In re Telfair

• Decision Date: 26 August 1998
• Docket Number: Adversary No. 97-01064A.,Bankruptcy No. 92-12162
• Citation: 224 BR 243
• Parties: In re Eugene TELFAIR, Debtor. Eugene TELFAIR, Gail E. Telfair, and All Other Person Similarly Situated, Plaintiffs, v. FIRST UNION MORTGAGE CORP., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Georgia

224 B.R. 243 (1998)

In re Eugene TELFAIR, Debtor Eugene TELFAIR, Gail E. Telfair, and All Other Person Similarly Situated, Plaintiffs, v. FIRST UNION MORTGAGE CORP., Defendant.

Bankruptcy No. 92-12162, Adversary No. 97-01064A.

United States Bankruptcy Court, S.D. Georgia, Augusta Division.

August 26, 1998.

Mr. John B. Long, Angela C. McElroy, Augusta, GA, for plaintiff.

Wm. Byrd Warlick, Warlick, Tritt & Stebbins, Augusta, GA, Mark C. Treanor, Russell J. Pope, Treanor, Pope & Hughes, Towson, MD, for defendant.

ORDER

JOHN S. DALIS, Bankruptcy Judge.

The plaintiffs, Eugene and Gail Telfair, moved for class certification on two causes of action brought in this adversary proceeding, regarding the defendant's, First Union Mortgage Corporation ("First Union"), application of postconfirmation plan payments to attorney fees and expenses and First Union's force placing of the Telfairs' insurance.¹ First Union moved for summary judgment in response. First Union's motion is granted and Mr. Telfair's motion is denied.

Federal Rule of Bankruptcy Procedure 7056 incorporates Rule 56 of the Federal Rules of Civil Procedure. Under Rule 56, this Court will grant summary judgment only if ". . . there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party has the burden of establishing its right of summary judgment. See Clark v. Coats & Clark, Inc., 929 F.2d 604, 608 (11th Cir.1991). The evidence must be viewed in a light most favorable to the party opposing the motion. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970).

Eugene Telfair and his wife obtained a Veteran's Administration ("VA") guaranteed loan in 1984 from First Union's predecessor in interest. As part of the loan, Mr. Telfair and his wife executed a VA form Security Deed² granting a security interest in their residential property in Richmond County, Georgia. Pursuant to the Security Deed, First Union required the Telfairs to place in escrow an amount to pay insurance, taxes and other costs. Paragraph three of the Security Deed refers to this account as a "trust" and to First Union as the "trustee." In 1988 the Telfairs failed to provide proof of insurance on their property. At that time First Union "force placed" the insurance by substituting an insurance company from whom First Union receives commissions for obtaining insurance business, instead of using the insurance company the Telfairs previously used for coverage of their home. The new company, Balboa Insurance Company ("Balboa"), charged higher premiums than the company the Telfairs had used. Mr. Telfair claims he did not receive notice of his lapsed insurance and the force placing to Balboa by First Union. Balboa continued to insure the Telfair's property until after Mr. Telfair's bankruptcy filing. The Telfairs obtained their own insurance with State Farm as of March 31, 1998.

Mr. Telfair filed for chapter 13 protection on December 7, 1992. His plan was confirmed on May 3, 1993. Thereafter, First Union assessed Mr. Telfair attorney fees and expenses for First Union's filing motions to lift the stay of 11 U.S.C. § 362(a) on June 19, 1995, July 31, 1995, and May 20, 1996, due to Mr. Telfair's failure to make payment when due under the Chapter 13 plan and loan documents. First Union applied the payments received from the Chapter 13 trustee and the Telfairs to these fees and expenses, thus leaving a delinquency upon the completion of plan payments and Mr. Telfair's discharge. This caused the Telfairs to be in default, and First Union notified them of the pending foreclosure on their home. The Telfairs filed this adversary proceeding on September 23, 1997 seeking to obtain injunctive and equitable relief claiming a violation of 11 U.S.C. § 506(b) in collecting attorney fees and expenses without court approval, violation of the automatic stay of 11 U.S.C. § 362(a), and violation of the discharge injunction of 11 U.S.C. §§ 524 and 1328. Count two alleges First Union breached its fiduciary duties to Mr. Telfair subsequent to the bankruptcy filing by profiting from escrow funds of Mr. Telfair placed in trust with First Union as trustee or agent. First Union force placed the Telfairs' insurance without notifying Mr. Telfair and received profits from such act, which is prohibited under O.C.G.A. §§ 10-6-24 and 10-6-25.

