Summary:
In a long-running case, of which this is the fourth opinion from the court, the Debtor and Bankruptcy administrator objected to the attorney’s fees sought by Bate Land Company (“BLC”). The Court held that BLC was an over secured creditor under 11 U.S.C. § 506(b).
The Debtor, however, first contended that the Note provided for attorney’s fees to BLC only in the event of a default and that, since the bankruptcy was filed during the 10-day grace period after the initial missed payment, there had been not default. The Court, however, held that the contract “specifically refers to the failure to make a payment as a default, and does not condition recovery of attorneys’ fees on the expiration of the cure period or a declaration of default. As such, a default occurs regardless of cure and regardless of a declaration of default.” This argument by the Debtor was also rejected as to the allowance of post-default interest.
Next the Debtor argued that BLC had not complied with the notice requirements of N.C.G.S. § 6-21.2 prior to seeking attorney’s fees. The Bankruptcy Court rejected this, relying on Three Sisters Partners, L.L.C. v. Harden (In re Shangra-La, Inc.), 167 F.3d 843 (4th Cir. 1999), that 11 U.S.C. § 506(b) created an independent right to attorney’s fees, pre-empting the state law requirements of N.C.G.S. § 6-21.2.
After determining that BLC was entitled to attorney’s fees, the Court then turned to the objection by the Debtor, joined by the Bankruptcy Administrator, regarding the reasonableness of the fees requested. Relying on the twelve factors from Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974), the bankruptcy court found that many of the instances of multiple attorneys appearing for BLC were duplicative and unreasonable “over lawyering”. That the legal fees sought by BLC were substantially higher than those sought by the debtor’s attorney, who handle the case “competently and much more economically”, also weighed heavily. Further, the Court critiziced the “lumping” of multiple services into single inadequately described time entries. These factors, among other, justified a reduction of the requested attorney’s fees.
Looking at the requested default interest rate, the Court held that such an interest rate was presumptively valid, but subject to the equities of the case. Here, while only a 3% difffential, the Court held that the unique facts of this dirt-for-debt plan did not justify the higher interest rate.
Commentary:
The right to attorney’s fees under the Note in this case following default, should be contrasted with the obligation to accelerate a mortgage note following default as a pre-condition to attorney’s fees as found in most residential home mortgages. There, simply missing a payment is not sufficient for there to be a default, but actual and formal acceleration is generally required. See In re Deep River Warehouse, Inc., Case No. 04-52749, 2005 Bankr. LEXIS 1251, 2005 WL 1513123 (Bankr. M.D.N.C. June 22, 2005).
Worth further note is that the §506(b) allowance of attorney’s fees for over secured creditors as “provided for under the agreement or State statute under which such claim arose.” This disjunctive “or” allows attorney’s fees under either circumstance, thereby allowing pre-emption state laws if the contract provides for attorney’s fees. Contrast this with 11 U.S.C. § 1322(e), which requires that “the amount necessary to cure [a] default”, which could include attorney’s fees, must be determined “in accordance to the underlying agreement and applicable non-bankruptcy law.” (Emphasis added.) Here the conjunctive “and” require compliance with both the contract and state and federal laws, indicating that state laws regarding mortgage default notices, such as N.C.G.S. § 45091, are not pre-empted in Chapter 13.
For a copy of the opinion, please see:
Bate Land & Timber, L.L.C.- Equitable Reduction in Attorney’s Fees
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