In re Banks

• Decision Date: 30 December 1982
• Docket Number: Bankruptcy No. 82-3222,82-3545 and 82-3693.
• Citation: 31 BR 173
• Parties: In re Robert Eligha BANKS. In re George E. TOWNSEND. In re Arthur J. BUSH & Judy Ann Bush, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Alabama

31 B.R. 173 (1982)

In re Robert Eligha BANKS In re George E. TOWNSEND In re Arthur J. BUSH & Judy Ann Bush, Debtor.

Bankruptcy Nos. 82-3222, 82-3545 and 82-3693.

United States Bankruptcy Court, N.D. of Alabama, W.D.

December 30, 1982.

Glenn N. Baxter, Tuscaloosa, Ala., for Transamerica Financial Service.

J. William White, Tuscaloosa, Ala., for Robert Eligha Banks.

Walter P. Crownover, Tuscaloosa, Ala., for George E. Townsend.

C. Park Barton, Jr., Tuscaloosa, Ala., for Arthur J. Bush and Judy Ann Bush.

Jane K. Dishuck, Standing Trustee.

GEORGE S. WRIGHT, Bankruptcy Judge.

The issue before the Court is whether under § 506(b) an oversecured creditor is entitled to add a $50 attorney's fee for merely filing a proof of claim.

FINDINGS OF FACT

ROBERT ELIGHA BANKS (BK82-3222)

GEORGE E. TOWNSEND (BK82-3545)

ARTHUR J. BUSH & JUDY ANN BUSH (BK82-3693)

1. These three cases are filed under Chapter 13 listing Transamerica Financial Services (hereinafter Transamerica) as a secured creditor with a mortgage only on real property that is the debtor's principal residence.¹ The plans provided for direct current mortgage payments and payment of arrearage to cure the default through the plan as follows:

                                           Monthly
                               Petition    Current
                Debtor         Filed       Payment    Arrearage
                Banks          6/1/82       $156        $161
                Townsend       6/17/82        -           -
                Bush           6/24/82      $388        $776
                

2. Transamerica filed a Proof of Claim claiming arrearage and a $50 attorney's fee² for filing the proof of claim in each case for attorney for Transamerica, Glenn N. Baxter.

3. A confirmation hearing was had and Transamerica was ordered paid a monthly amount to cure the default.

4. Jane K. Dishuck, Standing Trustee, filed a "Motion of Trustee to Examine and Reduce Claim" objecting to the claim in each case for the $50 attorney's fee. A hearing was conducted and the Court determines that in each case the debtors had equity in their homestead so that Transamerica is oversecured within the meaning of § 506(b).³ The services performed by the attorney of merely filing a proof of claim are not required to be performed by an attorney and such type of services are not forbidden for nonlawyers.⁴

CONCLUSIONS OF LAW

I. THE VALIDITY AND CONSTRUCTION IS A MATTER OF STATE LAW

It is well established that in a bankruptcy proceeding the validity and construction of a clause in a note or mortgage providing for attorney's fees is a matter of state law. Security Mortgage Company v. Powers, 278 U.S. 149, 49 S.Ct. 84, 73 L.Ed. 236 (1928); In re Morris, 602 F.2d 826 (8th Cir.1979); In re Atlanta Int'l Raceway, Inc., 513 F.2d 546, 548 (5th Cir.1975); In re Sonoma V., 23 B.R. 789 (9th Cir.Bkrtcy.App. 1982); In re Dye Master Realty, Inc., 15 B.R. 932, 8 B.C.D. 475 (Bkrtcy.W.D.N.C. 1981); In re Crafty Fox Ltd., 5 B.R. 820, 821 (D.C.W.D.Va.1980).

II. ALABAMA LAW CONTROLS VALIDITY AND CONSTRUCTION

The language in the mortgages is limited in that attorney's fees are allowed for "advertising, selling and conveying, including such attorney's fees as are allowed by law", so that under the language of such mortgage an attorney's fee would only be allowed if there was a foreclosure sale and not for filing of a proof of claim or attendance of any hearings. Consequently, the language in the mortgages does not authorize the $50 attorney's fee in these three cases. However, the case of Taylor v. Jones, 290 Ala. 268, 276 So.2d 130, cert. denied, 414 U.S. 879, 94 S.Ct. 126, 38 L.Ed.2d 124 (1973), allowed the recovery of reasonable attorney's fees where the language in the note so authorized even though the language of the mortgage did not permit a recovery and, further the claim for attorney's fees became a part of the main debt.

The language in the notes in the three cases is substantially similar by providing that the debtor "agrees to pay reasonable attorney's fees" if referred to an attorney.

Code of Alabama, § 5-19-10 (1975) has a provision conditioning the allowance of attorney's fees:

"With respect to an original principal amount or original amount financed not exceeding $300.00, a consumer credit contract may not provide for payment by the debtor of attorney\'s fees. With respect to larger amounts, the contract may provide for the payment by the debtor of reasonable attorney\'s fees not exceeding 15 percent of the unpaid debt after default and referral to an attorney not a salaried employee of the creditor. . . . A provision in violation of this section is unenforceable." (Acts 1971, No. 2052, p. 3290, § 6.) (Underlining for emphasis.)

