In re 804 Cong., L. L.C.

• Decision Date: 13 March 2015
• Docket Number: CASE NO. 10–12184–TMD
• Citation: 529 B.R. 213
• Parties: In re: 804 Congress, L.L.C., Debtors.
• Court: U.S. Bankruptcy Court — Western District of Texas

529 B.R. 213

In re: 804 Congress, L.L.C., Debtors.

CASE NO. 10–12184–TMD

United States Bankruptcy Court, W.D. Texas, Austin Division.

Signed March 13, 2015

Barbara M. Barron, Stephen W. Sather, Barron & Newburger, P.C., Austin, TX, for Debtors.

MEMORANDUM OPINION

TONY M. DAVIS, UNITED STATES BANKRUPTCY JUDGE

This case is here on remand from the Fifth Circuit, which ordered this Court to determine whether a foreclosure commission claimed by a substitute trustee and attorney fees claimed by a mortgagee, both of which this Court earlier held unreasonable under section 506, nonetheless can and should be allowed under section 502. As discussed below, the substitute trustee's claim is allowed under section 502 because the claim is enforceable under state law and does not fall within any of the section 502(b) exceptions. However, the mortgagee's claim for attorney's fees is disallowed under section 502 because the mortgagee failed to prove that its fees were enforceable under state law.

I. BACKGROUND

The background of the case is straightforward, if unusual. 804 Congress, L.L.C., (the “Debtor ”) borrowed money from Wells Fargo Bank, N.A. (“Wells Fargo ”) to purchase an office building (the “Property ”). The Debtor defaulted on the loan and filed bankruptcy twice to fight off foreclosure. The Debtor tried to sell the Property, but could not. After receiving relief from the automatic stay in the Debtor's second bankruptcy case, Wells Fargo directed the substitute trustee, Greta Goldsby (“Goldsby ”), to post the property for foreclosure once again. The Property was sold during the foreclosure sale for $4,355,000. Since Wells Fargo's claim was only $4,114,536, this left $240,464 in surplus proceeds. The Deed of Trust securing the Property provided for the recovery of Wells Fargo's reasonable attorney's fees and collection costs, and for Goldsby to collect a commission of five percent of the sales proceeds in the event of a foreclosure. Since all creditors have been paid in full, the question before this Court was, and is, whether the surplus will be applied, in whole or in part, to the attorney's fees and the trustee's commission, or paid to the Debtor.

II. PRIOR PROCEEDINGS

This Court held a hearing in January of 2011 (the “Claim Objection Hearing ”), after which it determined that it had jurisdiction to consider allowance of Goldsby's $217,750 claim for her foreclosure commission, and of Wells Fargo's $83,327 claim for attorney's fees.¹ This Court then determined that a $217,750 foreclosure commission was unreasonable, and could not be allowed under section 506.² However, this Court did find that $7,500 was a reasonable fee based on the work Goldsby performed,³ and so allowed the claim in that amount. Finally, this

Court determined that none of the fees requested by Wells Fargo could be allowed under section 506, as Wells Fargo failed to support its claim with sufficient documentation.⁴ This Court then ruled on the allowance of Wells Fargo's claim under section 502, and found that it could not be allowed as an unsecured claim either.⁵ It appears that this Court did not rule on the allowance of Goldsby's commission under section 502.⁶

On appeal, the District Court reversed and remanded, holding that once this Court lifted the automatic stay and the foreclosure sale occurred, it no longer had jurisdiction over the property or the proceeds of the foreclosure sale.⁷ The Debtor appealed the District Court's ruling to the Fifth Circuit, which first ruled that this Court did have jurisdiction to determine the reasonableness of the fees under section 506.⁸ The Fifth Circuit then ruled that this Court did not abuse its discretion in determining that only $7,500 of the commission sought by Goldsby, and none of the fees sought by Wells Fargo, were reasonable and allowable under section 506.⁹ Finally, the Fifth Circuit noted that Goldsby and Wells Fargo argued that even if the fees were properly disallowed under section 506, they should nonetheless be allowed as unsecured claims under section 502.¹⁰ The Fifth Circuit went on to say that this argument raised a significant legal issue, as to which several circuit courts had ruled, but also noted that it was not clear whether the section 502 issues had been properly raised or considered by this Court.¹¹ Accordingly, the Fifth Circuit remanded the case to this Court to consider whether the fees can and should be allowed as unsecured claims under section 502.¹²

