PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

In Re: SHANGRA-LA, INCORPORATED,

Debtor.

THREE SISTERS PARTNERS, L.L.C.,

Creditor-Appellant,

v.

No. 98-1497

HOLMES P. HARDEN, Trustee-inbankruptcy,

Appellee,

and

MARJORIE K. LYNCH,

Bankruptcy Administrator-Appellee.

Appeal from the United States District Court

for the Eastern District of North Carolina, at Raleigh.

W. Earl Britt, Senior District Judge.

(CA-98-56-5-BR, 96-01939-5-ATS)

Argued: October 28, 1998

Decided: January 19, 1999

Before MURNAGHAN and WILLIAMS, Circuit Judges, and

BLAKE, United States District Judge for the District of Maryland,

sitting by designation.

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Reversed and remanded by published opinion. Judge Williams wrote

the opinion, in which Judge Murnaghan and Judge Blake joined.

_________________________________________________________________
COUNSEL

ARGUED: Peter Joseph Sarda, WALLACE, CREECH & SARDA,

L.L.P., Raleigh, North Carolina, for Appellant. William Peak Janvier,

MERRITT, WOOTEN & JANVIER, P.A., Raleigh, North Carolina,

for Appellee Harden; John Gregory Rhyne, Staff Attorney, BANKRUPTCY ADMINISTRATOR'S OFFICE FOR THE EASTERN

DISTRICT OF NORTH CAROLINA, Wilson, North Carolina, for

Appellee Lynch.

_________________________________________________________________

OPINION

WILLIAMS, Circuit Judge:

Three Sisters Partners, L.L.C. (Three Sisters) appeals the district

court's affirmance of the bankruptcy court's order denying in toto its

request for postpetition attorneys' fees arising from Three Sisters's

involvement in its commercial tenant's bankruptcy case. For the reasons stated herein, we reverse and remand for further proceedings

consistent with this opinion.

I.

Three Sisters entered into a long-term commercial lease with

Shangra-La, Inc. (Shangra-La) on June 14, 1995. The lease concerned

a warehouse located at 427 Dawson Street in downtown Raleigh,

North Carolina, in which Shangra-La intended to operate a night club.

The lease had an initial term of five years and granted Shangra-La

three options to renew the lease for additional five-year periods.

Shangra-La also was granted the option to purchase the property

within the first forty-eight months of the lease for $700,000.

Paragraph 21 of the lease agreement governed "Default." Default

under the lease was triggered by certain occurrences including: "[t]he

failure of [lessee] to pay when due any rent or any other sum for

which the [lessee] becomes liable or obligated to pay under the

[l]ease;" and "[t]he failure of[lessee] to perform timely any acts

required of it in the performance of the [l]ease or otherwise to comply

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with any term or provision [t]hereof." (J.A. at 19.) Upon default the

lease further provided:

22.4 In the event the LESSOR shall employ an attorney to

collect any sum due under the Lease or enforce any obligation of the LESSEE hereunder, the LESSEE shall be liable

for reasonable attorneys' fees in the amount of fifteen percent (15%) or the maximum percentage allowed thereunder

of the outstanding balance due under the Lease pursuant to

N.C.G.S. § 6-21.2 now in effect or as amended. The outstanding balance due under the Lease shall be any rent owed

to the LESSOR along with any other sum or sums which

become due to the LESSOR under any provision of the

Lease.

(J.A. at 20-21.)

Unfortunately, during the spring and summer of 1996, Shangra-La

experienced some financial difficulties and was not able to meet its

obligations under the lease. Contractors who had performed interior

improvements in the warehouse filed mechanics' liens on the property. Three Sisters considered these liens to be defaults under the

lease agreement and began to pursue the state law remedy of summary ejectment in September 1996; however, Three Sisters continued

to negotiate a settlement with Shangra-La that would have enabled

Shangra-La to maintain its leasehold interest in the property. By

October 1996, however, negotiations were drawing to a close.

Shangra-La did not pay the October rent when due. As a result, Three

Sisters sent a letter stating that it was terminating the lease, requesting

that Shangra-La voluntarily relinquish the property, and demanding

reimbursement for attorneys' fees in the amount of $2,223.

Shangra-La did not voluntarily surrender the premises, and Three

Sisters pursued its ejectment action in the Wake County district court.

The magistrate ordered Shangra-La's eviction. Shangra-La appealed

that state court ruling. Shortly thereafter, on November 13, 1996 and

before the state appeal could be heard, Shangra-La filed a voluntary

petition for Chapter 11 protection in the United States Bankruptcy

Court for the Eastern District of North Carolina.

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As the Shangra-La matter progressed through the bankruptcy court,

Three Sisters actively participated in the case. On November 22,

1996, Three Sisters filed its first motion for relief from the automatic

stay imposed by 11 U.S.C.A. § 362(a) (West Supp. 1998) on the

ground that Shangra-La's interest in the property terminated by operation of state law prior to the filing of the bankruptcy petition. See 11

U.S.C.A. § 365(c)(3) (West Supp. 1998) (providing that the Trustee

may not assume a lease of nonresidential real property when the lease

has been terminated under applicable nonbankruptcy law prior to the

order for relief). The bankruptcy court denied that motion.

On January 9, 1997, the Trustee in bankruptcy gave notice that he

intended to assume the Three Sisters lease under the terms of § 365

of the Bankruptcy Code. 11 U.S.C.A. § 365 (West Supp. 1998). Three

Sisters objected to the assumption of the lease on January 22, 1997.

Before ruling on the objection, the bankruptcy court held the assumption proceedings in abeyance pending plan confirmation. Three plans

of reorganization were proposed: one by each of two competing subgroups of Shangra-La shareholders and one by Three Sisters. Three

Sisters also filed objections to each of the shareholder plans.

The bankruptcy court confirmed one of the two shareholder plans

by an order dated May 13, 1997. The confirmed plan called for the

assumption of the Three Sisters lease and included provisions to cure

any remaining defaults under the lease. The plan also provided that

Three Sisters would be provided with adequate assurances of future

performance. The confirmed plan was never effectuated, however,

because the plan proponent was not able to obtain adequate capital to

pay necessary start-up costs.

As a result, upon motion from Shangra-La's Trustee, the bankruptcy court converted the case from a Chapter 11 reorganization to

a Chapter 7 liquidation. After the conversion, the Trustee moved for

an extension of time in which to make a decision to assume or assign

the Three Sisters lease under § 365(d)(3) of the Bankruptcy Code.

Three Sisters objected to the motion to extend time, and once again

moved for relief from the automatic stay. As its ground for relief from

the automatic stay, Three Sisters reiterated its earlier position that the

Trustee could not assume or assign the leasehold interest because the

lease had been terminated prior to Shangra-La's Chapter 11 filing.

 4
See 11 U.S.C.A. § 365(c)(3). The bankruptcy court granted the Trustee's motion to extend time to assume or assign the lease and denied

Three Sisters's motion for relief from the automatic stay. On September 5, 1997, the bankruptcy court issued an order granting the Trustee's request to assume the lease.

Next, Three Sisters's attorneys applied for reimbursement of attorneys' fees and expenses incurred related to the Shangra-La lease, a

total of $42,733.09. The application stated no legal theory for the

recovery of the fees and expenses. The trustee objected to the fee

request. After a hearing on the attorneys' fee question, the bankruptcy

court determined that Three Sisters's attorneys were entitled to

$5,416. Specifically, the bankruptcy court determined that under 11

U.S.C.A. § 365(b)(1)(B), the attorneys were entitled to fees related to

the default of the lease. Thus, the bankruptcy court concluded that the

Three Sisters's attorneys were entitled to recover for collection efforts

related to all prepetition defaults, including the letter-writing and

negotiations related to the mechanics' liens and the work in state

court pursuing ejectment. The bankruptcy court determined, however,

that the actions taken by Three Sisters during the bankruptcy case

were not recoverable under 11 U.S.C.A. § 365(b)(1)(B) because

Three Sisters had litigated issues particular to bankruptcy law. Additionally, the district court determined that the attorneys' expenses and

fees were not administrative expenses recoverable under 11 U.S.C.A.

