In re Evans

Citation336 B.R. 749
Decision Date20 January 2006
Docket NumberNo. 05-12040.,05-12040.
PartiesIn re Hubert N. EVANS, Julia C. Evans, Debtors.
CourtUnited States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio

David A. Kruer, Dearfield, Kruer & Company LLC, Portsmouth, OH, for debtors.

Joel K. Jensen, Lerner, Sampson & Rothfuss, Cincinnati, OH, for Bankers Trust Company.

ORDER

J. VINCENT AUG, JR., Bankruptcy Judge.

This matter is before the Court on the Debtors' "Objection to Proof of Claim Filed By Bankers Trust Company of California" (Doc. 20), on the response and memorandum filed by Bankers Trust (Docs. 27 & 35) and on the Chapter 13 Trustee's brief and memorandum in support of the Debtors' objection (Doc. 32). An evidentiary hearing was held on October 26, 2005.

This Court has jurisdiction over this matter under 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). The following constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

FACTS

Debtors filed their chapter 13 petition and plan on March 23, 2005. The plan provides for the payment of a mortgage arrearage in the amount of $6,470.28. On April 11, 2005, Bankers Trust filed a proof of claim asserting a secured claim for a mortgage arrearage in the amount of $16,642.28. That proof of claim was amended on July 14, 2005, to reflect a secured claim for the arrearage in the amount of $17,397.82. Debtors' plan was confirmed by order entered on August 4, 2005.

The Debtors object to the inclusion of the following charges in Bankers Trust's secured claim for the mortgage arrearage, which essentially fall into the listed categories:

                Attorney fees
                     Pre-petition
                     Foreclosure attorney fees      $1,700.00
                     Previous bankruptcy atty
                       fees/costs                    1,950.00    $3,650.00
                                                    _________
                     Post-petition
                     Post-petition bankruptcy
                       atty fees                    $  550.00       550.00
                Title work:1
                     Foreclosure title work         $  350.00
                     Title update work                 200.00
                     Foreclosure title insurance        58.00       608.00
                                                     ________
                Costs
                     Estimated court costs          $2,809.84
                     Escrow advance                    284.75
                     Property preservation             225.45
                     Suspense balance                   13.20    $3,333.24
                                                    _________    _________
                     Total                                       $8,141.24
                                                                ==========
                

Debtors request that Bankers Trust's claim be disallowed in the amount of $8,141.24. They assert that inclusion of these fees and costs in the amount due to Bankers Trust violates §§ 1322(e) and 506(b) of the Bankruptcy Code2 and that it also violates Ohio public policy. The Chapter 13 Trustee joins in the Debtors' objection with respect to the above claims with the exception of the escrow advance and the suspense balance. On the theories discussed below, Bankers Trust asserts that the above amounts are properly included in its proof of claim for the mortgage arrearage.

At the hearing, the parties stipulated to the following facts:

1. The loan documents executed between the parties contemplated the payment of the charges included in Bankers Trust's proof of claim.

2. The mortgage is undersecured.

3. Debtors stipulated for the purposes of the hearing only, that the charges accrued by the creditor are reasonable. The Debtors reserved the right to challenge specific charges at a later date.

ISSUES AND DISCUSSION

1. In a chapter 13 case, must a creditor meet the requirements of both § 506(b) and § 1322(e) to be entitled to include its attorney fees, costs and charges in its secured claim for a mortgage arrearage?

a. If the creditor does not meet the requirements of § 506(b) does that mean that it may still have a claim for attorney fees, costs and charges but that those amounts are unsecured?

b. Can an unsecured claim be part of an arrearage claim pursuant to § 1322(e)?

2. Is a cure of a mortgage default pursuant to § 1322(b)(3) the equivalent of a reinstatement of a mortgage under the terms normally found in a residential mortgage?

11 U.S.C. § 506 determines when a claim is entitled to secured status but does not govern the actual allowance or disallowance of a claim. It provides:

§ 506. Determination of secured status.

. . .

To the extent that an allowed secured claim is secured by property the value of which, . . . is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.

11 U.S.C. § 506(b). Based on the parties' stipulation that Bankers Trust is undersecured, Bankers Trust does not meet the requirements of § 506(b) to include the above charges and costs as a secured part of its claim. However, Bankers Trust argues that the plain language of § 1322(e) provides that only the provisions of § 1322(e) are relevant to determine the amount of the arrearage owed by a debtor to a creditor and that the requirements of § 506(b) do not apply. On the other hand, the Debtors and the Chapter 13 Trustee assert that the requirements of both sections must be met.

Pursuant to § 1322(b)(3), the Debtors' plan may include provisions to cure its default with Bankers Trust. The amount necessary to cure the default is established by § 1322(e) which provides:

Notwithstanding subsection (b)(2) of this section and sections 506(b) and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the amount necessary to cure the default, shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.

Case Law Analysis

Many oversecured creditors in this district, as noted in the cases below, have argued that only § 506(b) applies and the courts have found that the oversecured creditors must in fact meet the requirements of § 1322(e). We now have an undersecured creditor arguing that § 506(b) does not apply at all and that it only needs to meet the requirements of § 1322(e). Our research shows that the language of § 1322(e) is far from plain and clear. There is case law on both sides of this issue and the interplay between the sections is in a confusing state.

