Opinion
No. 00-46099 T; Chapter 11
December 20, 2001
MEMORANDUM OF DECISION
The above-captioned reorganized debtor (the "Debtor") seeks attorneys' fees from Alma Gardner ("Gardner"), a secured creditor, pursuant to Cal. Civ. Code § 1717 ("CC § 1717") as the prevailing party in various disputes which were litigated in connection with the Debtor's objection to Gardner's proof of claim. The Debtor also seeks to amend its reorganization plan (the "Plan") to extend its deadline for paying off Gardner's loan by six months, from December 31, 2001 to June 30, 2002. For the reasons stated below, the Court concludes that the Debtor is entitled to $3,855 in attorneys' fees as the prevailing party under C.C. § 1717 but that the Debtor may not amend the Plan.
INTRODUCTION
The Debtor filed a voluntary petition seeking relief under chapter 11 of the Bankruptcy Code on October 31, 2000. The Debtor confirmed the Plan on March 19, 2001. The Plan provided that, if Gardner's claim were not paid in full by December 31, 2001, Gardner would be entitled to relief from stay to continue its foreclosure proceedings or to pursue any other available remedy at law or equity. An order amending and approving the disclosure statement and amending and confirming the Plan was signed and filed on March 22, 2001. The order provided, as pertinent to this creditor, that, if the monthly interest payments were not made when due or after notice of default, Gardner would have relief from the automatic stay to foreclose. Otherwise, the Plan provided that Gardner's claim would be paid when the real property that secured it (the "Property") was refinanced or sold, whichever occurred first. Pending the sale or refinance, the Debtor agreed that interest would accrue at the rate of 10.75% per annum and that the Debtor would make partial interest payments of $4,703.13 per month.
The Debtor attempted to refinance the Property but found the interest rates and points required by the proposed lenders unattractive. The Debtor then listed the Property for sale and received several offers to purchase the Property. The Debtor made a counteroffer to one of these offers which was rejected. Shortly thereafter, after the September 11 terrorist attacks on the World Trade Center and Pentagon, the real estate market took a plunge, and no more offers were received. The Debtor's real estate broker advised the Debtor to take the Property off the market for three months. As a consequence, the Debtor seeks to amend the Plan to provide that Gardner's claim must be paid by June 30, 2002 rather than December 31, 2001. Gardner opposes the motion.
During the bankruptcy case, the Debtor and Gardner have litigated several disputes concerning Gardner's secured claim. First, the Debtor challenged Gardner's calculation of interest and her right to late charges. The Court found for Gardner with respect to the calculation of interest and for the Debtor with respect to the late charges. Second, Gardner filed two motions seeking allowance of attorneys' fees as part of her secured claim, one for fees incurred before the bankruptcy filing and the other for fees incurred after the filing. The Court disallowed all of Gardner's pre-petition fees and allowed some (and disallowed some) of her post-petition fees. The Debtor seeks its attorneys' fees incurred in connection with the above-described contested matters. The Debtor contends that it was the prevailing party and, as such, is entitled to recover its fees pursuant to C.C. § 1717. The Debtor also seeks attorneys' fees for its motion for attorneys' fees. Gardner disputes the Debtor's claim for attorneys' fees in its entirety. She contends that C.C. § 1717 does not apply to litigation in a motion context. She also contends that the Debtor was not the prevailing party with respect to the litigation.
DISCUSSION A. MOTION TO AMEND THE PLAN
Section 1127(b) of the Bankruptcy Code provides that "the proponent of a plan . . . may modify such plan at any time after confirmation of such plan and before substantial consummation of such plan, but may not modify such plan so that such plan as modified fails to meet the requirements of sections 1122 and 1123 of . . . [the Bankruptcy Code]." The Debtor contends that the Plan has not been substantially consummated, that, as modified, the Plan would meet the requirements of 11 U.S.C. § 1122 and 1123, and that granting the motion to modify the Plan is warranted under the circumstances. The Court agrees with the Debtor that, as modified, the Plan would meet the requirements of §§ 1122 and 1123. However, the Court believes that the Plan has been substantially consummated. Additionally, the Court does not believe the modification is warranted under the circumstances.
1. Substantial Consummation
Section 1101(2) provides that:
(2) "substantial consummation" means:
(A) transfer of all or substantially all of the property proposed by the plan to be transferred;
(B) assumption by the debtor or by the successor to the debtor under the plan of the business or of the management of all or substantially all of the property dealt with by the plan; and
(C) commencement of distribution under the plan.
