In re Hagin

• Decision Date: 25 July 1927
• Docket Number: No. 3158.,3158.
• Citation: 21 F.2d 434
• Parties: In re HAGIN.
• Court: U.S. District Court — Eastern District of Louisiana

21 F.2d 434 (1927)

In re HAGIN.

No. 3158.

District Court, Eastern District, Louisiana, New Orleans Division.

July 25, 1927.

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James G. Schillin, of New Orleans, La., for petitioners.

D. H. Theard, of New Orleans, La., for mortgagee.

BURNS, District Judge.

Petitioners for review, E. A. Carrere Sons, complain of error in an order of the referee dated June 14, 1927, in that the referee allowed the Phœnix Building & Homestead Association, holder of a first mortgage, interest on its claim up to date of sale, and beyond the date of adjudication, together with certain fines and penalties assessed by the said homestead association, according to its by-laws, pursuant to the act of mortgage, after the date of adjudication, and attorney's fees up to $400.

Petitioner is the holder of a second mortgage, which cannot be paid in full because, while the security, consisting of real estate, sold for more than enough to pay the first mortgage, the overplus is not enough to pay petitioner in full. Hence this review.

Petitioner contends that no attorney's fees should be allowed, although stipulated for in the mortgage, because the mortgage was not due or exigible at the time of adjudication; that no suit by the mortgagee was necessary, and that the trustee made the sale; that such expenses are not provable or dischargeable in bankruptcy — citing section 63a of the Bankruptcy Act (11 USCA § 103); A. G. Gugel, Trustee, v. N. O. Bank (5 C. C. A.) 239 F. 676, 39 Am. Bankr. Rep. 161; In re Roche (5 C. C. A.) 101 F. 956; British & A. M. Co. v. Stuart (5 C. C. A.) 210 F. 425, 31 Am. Bankr. Rep. 465, and several other cases to the effect that such attorney's fees are not provable debts.

My conclusion is that section 63a has no bearing on the question. Section 67d (11 USCA § 107) applies. The vendor's lien and first mortgage before the court in this case is not attacked for invalidity. It is settled law that interest is to be computed on the mortgage up to the date of sale, where the security brings sufficient by its sale to pay the mortgage in full, in accordance with the terms of the mortgage, and that attorney's fees are allowable to the mortgagee in a reasonable amount, commensurate with the service rendered in the bankruptcy court. Such allowances do not depend upon or arise out of the contractual or conventional stipulation in the note and mortgage. Coder v. Arts (8 C. C. A.) 152 F. 943, 15 L. R. A. (N. S.) 372; affirmed in 213 U. S. 223, 29 S. Ct. 436, 53 L. Ed. 772, 16 Ann. Cas. 1008; San Antonio Loan & Trust Co. v. Booth (5 C. C. A.) 2 F.(2d) 590; In re Fabacher (D. C.) 193 F. 556, 27 Am. Bankr. Rep. 534; Remington, §§ 921, 2615; In re Torchia (D. C.) 185 F. 576.

The order of the referee discloses no error. The petition for review is denied. A decree may be entered, affirming the referee's order.

On Rehearing.

Upon the original submission of the petition for review, an opinion was filed sustaining the referee's order allowing an attorney fee of $400 to the first mortgage creditor, in accordance with a rule established in this district since 1911, when the cases of In re Ferreri, 188 F. 675, and In re Fabacher, 193 F. 556, were decided, and in which, upon equitable considerations, such fees were allowed, notwithstanding it was held that the mortgagee was not entitled to the 10 per cent. stipulated for in the act of mortgage, because the debt had not matured before adjudication in bankruptcy, and the mortgage note had not been placed in the hands of an attorney for legal proceedings. The conclusion was reached that a reasonable attorney's fee might be allowed the mortgage creditors upon the theory that certain decisions of the Supreme Court of Louisiana prior to the Bankruptcy Act of 1898 (11 USCA), notably H. J. Mullan v. His Creditors, 39 La. Ann. 397, 2 So. 45, were analogous. In that case the stipulated 10 per cent. was allowed in full, although the property securing the mortgage was sold by a syndic for the creditors, under the then subsisting insolvent laws of the state.

Since then the Circuit Court of Appeals for the Fifth Circuit has ruled that such stipulations should be strictly construed, in a case where the stipulation was identical with that under consideration. It reads as follows:

"The purchaser moreover agrees and binds himself, in case it should become necessary to institute suit for the recovery of the amount of said note or any part thereof, to pay fees of the attorney, who may be employed for that purpose, which fees are hereby fixed at 10 per cent. of the amount sued for."