III. JURISDICTION AND AUTHORITY

The allowance of fees under section 506 implicates federal law, as those fees must be “reasonable” under a federal law standard.¹³ In addition, bankruptcy jurisdiction extends to matters that can have a “conceivable effect on the estate being administered in bankruptcy,”¹⁴ and the allowance of a secured claim for fees under section 506 will have an effect on the estate because the fees allowed will decrease the unencumbered value available from the collateral to satisfy unsecured claims or equity. Allowance of an unsecured claim under section 502 affects the estate in the same way because doing so will dilute the distribution to other unsecured creditors or to equity. Of course, Congress considered allowance of claims under section 502 to be within the core jurisdiction of the bankruptcy court.¹⁵ And based on the Supreme Court's discussion in Stern v. Marshall, the bankruptcy court has constitutional authority to issue final orders on allowance of claims.¹⁶

IV. ANALYSIS

A. Should the Claims of Wells Fargo and Goldsby be Allowed Under Section 502?

To determine whether the claims of Wells Fargo and Goldsby should be allowed under section 502, this Court must consider: (1) who had the burden of proof; (2) whether the parties raised their arguments under section 502 before the Claim Objection Hearing; and (3) whether the evidence shows that Wells Fargo and Goldsby have enforceable claims under section 502.

1. Wells Fargo and Goldsby had the burden of proving the amount and validity of their claims.¹⁷

A creditor must file a proof of claim to obtain a distribution from the estate.¹⁸ Here, Goldsby filed a proof of claim in the amount of $217,750, representing her five percent commission from the proceeds of the foreclosure sale.¹⁹ Wells Fargo also filed a proof of claim, asserting a claim for $3,278,146.35, which included $83,326.80 in legal fees.²⁰ For supporting documentation, Goldsby and Wells Fargo each attached a document to their respective proofs of claim called “Summary of Supporting Documentation and Itemized Statement of Interest and Charges” (the “Summary ”), which lists the note, deed of trust, and related documents. But neither claim attached any of the listed documents. In support of its claim for legal fees, the Wells Fargo Summary only says: “Other Fees—Legal: $83,326.”²¹ Notably, Wells Fargo did not attach documents detailing the legal fees to its proof of claim. Similarly, as to the foreclosure commission, the Goldsby Summary only says: “$217,750.00—for expenses of foreclosure, including a commission to Trustee of 5% of the bid per the Deed of Trust (5% of $4,355,000.00).”²²

If a creditor files a proof of claim, the claim is deemed allowed, unless a party in interest objects.²³ “Deemed allowed” means that the holder of the claim will be able to “receive distribution from the debtor's assets in a case or under a plan.”²⁴ To avoid this result, a party in interest must file a written objection to the claim.²⁵ Here, the Debtor did file objections, one to the Goldsby claim, and one to the Wells Fargo claim.²⁶ Upon objection by a party in interest, the claim is no longer “deemed allowed” under section 502(a); however, if the proof of claim was correctly filed in accordance with the relevant rules, it still constitutes “prima facie proof of that claim's validity and dollar value.”²⁷ In its amended brief in support of its objection to the Wells Fargo claim, the Debtor argued that the claim is not prima facie valid because no documents were attached²⁸ —such as billing invoices, or more helpfully, the contemporaneous time records generally used in and out of bankruptcy cases to determine the reasonableness of fees.²⁹ Additionally, the Debtor objected to both of the Wells Fargo and Goldsby claims on the grounds that both sought postpetition expenses under 11 U.S.C. § 506(b) that had to be requested through a motion rather than a proof of claim, and that the fees were unreasonable and should be disallowed under section 506(b).³⁰

If a party in interest objects to a proof of claim that is entitled to prima facie validity, the burden is on the objecting party to introduce evidence sufficient to rebut the presumption of validity.³¹ To rebut the claim, the evidence the objecting party produces must be “at least equal in probative force to that offered by the proof of claim and which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency.”³² If the objecting party produces sufficient rebuttal evidence, the burden shifts to the claimant to prove its claim by a preponderance of the evidence.³³ For claims that are not entitled to prima facie validity, the claimant bears the initial burden to produce evidence to support the amount and validity of the claim.³⁴

Here, regardless of whether the Wells Fargo and Goldsby claims are entitled to the presumption of prima facie validity, this Court finds that the Debtor sufficiently rebutted the presumption of validity and the burden was on Wells Fargo and Goldsby to produce evidence to support their claims. As noted, Wells Fargo attached no evidence to support its claim for attorney's fees.³⁵ Goldsby likewise failed to attach documentation to support her claim.³⁶ In its objections to the claims, the Debtor argued that the fees and commission were not reasonable,³⁷ “which, if believed, would refute at least one of the allegations that is essential to the [claims'] legal sufficiency”³⁸ under section 506, and as we shall...