In re Keaton

• Decision Date: 28 August 1997
• Docket Number: No. 1:95-CV-252,Bankruptcy No. 94-13206.,1:95-CV-252
• Citation: 212 BR 587
• Parties: In re Ken D. and Tonya J. KEATON, Debtors. Ken D. and Tonya J. KEATON, Appellants, v. BOATMEN'S BANK OF TENNESSEE, Appellee.
• Court: U.S. District Court — Eastern District of Tennessee

212 B.R. 587 (1997)

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

Ken D. and Tonya J. KEATON, Appellants, v. BOATMEN'S BANK OF TENNESSEE, Appellee.

No. 1:95-CV-252, Bankruptcy No. 94-13206.

United States District Court, E.D. Tennessee.

August 28, 1997.

Richard L. Banks, Richard L. Banks & Associates, PC, Cleveland, TN, for appellants.

David E. Nelson, Jr., Wagner, Nelson & Weeks, Chattanooga, TN, Herman O. Loewenstein, Nashville, TN, for appellee.

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

William R. Sonnenburg, U.S. Department of Justice, Office of U.S. Trustee, Chattanooga, TN, trustee.

MEMORANDUM

COLLIER, District Judge.

In this appeal from a final decision of the United States Bankruptcy Court for the Eastern District of Tennessee, In re Ken D. Keaton, 182 B.R. 203 (Bankr.E.D.Tenn.1995) (Stinnett, J.), Debtors Ken D. Keaton and Tonya J. Keaton challenge the Bankruptcy Court's decision allowing Creditor Boatmen's Bank of Tennessee ("the Bank") to collect attorney fees¹ incurred after Debtors filed a Chapter 13 bankruptcy petition. The issue on appeal arose because the Bank has an undersecured claim against the bankruptcy estate. The Bank asserts an $18,691.43 claim, including $250.00 in attorney fees, which is secured by collateral valued at $13,500.00. Thus, the Bank's claim is undersecured by approximately $5000.00.

I. STANDARD OF REVIEW

Jurisdiction to hear appeals from Bankruptcy Court is conferred by 28 U.S.C. § 158. In determining appeals from Bankruptcy Court, this Court sits as an appellate court, reviewing the Bankruptcy Court's findings of fact under a clearly erroneous standard, but conducting a de novo review of the Bankruptcy Court's conclusions of law. Fed.R.Bankr.P. 8013; In re Isaacman, 26 F.3d 629, 630 (6th Cir.1994); Harbour Lights Marina v. Wandstrat, 153 B.R. 781 (S.D.Ohio 1993). However, the Court may overturn matters within the discretion of the Bankruptcy Court only for an abuse of discretion. Fed.R.Bankr.P. 8003; American Imaging Services, Inc. v. Eagle-Picher Industries, Inc. (In re Eagle-Picher Industries, Inc.), 963 F.2d 855, 858 (6th Cir.1992); accord Investors Credit Corp. v. Batie, 995 F.2d 85, 88 (6th Cir.1993).

Debtors present two issues for review: (1) whether the Bank, as an undersecured creditor, is entitled to collect, from the bankruptcy estate, attorney fees incurred postpetition in contradiction to the express requirements and mandates of 11 U.S.C. § 502(b), 11 U.S.C. § 506(b), and Bankruptcy Rule 2016; and (2) whether the Bankruptcy Court erred in denying intervention by the United States Trustee in contradiction to the powers and obligations of that office in reviewing fee applications.²

Because the issues raised by Debtors involve conclusions of law and are matters of statutory construction, the Court will review the Bankruptcy Court's decision de novo. Having considered the arguments of the parties, carefully reviewed the briefs, the applicable law, and several sections of the Code in pari materia, the Court will AFFIRM the Bankruptcy Court's decision allowing attorney fees.

II. DISCUSSION

The issue sub judice can be considered in three parts. First, Debtors contend the Bank's attorney fees are a postpetition claim. Second, arguendo the fees are a prepetition claim, Debtors alternatively argue the fees are disallowed by § 506(b) because the Bank is not an oversecured creditor. Third, Debtors assert the analysis in United Savings Association of Texas v. Timbers of Inwood Forest Associates, 484 U.S. 365, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988), which disallows postpetition interest to an undersecured or unsecured creditor based on § 506(b), can be extended to disallow postpetition attorney fees to the Bank.

