Morris, In re, 79-1053
| Citation | 602 F.2d 826,5 B.C.D. 683 |
| Decision Date | 26 July 1979 |
| Docket Number | No. 79-1053,79-1053 |
| Parties | , Bankr. L. Rep. P 67,277, 27 UCC Rep.Serv. 333 In re Eugene MORRIS, Debtor. WORTHEN BANK & TRUST COMPANY, N. A., Appellee, v. Eugene MORRIS and A. L. Tenney, Trustee, Appellants. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Charles Darwin Davidson, Patten, Brown, Leslie & Davidson, Little Rock, Ark., argued and on brief, for appellants.
Isaac A. Scott, Jr., Wright, Lindsey & Jennings, Little Rock, Ark., argued, for appellee.
Before GIBSON, Chief Judge, and HEANEY and McMILLIAN, Circuit Judges.
This appeal questions whether a secured creditor is entitled to allowance of attorney fees as provided in an installment sales contract after the debtor has filed a petition under Chapter XIII of the Bankruptcy Act. The Bankruptcy Court answered the question in the negative, but the District Court 1 reversed. We affirm the District Court.
Eugene Morris, a gas station manager, purchased a one-half ton pickup truck and an automobile from Crockett Motors, Inc. on November 3, 1975, and February 7, 1976. He executed conditional sales contracts which included the following provision:
If this contract after default is placed in the hands of an attorney for collection, the buyer will pay the holder of the contract a reasonable attorney's fee not exceeding 10% Of the unpaid principal and interest, such payment to be secured by the security interest created under the contract.
The contracts were assigned by Crockett Motors to Worthen Bank & Trust Company (Worthen) and the security interests were perfected. On February 27, 1976, twenty days after purchasing the second vehicle and while the sheriff was trying to execute an unrelated judgment against him, Morris filed a petition under Chapter XIII of the Bankruptcy Act.
Worthen thus found that within a four-month period it had become the assignee of two conditional sales contracts on which Morris owed approximately $5,000 and Morris had sought the haven of the Bankruptcy Court. Not surprisingly, Worthen referred the contracts to its attorney for collection. The efforts of Worthen to free the vehicles from the Bankruptcy Court for purposes of foreclosure were not successful. In fact, two and one-half years ago the Bankruptcy Court ruled that the value of the collateral was less than the secured debt. Ultimately, the only active controversy centered on Worthen's claim that it was entitled to include in its claim reasonable attorney fees up to ten percent of the debt.
In a memorandum order filed January 24, 1977, the Bankruptcy Court denied Worthen's claim for attorney fees. It relied exclusively on Mechanics'-American National Bank v. Coleman, 204 F. 24 (8th Cir. 1913), and In re Schindler, 223 F.Supp. 512 (E.D.Mo.1963). The Bankruptcy Court, without discussing Arkansas law, quoted extensively from Schindler, including:
The validity of a lien for attorney's fees as part of a mortgage lien in bankruptcy, is determined by local law, and construction of the contract providing therefor is likewise a question of local law. The enforcement of the lien in bankruptcy is a federal question.
223 F.Supp. at 533. The Schindler court noted that there were no Missouri cases deciding the local law issue. Thus that court turned to other case law, especially early decisions of this court. One of those decisions was Mechanics'-American National Bank v. Coleman, 204 F. 24 (8th Cir. 1913), which purported to decide the validity of provisions for attorney fees under a federal common law of commercial practice. Mechanics'-American declined to follow state decisional law in interpreting commercial agreements in a context similar to that involved in this case because of the Judiciary Act of 1789 as interpreted by Swift v. Tyson, 41 U.S. (16 Pet.) 1, 10 L.Ed. 865 (1842).
The difficulty with Mechanics'-American, and hence with the Bankruptcy Court's opinion in this case, is that Swift v. Tyson was overruled in Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The District Court recognized this and further noted that the Supreme Court specifically held that the validity and construction of attorney fee provisions in security instruments after bankruptcy should be determined by state law. Security Mortgage Co. v. Powers, 278 U.S. 149, 153-54, 49 S.Ct. 84, 73 L.Ed. 236 (1928). The unexplained total failure of the Bankruptcy Court to examine Arkansas law in this case results in its opinion having no persuasive effect.
Throughout much of its course, Arkansas law disfavored the recovery of attorney fees in litigation even where provided for in a note or related instrument. American Exchange Trust Co. v. Truman Special School Dist., 183 Ark. 1041, 40 S.W.2d 770 (1931); White-Wilson-Drew Co. v. Egelhoff, 96 Ark. 105, 131 S.W. 208 (1910). However, in 1951 the General Assembly of Arkansas passed Act 350 which provided in part:
A provision in a promissory note for the payment of reasonable attorneys' fees, not to exceed ten per cent (10%) of the amount of principal due, plus accrued interest, for services actually rendered in accordance with its terms is enforceable as a contract of indemnity.
Ark.Acts 1951, No. 350, § 1, p. 841, Codified in Ark.Stat.Ann. § 68-910. This was narrowly construed in National Bank of Eastern Arkansas v. Blankenship, 177 F.Supp. 667 (E.D.Ark.1959), by then Chief District Judge, now Circuit Judge J. Smith Henley. He did so without the aid of state judicial interpretation but assumed that the policy against attorney fee recovery would result in the statute being strictly construed to validate only fee provisions found in promissory notes.
Subsequent to the Blankenship opinion, Arkansas adopted the Uniform Commercial Code. Various sections of the Code liberalize the contractual freedom of the parties and suggest that provisions for attorney fees are enforceable. See Ark.Stat.Ann. § 85-3-119(1) and § 85-9-504(1)(a). 2 In Geyer v. First Arkansas Development Finance Corp., 245 Ark. 694, 434 S.W.2d 301, 302-03 (1968), the Arkansas Supreme Court recognized these developments and construed Ark.Stat.Ann. § 68-910 to permit recovery of attorney fees as per a provision in a mortgage. The note in that case incorporated the mortgage language by reference.
In light of the Geyer case we cannot say that the District Court erred in holding that under Arkansas law the sales contracts' provisions for attorney fees are valid. But see Bleidt v. 555, Inc., 253 Ark. 766, 489 S.W.2d 235 (1973). The District Court is entitled to deference on matters of the law of the state where it sits. In this situation it seems clear that an attorney fee provision contained in a conditional sales contract which included a promise to pay should be enforced after a similar provision contained in a mortgage referenced in a promissory note was enforced in Geyer.
The trustee also argues that activities of Worthen's counsel in the Chapter XIII proceedings were not "collection" as that term is used in...
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