Court Opinion

ID: 772778
Source: CourtListenerOpinion
Date Created: 2012-04-18 11:16:52+00
Date Added: 2024-06-11T15:35:53.739514
License: Public Domain

245 F.3d 1283 (11th Cir. 2001)
In re DANIEL A. WELZEL, Debtor.DANIEL A. WELZEL,  Plaintiff-Appellee,v.ADVOCATE REALTY INVESTMENTS, LLC, Defendant-Appellant.In re DANIEL A. WELZEL, Debtor.ADVOCATE REALTY INVESTMENTS, LLC, Plaintiff-Appellant,v.DANIEL A. WELZEL, Defendant-Appellee.
No. 99-14875D.C. Docket No. 99-00142-CV-4No. 99-14876D.C. Docket No. 99-00145-CV-4
UNITED STATES COURT OF APPEALSELEVENTH CIRCUIT
March 29, 2001

Appeals from the United States District Court for the Southern District of Georgia
Before WILSON, COX and GIBSON*., Circuit Judges.
GIBSON, Circuit Judge:

1
The issue in this case is whether the Bankruptcy Code preempts a Georgia statute  authorizing a creditor to collect a fifteen- percent attorney's fee upon default  and with proper notice. The debtor Daniel A. Welzel, Jr. objected to that  portion of Advocate Realty Investments, LLC's claim which represents the  statutory attorney's fees. The bankruptcy court sustained the objection in part and overruled it in part. The district court reversed and held that the Georgia statute is preempted. We affirm the judgment of the district court.

2
Welzel borrowed more than $1 million from the Darby Bank and Trust Company secured by mortgages on real estate in the historic district of Savannah, Georgia. Advocate purchased the notes from the bank shortly after the bank had  given written notice to Welzel that the indebtedness was in default and immediately due and payable, and that in accordance with Ga. Code Ann.  13-1-11  (1982) the bank would enforce certain provisions of the notes such that Welzel  had ten days in which to pay the principal and interest to avoid incurring  liability for attorney's fees. The parties stipulated that Welzel failed to pay  within the ten-day period. Welzel filed for relief under Chapter 11 of the  Bankruptcy Code after the ten-day grace period expired, and the case was later  converted to a Chapter 7 liquidation.

3
Welzel stipulated that Advocate's right to fifteen percent of the indebtedness  for attorney's fees vested as a matter of state law upon his failure to satisfy  the debt within ten days of the written notice. Advocate filed a secured claim  in the amount of $1,125,464.47, which included $146,799.71 in statutory  attorney's fees.1 The bankruptcy court noted in its order that an estimate of the attorney's fees Advocate had actually incurred at the time of the hearing  was $40,000. Welzel objects to the allowance of any attorney's fees beyond those  actually incurred and determined to be reasonable.

I.

4
The parties contest only the conclusions of law reached by the bankruptcy court  and the district court, and therefore our review is de novo. Charles R. Hall  Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280, 1282 (11th Cir. 1998). We  address an issue not yet decided in this circuit, namely whether the amount of  attorney's fees an oversecured creditor may recover is determined under state  law or under the "reasonable amount" standard contained in section 506(b) of the  Bankruptcy Code, 11 U.S.C.  506(b) (1994). We conclude that the latter controls  by virtue of preemption.

5
Under section 506(b), a holder of a secured claim is entitled to reasonable  attorney's fees if the creditor is oversecured2 and the underlying agreement  upon which the claim is based provides for the fees. Welzel acknowledges that  Advocate's claim is an allowed secured claim, that Advocate is oversecured, and  that the notes which form the basis of its claim provide for attorney's fees  upon collection. Welzel claims that the attorney's fees must be "reasonable"  under section 506(b); Advocate argues that it is entitled to collect the fifteen  percent set forth in the notes because its right to that amount vested under  Georgia law.

6
Advocate relies on Ga. Code Ann.  13-1-11, which governs the procedure for  validating and enforcing an attorney's fee provision in a note. Under the  Georgia statute, if the creditor gives written notice of default and the debtor  does not cure the default within ten days of receipt of the notice, the  contractual obligation is valid and enforceable. Here, Advocate's predecessor  adhered to this procedure and Welzel failed to cure the default within the  notice period. After the notice period passed, Welzel sought protection under  the bankruptcy laws. Advocate asserts that the timing of events renders the  fifteen-percent charge for attorney's fees enforceable as part of Welzel's  principal obligation because its right to collect those fees vested  pre-petition, relying on Mills v. East Side Investors (In re East Side  Investors), 694 F.2d 242, 246 (11th Cir. 1982). Although it is correct that East  Side Investors held that attorney's fees were enforceable as a part of the  debtor's principal obligation, the case was decided as the law was applied  before the enactment of the Bankruptcy Reform Act of 1978 (of which section  506(b) was a part). Because there has been a change in the applicable statute,  we are no longer bound by East Side Investors.

