Do debtors have to pay creditors attorney fees: A look at In re Anderson and the requirement of Reasonableness

When you file a chapter 13 bankruptcy there is always a concern that you will end up paying not only your attorney fees but those of your creditors.  In some cases where there is a secured claim it is possible that the person filing the bankruptcy could be responsible for the fees generated by the attorney for the creditor.  The example that most often comes to mind are fees for the production and filing of a proof of claim on a home mortgage.  The attorney for the mortgage company is usually allowed a claim for their attorney fees that is added to the claim and paid through the bankruptcy case.  Most of this is anticipated ahead of time and it is basic required work for the bankruptcy case to run smoothly.  

Today’s topic concerns attorney fees incurred after the debtor files the bankruptcy petition. Attorney’s fees are generally recoverable if they are based on a pre-petition contract enforceable under state law or statute. A creditor in this situation wishing to augment a pre-petition claim with post-petition legal expenses, must do so under § 506(b) during the pendency of the bankruptcy case. Courts have allowed secured creditors to collect attorneys fees from challenging a proposed plan if they are found reasonable. In re Williams, 174 B.R. 307, 309 (Bankr. D. Kan. November 22, 1994) A discussion of In re Anderson, No. 15-41155-13, (Bankr. D. Kan. Nov. 16, 2020) provides insight into the complexities of fee recovery for creditors attorneys and why their litigation strategies matter.

Facts of Anderson 

Debtors had mortgages with CoreFirst Bank and Trust that covered their personal residence, a single family rental property and an eight-plex rental property.  The largest mortgage was $129,789.12 and had a balloon payment. The smaller was $3,621.47.  In addition to the mortgages the debtors had unsecured at $13,290.  In the years before filing the debtors had made their payments on the mortgages and when the balloon payments were due the loan was rewritten.  At some point CoreFirst stopped rewriting the loans and called the note due.  There was no default before this time.  When the debtors could not find any financing CoreFirst filed a foreclosure action in the Shawnee County District Court in September of 2015.   Debtors then filed their chapter 13 bankruptcy case in November of 2015.  

CoreFirst then spent almost a year litigating the feasibility of the Chapter 13 plan with the debtors.  The debtors first plan proposed paying CoreFirst’s claim in full at the contract rate of interest.  The court held a trial on the feasibility of debtors plan, and concluded that an amended plan was necessary to increase the payments slightly to cover the claims to be paid in the plan.   CoreFirst then objected to the amended plan.  A second amended plan was filed and CoreFirst objected to that as well and a second trial was necessary on the same issues. At no time was CoreFirst not being paid in full on their claim and at no time were they not adequately protected by the substantial equity cushion in the property.  The Court ultimately confirmed Debtors’ Chapter 13 plan in October 2016, nearly a year after their petition was filed.   

Debtors have successfully completed almost 5 years of repayment and their Chapter 13 plan is nearly complete. Upon notice from the Trustee that the plan was near completion the Debtors attorney filed an application for compensation asking for fees for time spent litigating the second amended plan. Debtors attorney had previously filed fee applications and already had total fees paid through the trustee of $8,687.50.   Debtors counsel noted that the Trustee has inadvertently overpaid attorney’s fees by $1,250 and sought approval of those additional fees, which were actually less than what he was owed.

CoreFirst responded to Debtors attorney fees and sought to amend its claims to add roughly $17,000 in attorneys fees from the plan confirmation battle. CoreFirst stated it did not seek fees through the Chapter 13 Plan, but rather an order confirming its rights to collect fees outside the bankruptcy process, following the termination of the automatic stay. 

Discussion of Anderson 

A bankruptcy creditor seeking attorney’s fees has the burden of establishing its entitlement to fees and the reasonableness of the fees sought. Four requirements must be met for the allowance of fees to a secured creditor: (1) the claim must be an allowed secured claim; (2) the creditor holding the claim must be over-secured; (3) the entitlement to fees, costs, or charges must be provided for under the agreement or state statute under which the claim arose; and (4) the fees, costs and charges sought must be reasonable in amount.  

CoreFirst claim was an allowed secured claim.  There was no issue about the validity of the claim and no objection to the claim.  Debtors were proposing to pay the claim in full from the beginning at the contract rate of interest.  The first part of the test was satisfied.

The property securing the claim included three pieces of real estate and CoreFirst’s claim valued them at $249,000, substantially above the amount owed on the claims.  Debtors’ schedules also valued the property at above the total claim.  At no time was this an issue in the case, and at no time was CoreFirst undersecured or inadequately protected. The second part of the test was clearly satisfied and never at issue.

All of the mortgages contained language allowing CoreFirst to recover fees and costs incurred in the enforcing of the mortgages.  Documents were provided to the court and the language was clear.  The third part of the test was also clearly satisfied.

The last prong of the test is whether or not the fees sought are reasonable.  This is the area where the court took issue with the behavior of CoreFirst in prosecuting their actions.  One bankruptcy court within the 10th circuit noted the “mere fact that a legal action is initiated based on a contract which allows for the reimbursement of attorney fees and costs does not mean that the fees and costs incurred in connection with each cause of action or defense are reimbursable.” (In re Gledhill, 164 F.3d at 1340.) 

The Anderson court has emphasized a balancing the equities test and noted that an oversecured creditor does not have a blank check, and reasonableness is dependent of facts of a particular case. Just because a creditor is oversecured and can add attorneys’ fees on its claim does not mean that it should.  

Here the court noted facts in the case that that lead to the unreasonableness determination:

First, the debtors had been current for more than 20 years to this creditor and the creditor had substantial equity in its claim. 

Second, this case involved a payoff of the entire allowed secured claim. In these types of cases, courts have held that post-bankruptcy collection efforts or attempts to retain a lien against the property that secured the creditor’s claim are inconsistent with the confirmed plan and 11 U.S.C.S. § 1327(a).  

Third, the court made clear that the feasibility of debtors Ch. 13 plans had generally been established at the first trial. Yet, the creditor not only objected, but forced a second trial on essentially the same issues. The court determined the litigation occurring in the second trial was not justified and those fees “certainly were not reasonable”. 

Fourth, creditor’s amendment of its claim was made the night before the completion of the debtor’s case with no justification for failing to file a motion in the previous four years.  

Conclusion 

What Anderson teaches us is that creditors attorneys must observe a “rule of reason” for their clients to be able to recover fees incurred in post-petition litigation. While most of us agree the word “reasonable” sounds undefined and nebulous, debtors should be protected from creditors failing to exercise restraint with the belief that the estate must foot the bill due to their oversecured status. Creditors attorneys should be conscious of their post-petition litigation tactics and note the timing of filing amended claims and fee requests while protecting creditor interests.  Tactics that seem to have little or no merit in terms of protecting the creditors position should be avoided as a wasteful and dubious, with little value other than to consume the creditor’s retainer since the funds of the estate will not be available to cover the costs.

If you have any questions about bankruptcy or bankruptcy issues please feel free to contact our office and one of our bankruptcy attorneys will gladly go over them with you.  We have offices in Wichita, Topeka, Lawrence and Overland Park. 

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