In re Plant

• Decision Date: 10 February 2003
• Docket Number: No. 02-40732.,02-40732.
• Citation: 288 B.R. 635
• Parties: In re Timothy L. PLANT, Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

288 B.R. 635

In re Timothy L. PLANT, Debtor.

No. 02-40732.

United States Bankruptcy Court, D. Massachusetts.

February 10, 2003.

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David T. Noonan, Esq., Amherst, MA, for Debtor.

Andrew Harmon, Esq., Harmon Law Offices, Newton Highlands, MA, for National City Mortgage.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is an Objection to Confirmation of the Debtor's Chapter 13 Plan (the "Objection") filed by National City Mortgage Corporation ("National City"). The debtor, Timothy L. Plant (the "Debtor"), has filed a response (the "Response"). Also before the Court is National City's "Application for Compensation Under Section 506(b)" (the "Fee Application").

The issue presented is one of first impression in this district. The dispute centers on whether the Court may compel mortgagee's counsel to file a fee application conforming to Federal Rule of Bankruptcy Procedure 2016 ("FRBP 2016") and Massachusetts Bankruptcy Local Rule 2016-1 ("MBLR 2016-1") as a condition to inclusion of attorney fees and expenses in the default cure amount of a Chapter 13 plan. More specifically, the issue is whether FRBP 2016 and MBLR 2016-1 apply, notwithstanding 11 U.S.C. § 1322(e)'s dictate that interest, fees, and costs added to a default cure amount pursuant to § 1322(b)(5) be determined according to the underlying contract and nonbankruptcy law. For the reasons set forth below, the Court holds in the affirmative.

I. FACTS AND TRAVEL OF THE CASE

On March 18, 1998, the Debtor obtained a loan from National City secured by a first priority mortgage on his residence, located in Belchertown, Massachusetts (the "Property"). Pursuant to the terms of the note (the "Note") and mortgage (the "Mortgage") executed by the Debtor, failure to timely pay the full amount of the monthly installment constitutes a default entitling National City (with exceptions not relevant here) to require immediate payment of the entire principal balance and accrued interest due under the Note. The Note also contains a provision for collection of costs and fees incurred by National City in case of default. Paragraph 7 of the Note provides that:

If [National City] has required immediate payment in full ... [National City] may require [the Debtor] to pay costs and expenses including reasonable customary attorney fees for enforcing this Note to the extent not prohibited by applicable law. Such fees and costs shall bear interest from the date of disbursement at the same rate as the principal of this Note.

Paragraph 18 of the Mortgage further provides for remedies available to National City upon default:

If [National City] requires immediate payment in full [upon default], [it] may invoke the statutory power of sale and any other remedies permitted by applicable law. [National City] shall be entitled to collect expenses incurred in pursuing the remedies provided in this paragraph 18, including, but not limited to reasonable attorneys' fees and costs of title evidence.

Prior to filing his Chapter 13 petition, the Debtor defaulted on the Mortgage by failing to make eight monthly payments due under the Note. National City retained the services of Harmon Law Offices, P.C. ("Harmon") to proceed with foreclosure of the Mortgage. Harmon sent relevant notices to the Debtor, successfully prosecuted an action in the Massachusetts Land Court under the Soldiers and Sailors Civil Relief Act of 1940, advertised the foreclosure sale and engaged the services of an auctioneer.¹

Foreclosure of the Mortgage was stayed by the Debtor's petition under Chapter 13 of the Bankruptcy Code, filed on February 7, 2002. As permitted under § 1322(b)(5),² the Debtor proposed in his plan to pay an estimated $10,000 to cure the prepetition arrears on the Mortgage. National City filed the instant Objection, claiming the total amount of arrears to be $11,008.18.³ Included in its arrearage computation is $2,496.76 itemized in National City's Proof of Claim as prepetition foreclosure legal fees and costs.⁴ Postpetition fees and costs of $800 are also added, represented as $250 for legal fees, a $500 auction cancellation fee, and a $50.00 title update fee, for total fees and costs of $3,296.76 (the "Fees"). In light of the value of the Property and the amount of National City's claim, it is undisputed that the claim is fully secured.⁵

II. POSITIONS OF THE PARTIES

The Debtor objects to inclusion of the Fees in the arrearage. The Debtor does not generally object to National City's entitlement to attorney fees and costs pursuant to the Note and Mortgage. However, he argues that because National City is an oversecured creditor, the Fees may only be included in the arrearage if allowed by the Court, pursuant to 11 U.S.C. § 506(b),⁶ FRBP 2016 and MBLR 2016-1. FRBP 2016 mandates that any entity "seeking reimbursement of necessary expenses from the estate shall file [a fee application] setting forth a detailed statement of ... the time expended ...." Fed. R. Bank. P.2016. MBLR 2016-1 further requires itemization of the services performed and the time incurred, broken down by the tenth of the hour.⁷