7
Four circuits have addressed this issue since the adoption of the 1978 Act, and  all have determined that the award of attorney's fees is governed by section  506(b) rather than by state law. First W. Bank & Trust v. Drewes (In re Schriock  Constr., Inc.), 104 F.3d 200 (8th Cir. 1997); Joseph F. Sanson Inv. Co. v. 268  Ltd. (In re 268 Ltd.), 789 F.2d 674 (9th Cir. 1986); Blackburn-Bliss Trust v.  Hudson Shipbuilders, Inc. (In re Hudson Shipbuilders, Inc.), 794 F.2d 1051 (5th  Cir. 1986); Unsecured Creditors' Comm. v. Walter E. Heller & Co. Southeast, Inc.  (In re K. H. Stephenson Supply Co.), 768 F.2d 580 (4th Cir. 1985). Some of these  cases include a thorough recitation of the legislative history insofar as it  relates to Congress's intent that state law should no longer govern the  enforceability of attorney's fee agreements. See, e.g., In re 268 Ltd., 789 F.2d  at 676-77; In re K. H. Stephenson Supply Co., 768 F.2d at 582- 85. Two circuits  have applied preemption to allow fees to be awarded where state law would have  denied recovery. In Schriock, the Eighth Circuit held that an attorney's fees  provision in a contract was enforceable under section 506(b) even though it was  invalid under state law. 104 F.3d at 202-03. In K.H. Stephenson, the Fourth  Circuit held that an oversecured creditor should be awarded its reasonable  attorney's fees in spite of its failure to comply with the provisions of state  law. 768 F.2d at 585.

8
We agree with the analyses and uniform conclusions of these courts,3 and we hold that Advocate is entitled to its reasonable attorney's fees under section 506(b) and not the fifteen-percent fee that Georgia law would provide. We therefore affirm the district court's judgment.

II.

9
The district court rejected the bankruptcy court's bifurcation of Advocate's  claim as it relates to attorney's fees. The bankruptcy court allowed the claim  and determined that the reasonable fees actually incurred by Advocate would be  treated as a secured claim, and the balance of the fifteen percent would be  treated as a general unsecured claim for the purposes of distribution. Although  there is less unanimity among the courts on this issue, we hold that Advocate is  entitled to recover in full its reasonable attorney's fees as a secured claim  but that any additional amount is not recoverable in a bankruptcy proceeding.  "The federal courts have recognized that percentage fee assessments under [Ga.  Code Ann.]  13-1-11 are grossly disproportionate to the amount of fees actually  incurred and that they in fact provide a windfall to the creditor. . . ." In re  Centre Court Apts., Ltd., 85 B.R. 651, 655 (Bankr. N.D. Ga. 1988) (collecting  cases). Moreover, as Advocate argued to the district court and continues to  argue here, there is no statutory authority for bifurcation. Section 506(b) is  the preempting statute, and it completely displaces state law to the contrary.

10
Because the bankruptcy court is a court of equity, Advocate makes much of the  notion that its right to collect the fifteen- percent attorney's fees vested  before Welzel filed his bankruptcy petition. We recognize how the Georgia  statute operates, and we conclude that the word "vested" overstates the sequence  of events. Advocate held several notes from Welzel, all of which contained the  same boilerplate language about attorney's fees. The Georgia statute directs  that such fee agreements are enforceable, valid, and collectible with the proper  notice. The statute does not itself award fees-it only validates  already-existing fee agreements. Here, the fee- agreement portion of the notes  also cautions that Advocate's ability to collect attorney's fees of fifteen  percent is "subject to any limits under applicable law." Although Advocate  asserted its rights under the fee agreement pre-petition, it did not file suit  and no services were rendered until post-petition. Thus, because section 506(b)  is an "applicable law" that limits recovery to reasonable fees, there is no  compelling reason to bifurcate Advocate's claim for fees because it incurred  fees only in connection with the bankruptcy.

Conclusion

11
We AFFIRM the judgment of the district court, and we REMAND so that Advocate may  petition the bankruptcy court for the allowance of reasonable attorney's fees as  an oversecured creditor.

Notes:

*
 Honorable John R. Gibson, U.S. Circuit Judge for the Eighth Circuit,  sitting by designation.