The language in the three notes provides:

"If the original balance of the loan exceeds Three Hundred Dollars ($300) I will pay reasonable attorney\'s fees, but not over fifteen percent (15%) of the unpaid balance, if you refer my account to an attorney who is not your salaried employee."

§ 5-19-10 requires two conditions: (1) "after default", and (2) "referral to an attorney", be placed in a contract before reasonable attorney's fees may be collected. The condition "after default" has been omitted from these notes, such failure makes the provision unenforceable and invalid under Alabama Law. Further, merely referring a matter to an attorney does not authorize attorney's fees because services must be necessary in order to recover under such note. Boyd v. Jones, 96 Ala. 305, 38 Am.St.Rep. 100, 11 So. 405 (1892); Hamilton et al v. Burgess, 233 Ala. 4, 170 So. 348 (1936); Gugel v. New Orleans Nat. Bank, 239 F. 676 (5th Cir.1917); Annot., "Right to Attorney's Fees on Enforcing Chattel Mortgages", 63 ALR 1314, 1315 (1929).

Consequently, the language in the notes under Alabama Law does not authorize the recovery of attorney's fees. See also In re Roberts, 20 B.R. 914, 6 C.B.C.2d 892 (Bkrtcy.E.D.N.Y.1982).

III. ENFORCEABILITY IS MATTER OF FEDERAL BANKRUPTCY LAW

The enforceability of the claim for attorney's fees is a question of Federal Bankruptcy Law. Security Mortgage Company v. Powers, supra; In re Atlanta Int'l Raceway, Inc., supra, at 549; In re Dye Master Realty, Inc., supra. The case of In re Delaney, 534 F.2d 645 (5th Cir.1976), held that even though a Chapter XIII debtor incurred attorney's fees after the commencement of the case that the enforcement is committed to the Court's discretion.

A. DISTINCTION BETWEEN REHABILITATIVE AND LIQUIDATION CHAPTERS. The Court must look at the underlying purpose of a Chapter 13 rehabilitative proceeding. The 5th Circuit has made a distinction between rehabilitative proceedings and liquidation proceedings in In re Atlanta Int'l Raceway, Inc., supra, 550:

"The Supreme Court has repeatedly stated that reorganization proceedings are sui generis, and rules appropriate in an ordinary bankruptcy may be inapplicable in a reorganization." See Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 470 n. 3, 94 S.Ct. 2504, 2507, 41 L.Ed.2d 243 (1974); Continental Illinois Nat. Bank & T. Co. v. Chicago, etc., Co., 294 U.S. 648, 676, 55 S.Ct. 595, 606, 79 L.Ed. 1110 (1935).

See also In re Delaney, supra, which held:⁵

"To permit creditors to add further to the debtor\'s burden, and to in effect achieve a late preference over other creditors, would subvert the purposes of such proceedings." at 534 F.2d 647.

See also In re Roberts, 20 B.R. 914, 922, (Bkrtcy.E.D.NY.1982); In re Burns, 16 B.R. 757, 762 (Bkrtcy.M.D.GA.1982); In re Caudle, 13 B.R. 29, 7 BCD 1301 (Bkrtcy.W.D. Tenn.1981) entitlement to interest under § 506(b).⁶

B. THE EFFECT OF § 362(a) AUTOMATIC STAY ON POST-PETITION ATTORNEY'S FEES. 11 U.S.C. § 362(a) provides that the filing of a bankruptcy petition operates as a stay of:

"(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate;

(4) any act to create, perfect, or enforce any lien against property of the estate;

(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;"

In the case of Diversified Mortgage Investors v. LaRose, 7 B.R. 447 (Bkrtcy.M.D. LA.1980), the Court held that a provision for attorney's fees in the real estate mortgage could not be enforced in a bankruptcy proceeding, which superseded an aborted arrangement proceeding under Chapter XI of the Bankruptcy Act of 1898. The note accompanying the mortgage provided that the mortgagor would pay 25% additional on the amount of both principal and interest if the note was "placed into the hands of an attorney or sued upon." In denying the post-petition attorney's fees the Court emphasized the automatic stay created by Rules 401 and 601 of the Bankruptcy Rules of Procedure. The Court reasoned:

"It is our conclusion that whatever legal services may have been sought by and rendered to Campbell after the commencement of the arrangement/bankruptcy proceeding were not within the purview of the stipulation, because the circumstances which might have created an absolute (as distinguished from conditional) obligation to pay attorney\'s fees were by law automatically prohibited from happening.

The automatic stay invoked by the institution of the proceeding barred any collection effort by Campbell; and his subsequent placement of the note in the hands of the attorneys was

...