§ 503, because Three Sisters had not made a substantial contribution

to the bankruptcy case. Three Sisters later filed a motion for rehearing

in the bankruptcy court that was denied.

Three Sisters appealed to the district court. The district court

affirmed the ruling of the bankruptcy court without opinion. Three

Sisters filed a timely notice of appeal.

II.

Before us, Three Sisters attacks the bankruptcy court's order denying it the $37,317.09 of postpetition fees and expenses incurred during the progress of Shangra-La's bankruptcy1 on the ground that the

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1 Although Three Sisters is appealing the district court's affirmance of

the bankruptcy court's order, because the district court's order was a

summary affirmance, we refer to the bankruptcy court order for convenience.

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fees are recoverable under § 365 of the Bankruptcy Code.2

We review the judgment of a district court sitting in review of a

bankruptcy court de novo, applying the same standards of review that

were applied in the district court. See Cook Group v. C.R. Bard, Inc.,

149 F.3d 249, 251-52 (4th Cir. 1998).

A.

Section 365 of the Bankruptcy Code governs "Executory Contracts

and Unexpired Leases," and provides:

If there has been a default in an executory contract or unexpired lease of the debtor, the trustee may not assume such

contract or lease unless, at the time of assumption of such

contract or lease, the trustee --

(A) cures, or provides adequate assurance that the trustee

will promptly cure, such default;

(B) compensates, or provides adequate assurance that the

trustee will promptly compensate, a party other than the

debtor to such contract or lease, for any actual pecuniary

loss to such party resulting from such default; and

(C) provides adequate assurance of future performance

under such contract or lease.

11 U.S.C.A. § 365(b)(1) (West 1993 & Supp. 1998). Three Sisters

claims its right to postpetition attorneys' fees under § 365(b)(1)(B),

which provides for compensation for the landlord's actual pecuniary

losses resulting from default under the lease.

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2 Three Sisters also claims that the fees and expenses are recoverable

under § 503 of the Bankruptcy Code as an administrative expense.

Because Three Sisters cannot point to a tangible benefit to Shangra-La's

estate, we summarily reject the argument as without merit. See In re DP

Partners, Ltd., 106 F.3d 667, 673 (5th Cir.), cert. denied, 118 S. Ct. 63

(1997).

 6
In its analysis of Three Sisters's claim to post-petition attorneys'

fees under § 365(b)(1)(B), the bankruptcy court appeared to adopt a

bright-line test drawn from the Ninth Circuit's opinion in In re

Fobian, 951 F.2d 1149 (9th Cir. 1991). In Fobian, the Ninth Circuit

noted that state law often controls the question of whether a creditor

may be entitled to attorneys' fees relating to a particular debtor's

bankruptcy case. Id. at 1153. The Ninth Circuit nevertheless determined that where litigated issues "involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law,

attorney's fees will not be awarded absent bad faith or harassment by

the losing party." Id.

Applying this rule to Three Sisters's case, the bankruptcy court

determined that Three Sisters was not entitled to attorneys' fees for

its participation in Shangra-La's bankruptcy. Specifically, the bankruptcy court held that Three Sisters's participation in the plan confirmation process "involved strictly bankruptcy issues," In re ShangraLa, Inc., 213 B.R. 303, 305 (Bankr. E.D.N.C. 1997), and therefore

attorneys' fees were not available under the Fobian formulation.

Additionally, while recognizing that "Three Sisters' motions for relief

from the automatic stay present a closer question," the court reasoned

that because the motion for relief was "primarily one to dissolve an

injunction created by the Bankruptcy Code," the attorneys' fees

incurred in that endeavor did not constitute pecuniary loss under

§ 365(b)(1)(B) and were not recoverable. Id. at 305-06. This formulation inappropriately focuses on the presence of issues peculiar to

bankruptcy law, rather than on whether the attorney's actions were

reasonably undertaken in furtherance of purposes for which attorneys'

fees are properly recoverable under the terms of the lease and applicable state law.

