Opinion
Case No. 7-99-02528-11
March 17, 2003
Richard E.B. Foster, Esquire, Roanoke, Virginia, counsel for the debtor.
John G. McJunkin, Esquire, N.W. Washington, D.C., counsel for Beal Bank, SSB.
DECISION AND ORDER:
The matter before the court for decision is the claim by Beal Bank, SSB (herein Beal) for allowance of attorney's fees and expenses incurred post petition. The statutory basis for Beal's claim is 11 U.S.C. § 506 (b) which allows an over secured creditor to add attorney's fees and expenses to its secured claim if the criteria set forth in section 506(b) are met. Debtor concedes that Beal is over secured but takes issue with Beal's entitlement to a section 506(b) claim because there is no "agreement" which provides for attorney's fees and existence of such an agreement is an element of section 506(b) which Beal must satisfy in order to have a claim under section 506(b). Debtor's position is that any "agreement" which he had with Beal was merged into a judgment Beal obtained prepetition. Beal counters with the argument that federal law (§ 506(b)) controls the determination of attorney's fees notwithstanding the Virginia law of merger. Both parties filed memorandums and were heard in oral argument. For the reasons set forth below, the court holds that Beal is not entitled to allowance of attorney's fees and expenses under 11 U.S.C. § 506 (b).
Facts:
Beal is the assignee of a promissory note from the debtor to Sovran Bank, N.A. The note provides for attorney's fees in the event of default. See, Beal Ex. 1, page 7. Debtor defaulted on the note and Beal obtained a judgment against debtor in the United States District Court for the Western District of Virginia on March 9, 1999 (herein the Judgment). See, Beal Exhibit 2. Beal properly docketed the Judgment giving it a perfected judgment lien with respect to a large segment of debtors real estate holdings.
Prior to judgment. the note was secured only by the Blacksburg Holiday Inn which was foreclosed prior to the judgment. Thus. prior to obtaining the Judgment and after foreclosure. Beal was the holder of an unsecured promissory note and guaranty.
Debtor filed his petition for relief under Chapter 11 of the Bankruptcy Code on July 27, 1999. Beal filed its proof of claim on November 4, 1999. The sole basis of its claim is the judgment. Beal has been a very active creditor in the Chapter 11 proceeding and has incurred $260,053.60 in post petition attorney's fees and expenses. See, Beal Exhibit 3.
Discussion:
Under 11 U.S.C. § 501 et. seq. a claim that exists as of the date of the filing of the bankruptcy petition is entitled to be paid from assets of the estate. As of the date of the filing of the debtor's bankruptcy petition, Beal had a claim which was secured as a result of the Judgment. The Judgment awarded Beal a principal amount, accrued interest to date of judgment, a fixed amount of attorney's fees ($240,000.00 comprised of prejudgment accrued attorney's fees and an amount for post-judgment collection) and interest at 9% post-judgment on principal, interest, and attorney's fees until paid. Beal, Exhibit 2. Beal docketed the Judgment more than 90 days prior to debtor's bankruptcy filing thereby obtaining judgment lien status under Virginia law and eliminating any avoidance action that would have been available to the debtor under the Bankruptcy Code. The Judgment provided the sole basis for Beal's claim as an over secured creditor entitled to post-petition attorney's fees under 11 U.S.C. § 506 (b).
11 U.S.C. § 101 (5) "`claim' means — (A) right to payment. whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured."
See Official Bankruptcy Form 10.
11 U.S.C. § 506 (b) "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 for under the agreement under which such claim arose)."
Beal argues that it fulfills all the elements of 11 U.S.C. § 506 (b) necessary for allowance of attorney's fees. The debtor concedes that Beal is over secured but disputes the element that requires that attorney's fees on its secured claim be "provided for under the agreement under which the claim arose." Debtor argues that as of the date of his filing, Beal's claim arose as a result of the prepetition Judgment and that, upon filing, the agreement (the promissory note and guaranty) no longer existed due to the doctrine of merger under Virginia law. Debtor's conclusion is that since Virginia law extinguished the agreement giving rise to the claim for attorney's fees, there is no agreement that forms the basis for a § 506(b) claim and Beal is relegated to a secured claim based solely on the Judgment.
They are: 1. Claimant is over secured: 2. Claim arises from an agreement: 3. Claim is reasonable.
Because of the court's ruling. the issue of reasonableness need not be addressed at this time.
The court is satisfied that the Debtor's analysis and application of the existing Virginia case law pertaining to the doctrine of merger is accurate and on point. The court finds that prior to the filing of debtor's petition, the only basis for Beal's claim was the Judgment. In fact, but for the Judgment and its docketing to perfect a judgment lien Beal would have no legal basis for a § 506(b) claim because prior to judgment its claim was rooted in an unsecured promissory note and guaranty. Before Federal Bankruptcy Law became operative vis' a vis' Beal and the debtor the promissory note and guaranty were merged by Virginia law into the judgment and Virginia law operated prepetition to dictate that the Judgment was the only basis for Beal's claim.
See, Sands v. Roller, 118 Va. 191, 193, 86 S.E. 857, 858 (1915).
The Beal judgment, properly docketed and not avoidable under bankruptcy law, formed the basis for determination of Beal's claim rights in the Chapter 11 proceeding. Beal would have the court reach back to its prejudgment posture to divide the merged judgment and the note and guaranty in order to meet the specific language of § 506(b) that there must be "reasonable fees, costs, or charges provided for under the agreement under which such claim arose." However, the Bankruptcy Code takes claimants as it finds them as of the date of the petition and applies the plain wording of its code sections to the claim status on the petition date. In this case, the basis for a § 506(b) over secured claim is rooted solely in the Judgment. There is no "agreement" as of the date of filing that satisfies the last § 506(b) element because Virginia law extinguished it prepetition. An agreement for attorney's fees in an unsecured promise to pay a promissory note cannot be resurrected post-petition to allow Beal as a secured judgment lien creditor to collect attorney's fees incurred post-petition.
See, U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
Beal relies on Unsecured Creditors Committee v. Walter E. Heller Company Southeast, Inc., 768 F.2d 580 (1985) for the proposition that allowance of post-petition attorney's fees is governed by federal law [ 11 U.S.C. § 506 (b)] even when state law would dictate another result. In Heller, there was an existing agreement as of the date of the bankruptcy petition which provided for attorney's fees. Heller and the debtor operated under this agreement post petition. That agreement formed the basis for Heller's prepetition and post-petition claim. Thus, Heller is distinguishable on its facts and this court declines to extend its holding to the facts given in this case. Federal law may govern the allowance of a section 506(b) claim but only with respect to that claim as it exists on the petition date. In this case, Virginia law determined the existence of the claim as of the date of filing.
Conclusion
Based upon a plain reading of § 506(b), there had to be an agreement as of the date of the petition which would give rise to a secured claim for attorney's fees. There was no such agreement in existence in this case and Beal has no § 506(b) claim for post-petition attorney's fees. Instead, it has a post-petition secured claim based on its perfected judgment lien. For the foregoing reasons, it is
ORDERED:
That the motion of Beal Bank, SSB for allowance of its fees and expenses under 11 U.S.C. § 506 (b) as a secured claim be, and it hereby is DENIED.