Mr. Telfair's first count seeks a determination that a secured creditor in a chapter 13 case cannot, without having attorney's fees and expenses allowed by the bankruptcy court under 11 U.S.C. § 506(b)³, add its postpetition attorneys fees and expenses to the debt of a debtor or use postpetition payments made to the creditor to pay those unallowed fees and expenses. Mr. Telfair alleges a debtor's earnings subsequent to the filing constitute property of the estate under 11 U.S.C. § 1306(a)(2); First Union took property of the estate to pay unauthorized fees and expenses in violation of 11 U.S.C. § 362(a)(3); and First Union's violation of 11 U.S.C. §§ 506 and 362(a)(3), by not applying the payments to principal and interest on the loan, caused Mr. Telfair irreparable harm due to the foreclosure of his home. First Union responds that Mr. Telfair does not have a claim under 11 U.S.C. § 506(b), because the section is inapplicable to attorney fees and expenses which arise postconfirmation, and 11 U.S.C. § 1322(b)(2)⁴ and the Security Deed solely apply postconfirmation.

The United States Supreme Court in Rake v. Wade, 508 U.S. 464, 113 S.Ct. 2187, 124 L.Ed.2d 424 (1993), held that § 506(b) only establishes the amount of an allowed preconfirmation secured claim, to the extent provided for under the applicable security agreement and note terms.

Under § 506(b) the holder of an oversecured claim is allowed interest on his claim to the extent of the value of the collateral. Section 506(b) "directs that postpetition interest be paid on all oversecured claims," U.S. v. Ron Pair, 489 U.S., 235 at 245, 109 S.Ct., 1026 at 1032 (1989) (emphasis added), and, as the parties acknowledge, such interest accrues as part of the allowed claim from the petition date until the confirmation or effective date of the plan. . . . The arrearages owed on the mortgages held by respondent are plainly part of respondent\'s oversecured claims. Under the unqualified terms of § 506(b), therefore, respondent is entitled to preconfirmation interest on these arrearages. Where the statutory language is clear, our "`sole function . . . is to enforce it according to its terms.\'" Ron Pair, supra, at 241, 109 S.Ct., at 1030 (quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917)). Accord, Connecticut Nat. Bank v. Germain, 503 U.S. 249, 253-254, 112 S.Ct. 1146, 1149-1150, 117 L.Ed.2d 391 (1992). . . . Construing §§ 506(b) and 1322(b)(5) together, and giving effect to both, we conclude that § 1322(b)(5) authorizes a debtor to cure a default on a home mortgage by making payments on arrearages under a Chapter 13 plan, and that where the mortgagee\'s claim is oversecured, § 506(b) entitles the mortgagee to preconfirmation interest on such arrearages.

Rake v. Wade, 508 U.S. at 471-72, 113 S.Ct. at 2291-92, 124 L.Ed.2d 424. Section 506(b) is not a limitation on the allowance of attorney fees and expenses postconfirmation and predischarge nor does it authorize such fees postconfirmation. Simply put, § 506(b) has no application to claimed postconfirmation attorneys fees and expenses. Plaintiff's cause of action cannot be sustained under § 506(b).

Mr. Telfair also argues First Union violated the § 362⁵ stay in failing to obtain court approval before applying collected payments to attorney fees and expenses. I previously held in In re McKnight, 136 B.R. 891 (Bankr.S.D.Ga.1992), that all property revests in the debtor upon confirmation and that only the postconfirmation earnings of the debtor used for payment under the plan remain property of the estate. Mr. Telfair's postconfirmation earnings used for payments made pursuant to his Chapter 13 plan are property of the estate until paid to the creditor pursuant to the plan. The confirmed plan, as it pertains to First Union, provided that "Debtor shall make regular post-petition payments as they become due to creditors (named below) holding security interests in Debtor's residence. Any claim filed for prepetition arrearage on such obligation shall be paid by distributions from the Chapter 13 Trustee. First Union Mortgage. . . ." The Security Deed provides in paragraph 6 that

such expenses and fees as may be incurred in the protection of said premises, including the fees of any attorney employed by the Grantee for the collection of any or all of the indebtedness hereby secured . . . and attorneys\' fees reasonably incurred in any other way, shall be paid by the Grantor.

The Security Deed and state law govern the allowance of attorney fees postconfirmation, not § 506(b). This deed provides First Union with authorization to assess and collect attorney fees. Mr. Telfair's counsel raises for the first time in brief opposing summary judgment that if § 506(b) is not applicable, First Union must in any event comply with the State law ten-day notice requirement under O.C.G.A. § 13-1-11⁶ before assessing attorney's fees upon default by a debtor and applying payment received from a debtor to these fees. Assuming that First Union was required to provide the notice under O.C.G.A. § 13-1-11 and failed to do so, there was no § 362 stay violation. Mr. Telfair made payments to First Union as required under his confirmed plan. The application of those payments once received by First Union may have violated state law but did not violate federal bankruptcy law. Bankruptcy Code § 362(a)(1), (2), (5), (6) & (7) prohibit conduct to enforce a prepetition debt. In this case the complained of attorneys fees collected by First Union were...