While useful for its bright-line distinction, the state law/bankruptcy

law dichotomy relied upon by the bankruptcy court cannot serve to

solve the puzzle of a landlord's right to post-petition attorneys' fees

under § 365(b)(1)(B) of the Bankruptcy Code. Section 365(b)(1)(B)

requires that the Trustee compensate the landlord for any actual pecuniary loss resulting from a default under an unexpired lease, before

assuming the lease. See 11 U.S.C.A. § 365(b)(1)(B). This mandate

exists in order to strike a balance between landlord and tenant. The

tenant who has defaulted under the terms of the lease can continue to

 7
possess property under favorable terms negotiated in better financial

times, but in order to do so, the tenant must make the landlord whole

for his losses and give him the benefit of his bargain -- a bargain that

the landlord has negotiated under state law. Thus, bankruptcy law, by

ordering that default be cured under § 365(b)(1)(A) and that pecuniary losses be paid under § 365(b)(1)(B), sends us back to state contract law for a determination of the terms of default and the landlord's

rights upon default under the lease.3 Cf. In re Lavigne, 114 F.3d 379,

387 (2d. Cir. 1997) (applying state law to determine damages for

breach of contract upon Trustee's rejection of lease under § 365); In

re Rega Properties, Ltd., 894 F.2d 1136, 1139 (9th Cir. 1990) (noting

that in the absence of contrary guidance, state damages law was to be

applied under § 365 unless doing so conflicted with bankruptcy policy).

With this understanding of the applicable law, it is clear that there

are three keys to settling Three Sisters's right to postpetition attorneys' fees: the language of § 365(b)(1)(B); relevant North Carolina

law regarding recovery of attorneys' fees; and the terms of the ThreeSisters/Shangra-La lease.

B.

1.

Section 365 of the Bankruptcy Code, 11 U.S.C.A.§ 365 (West

1993 & Supp. 1998), grants the trustee in bankruptcy the right to

assume or reject executory contracts and unexpired leases. See 3

Collier on Bankruptcy ¶ 365.01 (Lawrence P. King, ed., 15th ed.

1998). "[T]he authority to reject an executory contract is vital to the

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3 The Bankruptcy Code also eliminates some of the more onerous antidebtor provisions that can be negotiated at arms length under state law.

For example, the Code eliminates "ipso facto" clauses under which a

bankrupt tenant may find his lease automatically terminated because he

has sought bankruptcy protection. See 11 U.S.C.A. § 365(e)(1) (West

1993). Recent amendments also provide that the landlord may not charge

the debtor the default rate of interest under the contract or lease when the

default with which the debtor is charged is nonmonetary in nature. See

11 U.S.C.A. § 365(b)(2)(D) (West Supp. 1998).

 8
basic purpose of a Chapter 11 reorganization, because rejection can

release the debtor's estate from burdensome obligations that can

impede a successful reorganization." NLRB v. Bildisco & Bildisco,

465 U.S. 513, 528 (1984). Likewise, the power to assume and/or

assign the lease gives the trustee significant flexibility in managing

the estate. A leasehold interest often proves to be the most valuable

asset in a small business bankruptcy. When the debtor assumes its

unexpired lease, however, it assumes it cum onere -- the debtor must

accept obligations of the executory contract along with the benefits.

See Adventure Resources, Inc. v. Holland, 137 F.3d 786, 798 (4th

Cir.), cert. denied, 117 S. Ct. 404 (1998).

Because the Bankruptcy Code also recognizes the interest of the

landlord in realizing the benefit of the bargain struck with the tenant,

albeit under brighter financial circumstances, in order to assume the

lease, the trustee must cure any remaining defaults under the contract

or lease. See id.; 11 U.S.C.A. § 365(b)(1)(A) ("If there has been a

default . . . the trustee may not assume such contract or lease unless

. . . the trustee . . . cures, or provides adequate assurance that the

trustee will promptly cure, such default."). Further, prior to assumption of the lease, the trustee must "compensate[ ], or provide[ ] adequate assurance that the trustee will promptly compensate, a party

other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default." 11 U.S.C.A.

