In re Keaton

• Decision Date: 01 June 1995
• Docket Number: Bankruptcy No. 94-13206.
• Citation: 182 BR 203
• Parties: In re Ken D. KEATON, Tonya J. Keaton, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Tennessee

182 B.R. 203 (1995)

In re Ken D. KEATON, Tonya J. Keaton, Debtors.

Bankruptcy No. 94-13206.

United States Bankruptcy Court, E.D. Tennessee.

June 1, 1995.

Richard L. Banks, Cleveland, TN, for debtors Ken D. Keaton and Tonya J. Keaton.

Herman O. Loewenstein, Nashville, TN, David E. Nelson, Wagner, Nelson & Weeks, Chattanooga, TN, for Boatmen's Bank.

Arthur C. Grisham, Jr., Grisham, Knight & Hooper, Chattanooga, TN, amicus curiae.

MEMORANDUM

R. THOMAS STINNETT, Bankruptcy Judge.

In this chapter 13 case, Ken D. Keaton and wife, Tonya J. Keaton ("Debtors") have filed an objection to the claim of Boatmen's Bank of Tennessee ("Boatmen's") to the extent that Boatmen's seeks to include in its claim attorney's fees in the amount of $250.00 for representation in the bankruptcy court. For the reasons hereinafter stated, the objection will be overruled and the claim allowed as filed.

This is a core proceeding. 28 U.S.C. § 157(b)(2)(B).

I.

The Debtors filed their voluntary petition under chapter 13 of the United States Bankruptcy Code (11 U.S.C.) on September 7, 1994. As pertinent here, the chapter 13 plan proposed under paragraph 2(C) that holders of certain allowed secured claims would retain the liens securing such claims and would be paid the value of the security. Paragraph 2(C) of Debtors' plan also proposed that the unsecured balance would be paid as provided in paragraph 2(E).

Boatmen's was listed as a secured creditor under paragraph 2(C). The plan indicates Boatmen's has a security interest in a Nissan pickup having a value of $13,500.00. The plan further provides that Boatmen's will receive $287.00 per month until the value of its collateral is paid in full together with interest at the rate of 10% per annum.

The chapter 13 plan of the Debtors proposed in paragraph 2(E) that the holders of allowed unsecured claims (including the unsecured claim of any undersecured creditor) would be paid 71% of the claim during the plan.

Boatmen's received notice of the meeting of creditors scheduled pursuant to 11 U.S.C. § 341(a). With the notice, Boatmen's was also provided a plan summary indicating how Debtors proposed to treat the Boatmen's indebtedness. The notice also provides:

". . . The creditors must file any objection to confirmation in writing at or before the first date and hour set for the meeting of creditors. A claim secured by a non-voidable lien will be allowed as a secured claim only to the extent of the value of the property securing the claim and an unsecured claim as to the balance. . . . The value of the collateral proposed by the Debtors\' plan will become the value of the secured portion of the claim upon confirmation unless a timely objection to confirmation is filed. . . . "

The meeting of creditors was held on October 5, 1994, as scheduled. The attorney for Boatmen's appeared at the meeting of creditors. Although a claim was filed on behalf of Boatmen's on October 5, 1994, indicating its collateral had a value of $18,691.43, no objection to confirmation was filed by Boatmen's.

There being no objection to confirmation filed on behalf of any creditor, the Debtors' plan was confirmed by order entered as of October 5, 1994. Thus, the value of the collateral stated in Debtors' plan became binding upon the Debtors and Boatmen's. 11 U.S.C. § 1327(a). See, e.g., In re Basham, 167 B.R. 903 (Bankr.W.D.Mo.1994); Midlantic National Bank v. Kouterick (In re Kouterick), 161 B.R. 755 (Bankr.D.N.J.1993); In re Fox, 142 B.R. 206 (Bankr.S.D.Ohio 1992); 2 KEITH M. LUNDIN, CHAPTER 13 BANKRUPTCY § 6.10 at 6-17 — 6-26 (2nd ed. 1994). As a result, Boatmen's claim is undersecured. The portion of the claim that exceeds $13,500 is a general unsecured claim for purposes of this Chapter 13 case. The attorney's fees, as allowed in the case, will be part of the unsecured claim. In re Ely, 28 B.R. 488 (Bankr.E.D.Tenn.1983); see, Sexton v. Dreyfus, 219 U.S. 339, 31 S.Ct. 256, 55 L.Ed. 244 (1911); 3 JAMES W. MOORE, ET AL., COLLIER ON BANKRUPTCY ¶ 57.20 (14th ed. 1978).

Boatmen's claim included an attorney's fees of $250.00 for representation in the bankruptcy court.¹ Debtors promptly filed their objection.

II.

The sole issue before the court is whether an undersecured creditor² is entitled to include in its claim attorney's fees anticipated in a chapter 13 case³, provided the creditor has a non-bankruptcy right to attorney's fees in the event of default⁴.

In the event an objection is made to a claim, the court, after notice and a hearing, is required to ". . . determine the amount of such claim as of the date of the filing of the petition . . ." 11 U.S.C. § 502(b). Accordingly, resolution of this issue must begin with the definition of claim in the Bankruptcy Code.

The Bankruptcy Code includes a broad definition of claim:

(5) "claim" means —

(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal equitable, secured, or unsecured; . . .

