McCormick v. Starion Fin. (In re McCormick)

• Decision Date: 18 May 2017
• Docket Number: No. 16–6031,16–6031
• Parties: IN RE: Stephen D. MCCORMICK, also known as Steve D. McCormick; Karen A. McCormick, Debtors Stephen D. McCormick; Karen A. McCormick, Debtors–Appellants v. Starion Financial, Movant–Appellee
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit

567 B.R. 552

IN RE: Stephen D. MCCORMICK, also known as Steve D. McCormick; Karen A. McCormick, DebtorsStephen D. McCormick; Karen A. McCormick, Debtors–Appellants

v.Starion Financial, Movant–Appellee

No. 16–6031

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted: April 26, 2017

Filed: May 18, 2017

Jon R. Brakke, Caren W. Stanley, Vogel Law Firm, Fargo, ND, for Debtors–Appellants.

Timothy Dwight Lervick, Crowley & Fleck, Bismarck, ND, Joseph A. Turman, Katrina A. Turman Lang, Turman & Lang, Fargo, ND, for Movant–Appellee.

Before SALADINO, Chief Judge, FEDERMAN and SHODEEN, Bankruptcy Judges.

SALADINO, Chief Judge.

On March 10, 2014, the bankruptcy court¹ denied Starion Financial's ("Starion") motion to compel payment of Starion's attorneys' fees and expenses in accordance with the confirmed Chapter 11 plan of reorganization and granted the Debtors' motion to disallow Starion's attorneys' fees and costs. Starion appealed to this panel, and we reversed the decision of the bankruptcy court and remanded the case for consideration of the issues as to timeliness and reasonableness of the requested fees and costs.²

The Debtors Stephen D. and Karen A. McCormick now appeal from the bankruptcy court's order granting in part and denying in part Starion's motion to compel payment of fees under the confirmed plan of reorganization, and granting in part and denying in part the Debtors' motion to disallow attorneys' fees and costs claimed by Starion. We have jurisdiction of this appeal from entry of the bankruptcy court's final order pursuant to 28 U.S.C. § 158(b). For the reasons set forth below, we affirm.

BACKGROUND

Prior to bankruptcy filing, the Debtors were engaged in a variety of businesses, including construction, real estate investment, and development. The Debtors operated their businesses individually and through a number of limited liability companies that they owned and controlled, including Misty Waters, LLC; Steve and Karen McCormick, LLC; and Construction Financial Services, LLC.

Over the course of several years the Debtors, their companies, and Starion entered into a series of loan transactions that included execution by the Debtors and their companies of a number of loan documents, including promissory notes secured by mortgages encumbering various parcels of real estate. The Debtors also executed personal guarantees of the obligations owed to Starion by the entities owned by the Debtors.

Defaults under the loans resulted in a workout agreement dated July 26, 2012, among Starion, the Debtors, and their companies. As part of that agreement, Starion agreed to forbear from exercising its default remedies under certain conditions. The Debtors and their companies reaffirmed their obligations to Starion under the loan documents and the Debtors and Misty Waters, LLC executed a new mortgage encumbering a development called Misty Waters for up to $7 million.³ The Debtors also executed and delivered confessions of judgment, apparently to secure their guaranty obligations. The workout agreement provided that the confessions of judgment could be immediately filed with the clerk of the court and transcribed to such other jurisdictions as Starion desired. The judgments were entered on July 27, 2012, in Burleigh County, North Dakota, and Starion promptly transcribed them to other counties in North Dakota, thereby creating judgment liens in counties where the Debtors owned real estate.

The Debtors filed a voluntary Chapter 11 petition on August 29, 2012, and on August 9, 2013, filed a second amended plan of reorganization. Starion filed its objection to confirmation raising a number of objections, including: "Starion, as an oversecured creditor is entitled to its attorney's [f]ees. The Plan does not provide for payment [of] Starion Financial's attorney's fees claim."

Starion, the Debtors, and their companies settled Starion's plan objection with an addendum to the Debtors' second amended plan dated September 10, 2013 ("Starion Addendum").⁴ The Starion Addendum identified all of the obligations owed to Starion by the Debtors and their companies, and agreed that the total indebtedness owed to Starion as of July 1, 2013, included principal of $6,272,116.56, interest of $314,242.86, and interest accrual at a daily rate of $1,019.23. The parties agreed upon the plan treatment and repayment terms for that indebtedness. Among other provisions, the Starion Addendum stated:

Collection Costs . Debtors agree to pay Starion's allowable attorney's fees and costs associated with both Debtors' bankruptcy proceedings including but not limited to reasonable attorneys' fees, consulting, appraisal, filing fees, late fees, etc. (collectively referred to as "Fees") through the Plan. The procedure for allowance of such attorneys' fees and costs will be as provided in the Plan.