11 U.S.C. § 1101(2). All three elements must be satisfied in order for a plan to be substantially consummated. In re Fansal Shoe Corp., 119 B.R. 28, 30 (Bankr.S.D.N.Y. 1990). The proponent of the modification has the burden of establishing whether a plan has been substantially consummated. Id. Whether a plan has been "substantially consummated" is a question of fact. See In re Jorgensen, 66 B.R. 104, 106 (Bankr. 9th Cir. 1986).
The Debtor concedes that it has assumed the business or management of all of the property dealt with by the Plan as provided by § 1101(2)(B). However, it contends that it has not transferred all or substantially all of the property proposed by the Plan to be transferred, as provided by § 1101(2)(A), or commenced distribution under the plan, as provided by § 1101(2)(C).
a. Transfer of Property Proposed By the Plan To Be Transferred
The Debtor notes that the Plan anticipates that the Property will be sold or refinanced so as to pay Gardner's claim. It is undisputed that the Property has not yet been sold or refinanced. For this reason, the Debtor contends, the first requirement for substantial consummation has not yet occurred. See 11 U.S.C. § 1101(2)(A). This contention has no merit.
The Ninth Circuit Bankruptcy Appellate Panel considered the meaning of § 1101(2)(A) in In re Antiquities of Nevada, Inc., 173 B.R. 926, 928-930 (1994). The Panel noted that there are two schools of thought on the subject, represented respectively by In re Heatron, Inc., 34 B.R. 526 (Bankr.W.D.Mo. 1983) and In re Hayball Trucking, Inc., 67 B.R. 681 (Bankr.E.D.Mich. 1986). The Panel adopted the Hayball Trucking view. TheHayball Trucking court reads "transfers," as the term is used in § 1101(2), to refer to the "types of transfers such as are often contemplated on or shortly after the effective date of a confirmed plan . . . undertaken to shape the new financial structure of the debtor. . . ." Id. Examples of such types of transfer given by the Hayball Trucking court are "the transfer of a security interest to unsecured creditors, . . . a transfer of stock to creditors or third parties, a transfer of promissory notes to creditors, transfers of property to secured creditors in satisfaction of their claims, or transfers of property by third parties to the debtor." Id.
Thus, to qualify as a "transfer" within the meaning of § 1101(2)(A), a transfer must be: (1) a noncash transfer, (2) that occurs on or near the effective date, and (3) is undertaken to shape the new financial structure of the debtor. The proposed sale or refinance of the Property, as contemplated by the Plan, meets the first of these three requirements but not the second or third. In particular, the Court does not believe that a proposal to sell or refinance property within six months of the effective date, with no specific agreement in place, meets the second of these three requirements. The Court is aware that some courts in other jurisdictions have concluded otherwise with respect to this issue. See, e.g., Vermont National Bank v. Boroff, 189 B.R. 53, 56 (D.Vt. 1995). The Court finds these cases unpersuasive. The Hayball Trucking approach is sounder: i.e., interpreting the term "transfer" in § 1101(2)(A) as limited to noncash transfers at or near the effective date made to shape the new financial structure of the debtor. Otherwise, the act of confirming a plan providing for a sale some time in the future, with no specific transaction in prospect, is rendered meaningless. If no sale or refinance ever occurs, the plan could be modified at any time thereafter.
The Court concludes that no transfers were proposed by the Plan within the meaning of the word "transfer" in 11 U.S.C. § 1101(2)(A). Where, as here, no transfers are proposed by a plan, this requirement is irrelevant to a determination of whether a plan has been substantially consummated. In re Antiquities of Nevada, Inc., 173 B.R. at 930; see also In re Scotland Guard Services, Inc., 139 B.R. 264, 266 (Bankr.D.P.R. 1991); In re Fansal Shoe Corp., 119 B.R. 28, 30 (Bankr.S.D.N.Y. 1990).
b. Commencement of Distribution Under the Plan
The Debtor also contends that the Plan has not been substantially consummated because the Debtor has not "commenced distribution" under the Plan. This contention also has merit. As stated in Antiquities of Nevada, "distributions" as used in § 1101(2)(C) refers to cash payments to creditors. Moreover, it includes payment of both short term and long term debt. Id., 173 B.R. at 930. It also includes payment on secured debt. See In re Stevenson, 148 B.R. 592, 595-597 (D.Idaho 1992).
