Bain, In re

• Decision Date: 27 January 1976
• Docket Number: No. 75-1480,75-1480
• Citation: 527 F.2d 681
• Parties: In re Arthur Lawrence BAIN, Individually and d/b/a Arthur L. BAIN Construction Company, Bankrupt. WOMACK LUMBER COMPANY, INC., on behalf of Walter C. Drake, Trustee, Appellant, v GUARANTY MORTGAGE COMPANY, Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 681

527 F.2d 681

In re Arthur Lawrence BAIN, Individually and d/b/a Arthur L.

BAIN Construction Company, Bankrupt.

WOMACK LUMBER COMPANY, INC., on behalf of Walter C. Drake, Trustee, Appellant, v GUARANTY MORTGAGE COMPANY, Appellee.

No. 75-1480.

United States Court of Appeals, Sixth Circuit.

Argued Oct. 17, 1975.

Decided Dec. 19, 1975.

Rehearing Denied Jan. 27, 1976.

Larry C. Sanders, Hills, Sanders, Miller & Daniel, T. Robert Hill, Jackson, Tenn., for appellant.

John R. Moss, Moss & Benton, William H. Brown, Jackson, Tenn., for appellee.

Before PHILLIPS, Chief Judge, and WEICK and ENGEL, Circuit Judges.

WEICK, Circuit Judge.

The controversy in this case arose out of a foreclosure of deeds of trust securing promissory notes and the public sale of real property conducted under the power of sale contained in the deeds of trust, which sale was held after the mortgagor had filed a voluntary petition in bankruptcy.

When the Bankruptcy Judge was advised by counsel of the proposed public sale he consented to the sale on condition that the sale would be subject to confirmation by the Bankruptcy Court.

At the sale, the mortgagee, Guaranty Mortgage Company [Guaranty Mortgage], bud in the real property for $938,277.79. On that date there was a balance of principal due on the promissory notes secured by the trust deeds in the amount of $771,685.02, and interest amounting to $80,356.78, or a total balance of principal and interest in the sum of $852,041.80. The bid of the mortgagee, Guaranty Mortgage, was therefore $86,235.99 in excess of the balance due on the notes secured by the deeds of trust.

Guaranty Mortgage seeks to retain the surplus as costs of sale and reasonable attorney's fees under provisions in the notes and deeds of trust. The creditors of the bankrupt claim the surplus as assets of the bankrupt's estate.

Following the public sale both Womack Lumber Company, Inc. [Womack], a general creditor of the bankrupt, and Guaranty Mortgage petitioned the Bankruptcy Court to confirm the sale. Thereafter Guaranty Mortgage petitioned the Bankruptcy Court to withdraw its petition for confirmation of sale. Womack requested the Bankruptcy Judge to adopt findings of fact and conclusions of law, which request was granted.

In his findings of fact the Bankruptcy Judge made a finding to the effect that the promissory notes contained a provision to the effect that a ten per cent attorney's fee could be retained by the mortgagee in the event of a foreclosure sale. The notes had not been offered in evidence at that time, and the Bankruptcy Judge's finding of fact had no support from the record. He also authorized Guaranty Mortgage to withdraw its petition for confirmation.

Womack appealed to the District Court. The District Judge did not discover the mistake of the Bankruptcy Judge with respect to the alleged ten per cent provision in the notes, and he remanded the case back to the Bankruptcy Court for further consideration.

Upon the remand the notes were offered in evidence. They provided in part as follows:

If this note is placed in the hands of an attorney for collection, by suit or otherwise, or to enforce its collection, or to protect the security for its payment, we will pay all costs of collection and litigation, together with a reasonable attorney's fee.

The Bankruptcy Judge held that ten per cent of the principal and interest which was bid at the foreclosure sale, was reasonable for foreclosure expenses and attorney's fees, and that no moneys were owned from said sale to the Trustee in Bankruptcy. He also confirmed the sale in all respects and denied the petition of Guaranty Mortgage to withdraw its petition for confirmation. Guaranty Mortgage did not appeal to the District Court.

Womack appealed to the District court, resulting in an affirmance of the order of the Bankruptcy Court. Womack then appealed to this court. We reverse.