1
  The bankruptcy court found that Advocate's total claim, after the application  of proceeds for previously court-approved sales of property, was $748,724.79.  Even though the amount of its claim diminished, Advocate continues to claim  $146,799.71 (fifteen percent of $978,664.76) as attorney's fees.

2
  An oversecured creditor is one whose claim is secured by property whose value exceeds the principal amount of the claim.

3
  A number of bankruptcy courts have reached the same conclusion. See, e.g., In re McGaw Prop. Mgmt., Inc., 133 B.R. 227, 229-30 (Bankr. C.D. Cal. 1991); In re Smith, 109 B.R. 421, 422-23 (Bankr. D. Mont. 1988); In re Wonder Corp., 72 B.R. 580, 586-88 (Bankr. D. Conn. 1987); In re B & W Mgmt., Inc., 63 B.R. 395, 401 (Bankr. D.C. 1986). Two bankruptcy courts have also determined that section 506(b) specifically trumps Ga. Code Ann.  13-1-11, the state statute at issue in this case. In re Centre Court Apts., Ltd., 85 B.R. 651, 659-61 (Bankr. N.D. Ga. 1988); Curtis v. Pilgrim Health and Life Ins. Co. (In re Curtis), 83 B.R. 853, 858-61 (Bankr. S.D. Ga. 1988).

12
COX, Circuit Judge, concurring in part and dissenting in part:

13
Responding to Advocate Realty Investments' arguments, the majority reaches three  conclusions. The first is that federal law trumps Georgia law by deeming the  contractual attorney fee, which is enforceable under O.C.G.A.  13-1-11, to be a  severable part of Advocate's claim. The second is that federal law provides the  standard of "reasonableness" under 11 U.S.C.  506(b), without regard to the  opinion of the Georgia legislature. Finally, it holds that  506(b)'s allowance  of "reasonable fees" to an oversecured creditor prohibits the creditor from ever  collecting - even if the debtor is solvent - the "unreasonable" fees that a  willing and sophisticated debtor agreed to pay in case of default. I agree with  the first two holdings. But the third is inconsistent with the Bankruptcy Code.

14
For the first and second holdings, the majority is in good company: The Fourth,  Fifth, Eighth, and Ninth Circuits have all held that federal law, not state law,  dictates whether a contractual fee is awardable as part of a secured claim and  how much is a "reasonable" fee. See First W. Bank & Trust v. Drewes (In re  Schriock), 104 F.3d 200, 203 (8th Cir. 1997) ( 506(b) authorized award of fee  notwithstanding contrary North Dakota law); Blackburn-Bliss Trust v. Hudson  Shipbuilders, Inc. (In re Hudson Shipbuilders, Inc.), 794 F.2d 1051, 1058 (5th  Cir. 1986) (federal law determines reasonableness of fee); Joseph F. Sansom  Investment Co. v. 268 Ltd. (In re 268 Ltd.), 789 F.2d 674, 677 (9th Cir. 1986)  (federal law determines fee's reasonableness); Unsecured Creditors' Comm. v.  Walker E. Heller & Co. S.E., Inc. (In re Walker E. Heller & Co. S.E., Inc.), 768  F.2d 580, 581 (4th Cir. 1985) (reasonable fee allowed to oversecured creditor  under agreement notwithstanding failure to comply with state-law notice  provision). And if you have decided that federal law controls, it follows that  the part of the claim called an attorney fee must be severed from the rest of  the claim and trimmed, as necessary, to meet a federal standard of  reasonableness. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109  S. Ct. 1026, 1030 (1989) (dictum).

15
Section 506(b) does not, however, explicitly disallow or avoid the  "unreasonable" part of the attorney-fee claim. In re 268 Ltd., 789 F.2d at 678.  It powerfully implies, of course, that the "unreasonable" part of the fee may  not be collected from the collateral; such a rule is an obvious and necessary  corollary to the statute's explicit authorization to collect only a "reasonable  fee" as part of the secured claim. But  506(b) is otherwise silent about what  happens to the rest of the fee.

