In re Tudor, No. 03-68935.

• Decision Date: 09 December 2005
• Docket Number: No. 03-68935.
• Citation: 342 B.R. 540
• Parties: In re Paul Allen TUDOR and Phyllis Jean Tudor, Debtors.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

Page 540

342 B.R. 540

In re Paul Allen TUDOR and Phyllis Jean Tudor, Debtors.

No. 03-68935.

United States Bankruptcy Court, S.D. Ohio, Eastern Division, at Columbus.

December 9, 2005.

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Todd G. Finneran, Columbus, OH, for Debtors.

Tracey M. Johnson, Rick D. DeBlasis, Edward J. Boll, III, Cincinnati, OH, for Chase Manhattan Mortgage Corp.

Frank M. Pees, Worthington, OH, Chapter 13 Trustee.

MEMORANDUM OPINION

JOHN E. HOFFMAN, JR., Bankruptcy Judge.

Chase Manhattan Mortgage Corporation ("Chase"), which holds a claim secured by a mortgage on the residence of the Chapter 13 debtor, Paul Allen Tudor ("Debtor"), filed a proof of claim that includes a mortgage arrearage of $9,230.35. The Debtor objected to the arrearage claim, arguing that three specific components of the claim should be disallowed: (1) prepetition attorney fees of $950 incurred by Chase in connection with a state court foreclosure action ("Prepetition Fees"); (2) prepetition costs of $450 for title work done in anticipation of the foreclosure action ("Costs"); and (3) attorney fees of $125 incurred by Chase after the filing of this case ("Postpetition Fees"). In determining whether the challenged Prepetition and Postpetition Fees (collectively, "Fees") and Costs are properly included in Chase's arrearage claim, the Court's guidepost is § 1322(e) of the Bankruptcy Code,¹ which provides that "if it is proposed in a plan to cure a default, the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law." 11 U.S.C. § 1322(e). Here, while there is no dispute that the note and mortgage signed by the Debtor grant Chase the contractual right to recover its Fees and Costs, the parties disagree as to whether the attorney fee provisions in the loan documents are enforceable under Ohio law.

The Debtor asserts that Chase's recovery of the Fees is barred by statute— namely, Ohio Revised Code § 1301.21— and Ohio case law. Because Ohio Revised Code § 1301.21 applies only to commercial, and not residential, lending transactions, the Court concludes that the statute's limitation on the enforceability of attorney fee provisions—allowing recovery only in transactions where the debt incurred exceeds $100,000—is not applicable in this case. Thus, Debtor's assertion that there is a statutory basis for disallowance of the Fees is incorrect. Chase's recovery of the Fees is, however, barred by Ohio common law. Under the Ohio Supreme Court's decision in Miller v. Kyle, 85 Ohio St. 186, 97 N.E. 372 (1911), contractual provisions in debt instruments calling for the payment of attorney fees upon a borrower's default are contrary to public policy and unenforceable. This common law rule ("Common Law Rule") applies here and precludes Chase from collecting the Fees. And, contrary to Chase's contention, recovery of the Fees may not be based on an exception to the Common Law Rule recognized by the courts in Davidson v. Weltman, Weinberg & Reis, 285 F.Supp.2d 1093 (Si/Ohio 2003) and Washington Mutual Bank v. Mahaffey, 154 Ohio App.3d 44, 796 N.E.2d 39 (2003). The Davidson and Mahaffey courts held that provisions in debt instruments conditioning a borrower's right to reinstate a mortgage on payment of the lender's attorney fees and costs expended in foreclosure proceedings are not contrary to public policy and thus are enforceable. Because cure of a mortgage arrearage through a Chapter 13 plan does not constitute a contractual mortgage reinstatement, the reinstatement exception to the Common Law Rule is not applicable in this case. In reaching the conclusion that the Fees are not an allowable component of Chase's arrearage claim, the Court rejects two additional arguments advanced by Chase: (1) that recovery of the Postpetition Fees is authorized by § 506(b) of the Bankruptcy Code; and (2) that the doctrine of equitable estoppel requires allowance of the Fees and Costs. Finally, the Court concludes that Chase's recovery of the Costs is permissible under Ohio law. Contrary to the Debtor's contention, the Court is not persuaded that the Costs are, in fact, disguised attorney fees.