The District Court was of the view that there was no equity in the property, and it stated that this view was supported by the record, or alternatively, that the ten per cent allowance for attorney's fees "is supported by adequate evidence and is reasonable." We find no evidence in the record to support either of these statements. There is nothing in the appendix, or in the stipulation contained therein, with respect to either the value of the property or the reasonableness of the attorney's fees.

The only proof as to attorney's fees was a minimum fee schedule of the Jackson-Madison County Bar Association. This schedule provided for a reasonable fee for the time involved plus 15% of the excess over the debt up to $10,000, and 10% of the amount over $10,000. In our opinion this fee schedule was no evidence of the reasonable value of the services rendered by the attorney in connection with the foreclosure sale. There is also a question of the legality of a fee schedule. Goldfarb v. Virginia State Bar Ass'n, 421 U.S. 773, 95 S.Ct. 2004, 44 L.Ed.2d 572 (1975).

No issue has been raised by either party on appeal concerning the confirmation of the sale. It was necessary that the sale be confirmed to comply with the order of the Bankruptcy Judge consenting to the sale. Since the foreclosure sale has been confirmed by the Bankruptcy Court, Guaranty Mortgage is not in position to claim that it bid in the property for too much money.

The District Court was of the opinion that the burden of proof was upon Womack to prove that the mortgagor had equity in the property. This burden was met by the amount for which the property was sold at foreclosure sale.

In our opinion Guaranty Mortgage may retain from the proceeds of sale only the actual costs of advertising and a reasonable attorney's fee for handling the foreclosure sale and obtaining confirmation thereof by the Bankruptcy Court.

There was no evidence in the record as to the amount which Guaranty Mortgage actually paid for advertising the sale or the amount paid to its attorney for services rendered in connection with the foreclosure and confirmation. Upon remand the burden is upon Guaranty Mortgage to prove not only its payment of attorney's fees, but also that the fees were reasonable. The reasonableness thereof must be determined by the Bankruptcy Court.

The validity and construction of a secured obligation to pay attorney's fees is a question of state law. Security Mortgage Co. v. Powers, 278 U.S. 149, 153-54, 49 S.Ct. 84, 73 L.Ed. 236 (1928). In Tennessee the inclusion of a provision for foreclosure expenses and a reasonable attorney's fee in a note and deed of trust requires judicial inquiry to determine whether a claimed amount is reasonable. Carolina Spruce Co. v. Black Mountain Ry., 139 Tenn. 248, 250, 201 S.W. 770, 771 (1917). Under Tennessee law such a provision in a note is an indemnity contract, Carolina Spruce Co. supra. See Quaker Oats Co. v. Burnett, 289 F.Supp. 283, 286 (E.D.Tenn.1968). The creditor can recover only expenses and fees actually incurred in the foreclosure.

Our holding is in accord with Tennessee law as expressed in In Re Myers' Estate, 55 Tenn.App. 195, 208, 397 S.W.2d 831, 837 (1965), which held:

Since the note ... provided only for reasonable attorney's fees and no proof was offered as to what amount would be reasonable, under the authority of Nu-Way Ice Mach. Co. v. Pig'N Whistle, 16 Tenn.App. 581, 65 S.W.2d 575, nothing can be allowed as an attorney's fee on this note.

The Nu-Way case, 16 Tenn.App. at 590, 65 S.W.2d at 579, similarly held:

In the absence of any proof as to what would be a reasonable attorney's fee, and the failure upon the part of complainant to make any proof on that subject, we think that it stands as waived.

Since the amount bid in excess of principal and interest owing on the notes is equity of the bankrupt's estate, except to the extent that the mortgagee can show the nature and extent of reasonable expenses and fees incurred, the Bankruptcy Court has jurisdiction over the bankrupt's equity as part of his estate under 11 U.S.C. Sec. 11(a)(7), and therefore can determine the amount which is to be allowed out of a foreclosure sale to cover expenses and attorney's fees.

It was error for the District Court to hold that the bankrupt's estate had no equity in the property in view of the fact that the property was sold for $86,235.99 more than the principal and interest owing on the secured notes,...