Welzel v. Advocate Realty Investments

Citation275 F.3d 1308
Decision Date17 December 2001
Docket NumberNos. 99-14875,99-14876,s. 99-14875
Parties(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, KENNETH L. ROYAL, Plaintiff, v. DANIEL A. WELZEL, Defendant-Appellee
CourtUnited States Courts of Appeals. United States Court of Appeals (11th Circuit)

Appeals from the United States District Court for the Southern District of Georgia

Before TJOFLAT, EDMONDSON, BIRCH, DUBINA, BLACK, CARNES, BARKETT, MARCUS and WILSON, Circuit Judges, and COX*, Senior Circuit Judge.

BIRCH, Circuit Judge:

This appeal requires us, as a matter of first impression in this circuit, to resolve two related issues under 11 U.S.C. § 506(b) (1994), a Bankruptcy Code provision that entitles oversecured creditors to reasonable attorney's fees, as part of their allowed secured claim, if the fees were provided for in the loan contract under which the claim arose. The first issue concerns whether the bankruptcy court should apply the § 506(b) reasonableness standard to contractually set attorney's fees that vest pre-petition and that are enforceable under state law. If § 506(b) does so apply, the second issue concerns whether a claim for fees should be bifurcated between secured and unsecured claims based on the amount of fees deemed reasonable, or whether collection of such fees should be limited to an amount considered reasonable, with the balance disallowed. The district court ruled that § 506(b) applies to attorney's fees that vest pre-petition and that are enforceable under state law. The court rejected the bifurcation framework and held that fees deemed unreasonable under § 506(b) should be disallowed. We agree with the district court that § 506(b) is applicable, but we conclude that bifurcation is the correct result. We therefore AFFIRM in part and REVERSE in part.

I. BACKGROUND

Darby Bank and Trust Company loaned over $1 million to Daniel A. Welzel. To effectuate the loan, Welzel executed several promissory notes that were secured by mortgages on properties he owned in the historic district of Savannah, Georgia. In the event of default, each note provided that "subject to any limits under applicable law," the lender would be entitled to its "costs of collection, including . . . fifteen percent (15%) of the principal plus accrued interest as attorneys' fees." R1-1 Exh. 1. Advocate Realty Investments, LLC later purchased these notes. Shortly before this purchase, Darby Bank notified Welzel in writing that his indebtedness was in default and that, as a result, the notes were immediately due and payable. In the written notice, Darby Bank also informed Welzel of its intention to invoke the attorney's fees provisions contained in the notes in accordance with O.C.G.A. § 13-1-11 (1982). Section 13-1-11 provides that from the date of such written notice, a debtor has ten days to pay the principal and interest due without incurring liability for the contractually set attorney's fees. Welzel did not pay the principal and interest within the ten day period. Upon expiration of the ten days, Welzel filed a petition for Chapter 11 relief, which subsequently was converted into a Chapter 7 liquidation.

After Welzel filed for relief, Advocate filed a secured claim for $1,125,464.47. The claim included $146,799.71 in contractually set attorney's fees, which represented an amount equal to 15% of principal plus accrued interest, as stipulated to in the notes. Approximately $40,000 of these fees were actually incurred by Advocate. Although Advocate had complied with O.C.G.A. § 13-1-11 with regard to the fees, the Bankruptcy Code, 11 U.S.C. § 506(b), provides that an oversecured1 creditor is entitled to reasonable attorney's fees as part of its allowed secured claim if the underlying loan contract provides for such fees. It is undisputed that Advocate is an oversecured creditor and that the $146,799.71 in attorney's fees were provided for in the notes. Welzel did dispute the inclusion of the contractually set attorney's fees as part of Advocate's secured claim because, he argued, the fees were unreasonable under § 506(b).

In response to Welzel's objection to Advocate's filed claim, the bankruptcy court addressed the relationship between O.C.G.A. § 13-1-11 and 11 U.S.C. § 506(b). The court found that, by virtue of O.C.G.A. § 13-1-11, Advocate's claim for contractually set attorney's fees had vested pre-petition and was an allowed claim under 11 U.S.C. § 502. The court ruled, however, that the fees were subject to the reasonableness standard contained in § 506(b). Fees determined to be reasonable under § 506(b) would be treated as a secured claim, the court concluded, with the balance of fees treated as an unsecured claim under § 502. The fees thus would be bifurcated into secured and unsecured portions.

Both parties appealed the bankruptcy court order to district court, and the appeals were consolidated. In reviewing the order, the district court agreed that Advocate's contractually set attorney's fees were subject to the § 506(b) reasonableness standard. In contrast, the court disagreed with the bankruptcy court's ruling that the fees should be bifurcated into a secured claim for the portion of fees deemed reasonable and an unsecured claim for the portion deemed unreasonable. Reversing the bankruptcy court, the district court held that the portion of contractual attorney's fees found unreasonable under § 506(b) were not to be treated as unsecured claims under § 502, but were to be disallowed entirely.

