In re Masnorth Corp., Bankruptcy No. 82-00992A

• Decision Date: 07 April 1983
• Docket Number: Bankruptcy No. 82-00992A,Adv. No. 82-2675A.
• Citation: 28 BR 892
• Parties: In re MASNORTH CORP., a/k/a the Courtyard Shopping Center, Debtor. The MIDLAND MUTUAL LIFE INSURANCE COMPANY, Plaintiff, v. MASNORTH CORP., a/k/a the Courtyard Shopping Center, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

28 B.R. 892 (1983)

In re MASNORTH CORP., a/k/a the Courtyard Shopping Center, Debtor The MIDLAND MUTUAL LIFE INSURANCE COMPANY, Plaintiff, v. MASNORTH CORP., a/k/a the Courtyard Shopping Center, Defendant.

Bankruptcy No. 82-00992A, Adv. No. 82-2675A.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

April 7, 1983.

Ron L. Quigley, Davis, Matthews & Quigley, P.C., Atlanta, Ga., for plaintiff.

Alfred G. Adams, Jr., Sutherland, Asbill & Brennan, Atlanta, Ga., for defendant.

ORDER

W. HOMER DRAKE, Bankruptcy Judge.

This case is before the Court on the Complaint for Relief from Stay filed by The Midland Mutual Life Insurance Company ("Midland") and on confirmation of the debtor's Chapter 11 plan of reorganization. After notice, a hearing was held on December 1, 1982, on these issues. The bases for Midland's objection to confirmation and complaint for relief from the automatic stay are substantially identical. Therefore, the Court will address Midland's objection to confirmation and complaint for relief from stay jointly.

The debtor's plan of reorganization seeks to cure and reinstate Midland's mortgage on 6600 Roswell Road ("the property") under the provisions of 11 U.S.C. § 1124.¹ Midland is the debtor's sole secured creditor. Midland contends that the debtor should not be granted leave to cure its mortgage default since (1) the debtor has failed to provide for deferred maintenance on the property; (2) the debtor has failed to provide for the payment of statutory attorney's fees under Official Code of Georgia § 13-1-11 (formerly Georgia Code § 20-506); and (3) the debtors has failed to offer Midland current market interest rates on both the mortgage arrearages and the reinstated mortgage principal. Midland has also objected to confirmation of the debtor's plan due to the debtor's alleged failure to comply with the provisions of 11 U.S.C. § 1129(a)(10). Section 1129(a)(10) of the Bankruptcy Code requires that at least one class of claims has accepted the plan without including any acceptance of the plan by an insider holding a claim of such class.

At the December 1, 1982 hearing, insufficient time was available to enable Midland to present all of its evidence concerning the amount of deferred maintenance which it believes the debtor must perform in order to cure its default under its mortgage obligations to Midland. The Court specifically reserved a final determination of the extent of the deferred maintenance which the debtor must undertake pending its ruling on certain of the legal issues which are the subject of this Order. For the reasons that follow, the Court finds that, subject to the debtor's complying with certain directions of the Court, the debtor may cure and reinstate Midland's mortgage and that the debtor's plan is a confirmable plan.

On March 2, 1982, at the time the debtor filed its reorganization petition, it was two payments in arrears to Midland. The debtor's monthly obligations to Midland are approximately $5,100.00 per month. The debtor has made no payments to Midland during the course of this proceeding. The debtor's plan proposes to pay Midland all arrearages in cash on the effective date of the plan, as well as to pay all administrative claims and all past due ad valorem taxes on the subject property. If the debtor does not have sufficient cash to fund these claims at confirmation, additional funds will be provided by the debtor's sole shareholder, Maswest, Inc.

The fair market value of the property was shown to be between $575,000 and $600,000, and the principal amount of the Midland obligation after reinstatement will be approximately $451,000.00. Midland is seeking statutory attorney's fees of 15% on the current outstanding balance of principal and interest of approximately $467,000.00.

CURE AND REINSTATEMENT

Midland has alleged that its mortgage cannot be cured and reinstated under 11 U.S.C. § 1124 because its legal, equitable, and contractual rights will not remain unaltered after the cure proposed by the debtor is consummated; that Midland will not be compensated for the damages arising out of the debtor's default, which includes the payment of market interest rate, and not contractual interest, on both arrearages and the reinstated mortgage principal; and that Midland will not receive payment of attorney's fees.