This memorandum opinion constitutes the Court's findings of fact and conclusions of law. See Fed.R.Civ.P. 52 (made applicable here by Fed. R. Bankr.P. 7052 and 9014).

I. Jurisdiction

The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2).

II. Factual and Procedural Background

On March 15, 2002, Paul Allen Tudor and Phyllis Jean Tudor² (collectively, "Tudors") executed and delivered a $100,000 promissory note ("Note") to Chase to finance their purchase of a single-family residence located in Pataskala, Ohio. To secure their payment obligations under the Note, the Tudors signed a mortgage ("Mortgage"), thereby granting Chase a lien on their home.

On November 24, 2003, Chase filed a foreclosure action against the Tudors in state court, alleging that they had defaulted in their payments under the Note and Mortgage. The Tudors responded by filing a voluntary petition for relief under Chapter 13 of the Bankruptcy Code on December 15, 2003.

The Court confirmed the Tudors' Chapter 13 plan on February 18, 2004. The plan calls for the Debtor to make monthly payments to the Chapter 13 Trustee of "$1,760.00 to plan end (but not to exceed 60 months[)] for a 10% dividend." Order Confirming Chapter 13 Plan (Doc. 17) at 2, ¶ 1 (emphasis deleted). Following confirmation of the plan, Chase filed the proof of claim at issue here. In its proof of claim, Chase listed a principal balance of $98,736.98 and an arrearage of $9,230.35 ("Arrearage Claim"), which includes the Fees and Costs. The Debtor filed his objection to the Arrearage Claim ("Objection") (Doc. 22), asserting that both the Fees and Costs constitute "attorney's fees," and that "[s]uch charges are not permissible under Ohio law." Objection at 1. Chase filed a timely response,³ arguing that the Fees and Costs are properly included in its Arrearage Claim. The parties then briefed the issue of whether the Fees and Costs are recoverable under Ohio law⁴ and supplemented the record by filing their Joint Stipulation of Facts ("Stipulation") (Doc. 35). The parties agree that their dispute is limited to the issue of whether the Fees and Costs are allowable components of the Arrearage Claim.

The Mortgage contains four separate provisions that call for the Debtor's payment of Chase's attorney fees and costs upon the occurrence of certain conditions. Three of these provisions— §§ 9, 14 and 22 of the Mortgage—are default-based, i.e., the Debtor's contractual obligation to pay attorney fees and costs is triggered by a default under the Mortgage ("Default Provisions"). The Default Provisions are set forth in relevant part below.

9. Protection of Lender's Interest in the Property and Rights Under this Security Instrument

If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, (b) there is a legal proceeding that might significantly affect Lender's interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy, probate, for condemnation or forfeiture, for enforcement of a lien which may attain priority over this Security Instrument or to enforce laws or regulations), or (c) Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender's interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property. Lender's actions can include, but are not limited to: (a) paying any sums secured by a lien which has priority over this Security Instrument; (b) appearing in court; and (c) paying reasonable attorneys' fees to protect its interest in the Property and/or rights under this Security Instrument, including its secured position in a bankruptcy proceeding. Securing the Property includes, but is not limited to, entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off. Although Lender may take action under this Section 9, Lender does not have to do so arid is not under any duty or obligation to do so. It is agreed that Lender incurs no liability for not taking any or all actions authorized under this Section 9.

Mortgage, § 9 (emphasis added).

14. Loan Charges.

Lender may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting Lender's interest in the Property and rights under this Security Instrument, including, but not limited to, attorneys' fees, property inspection and valuation fees[.] In regard to any other fees, the absence of express authority in this Security Instrument to charge a specific fee to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that are expressly prohibited by this Security Instrument or by Applicable Law[.]

Mortgage, § 14 (emphasis added).

22. Acceleration; Remedies.

Lender shall give notice to Borrower prior to acceleration following Borrower's breach of any covenant or agreement in this Security Instrument (but not prior to acceleration under Section 18 unless Applicable Law provides otherwise). The notice shall specify: (a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the...