Court Opinion

ID: 6995590
Source: CourtListenerOpinion
Date Created: 2022-07-24 03:32:38.862164+00
Date Added: 2024-06-11T16:09:44.699152
License: Public Domain

COX, Circuit Judge,
concurring in part and dissenting in part:
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.
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 awarda-ble 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. Sanson 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. Walter E. Heller & Co. S.E., Inc. (In re Walter 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, 103 L.Ed.2d 290 (1989) (dictum).
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. *1288But § 506(b) is otherwise silent about what happens to the rest of the fee.
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 chai'ged 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.”).
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) (“Although 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”).
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 underse-cured. 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.
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. *1289651, 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, 134 L.Ed.2d 440 (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.
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.
I therefore respectfully dissent.

. 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).