Opinion ID: 776049
Heading Depth: 3
Heading Rank: 2

Heading: Equitable Considerations and the Bifurcation Approach

Text: 33 Given that statutory language and structure support the use of a bifurcation approach under 11 U.S.C. § 506(b), we are loathe to reach a contrary result based on equitable considerations. Welzel argues that if § 506(b) is construed as creating a bifurcated framework and unreasonable fees are not disallowed, it provides creditors with a windfall by allowing them to collect attorney's fees far in excess of the value of services actually provided. We reject Welzel's equitable argument. 34 The statutory language of the Bankruptcy Code should not be trumped by generalized equitable pronouncements, especially when Congress has been explicit when it intends for courts to exercise equitable discretion in the bankruptcy arena. See § 365(d)(10) (instructing court to look at equities of the case); § 502(j) (instructing court to act according to the equities of the case); § 524(g)(4)(B)(ii) (instructing court to make determination that naming certain persons in injunction is fair and equitable); see also Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206, 108 S. Ct. 963, 969 (1988) ([W]hatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.). Were we to conclude otherwise, we would risk unraveling the careful balance between creditors' and debtors' rights, and the rights of creditors in relation to one another, that Congress has struck in provisions like § 502 and § 506. See United States v. Noland, 517 U.S. 535, 536, 116 S. Ct. 1524, 1525 (1996) (holding that bankruptcy court may not equitably subordinate claims on a categorical basis in derogation of Congress's scheme of priorities). 35 Furthermore, even if equitable considerations were to control the outcome here, equity favors Advocate, not Welzel. As Welzel acknowledges, a secured creditor like Advocate would be able to enforce the entire amount of contractually set attorney's fees under state law. At the same time, because Advocate is oversecured and Welzel is solvent, any portion of Advocate's claim that is disallowed accrues to the benefit of Welzel, not his other creditors. Under these circumstances, debtors like Welzel would be the ones receiving a windfall if we were to read 11 U.S.C. § 506(b) as trumping state law to authorize disallowance of unreasonable fees. 7 36 In addition, if we were to read § 506(b) to authorize disallowance of unreasonable fees, debtors would have a strong incentive to avoid otherwise valid contractual obligations under state law by filing voluntary bankruptcy petitions. We would open the floodgates to debtors using this same tactic under § 506(b) to persuade courts -- acting on equitable considerations -- to disallow a wide range of contractually set obligations, such as prepayment penalties and the like, whenever the terms might seem unreasonable. Such a result would only increase litigation and do a disservice to the parties' contractual expectations at the time the loan was effectuated. The transaction before us arose between sophisticated and counseled business entities. 37 Finally, if we read § 506(b) as a disallowance provision, we would turn a basic principle of bankruptcy law on its head. Unsecured creditors would be privileged over oversecured creditors like Advocate in the area of contractually set attorney's fees. Not subject to § 506(b), unsecured creditors who desired to collect unreasonable contractual fees would have an allowed claim under § 502, while as oversecured creditors would have such fees disallowed entirely under § 506(b). This outcome would create an absurd result -- unsecured creditors would be in a more protected position than a group of secured creditors. We should avoid construing § 506(b) in such a manner. See United States v. 6640 S.W. 48th St., 41 F.3d 1448, 1452 (11th Cir. 1995) (noting that a statute should be construed in a manner that avoids an absurd result). Reading 11 U.S.C. § 506(b) as a disallowance provision also would put an oversecured creditor in a worse position for having given the debtor a better bargain than he could have obtained had the creditor been undersecured or unsecured. No creditor should be put in a worse position for having made a better bargain, and we reject such an outcome here. 38 For these reasons, even if equity were considered in the present case, equity would enhance Advocate's position. As such, the equitable considerations here do not cause us to reject our original conclusion, predicated on statutory language and structure, that unreasonable fees under § 506(b) constitute allowable, but unsecured, claims. Such considerations only reinforce our original analysis.