§ 365(b)(1)(B) (emphasis added). Attorneys' fees incurred in attempting to collect sums due from debtors following default may be recovered as pecuniary loss under § 365(b)(1)(B) if such monies were

expended as the result of a default under the contract or lease between

the parties and are recoverable under the contract and applicable state

law. See, e.g., In re F & N Acquisition Corp., 152 B.R. 304, 308

(Bankr. W.D. Wash. 1993); In re Hillsborough Holdings Corp., 126

B.R. 895, 898 (Bankr. M.D. Fla. 1991).

Entitlement to attorneys' fees, however, is dependent on the terms

of the lease and on state law; § 365(b)(1)(B) does not create an independent right to an award of attorneys' fees. See, e.g., In re Ryan's

Subs, Inc., 165 B.R. 465, 467 (Bankr. W.D. Mo. 1994); In re Child

World, Inc., 161 B.R. 349, 353 (Bankr. S.D.N.Y. 1993); In re F & N

Acquisition Corp., 152 B.R. at 308; In re Hillsborough Holdings

Corp., 126 B.R. at 898; In re Joshua Slocum, Ltd., 103 B.R. 601, 607-

 9
08 (Bankr. E.D. Penn. 1989); In re Westview 74th Street Drug Corp.,

59 B.R. 747, 756-57 (Bankr. S.D.N.Y. 1986); In re Tech Hifi, Inc.,

49 B.R. 876, 881 (Bankr. D. Mass. 1985).4 

2.

North Carolina law governs the Three Sisters/Shangra-La lease,5

and therefore we must look to North Carolina law to evaluate Three

Sisters's argument that it is entitled to postpetition attorneys' fees

under state law and, accordingly, also under § 365(b)(1)(B). "`The

jurisprudence of North Carolina traditionally has frowned upon contractual obligations for attorney's fees as part of the costs of an

action.'" Stillwell Enters., Inc. v. Interstate Equip. Co., 266 S.E.2d

812, 814 (N.C. 1980) (quoting Supply, Inc. v. Allen, 227 S.E.2d 120,

123 (N.C. App. 1976)) (alteration omitted). "Thus the general rule [in

North Carolina is] that a successful litigant may not recover attorneys'

fees, whether as costs or as an item of damages, unless such a recovery is expressly authorized by statute." Id. "Even in the face of a carefully drafted contractual provision" authorizing payment of attorneys'

fees, the North Carolina courts "have consistently refused to sustain

such an award absent statutory authority therefor." Id. at 814-15.

Section 6-21.2 of the North Carolina General Statutes provides the

statutory authority for recovering attorneys' fees when permitted in a

lease. See R.C. Assocs. v. Regency Ventures, Inc., 432 S.E.2d 394,

397 (N.C. App. 1993) (noting that leases are "other evidence of

indebtedness" under N.C. Gen. Stat. § 6-21.2). The statute caps an

award of attorneys' fees at fifteen percent of the outstanding balance

owing on the instrument of indebtedness, see N.C. Gen. Stat. § 6-

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4 Three Sisters cites one case that holds that § 365(b)(1)(B) creates an

independent right to recover attorneys' fees without regard to the terms

of the lease and state law requirements, In re Westworld Community

Healthcare, Inc., 95 B.R. 730 (Bankr. C.D. Cal. 1989). Not only is that

case's holding against the great weight of authority, we find its reasoning

to be unpersuasive. Further, the holding was rejected in Lacy v. Westside

Print Works, Inc., 180 B.R. 557, 564 (B.A.P. 9th Cir. 1995).

5 The lease provided: "29.6 Governing Law. This agreement shall be

construed in accordance with and governed and enforced under the laws

of the State of North Carolina." (J.A. at 25.)

 10
21.2(1) & (2), and further requires that parties wishing to enforce the

provisions of their attorneys' fee agreements give adequate notice, see

N.C. Gen. Stat. § 6-21.2(5).

In sum, for Three Sisters to recover its postpetition attorneys' fees

through the operation of § 365(b)(1)(B) of the Bankruptcy Code,

which incorporates North Carolina law, the lease between Three Sisters and Shangra-La must have a clear contractual provision allocating to Three Sisters the right to collect attorneys' fees, that provision

must be lawful under an express grant of North Carolina statutory

authority, and Three Sisters must meet the requirements of the statute

to collect its fees.

