Court Opinion

ID: 2764492
Source: CourtListenerOpinion
Date Created: 2014-12-24 17:00:50.662495+00
Date Added: 2024-06-11T11:27:20.016879
License: Public Domain

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
      Starion Financial appeals from the bankruptcy court’s order denying its
Motion to Compel Payment of Fees Unde r the Confirmed Plan of Reorganizatio n
and granting the Debtors’ Mot ion to Disallow Attorneys’ Fees and Costs Clai med
by Starion Financial. We have jurisdiction of this appeal from        entry of the
bankruptcy court’s final or der 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 paym ent 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 th e loans resulted in a Workout Agreement
dated July 26, 2012 betw een Starion and the Debtors. As part of that agreement,
the Debtors consent ed to t he entry of j udgments against t hem 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 agai nst Debtors in the respective am ounts of
$2,078,034.26 and $1,000,000.00, plus interest.

      Debtors filed a voluntary chapter 11 petition on Augus t 29, 2012. Pre-
confirmation modifications to the       Debtors’ Second Amended Plan of
Reorganization (“Plan”) were accomplished by a series of filed addendum s. One
such addendum was filed to resolve and define the payment term s for Stari on’s
claim (“Starion Addendum”). Specifically that addendum stated:

             Collection Costs. Debtors agree to pay St          arion’s
             allowable attorney’s fees and costs associated with both
             Debtors’ bankruptcy procee dings including but not
             limited to reasonable attorneys’ fees, consulting,
                                          2
             appraisal, filing fees, late f ees, 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 t he Debtors’ Plan , incorporating t he Starion Addendum,
was confirmed by the bankruptc y court. Section 8.01(c) of t he confirmed plan
defines “Allowable Attorneys’ Fees and Costs” as “a cl aim against the debtors for
an oversecured creditor’s attorney’s fees and costs incurred in connection with the
creditor’s secured clai m.” That section goes on to describe the proc edure for
allowance of the fees and costs as follows:

             Any Allowable Fees and Costs m ust be approved by
             Debtors before payment is di sbursed. At least ten days
             prior to the Effective Date of the Plan, the creditor a nd/or
             its counsel, shall submit an itemized statement (reflecting
             date, a description of the se rvices, 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 am ount of the
             Allowable Attorneys’ Fees and Costs to be paid, the
             matter shall be determ ined by the Bankruptcy Court,
             upon notice and hearing. No paym ent of Allowable
             Attorneys’ Fees and Costs will be due until eithe r the
             agreement of the parties or a final determ ination by the
             Bankruptcy Court that those am ounts are due under the
             Plan.

      On October 3, 2013 Starion subm itted an itemized statement to the Debtor
for various costs inc luding interest, late fees, real esta te 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

                                            3
was not entitled to these am ounts based upon the Plan or 11 U .S.C. section 506(b)
the Debtors refused to pay the amounts re quested 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 am ount of $125,014.64 ba sed upon the Plan and 11 U.S.C. section
506(b). On the same day the Debtors fi led a motion seeking disallowance of the
Fee request contending that: there is no       agreement for the payment of Fees; th e
Fee request was untimely; and the Fees are not reasonable.

                       BANKRUPTCY COURT DECISION

      On March 10, 2014, the ba nkruptcy court issued its Order denying Starion’s
motion to com pel payment of attorney          fees and costs, and granting Debtors’
motion seeking disallowance of Starion’s re quest. The court began its analysis by
noting the term s of the St arion Addendum and the Pl an, and specifically
determined that: “bot h Debtors and St arion 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 all ows an oversecured creditor to recover reasonable fees
and costs provided for unde r the agreem ent under which the claim          arose, the
bankruptcy court first looke d at whether Starion’s claim was oversecured. The
court noted that, “D ebtors do not disput e Starion’s claim that it is oversecured. In
fact, in their brie   fs, Debtors refer        to Starion’s claim as oversecured.”