The Bankruptcy Appellate Panel for the Ninth Circuit found that

Although § 1322(e) appears to trump § 506(b), both sections potentially pertain when a secured creditor files a proof of claim, because it will not always be apparent that the debtor's chapter 13 plan will cure the default, and the case may be converted to or from chapter 7. The Code does not establish specific procedures for determining § 506(b) claims and § 1322 cure amounts.

Atwood v. Chase Manhattan Mortgage Co. (In re Atwood), 293 B.R. 227, 231 (9th Cir. BAP 2003) (reversing bankruptcy court where it failed to make a determination of reasonableness of attorney fees awarded in cure amount).

Cases in Ohio that have dealt with both § 506(b) and § 1322(e) involve a creditor that was oversecured and are thus, distinguishable from the case before us. In re Lake, 245 B.R. 282 (Bankr.N.D. Ohio 2000) and In re Landrum, 267 B.R. 577 (Bankr.S.D. Ohio 2001) (Hopkins, J.) are cited by Banker's Trust as support for the position that § 506(b) does not apply. However, the applicability of § 506(b) was not at issue or analyzed in In re Lake, and as noted, the creditor in In re Landrum, was oversecured. See also In re Shaffer, 287 B.R. 898 (Bankr.S.D.Ohio 2002) (Hopkins, J.) (oversecured creditor who met the requirements of § 506(b) must still meet the requirement of § 1322(e) that the attorney fees incurred with respect to an arrearage must be permitted by state law); In re Tudor, No. 03-68935, (Bankr.S.D.Ohio Dec. 9, 2005) (Hoffman, J.)(same). These cases have not dealt squarely with the argument that the creditor must meet the requirements of both sections.

Other courts have stated that both sections must be considered but the creditor may be entitled to attorney fees on the basis of § 1322(e) even if it does not meet all the requirements of § 506(b). In re Taylor, No. 02-10695, 2003 WL 22282173, at *3 (Bankr.D.Vt. Oct. 1, 2003) (considering both §§ 506(b) and 1322(e) on an alternative basis and finding that "the fact that [the creditor] was not an oversecured creditor does not disqualify it from collecting attorney's fees under § 1322(e).").

Still other courts have held that § 506(b) does not apply when determining a creditor's claim to cure a default. See Smiriglio v. Hudson United Bank, 98 Fed. Appx. 914, 2004 (3d Cir.2004)(§ 1322(e) supersedes § 506(b) at least in cases involving fees included in a claim for arrears); Key Bank of N.Y. v. Harko (In re Harko), 211 B.R. 116, 122 (2d Cir. BAP 1997) ("the introductory language [of § 1322(e)], which specifically references §§ 506(b) and 1325(a)(5), makes clear that these sections have no applicability in a cure situation."); In re Plant, 288 B.R. 635 (Bankr.D.Mass.2003) (§ 506(b) is inapplicable to a court's review of attorney fees in a case where a debtor seeks to cure a prepetition default over the life of a chapter 13 plan pursuant to § 1322(b)(5)). One commentator has stated,

For contracts entered into after October 22, 1994, 11 U.S.C. § 1322(e) makes no distinction between oversecured and undersecured claims. If a Chapter 13 plan cures default on an undersecured residential mortgage that was entered into after October 22, 1994, the amount necessary to cure default includes fees, expenses and other charges and interest to the extent allowed by the agreement and by nonbankruptcy law. The extent of security is irrelevant to new § 1322(e) — even if the residential mortgage is entirely unsecured, if the plan cures default, the mortgage holder will be entitled to recover whatever charges are allowed by the underlying agreement and...

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9 cases
  • In re Boyd, No. 08-14279 (RTL).
    • United States
    • U.S. Bankruptcy Court — District of New Jersey
    • 9 December 2008
    ...legal fees. A charge for the preparation and filing of a proof of claim is not a default that is being cured."); In re Evans, 336 B.R. 749, 752-56 (Bankr. S.D.Ohio 2006) (finding that § 1332(e) must be read in conjunction with § 506(b) and thus, a creditor must be oversecured in order for f......
  • Through Its Serv.r Countrywide Home Loans Inc. v. Tucker
    • United States
    • United States Courts of Appeals. United States Court of Appeals (6th Circuit)
    • 15 September 2010
    ...everything required by the underlying agreement and nonbankruptcy law regardless of whether the debt is undersecured), with In re Evans, 336 B.R. 749 (Bankr.S.D.Ohio 2006) (holding that a Chapter 13 debtor need only cure the amount of the default that is secured as defined in 11 U.S.C. § 50......
  • In re Thompson, 06-31642.
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio
    • 9 August 2007
    ...in light of its purpose, is ambiguous in its application to undersecured creditors. This position is represented by In re Evans, 336 B.R. 749 (Bankr.S.D.Ohio 2006), a similar case from an Ohio bankruptcy court dealing with an undersecured creditor attempting to include attorney fees, costs ......
  • In re McKenna
    • United States
    • United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Northern District of Ohio
    • 26 October 2006
    ...law does not allow for the assessment of legal fees and costs, can they be assessed anyway under § 506(b). In re Evans, 336 B.R. 749, 753 (Bankr.S.D.Ohio 2006). However, at this particular juncture, this tension between the two provisions is more academic than As just discussed, applicable ......
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