3.

Applying this analysis to Three Sisters's claim that it was improperly denied postpetition attorneys' fees, we conclude that remand to

the bankruptcy court for further consideration of factual matters is

necessary. As to preliminary matters, the lease contains a clear attorneys' fees provision in paragraph 22.4 of the lease, and, as we just

discussed, such fees are recoverable under North Carolina law. Further, the Bankruptcy Code recognizes that a landlord must be compensated for actual pecuniary losses resulting from defaults that

occurred under the lease during the course of the debtor's insolvency.

See 11 U.S.C.A. § 365(b)(1)(B). Attorneys' fees qualify as actual

pecuniary losses when state law would recognize them as such. See,

e.g., In re Ryan's Subs, Inc., 165 B.R. 465, 467 (Bankr. W.D. Mo.

1994).

The lease in this case permits recovery of fees where the lessor

employs an attorney "to collect any sums due under the lease or

enforce any obligation of LESSEE hereunder." Accordingly, the

focus of the bankruptcy court on remand as to any disputed item of

fees should be on whether the attorney's action was taken primarily

to collect sums due under the lease or to enforce an obligation of the

lessee. If so, and if the requested fee is otherwise reasonable, the fact

that issues peculiar to federal bankruptcy law were involved will not

preclude an award of fees. Accordingly, the focus of the bankruptcy

court on remand as to any disputed item of fees should be on whether

the attorney's action was taken primarily to collect sums due under

 11
the lease or to enforce an obligation of the lessee and whether state

law would allow recovery for such actions.

From our standpoint, reviewing the limited record before us, it is

hard to decipher what defaults occurred under the lease and what

steps Three Sisters took to cure those defaults. It is also difficult for

us to determine whether Three Sisters's postpetition involvement in

Shangra-La's bankruptcy proceeding had any relationship to defaults

under the lease or were undertaken for another purpose. It is equally

troublesome for us to determine whether the fees sought by Three Sisters's attorneys are reasonable. Interpreting the contract and the

course of events pre- and postpetition raises myriad factual issues that

the lower court must resolve in the first instance.

4.

The Trustee and the Bankruptcy Administrator for the Eastern District of North Carolina argue, however, that there is no need for us to

remand this matter, because a recovery of attorneys' fees is foreclosed

by operation of North Carolina law. They argue that attorneys' fees

are recoverable under N.C. Gen. Stat. § 6-21.2(5) only if the party

seeking the fees gives notice, and the Trustee and Bankruptcy Administrator assert that notice by means of a claim in the bankruptcy case

is inadequate to meet the requirements of the statute.

The record before us does not indicate that Three Sisters has given

notice adequate to satisfy the requirements of N.C. Gen. Stat. § 6-

21.2(5).6 See ITT-Industrial Credit Co. v. Hughes, 594 F.2d 384, 387-

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6 N.C. Gen. Stat. § 6-21.2(5) specifies that the individual seeking to

enforce the attorneys' fees provision:

shall, after maturity of the obligation by default or otherwise,

notify the maker, debtor, account debtor, endorser or party

sought to be held on said obligation that the provisions relative

to payment of attorneys' fees in addition to the"outstanding balance" shall be enforced and that such maker, debtor, account

debtor, endorser or party sought to be held on said obligation has

five days from the mailing of such notice to pay the"outstanding

balance" without the attorneys' fees. If such party shall pay the

"outstanding balance" in full before the expiration of such time,

then the obligation to pay the attorneys' fees shall be void, and

no court shall enforce such provisions.

 12
88 (4th Cir. 1979) (stating that under North Carolina law a claim in

bankruptcy is insufficient to meet notice requirements of § 6-21.2(5)).

North Carolina, although it strictly construes the notice requirement

of the statute, see Blanton v. Sisk, 318 S.E.2d 560, 564 (N.C. App.

1984), does not, however, place a time limit on filing the requisite

notice, see Gillespie v. DeWitt, 280 S.E.2d 736, 747 (N.C. App.

