Opinion
Bankruptcy No. 03-30966.
July 23, 2004
MEMORANDUM AND ORDER
This case is before the Court on motion by the United States of America, acting through the Farm Service Agency (FSA), to determine the extent and value of FSA's secured claim pursuant to 11 U.S.C. § 506. Scandia American Bank and FSA each hold mortgages on the real property of Debtors Clark and Jane Rismon. The parties do not dispute that the mortgages held by Scandia are prior to the mortgage held by FSA. Instead, Scandia and FSA disagree as to the value of Scandia's secured claim, thereby bringing into dispute the amount of FSA's secured claim. The Debtors do not take a position in this dispute.
By stipulation approved by the Court on June 22, 2004, the Debtors, FSA, and Scandia American Bank agree that the value of the real property owned by the Debtors and subject to mortgages held by Scandia and FSA is $84,500.00. They further agree that since September 16, 2003, Scandia received cash rent proceeds of $9,371.38 and proceeds from the sale of land subject to the mortgages held by Scandia and FSA in the amount of $166,034.41. Scandia applied the proceeds as follows:
Date Received Applied Note Applied to:
09/17/03 $5,181.00 $5,181.00 #74223
10/21/03 $4,190.38 $1,304.05 #74223 $2,886.33 #68531
04/19/04 $166,034.41 $94,541.41 #68531 $65,106.35 #67301 $6,386.65 Attorney fee reimbursement
The parties further stipulated that if Scandia is allowed to retain the $6,386.65 it applied toward attorney fees, the balance of its claim against the Debtor's real property is $50,612.00, and the value of FSA's secured claim is $33,888.00. On the other hand, if Scandia is required to reallocate the $6,386.65 it applied toward attorney fees toward loan principal, the balance of its secured claim is $44,225.35, and the value of FSA's secured claim is $40,274.65.
Promissory note #67301, dated May 2, 1996, is secured by a real estate mortgage signed on the same date. Promissory note #68531, dated March 31, 1997, is secured by a real estate mortgage signed on May 16, 1996. Promissory note #74223, dated June 11, 2001, is secured by "FSA Guaranty, FSSA." Scandia holds another promissory note, #74228, dated June 11, 2001 and secured by a 1997 Chevy Tahoe.
The matter was heard on June 22, 2004.
Section 506(b) provides:
To the extent that an allowed secured claim is secured by property the value of which . . . 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 for under the agreement under which such claim arose.
11 U.S.C. § 506(b). To recover attorney fees, a creditor must establish: (1) it is oversecured in excess of the fees requested; (2) the fees are reasonable; and (3) the agreement giving rise to the claim provides for attorney fees. First W. Bank Trust v. Drewes (In re Schriock Constr., Inc.), 104 F.3d 200, 201 (8th Cir. 1997) (citing In re Foertsch, 167 B.R. 555, 562 (Bankr. D.N.D. 1994)); McGehee v. Cox (In re Griffin), 310 B.R. 610, 617 (B.A.P. 9th Cir. 2004).
Although FSA also disputes the reasonableness of Scandia's fees, the Court will address that issue after the evidentiary hearing on the matter on July 27, 2004. The sole issue currently before the Court, therefore, is whether the agreement giving rise to Scandia's claim provides for attorney fees.
FSA had not challenged whether Scandia is oversecured.
The attorney fee clause in each of the promissory notes held by Scandia and signed by the Debtors is identical and provides:
I agree to pay all costs of collection, replevin or any other or similar type of cost if I am in default. In addition, if you hire an attorney to collect this note, I also agree to pay any fee you incur with such attorney plus court costs (except where prohibited by law). To the extent permitted by the United States Bankruptcy Code, I also agree to pay the reasonable attorney's fees and costs you incur to collect this debt as awarded by any court exercising jurisdiction under the Bankruptcy Code.
The two mortgages each provide:
[The Debtors] do covenant and agree . . . to pay as a part of the debt hereby secured, in case of each of any foreclosure or commencement of foreclosure of this mortgage, all costs and expenses and statutory attorney's fees in addition to all sums and costs allowed in that behalf by law[.]
The mortgage dated May 16, 1996, includes a provision not contained in the May 2, 1996 mortgage. It provides, "This mortgage is given to secure a line of credit . . . with repayment subject to the terms and conditions of the individual note or notes[.]"
FSA argues it was improper for Scandia to apply $6,386.65 of land sale proceeds toward attorney fees. Specifically, FSA asserts that pursuant to section 506(b) of the Bankruptcy Code, attorney fees must be expressly provided for under the mortgage agreement, and Scandia's mortgages only provide for fees in the case of foreclosure. FSA argues Scandia's attorney fees are therefore largely unsecured because most of the services provided by Scandia were in connection with the Debtors' bankruptcy, not foreclosure, proceedings. Although the promissory notes include language providing for attorney fees specifically in the case of bankruptcy, FSA asserts the promissory notes do not constitute the agreements under which Scandia's claim arises. FSA also contends that some of the attorney fees are attributable to chattel debt, not real property debt. In short, FSA agrees the fees attributable to the foreclosure may be included in Scandia's secured claim, but the fees attributable to the bankruptcy and chattel may not.
Attorney fees provisions must be express and bargained for by the parties in order to recover under section 506. In re Romano, 174 B.R. 342, 344 (Bankr. M.D. Fla. 1994); In re LaRoche, 115 B.R. 93, 95 (Bankr. N.D. Ohio 1990). The provisions must adequately inform the person signing the agreement that he or she would be held responsible for the creditor's attorney fees. In re LaRoche, 115 B.R. at 95. Additionally, courts have held that section 506(b) requires specificity in providing for attorney fees. In re Woodham, 174 B.R. 346, 348 (Bankr. M.D. Fla. 1994).
The Court agrees with FSA that the express language of the Debtors' mortgages only permit the collection of fees in foreclosure proceedings, but disagrees that Scandia's claim arises solely from the mortgages. See In re Woodham, 174 at 349 (finding an absence of a specific provision for attorney fees that was bargained for by the parties in either the underlying mortgage or the promissory note). The provisions in the promissory notes and the mortgages are sufficient to put the Debtors on notice that they would be held responsible for Scandia's attorney fees in bankruptcy. Accordingly, the attorney fees at issue fall within the ambit of fees allowed under the contractual language in question and permit allowance of "reasonable fees, costs, or charges provided for under the agreement" to an oversecured creditor pursuant to section 506(b) of the Bankruptcy Code. This applies to both prepetition and postpetition services of Scandia with regard to their secured debt.
Accordingly, the Court concludes the attorney fees of Scandia American Bank are provided for under the agreement under which its claim arose, thereby satisfying one of the three requirements for the allowance of attorney fees under 11 U.S.C. § 506(b).