Twiford Enters., Inc. v. Rolling Hills Bank & Tr. (In re Twiford Enter., Inc.)

• Decision Date: 15 October 2020
• Docket Number: Bankr. No. 18-20120,BAP No. WY-19-037
• Parties: IN RE TWIFORD ENTERPRISES, INC., Debtor. TWIFORD ENTERPRISES, INC., Appellant, v. ROLLING HILLS BANK AND TRUST, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

IN RE TWIFORD ENTERPRISES, INC., Debtor.TWIFORD ENTERPRISES, INC., Appellant, v. ROLLING HILLS BANK AND TRUST, Appellee.

BAP No. WY-19-037

Bankr. No. 18-20120

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

October 15, 2020

NOT FOR PUBLICATION^*

Chapter 11

OPINION

Appeal from the United States Bankruptcy Court for the District of Wyoming

Submitted on the briefs.^**

Before SOMERS, JACOBVITZ, and LOYD, Bankruptcy Judges.

LOYD, Bankruptcy Judge.

Corporate bankruptcy cases often take many forms. Some cases involve complex litigation and numerous parties. Other cases can essentially be boiled down to a two-party dispute. The appeal before us falls into the latter category. The debtor filed a bankruptcy petition in the United States Bankruptcy Court for the District of Wyoming after its largest secured creditor refused to renegotiate credit terms. The secured creditor sought postpetition interest, attorneys' fees, and costs pursuant to 11 U.S.C. § 506(b) based on the equity in the collateral.¹ The Bankruptcy Court, finding a valid contract allowing for interest and attorneys' fees, awarded postpetition interest and the majority of the requested attorneys' fees and costs. We affirm the Bankruptcy Court's award of postpetition interest, attorneys' fees, and costs.

I. Factual Background

Twiford Enterprises, Inc. (the "Debtor") owns and operates a cattle ranch in Glendo, Wyoming. The ranching operation consists of approximately 2,870 acres and 1,400 head of cattle. Jack and Stanetta Twiford serve as the Debtor's president and vice president, respectively. The Twiford family has controlled the ranchland since homesteading in 1878. In recent years, the Debtor financed the ranching operations through five loans made by Rolling Hills Bank and Trust (the "Bank"). The Debtor secured the loans with both real and personal property, including cattle. The Debtor indicates that even though the loans were current, disputes concerning the calculation ofvariable interest rates and the refusal to extend maturity dates caused it to seek bankruptcy protection in the face of a replevin action and foreclosure proceedings filed in Wyoming state court.

The Debtor filed a chapter 11 petition on March 7, 2018. The Bank filed a proof of claim ("Claim 8") based on five promissory notes totaling $5,797,103.29.² The Debtor objected to Claim 8, arguing the 18 percent default interest rate under the promissory notes constituted an impermissible penalty and the Bank failed to include documentation in support of its calculation of attorneys' fees.³ The Debtor supplemented its objection to Claim 8, providing additional history related to the loan negotiation process and arguing the terms of variable rate notes rendered it impossible to calculate the pre-default interest rate on the loans.⁴ The Bankruptcy Court conducted a telephonic evidentiary hearing on the Debtor's claim objection at which it overruled the objection to Claim 8 for reasons stated on the record.⁵ The Debtor did not appeal the order overruling the objection.

The Bank then filed a motion to allow postpetition interest, attorneys' fees, and costs to be included in its claim pursuant to § 506(b) (the "Motion").⁶ The Bank argued it was entitled to postpetition interest, attorneys' fees, and costs under § 506(b) because it is an oversecured creditor. The Bank's claim of $5,797,103.29 is secured by real property valued by the Debtor at $4,650,000 and personal property valued by the Debtor at$3,141,243, for a combined value of $7,791,243. The Bankruptcy Court's previous valuation of the assets securing the Bank's claim at $7,793,332 suggests there is an equity cushion of approximately $2,000,000. Accordingly, the Bank sought postpetition interest between the petition date of March 7, 2018 to May 15, 2019, in the amount of $377,097.31 plus per diem interest of $900.00 per day after May 15, 2019. The Bank also sought postpetition attorneys' fees and costs totaling $304,142.29.

The Debtor objected to the Bank's Motion, arguing it is impossible to verify the Bank's calculation of pre-default interest under the Variable Rate Notes because one cannot determine the applicable interest rate and the interest rate change date for those notes.⁷ Three of the promissory notes evidencing Claim 8 feature variable interest rates (the "Variable Rate Notes") that are tied to an index called Rolling Hills Bank & Trust Base Rate 2010 (the "Index"). The Index is an internal rate index maintained by the Bank. The Variable Rate Notes are summarized as follows.

