Opinion
Case No. 09-31932 TEC.
January 20, 2010
MEMORANDUM RE ATTORNEYS FEES CLAIMED BY SECURED CREDITORS 4 QUARTERS INVESTMENT COMPANY AND MARGARET POCOROBA
Secured creditor 4 Quarters Investment Company filed an application to have the attorneys fees it incurred in this bankruptcy case allowed as part of its secured claim pursuant to 11 U.S.C. § 506(b). Secured creditor Margaret Pocoroba filed a similar application. Debtor objected to both applications on the basis that the fee provision in each creditor's note and deed of trust did not cover the activities in question, and on the basis that the fees sought were not reasonable. Upon due consideration, and for the reasons set forth below, I determine that the fees should be allowed as requested, except as to $360 in fees sought by 4 Quarters.
A. Scope of Fee Clause
It is undisputed that attorney fees may be allowed as part of a secured claim under section 506(b) only if the promissory note or security agreement provides for the secured creditor to recover fees for the work in question. In re Dalessio, 74 B.R. 721, 723 (9th Cir. BAP 1987).
The deed of trust securing 4 Quarters' claim and the deed of trust securing Pocoroba's claim contain the same fee clause, which requires Debtor to pay secured creditor for fees reasonably incurred in any "proceeding purporting to affect the security" for the loan.
A bankruptcy case is a proceeding that very directly affects the security for the loan, because the filing of a bankruptcy petition stays the secured creditor from enforcing its rights against the collateral under non-bankruptcy law. See 11 U.S.C. § 362(a). The Ninth Circuit Bankruptcy Appellate Panel has described contractual language substantially identical to that in question here as "a broad attorney's fees provision," which covers fees incurred by the secured creditor in filing a motion for relief from stay or an objection to a confirmation of a plan of reorganization, where such action is necessary to protect the creditor's interest in the collateral securing the loan.Pasatiempo Properties v. Le Marquis Associates (In re Le Marquis Associates), 81 B.R. 576, 579 (9th Cir. BAP 1987); accord In re Dix, 140 B.R. 997, 999-1000 (Bankr. S.D. Cal. 1992).
Even under the broad fee provision involved here, however, attorney fees incurred by a secured creditor do not become part of the secured claim unless they are reasonable in amount and were incurred for services reasonably necessary to protect the secured creditor's interest in the collateral. Marquis, 81 B.R. at 578; Dix, 140 B.R. at 999.
B. Reasonableness of Creditors' Actions
4 Quarters holds a promissory note secured by a first deed of trust against a single-family residence at 2550 Webster Street, San Francisco. The outstanding loan balance on the note is approximately $1.3 million. 4 Quarters also holds a $695,000 note secured by a first deed of trust against a nine-unit apartment building at 1019 Ashbury Street, San Francisco, and a $763,000 note secured by a first deed of trust against a nine-unit apartment building at 2807-09 Steiner Street, San Francisco. Pocoroba holds a second-priority deed of trust on these same three properties, which secures an outstanding loan balance of approximately $424,000.
Both 4 Quarters and Pocoroba had good reason to be very active in the present bankruptcy case.
First, Debtor's failure to maintain the Webster Street property both pre- and post-petition posed a serious threat to the value of the collateral. Photographs submitted to the court show the property to be full of refuse, crumbling wallpaper and plaster, and parts of the roof and exterior walls in such a state of disrepair that parts of the building are open to the elements.
Second, Debtor refused to take a realistic view toward reorganization of her debts. Despite the fact that she had insufficient income to pay the present debt service on the Webster Street property, and despite the horrible state of disrepair into which she had allowed that property to fall, she stated at the first chapter 11 status conference that she intended to refinance that property. After reviewing the circumstances of the case, the court advised Debtor that she would be allowed a reasonable time to sell the property, but that the court would grant relief from stay to the secured creditors if she did not move her case along diligently. Debtor's counsel then filed a motion to establish procedures for selling the Webster Street property. At the hearing on that motion, Debtor withdrew the motion and fired her counsel.
Third, after the court appointed a chapter 11 trustee, Debtor interfered with the efforts of that Trustee to sell the Webster Street property, and to collect rents from the Ashbury Street and Steiner Street properties. Declarations filed by Trustee and his counsel indicate that Debtor: (1) refused to turn over legible or complete rent rolls to the Trustee; (2) refused to turn over keys to the Steiner Street gate and front door, forcing the Trustee to engage a locksmith replace the locks; (3) deposited rents into her daughter's checking account, returned those rents to Trustee only upon threat of a turnover motion, and never provided an accounting of the rents in question; (4) ordered workman who were trying to repair Webster Street's severely dilapidated roof and back wall to leave the premises; (5) authorized a man (Petrizze) to live on the Webster property without a lease and defended him at eviction proceedings after having told the Trustee that Petrizze had no authority to live on the property; (6) failed to collect half of the scheduled $36,000 in rents for September and October 2009; AND (7) after the Trustee's appointment, directed a tenant to pay rent to Debtor via an alias. When Trustee filed a motion to approve procedures for the sale of the Webster Street property, Debtor brought a motion to dismiss the chapter 11 case, which the court denied.
