In re Crafty Fox, Ltd.

• Decision Date: 06 February 1980
• Docket Number: Bankruptcy No. 77-00164.
• Parties: In re CRAFTY FOX, LTD., Debtor. FARMERS AND MERCHANTS BANK, Plaintiff, v. CRAFTY FOX, LTD., Defendant.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Virginia

3 B.R. 657 (1980)

In re CRAFTY FOX, LTD., Debtor.

FARMERS AND MERCHANTS BANK, Plaintiff, v. CRAFTY FOX, LTD., Defendant.

Bankruptcy No. 77-00164.

United States Bankruptcy Court, W.D. Virginia.

February 6, 1980.

Joseph P. Bounds, Roanoke, Va., for debtor-defendant.

Ralph B. Rhodes, Hutcherson & Rhodes, Rocky Mount, Va., for plaintiff.

Diana Perkinson, Roanoke, Va., for creditors' committee.

Ernest L. Light, Roanoke, Va., for disbursing agent.

MEMORANDUM OPINION AND ORDER

H. CLYDE PEARSON, Bankruptcy Judge.

The question presented concerns the reconsideration of the allowance of attorney's fees provided for in a deed of trust note secured upon debtor's real estate liquidated under a Chapter XI plan.

The threshold question involves the construction of Bankruptcy Rule 307¹ as to reconsideration of claims. A determination of this issue requires a review of the history of the case.

The Debtor, Crafty Fox, Ltd., owned and operated a 200 acre horse farm and riding stables in Franklin County, Virginia. As a part of this operation, the debtor also boarded horses for persons within the Roanoke area. In the course of its operation, cash flow and other financial troubles befell the debtor resulting in the filing of a Chapter XI petition in this Court. Thereafter, a plan was filed by the debtor, accepted by the creditors and confirmed by the Court. The plan provided for the sale and liquidation of all assets of the debtor free of liens with the liens being transferred to and impressed upon the proceeds. See Ray v. Norseworthy, 90 U.S. (23 Wall.) 128, 23 L.Ed. 116 (1875); Van Huffel v. Hardelrode, 284 U.S. 225, 52 S.Ct. 115, 76 L.Ed. 256 (1931); Wright v. Union Central Life Ins. Co., 304 U.S. 502, 58 S.Ct. 1025, 82 L.Ed. 1490 (1938); Alleboch v. Thomas 16 F.2d 853 (4th Cir. 1927) cert. denied, 274 U.S. 744, 47 S.Ct. 590, 71 L.Ed. 1325 (1927). The proceeds were to be distributed to its creditors in accordance with their respective priorities.

Among the creditors were two secured creditors holding deed of trust liens securing notes upon the debtor's real estate.

The first deed of trust had a total payoff of principal and interest of $112,409.70. This note was held by Loyd Flora, et al. (Flora) representing the initial purchase money of the farm. A second deed of trust note with a final payoff of $71,866.12, including principal and interest, was held by Farmers and Merchants Bank (Bank). Additionally, there were substantial priority creditors such as taxes, costs of administration and other claims, as well as substantial general unsecured creditors. Neither the debts represented by the notes or the liens secured by the deeds of trust were ever challenged throughout the proceedings by the debtor, creditor's committee or other party.

Both secured creditors filed Complaints pursuant to Rule 11-44 to be relieved from the stay and permitted to foreclose their respective deeds of trust. Decision thereon was deferred upon the Complaints to enable the Debtor to present a plan to its creditors for their consideration and acceptance. The plan was presented, accepted and confirmed providing for a sale free of liens at public auction subject to confirmation by this Court. The sale grossed the sum of $262,000.00. The disbursing agent duly appointed by the Court to receive and disburse the funds, filed his report with this Court projecting that the secured creditors, priority creditors, as well as unsecured creditors should in his judgment be paid in full, as well as all administrative costs and expenses if the sale was confirmed.

Pursuant to Rule 219, Counsel for the two noteholders filed applications for the allowance of attorneys' fees for services rendered to the noteholders in this Chapter XI proceeding. The applications were filed with detailed exhibits as to time expended, reserving to the applicants their objections to filing the same pursuant to Rule 219. These objections generally asserted the reason that this Court had no jurisdiction to consider and make a determination of the fees for Counsel for the respective deed of trust noteholders, since the notes themselves provided for a fixed contract amount payable to the noteholder for attorneys' fees and as such was not subject to alteration. Counsel contended that the notes providing a fixed sum was a matter of contract between the parties, to-wit: the maker (the Debtor herein) and the payee (noteholder) and therefore, was not subject to review, determination or revision by this Court.