Harmon did not keep contemporaneous time records of services rendered in National City's foreclosure of the Mortgage. Harmon states that because National City's engagement of Harmon for the foreclosure work was on a flat fee basis, no time records were kept. Harmon did, however, in response to the Debtor's Objection, submit the instant Fee Application with an "estimated" time record of services rendered in connection with the foreclosure. The Debtor objects to this estimation on the basis that, under MBLR 2016-1(a)(1), time records must reflect contemporaneously maintained time entries. The Debtor further objects to the $500 postpetition auction cancellation fee, claiming that it is unjustified because Harmon is affiliated with the auctioneer.

Harmon responds that § 506(b) is simply inapplicable in this case, at least as to the calculation of the prepetition portion of the default cure amount to be paid through the Chapter 13 plan. Instead, § 1322(e) mandates that the default cure amount must be determined solely according to the underlying contract and nonbankruptcy law. Consequently, Harmon maintains that FRBP 2016 and MBLR 2016-1 do not apply in the analysis of National City's right to reimbursement of its Fees,⁸ and, although this Court has jurisdiction to review the reasonableness of the Fees, there are "several ways to show that a fee is reasonable."

Harmon further contends that the Fees are reasonable here because its retention agreement with National City provides for a flat fee payment based on guidelines set by the Department of Housing and Urban Development ("HUD"), the investor in the loan serviced by National City. Citing to the HUD's Schedule of Standard Attorney Fees for foreclosure actions, Harmon argues that the claimed prepetition amount of $2,496.76 is within the amount set by HUD guidelines.⁹ In addition, Harmon claims that this amount is commensurate with foreclosure fees charged by other attorneys in Massachusetts. Finally, Harmon notes that had it charged its customary rates on an hourly basis, the total fees would have been significantly higher.¹⁰

III. DISCUSSION

A. The Applicability of § 506(b)

The Court agrees with Harmon's argument to the effect that § 506(b) is inapplicable to the Court's review of the Fees in this case. When a debtor seeks to cure a prepetition payment default over the life of a Chapter 13 plan pursuant to § 1322(b)(5), the amount of the arrearage must be "determined in accordance with the underlying agreement and applicable nonbankruptcy law." 11 U.S.C. § 1322(e) (2002).¹¹

The history of § 1322(e) is quite clear. Congress enacted this provision in 1994 to overrule the Supreme Court's holding in Rake v. Wade, 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993). In Rake, the court extended its rulings in United States v. Ron Pair Enter., Inc.,¹² to hold that where a Chapter 13 plan provided for an oversecured creditor's prepetition arrearage, § 506(b) required payment of postconfirmation interest on the home mortgage arrears (which itself might include preconfirmation interest) regardless of whether the underlying note, mortgage or state law permitted the accrual of such interest on interest. Rake, 508 U.S. at 472, 113 S.Ct. 2187.

By enacting § 1322(e), Congress expressly overruled the Rake holding, disconnecting in this respect § 506(b)'s application where a debtor cures a default through a Chapter 13 plan. Congress stated that the rule established in Rake

had the effect of giving secured creditors interest on interest payments, and interest on the late charges and other fees, even where applicable law prohibits such interest and even when it was something that was not contemplated by either party in the original transaction. [Section 1322(e)] will limit the secured creditor to the benefit of the initial bargain with no court contrived windfall .... It is the Committee's intention that a cure pursuant to a plan should operate to put the debtor in the same position as if the default had never occurred.

H.R. Rep. 103-834 at 55 (1994) reprinted in 1994 U.S.C.C.A.N. 3340, 3364. Section 1322(e) was intended to apply prospectively to contracts entered into after October 22, 1994, the effective date of the amendment. Id.

Courts have interpreted § 1322(e) to displace § 506(b)'s requirements not only as to interest on arrearages, but also to other fees and costs. In re Landrum, 267 B.R. 577, 580-81 (Bankr.S.D.Ohio 2001) (quoting In re Lake, 245 B.R. 282, 285 (Bankr.N.D.Ohio 2000) (holding that Congress did not limit the provisions of § 1322(e) to interest charges but also to attorney fees and foreclosure costs)). Thus, § 1322(e) applies with respect to interest, fees and costs to every contract effective after October 22, 1994, regardless of whether a particular claim is...