                                           4
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 all owed
under an agreement under which the claim arose. It held tha t: “Starion’s j udicial
liens ‘arose’ under the Judgments, which wh en 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 agre ement giving rise to
the claim for attorney fees and costs are the Judgment s.” Relying upon a North
Dakota statute that disfavors paym ent of attorney fees, the bankruptcy court
concluded that the absence of “a clau se or sentence [in the judgment]                                entitling
Starion to collect attorney fees” was fa                    tal to St arion’s request for payment.
Accordingly, Starion’s m otion to com pel payment was denied and the Debtor’s
motion disallowing the Fees was granted.                    Starion appeals the bankrupt cy 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 interpreta tion and application of 11 U.S.C. section 506(b).
Wegner v. Grunewaldt, 821 F.3d 1317, 1320 (8t h 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.

                                                        5
                                                 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 am ount
                  of such claim, there shall be allowed to the holder of such
                  claim, interest on such clai m, 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 fa ctors: “(1) the clai m must be an allowed
secured claim; (2) the creditor holding th e claim must be over-secured; (3) th e
entitlement to fees, costs, or charges m ust 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 am ount.” 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 st atute plainly
states that payment of reasonable fees, costs or charges “shall be allowed.”

         The bankruptcy court’s decision was ba sed solely on the third factor. Our
review is, therefore, lim ited to the third factor which requires a determination of
whether the agreement under which the cl aim arose provide s 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). 

                                                           6
      Starion argues that the bankruptcy cour t committed error in holding that the
state court judgments made Starion oversecu red, and thus t he judgments were the
“agreement” under which Starion’s claim m ust arise. Instead, Starion contends
that the underlying l oan 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 t o payment of it s fees arises is m isplaced. It is
undisputed that the promissory notes, mortgages, Workout Agreement and ot her
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 t erm “claim” is defined in the bankruptcy code as a
“right to payment, whether or not such     right is reduced to judgm ent, liquidated,
unliquidated, fixed, conti ngent, matured, unmatured, disputed, undisputed, legal,
equitable, secured or unsecured…” Stari on’s right to payment, or claim, arose
directly from its loan docum ents—as the definition of claim expressly recognizes
that the claim may exist with or wit hout a judgment. A judgm ent is sim ply a
means of enforcing a right to payment. Here, the judgments happen to give Starion
a lien on real property of the judgm ent debtors in the counties where the judgm ent
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 th at 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

                                           7
                 of action, a remedy ..., or a method by which to enforce
                 an underlying claim. That is, a lien is pa rt and parcel of
                 the underlying claim, the former existing only because of
                 the latter.”)

Branch Banking & Trust Co. v. Constr. S                        upervision Servs., Inc. (In re Constr.
Supervison Servs., Inc.), 753 F.3d 124,                      128 (4th Cir. 2014). The fact that the
parties utilized confessions of j udgment 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 judgm ent entered pursuant to t he
                 voluntary act or agreement of the defendant, and is
                 substantially an acknowledgment that a debt is justly due.
                 …

                 It is in effect a private ad mission to liability for a debt
                 without trial.

49 C.J.S. Judgments § 170 (emphasis added) . The judgm ents entered by the state
court in favor of t he Appellant served to acknowledge inde btedness and secure
payment of the obligations that existed under the notes, mortgages, guarantees3 and
Workout Agreement.

        It appears that the parties’ argum                   ents and t he 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 s eparate 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.

                                                         8
which the creditor became oversecured. 4 It also doe s 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 t ransactions. It is undisputed that the
original notes, m ortgages and guaranty documents provide                                  d for payment of
Starion’s Fees. Th e terms of the Workout Agreement also referenced Starion’s
right to clai m its Fees. The confession s of judgment and subsequent judgment
liens merely served as the mechanism to perfect an interest in additional collateral
to secure payment of all obligations t o Starion. As such, t he judgment entries
cannot be construed as the sole agreem ents for purposes of applyi ng 11 U.S.C.
section 506(b), and the bankruptcy court’ s conclusion that the Judgments m ust
constitute the agreement under which the A ppellant’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 reas onableness 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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