The Debtor's memorandum of points and authorities contends that there have been no distributions under the Plan. However, the Declaration of William Curtis (the "Curtis Declaration"), filed in support of the Debtor's motion, contradicts this contention. In his declaration, Curtis states that the Debtor has paid Gardner a number of partial interest payments as provided by the Plan. The Debtor does not address whether any payments have been made to the holder of the first deed of trust or, for that matter, the holder of administrative claims. Any such payments might also qualify as a distribution under the plan within the meaning of § 1101(2)(C). Arguably, payments to a secured creditor whose claim was not impaired by the plan might not constitute distributions under the plan. However, Gardner's pre-petition claim was impaired by the Plan. Gardner's pre-petition claim was discharged when the plan was confirmed and replaced by the provisions for repayment set forth in the Plan. See 11 U.S.C. § 1131(d)(1)(A). As a result, the partial interest payments made to Gardner post-confirmation clearly qualified as distributions under the Plan.
The burden of proving that a plan has not been substantially consummated falls on the party seeking to modify it. In re Fansal Shoe Corp., 119 B.R. 28, 30 (Bankr.S.D.N.Y. 1990). The Debtor has failed to meet this burden. To the contrary, the evidence presented establishes that no noncash transfers of property were contemplated by the Plan and that distributions to creditors have been commenced. As a result, the Plan has been substantially consummated and may not be modified at this time.
2. Requirements of 11 U.S.C. § 1122 and 1123
Even if the Plan had not been substantially consummated, the Court could not approve its modification if, as modified, the Plan would fail to comply with 11 U.S.C. § 1122 and 1123. Section 1122 deals with the classification of claims and interests. Section 1123 describes what types of provisions a plan must contain and what types of provisions a plan may contain. The Debtor does not propose to modify the classification of claims and interests in the Plan, to delete any provisions required by § 1123, or to add any provisions not permitted by § 1123. Thus, the Court concludes that the Plan, as modified, would satisfy the requirements of §§ 1122 and 1123. Thus, these provisions do not enter into the Court's decision not to grant the motion to modify the Plan.
3. Whether Modification is Warranted Under the Circumstances
The Debtor contends that the Court should permit the Plan to be modified to extend the time to sell or refinance the Property by six months because it made good faith efforts to sell or refinance the Property. Its failure to do either within the time frame originally required by the Plan was due to an unforeseeable event — the September 11 terrorist attacks on the World Trade Center and Pentagon — and their resulting effect on the economy in general and the real estate market in particular.
Gardner opposes the motion on fairness grounds. She contends that the Debtor has not acted in good faith. She contends that a refinance was never feasible and that the Debtor acted in bad faith, before the terrorist attack, by failing to accept an offer to purchase the Property for $1,250,000. In addition, Gardner contends that the proposed modification puts her secured claim unfairly at risk.
The Debtor contends that it has acted in good faith under the circumstances and that a six month delay will not jeopardize Gardner's secured position. The Curtis Declaration states that the value of the Property is approximately $1.3 million and that the secured debt encumbering the Property is only $920,000. Gardner contends that the Debtor has not provided a proper evidentiary foundation for its valuation of the Property. The Court agrees.
The Curtis Declaration states that some time before September 11, 2001, the Debtor received an offer to purchase the Property for $1,250,000. Based on this evidence, the Court concludes that, at that time, the Property was worth at least this amount. However, the issue is not what the Property was worth prior to September 11, 2001 but rather what it is worth today. The Curtis Declaration states that no offers have been received since September 11 and that the Debtor's broker has advised taking the Property off the market for three months. Based on this evidence, the Court concludes that the value of the Property is less than $1,250,000 at this time. The Court has no basis for determining how much less.
Moreover, the broker's advice clearly reflects a hope that the market will quickly rebound and that property values will return to their pre-September 11 level. Neither the Court nor the broker has any way of gauging whether this will occur. To the contrary, property values may decrease further during the next three to six months. Gardner's secured claim is unfairly put at risk given this uncertainty, particularly in view of the negative amortization aspect of the Plan. As a result, even if the Plan had not been substantially consummated, the Court would not grant the motion under these circumstances.
B. MOTION FOR ATTORNEYS' FEES AS PREVAILING PARTY
During the chapter 11 case, Gardner filed a secured proof of claim for $767,088.81. Of this amount, $36,765.72 was for late charges and $162,994.20 was for accrued, unpaid interest. The Debtor objected to Gardner's claim for late charges in its entirety and to $12,774.98 of the claim for interest. The Court ruled for Gardner with respect to the interest dispute and for the Debtor with respect to the late charges dispute.
Thereafter, Gardner filed two motions seeking attorneys' fees and costs, one for pre-petition attorneys' fees in the amount of $16,445.98 and foreclosure costs in the amount of $5,102.75 and the other for post-petition attorneys' fees and costs in the amount of $22,206. The Court denied Gardner's claim for pre-petition attorneys' fees and foreclosure costs in its entirety and allowed Gardner $18,591.57 in post-petition fees and $17.46 in post-petition costs.
