Unsecured Creditors' Committee 82-00261C-11A v. Walter E. Heller & Co. Southeast, Inc.

• Citation: 768 F.2d 580
• Decision Date: 22 July 1985
• Docket Number: No. 84-1626,84-1626
• Parties: 13 Collier Bankr.Cas.2d 105, 13 Bankr.Ct.Dec. 612, Bankr. L. Rep. P 70,652 UNSECURED CREDITORS' COMMITTEE 82-00261c-11A, Appellee, v. WALTER E. HELLER & COMPANY SOUTHEAST, INC., Appellant. In re K.H. STEPHENSON SUPPLY COMPANY, Debtor.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 580

768 F.2d 580

13 Collier Bankr.Cas.2d 105, 13 Bankr.Ct.Dec. 612,

Bankr. L. Rep. P 70,652

UNSECURED CREDITORS' COMMITTEE 82-00261c-11A, Appellee, v. WALTER E. HELLER & COMPANY SOUTHEAST, INC., Appellant In re K.H. STEPHENSON SUPPLY COMPANY, Debtor.

No. 84-1626.

United States Court of Appeals Fourth Circuit.

Argued March 4, 1985.

Decided July 22, 1985.

James C. Frenzel, Winston-Salem, N.C. (Thomas W. Waldrep, Jr., Womble, Carlyle, Sandridge & Rice, Winston-Salem, N.C., on brief), for appellant.

Peter J. Sarda, Raleigh, N.C., for appellee.

Before WIDENER, ERVIN and SNEEDEN, Circuit Judges.

ERVIN, Circuit Judge:

This is an appeal from the district court's reversal of a bankruptcy court's award of attorney's fees to an oversecured creditor. The bankruptcy court awarded attorney's fees to Walter E. Heller and Company, Southeast, Inc. (hereinafter "Heller"), an oversecured creditor, under an attorney's fee agreement with a bankrupt debtor in accordance with 11 U.S.C. Sec. 506(b). The Unsecured Creditors' Committee appealed, arguing that Heller's failure to comply with a state law notice requirement barred recovery of attorney's fees. The district court reversed the award on the basis that, in enacting Sec. 506(b) of the Bankruptcy Code, Congress intended state law to govern the enforceability of fee agreements, and that state law was not complied with in this case. Heller now appeals, arguing that the legislative history of Sec. 506(b) indicates that Congress intended that fees should be awarded notwithstanding contrary state law. We agree with Heller's interpretation of Sec. 506(b), and accordingly we reverse the order of the district court and remand the case for an award of attorney's fees.

I.

In May of 1980, K.H. Stephenson Supply Company (hereinafter "Stephenson") executed a promissory note in favor of Heller for $325,000. Under the terms of the note, Heller had a secured interest in Stephenson's assets which exceeded the value of the claim it secured. The note also provided for the payment of "all costs of collections, including a reasonable attorney's fee of 15% in case the principal of this note or any interest thereon is not paid at the respective maturity thereof, or in case it becomes necessary to protect the security hereof, whether suit be brought or not."

On February 9, 1982, Stephenson filed a petition for reorganization under 11 U.S.C. Sec. 1101. On February 12, 1982, Heller was notified that Stephenson intended to use cash collateral to which Heller's security agreements extended in order to finance Stephenson's operations. Heller objected, and sought a temporary restraining order in bankruptcy court. Heller later filed a proof of claim for $130,741.90 plus interest, costs, expenses and attorney's fees. Following a hearing, the parties agreed to a consent order which was entered on March 9, 1982. The consent order authorized Stephenson to continue financing its operations by incurring further indebtedness to Heller. Further indebtedness was secured to the same extent and subject to the same terms as the previous debts, including the attorney's fees provision. The consent order was later modified following negotiations between Heller and Stephenson.

On May 14, 1982, Heller filed a petition pursuant to 11 U.S.C. Sec. 506(b) for attorney's fees and expenses it incurred in obtaining the consent orders. ¹ On June 9, 1982, over Heller's objection, the bankruptcy court entered an order allowing Stephenson to implement a Plan of Retail Inventory Liquidation. Under the plan, Heller received principal and interest in full, but no costs, expenses and attorney's fees. Heller again applied for attorney's fees. The Unsecured Creditors' Committee ² contested Heller's petition, arguing that Heller had failed to comply with a North Carolina statute which provides that attorney's fee agreements are only enforceable after a creditor gives five days notice to the debtor after default. If the debtor pays within the five day period, the attorney's fees agreement is void and unenforceable. N.C.Gen.Stat. 6-21.2(5). ³

Following a hearing, the bankruptcy court found that Heller was an oversecured creditor and was consequently entitled to attorney's fees under 11 U.S.C. Sec. 506(b). The court overruled the Committee's objection on the basis that notice in this case would have been futile because Stephenson could not have paid its debt within five days of default. Upon rehearing, the bankruptcy court found that compliance with the state law notice provision was necessary, but that Heller had complied with the law by filing a proof of claim in February of 1982.

