In re Centre Court Apartments, Ltd.
| Decision Date | 21 April 1988 |
| Docket Number | Bankruptcy No. 87-00911-JB,A87-00910-JB. |
| Citation | 85 BR 651 |
| Parties | In re CENTRE COURT APARTMENTS, LTD., Debtor. In re EXECUTIVE PROPERTIES, LTD., Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
James C. Cifelli, Lamberth, Bonapfel, Cifelli & Willson, Atlanta, Ga., for debtors.
Paul E. Pressley, Hatcher, Irvin & Pressley, Atlanta, Ga., for Julius Iteld and Paul Klein.
This case presents the question of whether an oversecured creditor can enforce provisions for attorney's fees in a note and deed to secure debt as allowed under Georgia law in a Chapter 11 case when the Chapter 11 debtor proposes a plan to cure and reinstate the debt pursuant to 11 U.S.C. § 1124(2) and when the debtor in fact cures all arrearages and reinstates the debt and then pays the creditor in full the very next day from a Court approved sale of the collateral. The answer requires an analysis of the nature of the creditor's attorney's fee claim under Official Code of Georgia Annotated § 13-1-11 and an analysis of the effect of 11 U.S.C. § 1124(2) and 11 U.S.C. § 506(b) on the attorney's fee claim.
The two Chapter 11 debtors here, Executive Properties, Ltd., and Centre Court Apartments, Ltd., purchased an apartment complex located in Clayton County, Georgia (the "Property") in December of 1981 from Julius Iteld and Paul Klein. Both debtors are California limited partnerships. Centre Court Apartments, Ltd., purchased a 53.2% interest in the Property, and Executive Properties, Ltd. purchased the remaining 46.8% interest. In connection with that purchase, the debtors executed a purchase money promissory note in the principal amount of $700,000.00 (the "Note") and a purchase money deed to secure debt to secure that Note. The Note was payable in graduated amounts with a final balloon payment in 1991. The Note provided, in pertinent part, as follows:
Should this Note, or any part of the indebtedness evidenced hereby, be collected by law or through an attorney, the holders shall be entitled to collect reasonable attorneys fees and all costs of collection.
The purchase money deed to secure debt provided, in pertinent part, as follows:
And Grantor hereby further covenants and agrees that in case of any default in any partial payment of said indebtedness or in the due performance of any of the covenants herein expressed to be performed by Grantor, then and in that event, the entire amount of said principal indebtedness, together with any and all sums paid for account of Grantor in accordance with the provisions above set forth, shall, at the option of Grantee, then and thereby become and be due and payable forthwith, with accrued interest, and all expenses and cost of collection, including fifteen per centum of the amount due as attorney\'s fees, and the amount of such costs, expenses and fees shall be added to the amount of the debt hereby secured as part thereof and as such shall also be covered by the security of this deed; and time is the essence of this contract. (emphasis added)
In December of 1982, the debtors sold the Property and received a "wrap" note secured by a deed to secure debt. The new purchaser defaulted in January of 1985, and the debtors attempted to foreclose but were stayed by two Chapter 11 petitions filed by the purchaser. Ultimately, the automatic stay was lifted in those cases, and the debtors foreclosed on the Property in August of 1986. Julius Iteld and Paul Klein had not received any payments on the Note at issue here since August of 1985. On July 17, 1986, counsel for Messrs. Iteld and Klein notified the debtors by letter of their defaults and advised the debtors of their right to cure the defaults.
On August 6, 1986, counsel for Messrs. Iteld and Klein wrote the debtors notifying them that the debt had been accelerated and that they had the right under O.C.G.A. § 13-1-11 to pay all principal and interest within ten days of the receipt of the letter to avoid incurring attorney's fees. On August 29, 1986, more than ten days after the receipt of that letter, the debtors filed Chapter 11 petitions in the United States Bankruptcy Court in Los Angeles, California. In December of 1986, the cases were transferred to the United States Bankruptcy Court for the Northern District of Georgia.
On May 26, 1987, the debtors gave notice of a proposed sale of the Property pursuant to 11 U.S.C. § 363 and Bankruptcy Rules 6004 and 6006. The debtors proposed to sell the Property to an unrelated entity called Centre Court, Ltd., for $1,200,000.00 on June 15, 1987. On June 4, 1987, Iteld and Klein filed a motion for relief from the automatic stay. Following a hearing on that motion, the Court entered an order on July 1, 1987 denying the motion for relief from the automatic stay, advising Iteld and Klein that they could renew that motion and ordering the debtors to make all mortgage payments to Iteld and Klein on a current and ongoing basis.
On July 27, 1987, the debtors filed a joint disclosure statement and a joint plan of reorganization. The plan classified the secured claim by Messrs. Iteld and Klein as a Class III claim and provided the following treatment for that claim:
In the portion of the plan describing the means for implementation of the plan, the debtors state that their primary source for funding the plan would be operating revenue and the proceeds of a sale or refinancing of the Property. In Article VI of the plan entitled "Effect of Confirmation", the plan states that "by virtue of the reinstatement of their mortgage provided for herein, the Class III claimants shall not be permitted to declare a default and accelerate the unpaid balance under their promissory note and deed to secure debt due to any pre-Confirmation default".
In the disclosure statement, the debtors state that the plan provides that the debtors will pay all pre-confirmation arrearages to the Class III claimants on or before the Effective Date, thus curing any default under the terms of the Note and security deed and reinstating the maturity of the obligation. The disclosure statement further states that .
The disclosure statement states that the debtors intended to sell or refinance the Property and that they believe that a sale or refinancing will take place within 60 days of confirmation. The disclosure statement also states that acquisition and refinance loan commitments were recently obtained, that there was an existing contract which may close following confirmation, and that in the unlikely event that the Property could not be sold or refinanced, funds would be made available to meet all of the debtors' obligations under the plan.
On September 3, 1987, the Court held a hearing on the debtors' disclosure statement and approved it over the objections of Messrs. Iteld and Klein.
On September 21, 1987, the Honorable A. David Kahn held a hearing on the confirmation of the debtors' plan. The debtors announced that they planned to sell the Property on September 25, 1987; that they planned to pay all arrearages to Iteld and Klein and all unpaid taxes the day before the sale in order to bring the debt current; and that they planned to pay the entire outstanding balance to Iteld and Klein at the closing. The debtors announced that they were in a position to cure and reinstate the debt prior to closing. Iteld and Klein objected to the confirmation of the debtors' plan since it failed to provide for the payment of statutory attorneys's fees under O.C.G.A. § 13-1-11 which they claimed to be approximately $84,000.00.
At the hearing, the Court encouraged the parties to sell the Property promptly and to submit briefs on the issues regarding attorney's fees. The Court deferred ruling on the confirmation of the plan pending the submission of briefs, without prejudice to anyone's rights, and the Court directed the debtor to reinstate the debt of Iteld and Klein prior to closing to preserve the debtors' position.1
On September 21, 1987, the Court entered an Order authorizing the debtors to sell the Property to Centre Court, Ltd. pursuant to the contract dated May 15, 1987 as promptly as possible. The Court recognized in its Order that no objections had been filed to the notice of the proposed sale and that the original closing date referred to in the notice had been extended.
On September 23, 1987, the debtors sent a certified check to counsel for Messrs. Iteld and Klein in the amount of $145,708.75 and paid some $35,783.17 in property taxes. At the same time, the debtors deposited $86,751.94 in the Registry of the Bankruptcy Court, representing funds sufficient to satisfy Iteld's and...
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