The Debtor notes that its debt to Gardner is evidenced by a promissory note (the "Note") and secured by a deed of trust on the Property (the "Deed of Trust"). Both the Note and the Deed of Trust have attorneys' fee clauses that give Gardner the right to recover attorneys' fees and costs under some circumstances. Section 1717 of the California Civil Code provides that, when a contract contains an attorneys' fee clause, the prevailing party in litigation over the contract is entitled to its reasonable attorneys' fees even if the contractual clause only expressly authorizes an award of attorneys' fees to the other party to the contract. Cal. Civ. Code § 1717.
The Debtor contends that the above-described litigation was litigation over Gardner's secured claim and that it was the prevailing party in the litigation. Thus, the Debtor contends that it is entitled to recover from Gardner its reasonable attorneys' fees and costs incurred in connection with this litigation. The Debtor also seeks its attorneys' fees incurred in connection with its motion for attorneys' fees.
1. Debtor's Right to Attorneys' Fees Under C.C. § 1717
The American Rule provides that a party must bear its own attorneys' fees in the absence of a contractual or statutory right to fees or bad faith. In re Johnson, 756 F.2d 738, 741 (9th Cir. 1985), cert. denied 474 U.S. 828 (1985); In re Klause, 181 B.R. 487, 497 (Bankr.C.D.Cal. 1995) (citing Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247, 269-271 (1975)). There is no bankruptcy statute giving the Debtor the right to recover attorneys' fees from Gardner under these circumstances. Moreover, the attorneys' fee clauses in the Note and Deed of Trust do not support such a claim.
The Ninth Circuit has addressed the issue of whether a debtor may recover attorneys' fees pursuant to C.C. § 1717 for litigation in bankruptcy court. It has concluded that a debtor may recover fees under this state statute provided the issues litigated are governed by state contract law. In re Baroff, 105 F.3d 439, 441-442 (9th Cir. 1997); see also In re Hassen Imports Partnership, 256 B.R. 916, 923 (Bankr. 9th Cir. 2000) (§ 506(b) does not determine a debtor's entitlement to fees and costs). In Baroff, the debtor was the prevailing party in dischargeability litigation where the issues in dispute involved state contract law rather than issues of bankruptcy law. The Court held that the debtor was entitled to recover his attorneys' fees from the creditor under C.C. § 1717.
A Ninth Circuit bankruptcy court reached the same conclusion prior toBaroff under facts strikingly similar to those of the instant case. In In re McGaw Property Management, Inc., 133 B.R. 227, 231 (Bankr.C.D.Cal. 1991), both the creditor and the debtor requested attorneys' fees for litigation of state law issues concerning an oversecured proof of claim. Three issues were presented. The debtor prevailed with respect to two of the issues, which represented the bulk of the dollar amount at issue.Id. at 228.
The McGaw Property court concluded that the creditor's right to attorneys' fees was governed by section 506(b) which did not require the creditor to be the prevailing party to recover its attorneys' fees, only that the fees be provided for by contract and be reasonable. Accordingly, the court awarded the creditor attorneys' fees. Id. at 228-231. It then awarded the debtor its attorneys' fees pursuant to C.C. § 1717, finding that the debtor was the prevailing party. Id. at 231. Based on Baroff and McGaw Property, the Court concludes that the Debtor is entitled to recover its attorneys' fees from Gardner to the extent that the issues litigated were governed by state law and to the extent that the Debtor was the prevailing party.
2. Did Issues Involve State Law?
As discussed above, the first round of litigation involved a determination of whether Gardner had properly calculated interest and whether she was entitled to late charges. These were clearly issues governed by state law. Thus, to the extent the Debtor was the prevailing party, the Debtor is entitled to recover its reasonable attorneys' fees from Gardner incurred in connection with this litigation.
The second round of litigation involved a determination of Gardner's right to pre-petition and post-petition attorneys' fees as a secured claim against the estate. Although both Gardner and the Debtor originally took the view that state law governed Gardner's right to pre-petition attorneys' fees and 11 U.S.C. § 506(b) governed Gardner's right to post-petition fees, the Court concluded otherwise. Based on In re Kord Enterprises II, 139 F.3d 684 (9th Cir. 1988) and Matter of 268 Limited, 789 F.2d 674, 675-677 (9th Cir. 1986), the Court concluded that, when a secured creditor seeks attorneys' fees as part of its secured claim, its right to attorneys' fees is governed solely by § 506(b) regardless of whether the fees were incurred pre- or post-petition. Thus, the determination of this issue was made solely on the basis of federal law. The Debtor may not claim attorneys' fees incurred in connection with this litigation pursuant to C.C. § 1717. Gardner also contends that the Debtor is not entitled to attorneys' fees pursuant to C.C. § 1717 because C.C. § 1717 requires the party seeking attorneys' fees to be the prevailing party in a "suit." She contends that litigation concerning a proof of claim is not a "suit." The Court has previously rejected this narrow reading of the word "suit" in its determination of Gardner's right to attorneys' fees under 11 U.S.C. § 506(b) based on Kohl v. United States, 91 U.S. 367, 375 (1875) and its progeny.