16
Section 502, on the other hand, does have something to say about the rest of the  consensual "unreasonable" fee. That section provides that a claim, even if  objected to, "shall be allowed" unless some listed exception (such as one  disallowing unenforceable claims, 11 U.S.C.  502(b)(1), or another disallowing  unreasonable fees charged by the debtor's lawyer, id.  502(b)(4)) requires it  to be disallowed. Id.  502(b). No exception appears to apply here, and indeed  no one denies that Advocate's claim for the balance of the note and the attorney  fees permitted under O.C.G.A.  13-1-11 is an allowed claim. No one has  advanced, moreover, any reason for avoiding the fee agreement under any other  Bankruptcy Code provision. The estate is solvent, and Advocate should thus get  the fee that Welzel agreed to pay, just as other unsecured creditors are getting  paid. See In re Ridgewood Apts. of DeKalb County, Ltd., 174 B.R. 712, 719  (Bankr. S.D. Ohio 1994) ("[T]he claim for attorney fees must only be proper  under state law [O.C.G.A.  13-1-11, in that case] to become part of [the  creditor's] allowed unsecured claim.").

17
Section 506(b)'s silence could not trump  502(b)'s general instructions here,  because  506 addresses a distinct question: What kind of treatment does the  allowed claim get, preferential or ordinary? See 4 Collier on Bankruptcy   506.01, at 506-6 (Lawrence P. King, ed., 2d ed. 1999) ("[A]lthough section 506  applies a number of important rules specifying the determination of the secured  status of a claim, the section does not govern the allowance or disallowance of  the underlying claim itself."). Claims that  506(a) deems "secured" get favored  treatment - they do not have to line up, for instance, with other claims in the  order that  507 directs; their recovery from the collateral is protected in  many circumstances, see 11 U.S.C.  361, 363(e), and ill treatment of secured  claims can result in rejection of a plan under Chapters 11 or 13, see id.   1129(b)(2)(A), 1325(a)(5). This favored treatment for secured claims comes at  the expense of the estate, of course, and hence of unsecured creditors;  506(b)  therefore draws a line for special treatment of certain elements of a  potentially secured claim, such as penalties and fees, making them available  only when the claim is otherwise oversecured (and even then only when  "reasonable").

18
This line between preferred and ordinary status is obviously not the same as the  line that  502 draws between allowed and disallowed claims. At best, then, what   506(b) does is relegate the part of the fee claim that does not get secured  status (that is, the "unreasonable" part of the fee) to the ordinary status of  an unsecured claim. Incidentally, splitting a claim like this is not alien to  the Code; it is what explicitly happens when a claim is undersecured. See id.   506(a). On the contrary, reading  506(b) to perform  502's disallowing  function, but only for secured creditors, turns bankruptcy law upside down by  putting the unsecured creditor seeking an "unreasonable" contractual fee - who  gets the benefit of  502 and does not get tangled up in  506 -in a better  position than a secured one.

19
There thus being no sound statutory basis to disallow or avoid the "unreasonable" part of a fee claim, equitable considerations alone would have to  support the conclusion that "unreasonable" consensual fees are always disallowed  - a view that at least one bankruptcy court in this circuit has adopted, and  another has suggested. In re Homestead Partners, Ltd., 200 B.R. 274, 277 n.3  (Bankr. N.D. Ga. 1996) (dictum); In re Centre Court Apts., 85 B.R. 651, 661-62  (Bankr. N.D. Ga. 1988). But to let equity run the show ignores bankruptcy law's  foundation in the Code.1 Bankruptcy law is statutory, and when a statute affords  relief - as  502 does in allowing in full a claim for contractual fees - we  should not deny that relief on equitable grounds. Cf. Lonchar v. Thomas, 517  U.S. 314, 323, 116 S. Ct. 1293, 1298 (1996) ("[T]he fact that the writ [of  habeas corpus] has been called as `equitable' remedy . . . does not authorize a  court to ignore . . . statutes, rules, and precedents."). Congress has struck a  balance in  502 between respecting all creditors' contractual rights and  protecting creditors from one another. That is not a balance that is ours to  restrike.

20
Replacing a rule with equitable discretion, moreover, leaves us with no bounds  and no principles. Cf. id. Why is an unreasonable, but enforceable, fee  agreement inequitable, and not an above-market interest rate? Why, indeed,  should the court not protect unsecured creditors by determining whether the  debtor paid too much for the assets he bought on credit? We can label all of  these second-guesses "protection of other creditors," too, until we are in the  business of detouring around all the limited statutory grounds (in  502, 546,  and 547, for instance) Congress has given the bankruptcy courts to erase abusive  and unwise deals. It's best in the end for us to do as the bankruptcy court did  in this case and stick to the Code.

21
I therefore respectfully dissent.

NOTES:

1
 A Code that, incidentally, is not shy about explicitly conferring equitable  discretion in certain circumstances. See, e.g., 11 U.S.C.  365(d)(10); id.   502(j); id.  524(g)(4)(B)(ii).