Advocate then appealed, and a panel of our court, concluding that § 506(b) applied to the attorney's fees and that any fees deemed unreasonable should be disallowed, affirmed the district court decision. Welzel v. Advocate Realty Investments, LLC (In re Welzel), 255 F.3d 1266 (11th Cir. 2001). On Advocate's request for rehearing en banc, we voted to rehear the case and vacated the panel decision. Welzel v. Advocate Realty Investments, LLC (In re Welzel), 260 F.3d 1284 (11th Cir. 2001).2

Throughout this litigation, Advocate's position has been that because its contractually set attorney's fees vested prior to Welzel filing his petition, the fees merged into its allowed secured claim on the Savannah properties and are allowed for that reason. As such, Advocate contends that the reasonableness standard of 11 U.S.C. § 506(b) does not apply to fees that vest pre-petition. Advocate instead argues that § 506(b) is meant to widen creditor protections by permitting a creditor to collect contractually set attorney's fees deemed reasonable by the bankruptcy court, even if such fees arise post-petition or are unenforceable under state law.

Alternatively, Advocate has argued that if § 506(b) is held to apply to contractually set attorney's fees that vest pre-petition, its claim should be bifurcated such that any portion of fees deemed reasonable constitutes part of its secured claim under § 506(b), with the balance treated as an unsecured claim under § 502. Advocate's contention is that § 506(b), at most, addresses whether a claim should be treated as secured or unsecured, while § 502 determines whether a claim should be allowed or disallowed. Because its claim for fees is allowable under § 502, Advocate asserts that, even under the worst case scenario, it is entitled to any portion of fees considered unreasonable as an unsecured claim.

In contrast, Welzel's position throughout this case has been that § 506(b) completely preempts state laws like O.C.G.A. § 13-1-11. Welzel contends that 11U.S.C. § 506(b) requires that the bankruptcy court subject all contractually set attorney's fees owed to an oversecured creditor -- irrespective of whether they vest pre- or post-petition or whether they are enforceable under state law -- to the reasonableness standard. He further argues that § 506(b) limits the collection of fees to those deemed reasonable, with any portion of fees deemed unreasonable disallowed. That is, Welzel asserts that bifurcation between § 502 and § 506(b) is unwarranted because § 502 addresses allowability in general, while as § 506(b) addresses allowability in the particular context of contractually set attorney's fees. Equitable considerations, he elaborates, also support this reading of § 506(b). Consequently, Welzel asserts that the district court properly decided the § 506(b) issue and that the panel decision correctly affirmed.

II. DISCUSSION

In reviewing the contentions of the parties, we note that, because only issues of law are contested, we review de novo the district court's conclusions concerning 11 U.S.C. § 506(b). Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280, 1282 (11th Cir. 1998). We first address in section II.A whether the 11 U.S.C. § 506(b) reasonableness standard applies to Advocate's claim for attorney's fees, which vested pre-petition and are enforceable under state law. Concluding that § 506(b) does apply, we turn in section II.B to whether the bankruptcy court should bifurcate a claim for fees between secured and unsecured claims under § 506(b) and § 502 according to the reasonableness of the fees, or whether the court should limit the collection of fees to those that are reasonable, with the balance disallowed.

A. Applicability of the § 506(b) Reasonableness Standard to Advocate's Claim for Attorney's Fees

Historically, the amount and validity of claims made in bankruptcy proceedings were determined through reference to state law. See Mills v. East Side Investors (In re East Side Investors), 694 F.2d 242, 244-46 (11th Cir. 1982) (per curiam). In 1978, Congress passed the Bankruptcy Reform Act, thereby altering the traditional relation between federal and state law in bankruptcy proceedings. The provision of the Act at issue here, now codified at 11 U.S.C. § 506(b), provides:

To the extent that an allowed secured claim is...

To continue reading

Request your trial
105 cases
  • In re Gift
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Middle District of Tennessee
    • March 21, 2012
    ...the term "penalty" and treats it as being punitive in nature rather than merely a component of statutory interest. 4. In re Welzel, 275 F.3d 1308, 1319 (11th Cir. 2001) involved a chapter 7 case and the issue was whether unreasonable attorney fees should be allowed or disallowed, but there ......
  • In re Poffenbarger, 01-16096.
    • United States
    • United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Alabama
    • March 25, 2002
    ...The Eleventh Circuit has stated that "interpretation of the Bankruptcy Code must begin with its plain language." In re Welzel, 275 F.3d 1308, 1314 (11th Cir.2001) (citation omitted). Section 541(b)(1) says "any power that the debtor may exercise solely" for another's benefit is not property......
  • In re Dow Corning Corp.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (6th Circuit)
    • July 26, 2006
    ...A proof of claim filed under 11 U.S.C. § 501 is deemed an allowed claim "unless a party in interest . . . objects." See In re Welzel, 275 F.3d 1308, 1316 (11th Cir.2001) (citing 11 U.S.C. § 502(a)). If, as here, a party objects to a claim, § 502 requires that the bankruptcy court allow an o......
  • In re Gift
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Middle District of Tennessee
    • March 22, 2012
    ...this Court gives credence to the term “penalty” and treats it as being punitive in nature rather than merely a component of statutory interest. 4.In re Welzel, 275 F.3d 1308, 1319 (11th Cir.2001) involved a chapter 7 case and the issue was whether unreasonable attorney fees should be allowe......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT