In re Wonder Corp. of America

• Decision Date: 05 February 1988
• Docket Number: Civ. No. B-87-417 (TFGD).
• Citation: In re Wonder Corp. of America, 82 B.R. 186 (D. Minn. 1988)
• Parties: In re WONDER CORPORATION OF AMERICA, Debtor. CHASE MANHATTAN BANK, N.A., Appellant, v. WONDER CORPORATION OF AMERICA and Waldco, Inc., Appellees.
• Court: U.S. District Court — District of Minnesota

82 B.R. 186 (1988)

In re WONDER CORPORATION OF AMERICA, Debtor CHASE MANHATTAN BANK, N.A., Appellant, v. WONDER CORPORATION OF AMERICA and Waldco, Inc., Appellees.

Civ. No. B-87-417 (TFGD).

United States District Court, D. Connecticut.

February 5, 1988.

Robert A. Izard, Jr., Janet C. Hall, Donald Lee Rome, Robinson & Cole, Hartford, Conn., for appellant.

Douglas A. Strauss, Pullman, Comley, Bradley & Reeve, Bridgeport, Conn., for appellees.

MEMORANDUM OF DECISION

DALY, Chief Judge.

This is an appeal pursuant to 28 U.S.C. § 158 from the ruling of the United States Bankruptcy Court of this district. The parties have extensively briefed the issues and the background of the appeal. However, despite the impressive size of the file in this case, the issues presented to this Court are relatively straightforward. The appellant, Chase Manhattan Bank ("Chase"), an oversecured creditor of the debtor-appellee Wonder Corporation ("Wonder"), challenges the bankruptcy judge's determination of attorney's fees and costs recoverable by the appellant under 11 U.S.C. § 506(b). For the reasons set forth below, the ruling of the bankruptcy court is AFFIRMED.

BACKGROUND

On June 23, 1986, Wonder filed a petition under Chapter 7 of the Bankruptcy Code. The case was subsequently changed to one under Chapter 11. The bankruptcy court, after issuing a scheduling order setting a deadline for the filing of applications for administrative expenses under 11 U.S.C. § 503 and for attorney's fees and costs under 11 U.S.C. § 506(b), held hearings to resolve all such claims. Chase, along with others not party to this appeal, filed an application for attorney's fees and costs in accordance with prepetition agreements with Wonder.¹

The bankruptcy court found that Chase is an oversecured creditor of Wonder with claims against Wonder of approximately $1.7 million. Moreover, it also found Chase enjoyed a substantial equity cushion. Nevertheless, according to the bankruptcy court's assessment,² the attorneys for Chase expended 1,290 hours on the case. In total, Chase claimed fees and costs of $188,240.

After reviewing Chase's application, the bankruptcy court disallowed 515 of the hours claimed by Chase as "blatant and totally unproductive obstruction in the administration of this case. . . ." In Re Wonder Corp. of America, 72 B.R. 580, 592 (Bankr.D.Conn.1987). Among the items for which time was disallowed, the bankruptcy court included the motion for relief from the automatic stay, opposition to administrative expenses of the Chapter 7 trustee, opposition to the withdrawal of Wonder's original attorney, services in connection with the disclosure statements and plans, an inter-bank letter of credit dispute, and an appeal from the court's scheduling order on § 503 and § 506(b) fees and expenses. The bankruptcy court noted that these actions served no legitimate purpose and reflected excessive duplication.

In addition, the bankruptcy court concluded that much of the remaining time claimed was the result of a concerted effort on the part of Chase and the other oversecured creditors to resist and obstruct Wonder's reorganization plan. In order to account for this and the unnecessary duplication reflected in Chase's claims, the bankruptcy court reduced the remaining hours by two-thirds. As a result, Chase was allowed 258 hours, which, at an hourly rate of $150, came to $38,700 in fees. The bankruptcy court also allowed $11,123 in costs, giving Chase a total claim under § 506(b) of $49,823.

DISCUSSION

Section 506(b) of the Bankruptcy Code allows a creditor with an oversecured claim against a debtor in bankruptcy to recover as part of its claim any reasonable attorney's fees and costs under the agreement between the creditor and the debtor under which the creditor's claim arose. 11 U.S.C. § 506(b). The principal thrust of Chase's appeal is that the bankruptcy court applied the wrong standard in determining the amount of recoverable fees and costs, and that state law governs the issue of reasonableness.

The Court of Appeals for the Second Circuit has yet to squarely address the issue of the standard under § 506(b), although several other circuits have. The Fourth, Fifth, and Ninth Circuits all have concluded after extensive inquiries into the legislative history of the provision that § 506(b) imposes the condition of reasonableness as a matter of federal law. In Re Hudson Shipbuilders, Inc., 794 F.2d 1051, 1056-58 (5th Cir.1986); Matter of 268 Ltd., 789 F.2d 674, 675-77 (9th Cir.1986); Unsecured Creditors' Committee v. Walter Heller & Co. Southeast, Inc., 768 F.2d 580, 582-85 (4th Cir.1985). Therefore, under the interpretation of these three circuits, a claim for fees could be enforceable under state law yet be unreasonable under § 506(b) and federal law.

Chase maintains that, in this circuit, a different standard has been developed that applies state law to the issue of reasonableness. In support of its construction of the Second Circuit rule, Chase relies on In Re Continental Vending Machine Corp., 543 F.2d 986 (2d Cir.1976); In Re United Merchants and Manufacturers, Inc., 674 F.2d 134 (2d Cir.1982); and Matter of Salisbury, 58 B.R. 635 (Bankr.D.Conn.1985). A discussion of these cases will illustrate that the Second Circuit rule is not substantially different from the majority view of the standard on § 506(b).

Continental Vending, a case decided before the enactment of the present § 506(b), involved a secured creditor's claim for attorney's fees under agreements between the creditor and the debtor. The court of appeals held that the validity and construction of the contract provision providing for fees was governed by state law. However, it also stated that "a rule of reason must be observed, in order to avoid such clauses becoming a tool for wasteful diversion of an estate at the hands of secured creditors who, knowing that the estate must foot the bills, fail to exercise restraint in enforcement expenses." 543 F.2d at 994. Accordingly, the court ruled that the creditor could recover only those fees that were reasonably necessary to preserve its interests. Id. Unlike Continental Vending, United Merchants involved the claims of an unsecured creditor for fees pursuant to a contractual agreement.³ Nevertheless, relying in part on Continental Vending, the court of appeals again held that state law controlled the validity and construction of such contract provisions, and that an unsecured creditor could recover only those fees that the creditor reasonably believed to be necessary to protect its interest. 647 F.2d at 139-40. Finally, although the Salisbury court remarked that "state law will apply to determine reasonable fees," 58 B.R. at 640, it also nonetheless repeated the warning made first in Continental Vending of avoiding the wasteful diversion of the estate by allowing unreasonable fees. Moreover, it applied the standard that only fees reasonably believed to be necessary to the protection of the creditor's interest are recoverable. Id. See also Matter of Lagasse, 71 B.R. 551 (Bankr.D. Conn.1987).

The Court does not agree with Chase's construction of the standard elaborated in these cases. Chase confuses two distinct issues involved in the analysis of fees recoverable under § 506(b). The issue of the validity of the contractual provision allowing attorney's fees is not the same as the issue of reasonableness of the fees allowed. See Matter of 268 Ltd., 789 F.2d at 675-76. In fact, even Chase's discussion of these three cases belies its assertion that state law controls the issue of reasonableness. In each of these three cases, the court recognized that beyond the validity under state law of the fee provision of the prepetition agreement, it was required to take into consideration the reasonableness of the fees in terms of protecting the debtor's estate, which is a fundamental policy concern underlying the Bankruptcy Code. Because the reasonableness requirement is derived from the policy goals of the Bankruptcy Code, the Court can discern no way to read the "rule of reason" described in Continental Vending and followed in United Merchants and Salisbury as anything other than a matter of federal law.⁴In Re Mills, 77 B.R. 413, 418 (Bankr.S.D.N. Y.1987); In Re B & W Management, Inc., 63 B.R. 395, 401 (Bankr.D.D.C.1986); Matter of Nicfur-Cruz Realty Corp., 50 B.R. 162, 167 (Bankr.S.D.N.Y.1985).

Whether or not reasonableness is a matter of state or federal law, Chase argues that the Second Circuit standard for assessing reasonableness developed in Continental Vending and United Merchants is both subjective and prospective, and that the standard employed by the bankruptcy court was objective and retrospective. The distinctions drawn by Chase are without difference, and inaccurately describe the standard used by the bankruptcy court. Relying on United Merchants, Chase contends that under § 506(b) an oversecured creditor may obtain all fees and costs it reasonably believed to be necessary for the protection of its interests, which according to Chase is a subjective standard. Chase attempts to distinguish that standard from what it portrays as an objective one in Continental Vending, which held that services for which fees are claimed must have been "reasonably necessary." 543 F.2d at 994.

Even assuming that United Merchants applies to oversecured creditors under § 506(b),⁵ the language to which Chase cites supports the standard that the bankruptcy court applied. The court in United Merchants directed that "the controlling inquiry is whether, considering all relevant factors including duplication, the creditor reasonably believed that the services employed were necessary to protect his interests in the debtor's property." 674 F.2d at 140. The language used by the court of appeals is neither cryptic nor difficult to interpret. The standard in United Merchants is simply whether the belief that the fees were necessary was reasonable. It is...