The Court of Appeals held:

"As to the right of the first mortgagee to be allowed an attorney's fee of 10 per cent., as provided in his mortgage note, it is sufficient to say that in our opinion the occasion which called that provision into effect had not arisen under the facts in this case when the petition in bankruptcy was filed, since there were no legal proceedings instituted on the note or mortgage before the petition in bankruptcy was filed or thereafter. The sale free from liens in the bankruptcy court was not the equivalent, in this respect, of a foreclosure by the mortgagee of the mortgage lien. Merely placing the note in an attorney's hands did not fix the liability, which, as we construed the terms of the note, depended upon the rendition of legal services. The case of In re Roche, 101 F. 956, 42 C. C. A. 115, decided by this court, supports our conclusion." Gugel v. New Orleans National Bank (C. C. A.) 239 F. 676, 680. A stipulated, reasonable fee of $200 had been allowed in that case which was not in contest on review before the Circuit Court of Appeals.

In the instant case, the adjudication likewise intervened before the maturity of the mortgage note, and the occasion which called the stipulation for a 10 per cent. attorney's fee into effect has not arisen. Under the circumstances, which are identical with those in the Gugel Case, the mortgagee can take nothing under or by virtue of the stipulation in its contract. See, also, British & American Mortgage Co. v. George Stewart (C. C. A.) 31 Am. Bankr. Rep. 465, 210 F. 425; In re Jenkins (D. C.) 27 Am. Bankr. Rep. 860, 192 F. 1000; In re Garlington (D. C.) 8 Am. Bankr. Rep. 602, 115 F. 999; British & American Mortgage Co. v. Stuart (C. C. A.) 210 F. 425.

The contention for an allowance of attorney's fees such as was made in the Ferreri and Fabacher Cases, independent of the contract, upon alleged equitable considerations, and upon quantum meruit principles, is strenuously opposed by the petitioner for review, who holds a second mortgage. In addition to the above decided cases, the fact is emphasized that the Bankruptcy Act authorizes no payment of fees to attorneys for either secured or unsecured creditors, and therefore that this court has no authority to allow same. It is taken as significant that in the Ferreri and Fabacher Cases Judge Foster conceded that the decision of the Louisiana Supreme Court in the Mullane Case, where the full stipulated 10 per cent. was allowed, was merely analogous, although he considered it sufficient to sustain his exertion of the equity powers of this court.

The question does not depend upon mercantile law, but upon local statutes. In cases depending upon mercantile law, the true interpretation of contracts or other instruments of a commercial nature and the effects thereof are to be sought in the general jurisprudence, and the courts of the United States are not bound by the decisions of the courts of the state. R. S. 721, does not apply. Mechanics' American National Bank v. Coleman (C. C. A.) 204 F. 29, citing Swift v. Tyson, 16 Pet. 1, 10 L. Ed. 865, Burgess v. Seligman, 107 U. S. 20, 2 S. Ct. 10, 27 L. Ed. 359, and Liverpool & G. W. S. Co. v. Phenix Ins. Co., 129 U. S. 397, 9 S. Ct. 469, 32 L. Ed. 788.

In cases depending upon local statutes, however, the laws of the state must be regarded as rules of decision in the courts of the United States in cases where they apply. The courts of the United States are bound to take judicial notice of such statutes in considering questions affecting transfers, title, or interest in property respecting laws establishing rules of property as well as rules of practice. See R. S. 721, as section 1538, U. S. Comp. Stat. Ann., particularly the citations of authorities thereunder in footnotes 12, 14, 15, 19, and 24.

The act of sale and mortgage in this case is drawn in accordance with the statutory law of Louisiana, and, where such statutes are direct and applicable, the equity power of a court of the United States may not be exercised if the result conflicts with such statutes. Eaton on Equity, pp. 47, 48.

I am persuaded that, since an allowance of such fees is chargeable as a cost of administration in the bankrupt estate, and is therefore entitled to priority over all other creditors, it is given the quality or status of an equitable lien, thereby conflicting with a well-established rule of property, in respect of which the laws of the state are direct and applicable.

Equitable liens are unknown to the Romanesque law of Louisiana. Creditors generally have a direct common interest in the property of the debtor to which, or its proceeds, they have a right to a ratable distribution, except only for that part distinctly described and defined by the specific terms of a mortgage or a privilege. These are effective and...