- Case Type:
- Case Status:
- UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT: No. 17-2441 (4th Circuit, Feb 08,2019) Published
- The question in this appeal is whether the Bankruptcy Code bars a creditor from asserting an unsecured claim for attorneys’ fees, if those fees are incurred after the filing of a bankruptcy petition but guaranteed by a pre-petition contract. We join other federal courts of appeals in holding that the Code does not preclude such claims. Accordingly, we reverse the contrary determination of the district court and remand for further proceedings.
- Procedural context:
- Bank loaned $2.1 million to Debtor for farmland. Debtor signed three promissory notes secured by deeds of trust for farmland owned in North Carolina. Debtor agreed that if the notes were placed with an attorney for collection, he would pay “all costs of collection, including but not limited to reasonable attorneys’ fees.”. Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code. During the ensuing bankruptcy proceedings, Bank filed three proofs of claims – documents providing proof of a right to payment – for the outstanding principal and interest due on its promissory notes as of the date of the petition. Those three claims were entitled to preferential treatment under the Code because the promissory notes underlying them were secured by collateral – namely, Debtor's farmland. The preferential treatment under the code meant that the Bank's claims would be satisfied from the value of the farmland before any distributions were made to lower-priority unsecured claims. Debtor objected to the Bank's (via its assignee) post-petition fees treatment as secured and objected accordingly. The bankruptcy court addressed the Debtors federal-law argument, agreeing with him that the Code does not allow creditors like the Bank to assert unsecured claims for post-petition attorneys’ fees. Bank's assignee appealed the bankruptcy court’s order to the district court, and the district court affirmed. This timely appeal followed. The issues Court reviewed the factual findings for clear error and the legal conclusions de novo. The sole question before the Court was one of law: Under the Code, may a creditor assert an unsecured claim for post-petition attorneys’ fees based on a pre-petition promissory note?
- Debtor relied upon interpretations of 502(b); 506(b) and a public policy argument centered on the unfairness of the potential distributions to argue the claims were properly disallowed. The Court addressed each and the implications of the holding in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007). As to the argument under 502(b): "In sum, like our sister circuits, we can find nothing in § 502(b) that expressly disallows unsecured claims for post-petition attorneys’ fees." The argument under 506(b) also failed: "Again, we emphasize that under Travelers, the question before us is whether there is anything in § 506(b) that could be deemed an express disallowance of unsecured claims for post-petition attorneys’ fees." The Court also considered the Debtor's public policy argument that the increased secured claim founded on amounts incurred post-petition had the effect of diluting the return to the unsecured creditors. The Court disposed of those arguments, determining that: "those creditors, it is presumed, “gave value, in the form of a contract term favorable to the debtor . . . in exchange for the [attorneys’ fees] provision.” So allowing them to assert unsecured claims for those fees, far from “providing an undeserved bonus for one creditor at the expense of others,” simply “effectuates the bargained-for terms of the loan contract.” And in the end, if there is any tension between this policy of vindicating contract rights enforceable under state law and other bankruptcy principles, “it is the province of Congress,” not the courts, to adjust accordingly. "
- Before FLOYD and HARRIS, Circuit Judges, and Donald C. COGGINS, Jr., United States District Judge for the District of South Carolina, sitting by designation. Opinion by Circuit Judge Pamela Harris.
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