Thereupon, this Court, in accordance with applicable law, as the Court had perceived it, overruled the objections, proceeded after proper notice, to hear² and determine what amount should be fixed as a reasonable fee to Counsel for services rendered to the deed of trust note creditors in the collection thereof. The services rendered consisted primarily of the filing of the Complaint seeking relief from the stay of Rule 11-44 to permit foreclosure of the deeds of trust, overseeing the progress of the Chapter XI proceeding through its several hearings and final consideration of the plan, liquidation and payment of the proceeds upon their respective notes in full of principal and interest as contemplated by the plan by the Disbursing Agent. This Court, after mature consideration of the applications and exhibits, Memoranda and arguments of counsel rendering a joint opinion and order, fixing in each case, the sum of $2,000.00 attorneys fees for each noteholder as reasonable compensation for services rendered by counsel in collection of the notes in question. (A copy of the written opinion is attached hereto as Appendix "A".)

The allowance of the fees in full would have called for payment to the Bank 15% of the payoff amount of $71,866.12, totaling $10,779.92, and the payment upon the first deed of trust note to Flora of $112,409.70 or a total fee of $5,620.49. (Payment of these fees in full, according to an analysis filed with the Court by the Disbursing Agent would result in general unsecured creditors receiving only a fraction of their claims.³

Counsel for Flora filed their appeal to the District Court from the Order of this Court, in which the District Court reversed, holding that the fixed sum of 5% in the note was a matter of contract between the parties and not subject to a review, determination or revision by this Court. (A copy of this Opinion is affixed hereto as Appendix "B".)

After the District Court rendered its decision, Counsel for the Bank, pursuant to Rule 307, supra, filed its petition or motion for reconsideration of the claim of the Bank alleging that the Order of the District Court, which in effect had affirmed the initial position of Counsel for the Bank and Flora, warranted this Court's reopening and reconsidering the claim of the Bank, and that the said Bank should be allowed in payment of its claim the full contract attorney's fees of 15% of the amount collected to-wit: $10,779.92 because the original order was entered by the Bankruptcy Court as a result of a misapplication of the law.

After due notice to all interested parties, a hearing was held upon the petition for reconsideration. Appearing thereat was counsel for the debtor, Bank, Creditors' Committee and the disbursing agent in person. The Court took under advisement the objections to the petition for reconsideration and proceeded to hear the case on its merits as provided by Rule 307.

Rule 307, Rules of Bankruptcy Procedure, provides that a party in interest may move for reconsideration of an order allowing or disallowing a claim against the estate which the Court may consider upon a hearing after due notice. Upon hearing, the Court may make such further orders as are appropriate.

Rule 307 is derived from and a substantial revision of Section 57k. Bankruptcy Act (11 U.S.C. Section 93k). This Section is as follows:

"Claims which have been allowed may be reconsidered for cause and reallowed or rejected in whole or in part according to the equities of the case, before but not after the estate has been closed."

The Advisory Committee's Note to Rule 307 in part is as follows:

"This rule is a substantial revision of § 57k of the Act and General Order 21(6). Because these provisions have spoken only of the reconsideration of claims that have been allowed, it has sometimes been held that a referee has no jurisdiction to reconsider a disallowed claim, or the amount of priority of an allowed claim, at the instance of the claimant himself. See, e.g., In re Gouse, 7 F.Supp. 106 (M.D.Pa.1934); In re Tomlinson & Dye, Inc., 3 F.Supp. 800 (N.D.Okl.1933). This view disregarded § 2a(2) of the Act and the "ancient and elementary power" of a referee as a court to reconsider any of his orders. In re Pottasch Bros. Co., Inc., 79 F.2d 613, 616 (2d Cir. 1935); Castaner v. Mora, 234 F.2d 710 (1st Cir. 1956). This rule recognizes the power of the court, including a referee, to reconsider an order of disallowance on appropriate motion. Reconsideration of a claim that has been previously allowed or disallowed after objection is discretionary with the court."

A motion or a petition for reconsideration is governed by Rule 914 as a contested matter adversary in nature. See 12 Collier on Bankruptcy (Rules of Bankruptcy Procedure) Section 307.02. Further, Rule 924 which incorporates Rule 60 Federal Rules of Civil Procedure is applicable where, as in this case, the ten day period for taking an appeal has, of course, expired. Rule 60(b) FRCP provides and enumerates several grounds for granting relief from a final judgment order or decree.

Subparagraph (6) provides that relief may be granted for:

"Any other reason justifying relief from the operation of judgment."

Counsel for the Bank in this case contends that this Court's misapplication of the law relating to attorney's fees provided in a deed of trust note in the identical cases of Flora and the Bank is a case of such a nature, that the Court should grant a reconsideration of...