 

Attorneys’ Fees and Costs will be due until either the 

agreement of the parties or a final determination by the 

Bankruptcy Court that those amounts are due under the 

Plan. 

On October 3, 2013 Starion submitted an itemized statement to the Debtor 

for various costs including interest, late fees, real estate taxes, and appraisal and 

engineering fees. A few days later on October 7, 2013 Starion submitted an 

updated statement that included its attorneys’ fees. Taking the position that Starion 

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was not entitled to these amounts based upon the Plan or 11 U.S.C. section 506(b) 

the Debtors refused to pay the amounts requested for appraisal and engineering 

costs, and the attorneys’ fees (collectively “Fees”). 

 Starion filed a motion requesting the bankruptcy court to compel payment of 

its Fees in the amount of $125,014.64 based upon the Plan and 11 U.S.C. section 

506(b). On the same day the Debtors filed a motion seeking disallowance of the 

Fee request contending that: there is no agreement for the payment of Fees; the 

Fee request was untimely; and the Fees are not reasonable. 

BANKRUPTCY COURT DECISION 

On March 10, 2014, the bankruptcy court issued its Order denying Starion’s 

motion to compel payment of attorney fees and costs, and granting Debtors’ 

motion seeking disallowance of Starion’s request. The court began its analysis by 

noting the terms of the Starion Addendum and the Plan, and specifically 

determined that: “both Debtors and Starion agree that the Court’s analysis 

regarding Starion’s eligibility to recover attorney fees is confined to limits outlined 

in section 506 of the Bankruptcy Code.” 

Since section 506 allows an oversecured creditor to recover reasonable fees 

and costs provided for under the agreement under which the claim arose, the 

bankruptcy court first looked at whether Starion’s claim was oversecured. The 

court noted that, “Debtors do not dispute Starion’s claim that it is oversecured. In 

fact, in their briefs, Debtors refer to Starion’s claim as oversecured.” 

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Notwithstanding, the bankruptcy court did not ultimately decide whether Starion is 

oversecured, but instead assumed1

 that it was for purposes of its order. 

Next, the bankruptcy court looked at whether fees and costs were allowed 

under an agreement under which the claim arose. It held that: “Starion’s judicial 

liens ‘arose’ under the Judgments, which when entered by the clerk and recorded 

under North Dakota law created liens on real property. N.D.C.C. §28-20-13. 

Consequently, the documents this Court looks to for an agreement giving rise to 

the claim for attorney fees and costs are the Judgments.” Relying upon a North 

Dakota statute that disfavors payment of attorney fees, the bankruptcy court 

concluded that the absence of “a clause or sentence [in the judgment] entitling 

Starion to collect attorney fees” was fatal to Starion’s request for payment. 

Accordingly, Starion’s motion to compel payment was denied and the Debtor’s 

motion disallowing the Fees was granted. Starion appeals the bankruptcy court’s 

ruling. 

STANDARD OF REVIEW 

 A bankruptcy court’s findings of fact are reviewed for clear error and its 

conclusions of law are reviewed de novo. First Nat’l Bank v. Pontow, 111 F.3d 

604, 609 (8th Cir. 1997) (quoting Miller v. Farmers Home Admin. (In re Miller), 

16 F.3d 240, 242-43 (8th Cir. 1994)). In this case we review de novo the 

bankruptcy court’s interpretation and application of 11 U.S.C. section 506(b). 

Wegner v. Grunewaldt, 821 F.3d 1317, 1320 (8th Cir. 1987); White v. Coors 

Distributing, Co. (In re White), 260 B.R. 870, 874 (B.A.P. 8th Cir. 2001). 

 

1

 Based upon footnote 9 in the bankruptcy court’s order this element is deemed to have been conceded by the 

parties. 

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DISCUSSION 

Payment of attorney fees and costs to an oversecured creditor is permitted by 

the Bankruptcy Code at 11 U.S.C. section 506(b), which states: 

To the extent that an allowed secured claim is secured by 

property the value of which, after any recovery under 

subsection (c) of this section, is greater than the amount 

of such claim, there shall be allowed to the holder of such 

claim, interest on such claim, and any reasonable fees, 

costs, or charges provided for under the agreement or 

State statute2

 under which such claim arose. 

The statute requires a showing of four factors: “(1) the claim must be an allowed 

secured claim; (2) the creditor holding the claim must be over-secured; (3) the 

entitlement to fees, costs, or charges must be provided for under the agreement or 

state statute under which the claim arose; and (4) the fees, costs and charges sought 

must be reasonable in amount.” In re Sun ‘N Fun Waterpark, LLC, 408 B.R. 361, 

366 (B.A.P. 10th Cir. 2009). See also In re White, 260 B.R. 870, 880 (B.A.P. 8th 

Cir. 2001) (citing First W. Bank & Trust v. Drewes (In re Schriock Constr., Inc.), 

104 F.3d 200, 201 (8th Cir. 1997)). Upon proving these factors the statute plainly 

states that payment of reasonable fees, costs or charges “shall be allowed.” 

 

The bankruptcy court’s decision was based solely on the third factor. Our 

review is, therefore, limited to the third factor which requires a determination of 

whether the agreement under which the claim arose provides for the payment of 

attorney fees and costs. 