In addition to these acts, after Trustee's appointment and without any authorization by Trustee or this court, Debtor withdrew $40,000 cash from estate bank accounts.
In short, even though the claims of 4 Quarters and Pocoroba likely were fully secured, those creditors had reason to believe that the value of their collateral might substantially decline and payment of their claims be unreasonably delayed, if they did not actively push Debtor, Trustee, and the court to have the Webster Street property sold promptly, if possible before the full onslaught of the Northern California rainy season.
I determine that counsel for 4 Quarters acted reasonably in furtherance of the preservation of 4 Quarters' collateral in taking each of the actions performed in this bankruptcy case: filing a motion for relief from stay; participating at all court hearings regarding 4 Quarters' collateral; supporting the appointment of a chapter 11 trustee; cooperating actively with Pocoroba and the Trustee to further the prompt sale of the Webster Street property; opposing Debtor's multiple motions to dismiss the case; closely monitoring Debtor's use of cash collateral; filing responses to Debtor's objection to 4 Quarter's claim and Debtor's motion to sell the Webster Street property free and clear of (part of) 4 Quarters lien; reviewing and analyzing Debtor's prior bankruptcy case; prosecuting a Rule 2004 examination of Debtor; analyzing documents produced by Debtor in connection with the 2004 examination and following up on documents not produced; analyzing all pleadings and operating reports filed in Debtor's bankruptcy case; analyzing Debtor's tax returns; and preparing a payoff demand.
I determine that Pocoroba's counsel acted reasonably in furtherance of the preservation of Pocoroba's collateral in taking each of the actions he performed in this bankruptcy case: monitoring closely 4 Quarters' motion for relief from stay, filing a motion for relief from stay, participating at all court hearings concerning Pocoroba's collateral, supporting the appointment of a chapter 11 trustee, cooperating actively with 4 Quarters and the Trustee to further the prompt sale of the Webster Street property, and opposing Debtor's multiple motions to dismiss the case. It is worthy of note that Pocoroba's lien on each of the three properties was junior to the lien of 4 Quarters, and therefore Pocoroba had to watch carefully all actions taken by 4 Quarters, lest 4 Quarters obtain relief from stay and leave Pocoroba a sold-out junior lienholder. I also note that Pocoroba had as much reason as 4 Quarters to fear that dismissal of the chapter 11 case might very well slow the repayment of her claim.
C. Reasonableness of Amount of Fees Sought
Debtor's counsel first objects to the amount of fees sought by 4 Quarters and Pocoroba on the basis that neither creditor filed an application that conforms to the court's guidelines for fee applications. This argument is unpersuasive, because those guidelines do not apply to fees sought by secured creditors under section 506(b). The guidelines apply only to applications for fees by chapter 7 and chapter 11 trustees, and counsel and other professionals representing the bankruptcy estate. This court will sometimes in its discretion direct counsel for a secured creditor seeking fees under section 506(b) to use the fee application format specified in the guidelines, but the court did not do so in the present case.
After careful review of the time records submitted by 4 Quarter's counsel, consideration of the extent and nature of the proceedings in the case, the amount of 4 Quarter's claim, I find that 4 Quarter's counsel performed their services with reasonable efficiency, and that the amount sought is reasonable in light of the services performed and is in proportion to the amount at stake, except with respect to two very small, vague time entries totaling $360. Thus, 4 Quarters is entitled to recover attorneys fees and expenses of $177,268.61 through December 29, 2009 as part of its secured claim.
The court finds that the following two time entries are too vague to determine the reasonableness of the related fees: (1) entry by Ms. Kaelin dated July 23, 2009 for half an hour re status follow-up, list of outstanding information, "review update," and review e-mail to counsel; and (2) entry by Mr. Chen dated July 29, 2009 for half an hour re investigation of creditor matrix.
After careful review of the time records submitted by Pocoroba's counsel, consideration of the extent and nature of the proceedings in this case, the amount of Pocoroba's claim, and the fact that counsel for 4 Quarters took the lead oar on most issues involving the real property collateral, I find that Pocoroba's counsel performed his services with reasonable efficiency, and that the amount sought is reasonable in light of the services performed and is in proportion to the amount at stake. Thus, Margaret Pocoroba is entitled to recover $32,472.50 for attorneys fees and expenses through December 22, 2009 as part of her secured claim.