Loan

Number

Origination

Date

Principal

Amount

Interest Rate

xxxx1120

12/17/2014

$1,080,377.79

Index Rate - 2.35%

xxxx1230

06/03/2015

$1,075,367.77

Index Rate - 1.85%

xxxx1580

03/13/2017

$500,000.00

Index Rate - 1.85%

The Variable Rate Notes state the interest rates will change one day after the origination dates, and then may change as often as daily.

The Debtor also objected to the attorneys' fees and costs because the fees and costs were unreasonable, were based on overzealous representation, contained improper time entries, included fees for duplicative work, resulted from over-lawyering, and the hourly billing rates were excessive.⁸

The Bankruptcy Court conducted a hearing on the Motion and the Debtor's objection thereto on July 19, 2019.⁹ The Bankruptcy Court entered its order granting the Motion on September 26, 2019 (the "Order").¹⁰ The Order approved the Bank's request for postpetition interest, concluding the interest rates are ascertainable from the Index, which is incorporated in the Variable Rate Notes by reference. The Bankruptcy Court awarded postpetition interest of $377,097.31 and found interest continued to accrue at $900 per day. The Bankruptcy Court also awarded the Bank $205,281.50 in attorneys' fees, reducing the requested amount by $58,180.50 after finding charges for overzealous representation and billing entries for "not charged" items. Finally, the Bankruptcy Courtawarded costs of $7,910.97 and expert witness fees and costs of $30,801.82. The Debtor filed a timely notice of appeal of the Order on October 10, 2019.¹¹

II. Jurisdiction & Standard of Review

"With the consent of the parties, this Court has jurisdiction to hear timely-filed appeals from 'final judgments, orders, and decrees' of bankruptcy courts within the Tenth Circuit."¹² Neither party elected to have this appeal heard by the United States District Court for the District of Wyoming; thus, the parties have consented to our review. An order resolving a motion for postpetition interest, attorneys' fees, and costs is final for purposes of appellate jurisdiction.¹³

A bankruptcy court's award of postpetition interest, attorneys' fees, and costs under § 506(b) involves statutory interpretation invoking de novo review as are the court's conclusions concerning the allowance of such fees and costs as part of the securedclaim.¹⁴ "De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court's decision."¹⁵

The determination that attorneys' fees and costs are reasonable "will not be disturbed on appeal absent an abuse of discretion or erroneous application of the law."¹⁶ "The setting of a reasonable hourly rate is within the [trial] court's discretion."¹⁷ A trial court "abuses its discretion when it (1) fails to exercise meaningful discretion . . . , (2) commits an error of law, such as applying an incorrect legal standard or misapplying the correct legal standard, or (3) relies on clearly erroneous factual findings."¹⁸ Abuse of discretion also occurs when a "decision is arbitrary, capricious or whimsical or results in a manifestly unreasonable judgment."¹⁹ "As one court has put it, '[t]he question is not how the reviewing court would have ruled, but rather whether a reasonable person couldagree with the bankruptcy court's decision; if reasonable persons could differ as to the issue, then there is no abuse of discretion.'"²⁰

III. Discussion

a. Procedural Matter: Motion to Strike

The Debtor requests that the Court strike the second legal argument contained in the Bank's appellate brief.²¹ The Bank's brief asserts the Bankruptcy Court entered a final order overruling the Debtor's objection to Claim 8 and, therefore, the doctrine of res judicata precludes this Court from reviewing the enforceability of the Variable Rate Notes. We begin by noting the term res judicata is no longer favored by the Tenth Circuit Court of Appeals, which instead prefers the term claim preclusion.²² Regardless we read the Bank's res judicata argument as referring to the doctrine of claim preclusion.²³

The doctrine of claim preclusion

"prevent[s] a party from litigating a legal claim that was or could have been the subject of a previously issued final judgment." For claim preclusion to apply, "three elements must exist: (1) a [final] judgment on the merits in an earlier action; (2) identity of parties or privies in the two suits; and (3) identity of the cause of action in both suits."²⁴

Under claim preclusion, "a final judgment on the merits bars further claims by parties or their privies based on the same cause of action."²⁵ The doctrine applies to claims

that could have been raised and decided in a prior action—even if they were not actually litigated. If a later suit advances the same claim as an earlier suit between the same parties, the earlier suit's judgment "prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding."²⁶

The Bank argues the Bankruptcy Court's order overruling the Debtor's objection to Claim 8 is a final judgment deciding the validity of its claim on the merits. Therefore, the Bank argues the order overruling the objection to claim precludes this Court's review of the enforceability of the Variable Rate Notes. The Debtor counters, arguing the order overruling the objection to Claim 8 is...