The Unsecured Creditors' Committee then appealed. The district court found that Heller had not complied with the state law notice provision. Heller's entitlement to attorney's fees consequently turned on the question of whether, in enacting Sec. 506(b) of the Bankruptcy Code, Congress intended that attorney's fee agreements should be enforceable in accordance with state law, or notwithstanding contrary state law. The district court found the legislative history of Sec. 506(b) to be inconclusive. Reasoning from the language of the statute and the policies underlying the Code, the court concluded that Sec. 506(b) contemplates that attorney's fee agreements are only enforceable under the law of the forum state. The court therefore ruled that Heller was not entitled to attorney's fees because it had failed to comply with the notice requirement under North Carolina law.

Heller now appeals, arguing that the legislative history of Sec. 506(b) of the Bankruptcy Code indicates that Congress intended to abrogate the pre-existing requirement that state law govern the enforcement of attorney's fee agreements involving oversecured claims.

II.

Prior to the enactment of the Bankruptcy Reform Act in 1978, state law clearly governed the enforceability of attorney's fee agreements between oversecured creditors and bankrupt debtors. ITT Industrial Credit Co. v. Hughes, 594 F.2d 384, 387 (4th Cir.1979); In re Carey, 8 B.R. 1000, 1003 (Bankr.S.D.Cal.1981). In enacting the Bankruptcy Reform Act, Congress considered whether to abrogate the requirement that state law govern such agreements. At various points in the legislative process, Congress changed its mind. ⁴ The eventual product, Sec. 506(b) of the Bankruptcy Code, is not a model of clarity on this point. It provides that:

To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs or charges provided under the agreement under which such claim arose.

11 U.S.C. Sec. 506(b).

Courts have divided over the interpretation of Sec. 506(b). Under the minority position, Sec. 506(b) is simply a codification of pre-existing law, and consequently state law still governs attorney's fee agreements. See, e.g., In re Banks, 31 B.R. 173, 175 (Bankr.N.D.Ala.1982); LHD Realty Corp. v. National Life Insurance Co. (In re LHD Realty Corp.), 20 B.R. 722, 725 (Bankr.S.D.Ind.1982); In re Dye Master Realty, Inc., 15 B.R. 932, 935-36 (Bankr.W.D.N.C.1981); In re Sholos, 11 B.R. 782, 784-85 (Bankr.W.D.Pa.1981). Courts endorsing the majority view conclude that under Sec. 506(b) attorney's fee agreements are enforceable notwithstanding contrary state law. See, e.g., Longwell v. Banco Mortgage Co., 38 B.R. 709, 711 (N.D.Ohio 1984); In the Matter of Scarboro and Garnto, 13 B.R. 439, 442 (D.C.M.D.Ga.1981); In re Virginia Foundry Company, Inc., 9 B.R. 493, 496-97 (D.C.W.D.Va.1981); In re American Metals, 31 B.R. 229, 234-35 (Bankr.D.Kan.1983); In the Matter of Elmwood Farm, Inc., 19 B.R. 338, 341 (Bankr.S.D.N.Y.1982); In re Carey, 8 B.R. at 1002-04; accord, 3 Collier on Bankruptcy, p 506.05 (1984). Some courts adopting the majority view have relied upon the statements of Representative Edwards and Senator DeConcini, the floor managers of the legislation. Immediately prior to the passage of the Act, both told their respective Houses of Congress that:

Section 506(b) of the House amendment adopts language contained in the Senate amendment and rejects language contained in H.R. 8200 as passed by the House. If the security agreement between the parties provides for attorneys' fees, it will be enforceable under title 11, notwithstanding contrary law ...

124 Cong.Rec. 32,398, 33,997 (1978) (emphasis added). See In re Virginia Foundry Company, Inc., 9 B.R. at 496; In re American Metals, 31 B.R. at 234; In re Carey, 8 B.R. at 1004. The statements of these key legislators are entitled to great weight. See K. Klee, Legislative History of the New Bankruptcy Law, 28 DePaul L.Rev. 941, 957-960 (1979); ⁵ see also N. Singer, 2A Sutherland Statutory Construction Sec. 48.14 at 334-35 (4th ed. 1984). However, in light of the ambiguities in the language and legislative history of Sec. 506(b), we cannot simply assume that the statements of these individual members of Congress are determinative of the intention of the Congress as a whole. Consequently, a more detailed analysis of the legislative history of Sec. 506(b) is in order.

The relevant legislative history of Sec. 506(b) began in the House Judiciary Committee. When the House's version of the Bankruptcy Reform Act, H.R. 8200, was referred to the committee, Sec. 506(b) read as follows:

To the extent that an allowed secured claim is secured by property whose value is greater than the amount of such claim, there shall be allowed to the holder of such claim interest on such claim, and any reasonable fees, costs, or charges provided under the agreement under which such claim arose.

H.R. 8200, 95th Cong., 1st Sess. Sec. 506(b) (July 11, 1977), accompanying H.R.Rep. No. 95-595, 95th Cong., 1st Sess. (1977); reprinted in N. Resnick & E. Wypyski, 12 Bankruptcy Reform Act of 1978: A...