The cure and reinstatement of a mortgage that is in default necessarily alters a party's legal, equitable, and contractual rights under a contract. However, the cure of default and reinstatement of a mortgage is clearly contemplated by § 1124 of the Bankruptcy Code and is in furtherance of the Congressional purpose of allowing debtors to reorganize. The fact that a debtor may cure and reinstate a mortgage does not mean that a debtor may otherwise alter legal, equitable, or contractual rights between it and its creditor. Midland alleges that the debtor's attempt at cure in the instant case is effecting more than a cure and reinstatement, and therefore is affecting other rights between the parties. Specifically, Midland is concerned with the recovery of attorney's fees arising out of the debtor's default.

There are three possible bases for Midland's recovery of attorney's fees in the instant case. Initially, Midland seeks to recover attorney's fees under Official Code of Georgia § 13-1-11, as provided for in the subject mortgage and note. The Court notes at this time that Midland's final letter to the debtor was sufficient to comply with the provisions of Official Code of Georgia § 13-1-11. In the alternative, Midland seeks the recovery of attorney's fees under 11 U.S.C. § 506(b), which provides that where a secured creditor is oversecured, it shall be entitled to interest and other reasonable charges provided under the agreement under which its claim arises. The last manner in which Midland may recover attorney's fees is as compensation for damages arising out of the debtor's default. (11 U.S.C. § 1124(2)(C)).

The question of the treatment of "statutory attorney's fees" under the bankruptcy laws of the United States has been examined from many directions. See e.g. National Acceptance Company v. Zusmann, 379 F.2d 351 (5th Cir.1967); In the Matter of Atlanta International Raceway, Inc., 513 F.2d 546 (5th Cir.1975); In re East Side Investors, 694 F.2d 242 (11th Cir.1982) Petition for rehearing denied 702 F.2d 214 (11th Cir.1983); United States v. Allen, 699 F.2d 1117 (11th Cir.1983). The debtor has stated that it would pay Midland $6,000.00 in attorney's fees in spite of the fact that the debtor believes that Midland is entitled to recover attorney's fees only on the amount of the debt actually collected "by and through an attorney", this amount being the payment of arrearages of approximately $56,000.00 existing at the time of the confirmation hearing. East Side Investors, supra, addresses this contention of the debtor.

In East Side Investors, supra, the mortgage holder commenced a foreclosure proceeding prior to the filing of a bankruptcy petition. In conjunction with the acceleration of the mortgage note in East Side Investors, the debtor was informed of its right to avoid the payment of 10% of principal and interest as attorney's fees by payment in full of its outstanding obligation within ten days of receipt of this notice. More than ten days elapsed after the receipt of this notice by the debtor.² Thereafter, the debtor filed a bankruptcy petition to stop the foreclosure of its property. The question the Court addressed in East Side Investors was whether there had been collection of the subject note by and through an attorney within the meaning of Ga.Code § 20-506 (currently Official Code of Georgia § 13-1-11).

The Court in East Side Investors concluded that the bankruptcy stay which restrained the creditor from consummating its foreclosure sale was not a bar to finding that the subject note was collected by and through an attorney. The specific basis for this conclusion was that the creditor in East Side Investors was able to collect its debt through the debtor's Chapter XII proceeding pursuant to the provisions of a consent decree entered by the parties after the commencement of the debtor's bankruptcy proceeding. This consent order provided for the payment to the creditor in East Side Investors of the "full amount of principal due under the notes as well as the interest accrued and accruing." A cursory examination of East Side Investors indicates that the debtor's contention that it is obligated for statutory attorney's fees based solely on the amount of arrearages to be paid on the effective date of the plan has little merit. However, the main distinguishing factor between East Side Investors and the case sub judice lends support to a variance of the debtor's claim.

The key factor which distinguishes this case from East Side Investors is the fact that the debtor herein is seeking to cure and reinstate its mortgage, whereas in East Side Investors the debtor entered into a consent order which provided for the payment of principal and interest to the secured creditor therein.³ Cure and reinstatement is not equivalent to being cashed out or to receiving payment under a plan of reorganization. The Court of Appeals appears to recognize this distinguishing factor in its April 4, 1983 Order denying the debtor's application for rehearing in East Side Investors.

The proper treatment of the cure and reinstatement of a mortgage has been addressed by the United States Court of Appeals for the Second Circuit in In re Taddeo, 685 F.2d 24, 9 B.C.D. 556, 6 C.B.C.2d 1201 (2d Cir.1982). In Taddeo, the Second Circuit affirmed the holdings of the Bankruptcy Court and the District Court, which holdings allowed a debtor to deaccelerate and cure a mortgage default under the debtor's Chapter 13 plan. The Court stated therein that

"Curing a default commonly means taking care of the triggering event and returning to pre-default conditions. The consequences

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