A. Are the attorney fees at issue a post-petition claim or a prepetition claim?

Based on § 502, Debtors argue the Bank has not asserted a prepetition claim for attorney fees. In relevant part, § 502 provides:

(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest . . . objects.

(b) . . . If such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that —

(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured;

(2) such claim is for unmatured interest. . . .

* * *

(c) There shall be estimated for the purpose of allowance under this section —

(1) any contingent or unliquidated claim, the fixing or liquidation of which . . . would unduly delay administration of the case. . . .

11 U.S.C. § 502 (emphasis added).

Emphasizing the phrase "as of the date of the filing of the petition," Debtors contend attorney fees incurred after the petition is filed are not allowed by § 502. Citing In re Saunders, 130 B.R. 208 (Bankr.W.D.Va. 1991); Matter of Mobley, 47 B.R. 62 (Bankr. N.D.Ga.1985); and In re Stafford (Traylor v. Stafford), 30 B.R. 338 (Bankr.E.D.Ark.1983), Debtors argue the Bank has a postpetition claim at best. According to Debtors, however, postpetition claims concerning a Chapter 13 bankruptcy are governed by 11 U.S.C. § 1305. Section 1305 allows only two types of postpetition claims: taxes and consumer debts necessary for the debtor's performance under the plan. Because attorney fees fit in neither of these categories, Debtors conclude the Bank's attorney fees claim should be disallowed.

Debtors read § 502 too narrowly, however. By negative implication, § 502(b)(1) allows "contingent" or "unmatured" claims which are enforceable against the debtor "under any agreement or applicable law." Moreover, § 101(5)(A) broadly defines "claim" to include 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."

Here, it is undisputed that the Bank is entitled to attorney fees under an agreement with Debtors.³ Thus, the question becomes whether the Bank's claim is a "contingent" or "unmatured" claim within §§ 502(b)(1) and 101(5)(A). In considering this question, the Court finds the Sixth Circuit's decision in In re Martin, 761 F.2d 1163 (6th Cir.1985), instructive. The creditor in Martin "filed an adversary proceeding to have its debt determined to be excepted from discharge under 11 U.S.C. § 523(a)(2)(B)."⁴ The creditor also requested attorney fees incurred in prosecuting the adversary proceeding.

The court first determined the creditor was entitled to an exception from discharge because the debtor had materially misrepresented his net worth in obtaining the loan at issue. Next, in considering whether the creditor was entitled to attorney fees, the court reasoned:

The Bankruptcy Act explicitly grants fees and costs to prevailing debtors:

(d) If a creditor requests a determination of dischargeability of a consumer debt under subsection (a)(2) of this section, and such debt is discharged, the court shall grant judgment against such creditor and in favor of the debtor for the costs of, and a reasonable attorney\'s fee for, the proceeding to determine dischargeability, unless such granting of judgment would be clearly inequitable.

11 U.S.C. § 523(d); see In re Carmen, 723 F.2d 16 (6th Cir.1983).

The congressional failure to award attorney\'s fees to prevailing creditors was not accidental. Congress enacted section 523(d) out of concern that creditors were using the threat of litigation to induce consumer debtors to settle for reduced sums, even though the debtors were in many cases entitled to discharge.

The bill does not award the creditor attorney\'s fees if the creditor prevails. Though such a balance might seem fair at first blush, such a provision would restore the balance back in favor of the creditor by inducing debtors to settle no matter what the merits of their cases. In addition, the creditor is generally better able to bear the costs of the litigation than a bankrupt debtor, and it is likely that a creditor\'s attorney\'s fees would be substantially higher than a debtor\'s, putting an additional disincentive on the debtor to litigate.

H.R.Rep. No. 595, supra p. 1166, at 131, reprinted in 1978 U.S.Code Cong. & Ad. News at 6092.

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). Tennessee state law enforces such contractual obligations for reasonable attorney\'s fees. See, e.g., Coble Systems v. Gifford Co., 627 S.W.2d 359, 364 (Tenn. Ct.App.1981).

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 and is not dependent on an award of costs, so Rule 754 had no application here.

Martin, 761 F.2d at 1167-68 (emphasis added).

Although the Martin court did not face the precise issue presented in this case, its reasoning is nevertheless helpful in considering the claim at hand. The Martin court's conclusion that "a contractual right to attorney's fees is part of the debt" lends force to the argument that the Bank's...