Bankruptcy

MD Ga - Oversecured Creditor Entitled To Post-Petition Attorneys Fees Notwithstanding Failure To Comply With O.C.G.A. § 13-1-11

By Scott Riddle

JP Morgan Chase Bank v. ELL 11, LLC, No. 7:07-CV-158-HL, 2008 WL 4682263 (M.D. Ga. October 21, 2008).

The issue before the Court is --

This case presents the question of whether after the filing of a debtor's Chapter 11 petition, an oversecured creditor is entitled to attorney fees actually incurred post-petition when the creditor failed to comply with the notice requirements of O.C.G.A. § 13-1-11.

Section 506(b) of the Bankruptcy Code, which applies to oversecured creditors, provides that for “an allowed secured 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 or Statute under which such claim arose.” Section 502(a) further provides that claims are allowed if the creditor files a proof of claim and no objections are made in accordance with the permissible objections set forth in Section 502(b). In particular, § 502(b)(1) permits the Court to disallow a claim to the extent that it is “unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” In other words, § 502(b)(1) would permit a court to disallow a claim that is invalid under state law.

With regard to § 506(b), the Debtor does not dispute that the Appellant is an oversecured creditor, that the attorney fees are reasonable, or that the fees are provided for in the loan documents under which the claim arose. The Debtor argues, however, that § 502 is applicable such that post-petition attorney fees that are actually incurred should not be allowed when O.C.G.A. § 13-1-11 would otherwise disallow the claim because of the failure to provide a 10-day notice letter. In support, the Debtor cites In re Welzel, 275 F.3d 1308 (11th Cir.2001).
 ....

In concluding that a claim for contractually set attorney fees should be bifurcated between secured and unsecured claims based on the amount of fees deemed reasonable, the Court in Welzel took the analysis of § 506(b) a step further. Looking to the language and structure of §§ 502 and 506(b), the Court stated “ § 502 deals with the threshold question of whether a claim should be allowed or disallowed. Once the bankruptcy court determines that a claim is allowable, § 506 deals with the entirely different, more narrow question of whether certain types of claims should be considered secured or unsecured.” In re Welzel, 275 F.3d at 1318. Debtor extrapolates this language to mean that all contractually set attorney fees, whether incurred pre- or post-petition, or whether enforceable under state law or not, must pass through the two-step inquiry of § 502 and § 506. This Court views that reading of Welzel as too broad.

 

*4 As noted, supra, in Welzel the contractual attorney fees were earned pre-petition and were vested via compliance with O.C.G.A. § 13-1-11. The Court in Welzel was not confronted with whether contractual attorney fees earned post-petition must be enforceable under state law. Although not stated explicitly, Welzel left open the question of whether a distinction exists between contractual attorney fees that are not enforceable under state law and are earned pre-petition on one hand, and are those that are not enforceable under state law but earned post-petition on the other. This precise distinction was made in In re Amron Technologies, Inc., 376 B.R. 49 (Bkrtcy.M.D.Ga.2007). Viewing that distinction as consistent with both Eleventh Circuit precedent and the majority of other Circuits, this Court believes such a distinction is appropriate.....

 

In sum, it is the Courts conclusion that Appellant is entitled to attorney fees actually incurred after the filing of debtor's Chapter 11 petition, notwithstanding the failure to comply with the notice requirements of O.C.G.A. § 13-1-11. Accordingly, the Court reverses the Bankruptcy Court's order denying Appellant's Motion to Pay Attorneys' Fees Pursuant to 11 U.S.C. § 506(b) and awards Appellant its requested attorney fees and expenses incurred post-petition, including the cost incurred in bringing this appeal.

Full post as published by Georgia Bankruptcy Blog on October 29, 2008 (boomark / email).