On September 13, 2013, the Debtors' plan, incorporating the Starion Addendum, was confirmed by the bankruptcy court. Section 8.01(c) of the confirmed plan defines "Allowable Attorneys' Fees and Costs" as "a claim against the debtors for an oversecured creditor's attorney's fees and costs incurred in connection with the creditor's secured claim." That section goes on to describe the procedure for allowance of the fees and costs as follows:

Any Allowable Fees and Costs must be approved by Debtors before payment is disbursed. At least ten days prior to the Effective Date of the Plan, the creditor and/or its counsel, shall submit an itemized statement (reflecting date, a description of the services, increments of time spent, and hourly rate being charged), to the Debtors and their counsel, for approval. If the parties cannot come to an agreement or resolution as to the amount of the Allowable Attorneys' Fees and Costs to be paid, the matter shall be determined by the Bankruptcy Court, upon notice and hearing. No payment of Allowable Attorneys' Fees and Costs will be due until either the agreement of the parties or a final determination by the Bankruptcy Court that those amounts are due under the Plan.

On October 3, 2013, Starion submitted an itemized statement to the Debtors for various costs including interest, late fees, real estate taxes, and appraisal and engineering fees. A few days later on October 7, 2013, Starion submitted an updated statement that included its attorneys' fees. Taking the position that Starion was not entitled to these amounts based upon the plan or 11 U.S.C. § 506(b), the Debtors refused to pay the amounts requested for appraisal and engineering costs, and the attorneys' fees and expenses.

Starion filed a motion requesting the bankruptcy court to compel payment of its fees in the amount of $125,014.64 based upon the plan and 11 U.S.C. § 506(b). On the same day, the Debtors filed a motion seeking disallowance of the fee request contending that there is no agreement for the payment of fees; the fee request was untimely; and the fees were not reasonable.

BANKRUPTCY COURT'S FIRST DECISION

On March 10, 2014, the bankruptcy court issued its order denying Starion's motion to compel payment of attorneys' fees and costs, and granting the Debtors' motion seeking disallowance of Starion's request. The court began its analysis by noting the terms of the Starion Addendum and the plan, and determined that "both Debtors and Starion agree that the Court's analysis regarding Starion's eligibility to recover attorney fees is confined to limits outlined in section 506 of the Bankruptcy Code."

Since § 506 allows an oversecured creditor to recover reasonable fees and costs provided for under the agreement under which the claim arose, the bankruptcy court first looked at whether Starion's claim was oversecured. The court noted that "Debtors do not dispute Starion's claim that it is oversecured. In fact, in their briefs, Debtors refer to Starion's claim as oversecured."⁵ Apparently, Starion would not have been oversecured based solely on its mortgage liens, but became oversecured when the confessions of judgment were entered and transcribed to other counties—thereby creating liens on additional real estate owned by the Debtors.

Next, the bankruptcy court looked at whether fees and costs were allowed under an agreement under which the claim arose as required by § 506 of the Bankruptcy Code. It held that "Starion's judicial liens ‘arose’ under the Judgments, which when entered by the clerk and recorded under North Dakota law created liens on real property. N.D.C.C. § 28–20–13. Consequently, the documents this Court looks to for an agreement giving rise to the claim for attorney fees and costs are the Judgments." Relying upon a North Dakota statute that disfavors payment of attorney fees, the bankruptcy court concluded that the absence of "a clause or sentence [in the judgment] entitling Starion to collect attorney fees" was fatal to Starion's request for payment. As a result of that decision, the bankruptcy court did not reach the additional issues raised by the Debtors regarding the timeliness of the fees request and the reasonableness of the fees. Accordingly, Starion's motion to compel payment was denied and the Debtors' motion disallowing the fees was granted. Starion appealed the bankruptcy court's ruling.

FIRST B.A.P. DECISION

On appeal, the Debtors again conceded that Starion is an oversecured creditor, but argued that it is oversecured only because of the judgment liens it obtained by virtue of the confessions of judgment on other property of the Debtors in various counties in North Dakota. Because the judgments do not state anything about attorneys' fees, the Debtors asserted that Starion had no right to fees since it was oversecured only by virtue of the judgments.

In our opinion of December 24, 2014, we agreed with Starion that in addition to the confessions of judgment, its claim also "arose" under the various promissory notes, mortgages, loan agreements, workout agreement and other loan-related documents. All of those documents were still in effect and it is...