3. Was the Debtor the Prevailing Party?
As stated above, two issues were litigated that involved state law: (1) whether Gardner had properly calculated interest and (2) whether Gardner was entitled to late charges. The Court ruled in favor of Gardner on the first issue, which involved $12,774.98, and in favor of the Debtor on the second issue, which involved $36,765.72.
Gardner contends that she should be viewed as the prevailing party overall because her secured claim was for $767,088.81 and only a small portion of her claim was disallowed. The Debtor contends that this approach is unreasonable and that only the amounts in dispute should be considered. The Court agrees. Filing a proof of claim may not be fairly compared to commencing an action in nonbankruptcy court. A proof of claim is deemed allowed unless objected to. 11 U.S.C. § 502(a). No court action is required with respect to the claim until an objection is filed. 11 U.S.C. § 502(b); Fed.R.Bankr.P. 3007. Thus, when an objection to a claim is directed only to a portion of the claim, it is only this portion of the claim that is the subject of the action on the contract.
The Debtor contends that the amounts in dispute concerning both of the state law issues litigated should be lumped together. From this point of view, the Debtor is the prevailing party because the dollar amount of the late charge claim was larger than the dollar amount of the interest issue. The McGaw Property court took this approach. See id. at 231. The Court will do so as well. Moreover, this approach is supported by the wording of § 1717(b)(1): ". . . the party prevailing on the contract shall be the party who recovered a greater relief in the action on the contract." Cal. Civ. Code § 1717. According to the Debtor, the attorneys' fees incurred by the Debtor in connection with this portion of the litigation are $3,855 representing 15.42 hours of attorney time at an hourly rate of $250. The Debtor has provided a detailed itemization of the work performed giving rise to the fees. The amount appears reasonable, and the Debtor is entitled to recover this sum from Gardner.
The Debtor also requests attorneys' fees incurred in preparing and prosecuting its motion for attorneys' fees. The Court concludes that the Debtor is not entitled to an award of fees against Gardner with respect to this litigation. First, federal bankruptcy law controls whether the Debtor is entitled to attorneys' fees based on C.C. § 1717. Second, even if this motion were properly viewed as controlled by state law, using the combined dollar amount approach recommended by the Debtor and adopted by the Court, the Debtor is not the prevailing party with respect to its right to attorneys' fees for litigating the prior disputes with Gardner.
As noted above, the Debtor has only prevailed in its request for $3,855 in attorneys' fees for litigating the issues of interest and late charges. The Debtor has not prevailed in its request for attorneys' fees for litigating Gardner's right to attorneys' fees under 11 U.S.C. § 506(b). The Debtor requested $6,480 in attorneys' fees for litigating the latter issues. Because the dollar amount incurred in the latter litigation was greater than the dollar amount incurred in the former, the Debtor is not the prevailing party with respect to its right to attorneys' fees.
CONCLUSION
The Debtor may not modify the Plan. The Plan has been substantially consummated. Moreover, the proposed modification is not warranted under the circumstances. It would place too much risk on Gardner's secured position, given the uncertainty of the future of the real estate market.
However, the Debtor, as the prevailing party in the litigation concerning Gardner's calculation of interest and her right to late charges, is entitled to its attorneys' fees incurred in connection with that litigation in the amount of $3,855 pursuant to C.C. § 1717. The Debtor is not entitled to attorneys' fees for litigating Gardner's right to attorneys' fees under 11 U.S.C. § 506(b) because that issue was controlled by federal bankruptcy law. Finally, the Debtor is not entitled to attorneys' fees incurred in preparing and prosecuting this motion because the issues are governed by federal bankruptcy law. Moreover, the Debtor was not the prevailing party in connection with this motion because the dollar amount of the fee request denied is greater than the dollar amount of the fee request granted.
Gardner is directed to submit a proposed form of order denying the Debtor's motion to modify the Plan. The Debtor is directed to submit a proposed form of order granting in part and denying in part its motion for attorneys' fees.