1981); First Citizens Bank & Trust Co. v. Larson , 206 S.E.2d 775,

780 (N.C. App. 1974). Under the language of the statute, notice need

be given, "after maturity of the obligation by default or otherwise."

N.C. Gen. Stat. § 6-21.2(5). As a result, the North Carolina courts

have held that it is not necessary to give notice prior to instituting a

suit to enforce an attorneys' fees provision, but instead notice may be

given during the course of the proceedings. See Binning's, Inc. v.

Roberts Constr. Co., 177 S.E.2d 1, 3 (N.C. App. 1970). Of course,

actual notice is required before the obligation to pay attorneys' fees

matures. See Northwestern Bank v. Barber, 339 S.E.2d 452, 455

(N.C. App. 1986).

Although these cases are somewhat inconsistent and difficult to

reconcile, the North Carolina Court of Appeals emphasized in the

Binning's case that notice under the statute was adequate when that

notice was given promptly after the debtor made a motion to dismiss

the claim for attorneys' fees for failure to provide the requisite notice.

See Binning's, Inc., 177 S.E.2d at 3. From our review of the record

in this matter, it appears that the notice issue did not arise during the

litigation below, but is first raised on appeal. Thus, we conclude that

it is not yet too late for Three Sisters to give notice that it is seeking

attorneys' fees for postpetition involvement in Shangra-La's bankruptcy case. It may do so through an appropriate motion for relief

from the § 362 automatic stay,7 requesting that the court modify the

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7 Three Sisters argued persuasively at oral argument that it was faced

with a Hobson's choice under the notice provisions of the North Carolina

statute. Three Sisters claimed that if it gave notice as required under the

statute, it would face penalties for violating the automatic stay imposed

by § 362(a)(1), see 11 U.S.C.A. § 362(h) (providing that the debtor may

collect damages for violations of the automatic stay), and, yet, the failure

to give notice could result in a forfeiture of $40,000 in attorneys' fees.

We think the resolution to this dilemma is clear: a motion for relief from

the automatic stay under § 362(d)(1). See 11 U.S.C.A. § 362(d)(1) (pro-

 13
stay for the purpose of giving the statutory notice, if such stay is still

in place, upon remand.8

III.

In conclusion, the bankruptcy court erred to the extent that it

applied a bright-line test precluding the award of fees for actions primarily involving issues of bankruptcy law, without analyzing the

terms of the lease between the parties and the effect of state law. Recognizing that the bankruptcy court, with its superior knowledge of the

facts, may reach an identical conclusion as to the particular items of

attorneys' fees that should be recovered, we nevertheless believe a

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viding that a party in interest may make a motion for relief from the automatic stay and the court may grant relief for cause). Upon such a motion,

the bankruptcy court has an opportunity to evaluate the equities of the

situation and the interplay between bankruptcy requirements and state

law and can tailor relief accordingly.

8 Three Sisters argues that the reasoning of Unsecured Creditors'

Comm. v. Heller & Co., 768 F.2d 580, 581 (4th Cir. 1985), applies in this

case to preempt the notice requirements of N.C. Gen. Stat. § 6-21.2(5).

We disagree. Heller & Co. addressed § 506(b) of the Bankruptcy Code,

which states, "[T]here 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 under which such claim arose." 11 U.S.C.A.

§ 506(b) (West 1993). We held that when Congress enacted the Bankruptcy Reform Act in 1978, it created an independent right to attorneys'

fees under § 506(b). In Heller & Co., we reasoned that the language of

§ 506(b) in conjunction with its legislative history, indicated clear congressional intent to displace state law to the extent that it might be contrary to the written agreement specifically referenced in the Bankruptcy

Code. Thus, we determined that in North Carolina, the requirements of

§ 6-21.2 were preempted and the security agreement controlled the

award of attorneys' fees. Heller & Co., 768 F.2d at 585. In contrast,

§ 365 does not contain language indicating the primacy of the agreement,

and rather refers only to "pecuniary losses." Thus, we conclude that

§ 365 has not preempted the need to apply state law to determine an

award of attorneys' fees.

 14
remand is required to permit examination of this question under the

appropriate standard as enunciated in this opinion.

REVERSED AND REMANDED

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