11 U.S.C. § 101(5)(A).

The definition may include both prepetition and postpetition claims. Cf. 11 U.S.C. § 101(10) (definition of creditor); 11 U.S.C. §§ 501 & 502 (allowance of creditors' claims); 11 U.S.C. §§ 726 & 1325 (distributions to and treatment of allowed claims). However, the definition is relevant to determine whether Boatmen's had a right to payment at the time the petition was filed even though the right was contingent, unliquidated, or unmatured at that moment.

Mistakenly, the debtors refer to the attorney's fees as "postpetition" fees. While the representation may have been performed after the petition was filed, Boatmen's right to collect attorney's fees arose out of the contract and is a prepetition claim. In re United Merchants & Manufacturers, 674 F.2d 134, 137 (2d Cir.1982).

Similar conflicts arose between debtors and creditors under the preceding bankruptcy statutes that were known as the Bankruptcy Act. 11 U.S.C. (1978). The issue then was whether a creditor's claim for attorney's fees was provable. The law developed over a long period of time, but the courts finally established the rule that the creditor had a provable claim for attorney's fees if the contingencies were removed postpetition, and the contract language entitled the creditor to the add the attorney's fees under state law. 3A JAMES W. MOORE, ET AL., COLLIER ON BANKRUPTCY ¶ 63.15 (14th ed. 1978); In re United Merchants & Manufacturers, supra; Toys `R Us v. Esgro, Inc. (In re Esgro, Inc.), 645 F.2d 794 (9th Cir.1981); LeLaurin v. Frost National Bank of San Antonio, 391 F.2d 687 (5th Cir.1968); Hartman v. Utley, 335 F.2d 558 (9th Cir.1964). The development of the law and the reasoning of the cases decided under the Bankruptcy Act are instructive in reaching the conclusion that Boatmen's claim for attorney's fees is a prepetition claim.⁵

The Bankruptcy Code requires the same result. The Code discontinued the concept that claims must be provable in order to be allowed and adopted a broad definition of claim. The Code also dropped the rule that a contingent claim was not provable and not discharged, if the claim could not be liquidated or reasonably estimated without undue delay. Compare 11 U.S.C. §§ 93(d), 103(d) & 35(a) (1978) (Bankruptcy Act §§ 57(d), 67(d) & 17(a)) and 11 U.S.C. §§ 101(5), 101(12), 524(a), & 502(c); Woburn Associates v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1, 8-9 (1st Cir.1994); 3 LAWRENCE P. KING, ET AL., COLLIER ON BANKRUPTCY ¶ 502.03 (15th ed. 1995).

Cases under the Bankruptcy Code have reached the same result with regard to the creditor's claim for attorney's fees. The creditor has a prepetition, contingent, and unliquidated claim for attorney's fees. Woburn Associates v. Kahn (In re Hemingway Transport, Inc.), 954 F.2d 1, 8-9 (1st Cir. 1994); In re Independent American Real Estate, Inc., 146 B.R. 546, 555-556 (Bankr. N.D.Tex.1992); In re New York Trap Rock Corp., 137 B.R. 568 (Bankr.S.D.N.Y.1992); In re Ely, 28 B.R. 488 (Bankr.E.D.Tenn. 1983); In re Ladycliff College, 46 B.R. 141 (Bankr.S.D.N.Y.1985). Further, the Sixth Circuit Court of Appeals reached the same conclusion in In re Martin, supra:

However, creditors are entitled to recover attorney\'s fees in bankruptcy claims if they have a contractual right to them valid under state law, which appears to be the case here, as the note itself provided that the Martins would reimburse the Bank for the costs and attorney\'s fees necessary to collect the note. Security Mortgage Co. v. Powers, 278 U.S. 149, 153-54, 49 S.Ct. 84, 85-6, 73 L.Ed. 236 (1928); In re Bain, 527 F.2d 681, 685 (6th Cir.1975). The validity of the creditor\'s claim for attorney\'s fees does not depend on whether the obligation is secured (unless state law so provides). In re United Merchants & Manufacturers, 674 F.2d 134, 137 (2d Cir.1982). . . .

The bankruptcy court disallowed costs to the Bank pursuant to its discretionary power to award costs under former Bankruptcy Rule 754(b). However, a contractual right to attorney\'s fees is part of the debt to the creditor and is not dependent on an award of costs, so Rule 754 had no application here. See Bain, 527 F.2d at 685.

761 F.2d at 1168.

The Sixth Circuit's reasoning and its reliance on United Merchants & Manufacturers leaves little doubt⁶ that the Sixth Circuit would treat Boatmen's claim as a prepetition claim. Liberty National Bank & Trust Co. v. George, 70 B.R. 312, 316-317 (W.D.Ky. 1987); United Merchants & Manufacturers v. Equitable Life Assurance Society (In re United Merchants & Manufacturers), 674 F.2d 134, 137 (2d Cir.1982); Barclays/American Business Credit, Inc. v. Adams, 171 B.R. 298, 305 (Bankr.W.D.Tenn.1992).

The result is actually more beneficial for debtors in bankruptcy. If the attorney's fees are a postpetition debt, they will not be discharged in a Chapter 7 liquidation case. The creditor will have a right to collect them after the debtor receives a discharge....