 

2

 In 2005, the reference to a State statute as a basis for payment of an oversecured creditor’s claim for reasonable 

fees and costs was added to 11 U.S.C. section 506(b) to place consensual and non-consensual liens “on a level 

playing field” for purposes of applying the statute. In re Gift, 469 B.R. 800, 806 (Bankr. M.D. Tenn. 2012).

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Starion argues that the bankruptcy court committed error in holding that the 

state court judgments made Starion oversecured, and thus the judgments were the 

“agreement” under which Starion’s claim must arise. Instead, Starion contends 

that the underlying loan documents, the Workout Agreement, Plan and addendum 

thereto should be considered collectively to constitute the agreement required by 

section 506(b). 

The bankruptcy court’s reliance upon the judgments as the “agreement” 

under which Starion’s right to payment of its fees arises is misplaced. It is 

undisputed that the promissory notes, mortgages, Workout Agreement and other 

documents related to the loans that constitute Starion’s claim do contain 

appropriate attorney fee provisions. Those are the instruments under which 

Starion’s “claim arose.” The term “claim” is defined in the bankruptcy code as a 

“right to payment, whether or not such right is reduced to judgment, liquidated, 

unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, 

equitable, secured or unsecured...” Starion’s right to payment, or claim, arose 

directly from its loan documents—as the definition of claim expressly recognizes 

that the claim may exist with or without a judgment. A judgment is simply a 

means of enforcing a right to payment. Here, the judgments happen to give Starion 

a lien on real property of the judgment debtors in the counties where the judgment 

was entered, which increases the collateral for Starion’s claim but does not change 

the instruments under which the right to claim attorney fees arose. 

[A] lien secures an interest that already exists. See, e.g., 

In re AR Accessories, 345 F.3d at 458–59 (describing 

lien as “a mechanism for ... enforcement of a preexisting 

right”); 51 Am.Jur.2d Liens § 2 (2014) (“A lien is a cause 

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of action, a remedy ..., or a method by which to enforce 

an underlying claim. That is, a lien is part and parcel of 

the underlying claim, the former existing only because of 

the latter.”) 

Branch Banking & Trust Co. v. Constr. Supervision Servs., Inc. (In re Constr. 

Supervison Servs., Inc.), 753 F.3d 124, 128 (4th Cir. 2014). The fact that the 

parties utilized confessions of judgment to obtain the judicial lien is also relevant 

to the analysis under 11 U.S.C. section 506(b). 

A “judgment by confession” or “confession of judgment” 

signifies an acknowledgment of indebtedness, on which it 

is contemplated that a judgment may and will be 

rendered. It is a judgment entered pursuant to the 

voluntary act or agreement of the defendant, and is 

substantially an acknowledgment that a debt is justly due.

... 

It is in effect a private admission to liability for a debt 

without trial. 

49 C.J.S. Judgments § 170 (emphasis added). The judgments entered by the state 

court in favor of the Appellant served to acknowledge indebtedness and secure 

payment of the obligations that existed under the notes, mortgages, guarantees3

 and 

Workout Agreement. 

It appears that the parties’ arguments and the bankruptcy court’s order 

intermixed the two requirements of the right to fees under 506(b)—that the creditor 

be oversecured and that the right to fees be provided for under the agreement under 

which the claim arose. Those are two separate requirements. In particular, section 

506(b) does not require that the right to fees be provided in the agreement under 

3

 The underlying guarantees were not admitted into evidence. The record reflects that the Debtors did not contest 

the issue that the guarantees included a provision for the payment of attorney fees. 

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which the creditor became oversecured.4 It also does not require that it be in all

agreements that make up the secured claim of the creditor. 

The record reflects that the parties had a long standing lending relationship 

that involved numerous real estate lending transactions. It is undisputed that the 

original notes, mortgages and guaranty documents provided for payment of 

Starion’s Fees. The terms of the Workout Agreement also referenced Starion’s 

right to claim its Fees. The confessions of judgment and subsequent judgment 

liens merely served as the mechanism to perfect an interest in additional collateral 

to secure payment of all obligations to Starion. As such, the judgment entries 

cannot be construed as the sole agreements for purposes of applying 11 U.S.C. 

section 506(b), and the bankruptcy court’s conclusion that the Judgments must 

constitute the agreement under which the Appellant’s Fee claim arose for purposes 

of applying 11 U.S.C. section 506(b) is erroneous as a matter of law. 

CONCLUSION 

For the reasons set forth, the decision of the bankruptcy court is reversed. The case 

is remanded for further proceedings to determine the reasonableness and the 

timeliness of the Appellant’s Fee request.   

4

 We note that Debtors cite to D.W.G.K. Restaurants, Inc., 84 B.R. 684, 687 (Bankr. S.D. Cal. 1988) which states 

that the agreement referenced in section 506(b) is a security agreement. That conclusion is based on the legislative 

history of section 506(b), which states in part, “if the security agreement between the parties provides for attorneys’ 

fees, it will be enforceable under title 11....” The D.W.G.K. court and the Debtors seem to believe that as a result of 

that legislative history, only a security agreement can serve as the “agreement” under section 506(b). We disagree. 

The legislative history is certainly not limiting in its language and the statute clearly does not create any such 

limitation. 

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