03.4.2019 | Articles / Publications
Burr Alert: Fourth Circuit Green Lights Lender Claims for Post-Petition Attorneys’ Fees
Most lending institutions and bankruptcy practitioners are familiar with a secured creditor’s ability to include post-petition attorneys’ fees in its claim against a bankrupt debtor so long as (1) the claim amount does not exceed the collateral’s value and (2) entitlement to attorneys’ fees is permitted by statute or in a pre-petition contract. However, courts have wrestled with the issue of whether unsecured and under-secured creditors (where the amount of the debt exceeds the collateral value) may assert claims for attorneys’ fees incurred after a debtor’s bankruptcy filing.
On February 8, 2019, the Fourth Circuit Court of Appeals issued its opinion in Summitbridge National Investments III, LLC v. Faison, No. 17-2441 (4th Cir. 2019) and held that the Bankruptcy Code (11 U.S.C. § 101 et seq.) does not bar a creditor from asserting an unsecured claim for attorneys’ fees incurred after the filing of the bankruptcy case if those fees are permitted by statute or a pre-petition agreement. This lender friendly result may affect post-petition strategies of bankrupt debtors and creditors alike and reinforces the importance of including attorneys’ fee clauses in loan documents.
Prior to Ollie Faison’s (the “Debtor’s”) Chapter 11 bankruptcy filing on January 3, 2014, the Debtor obtained three loans from BB&T totaling $2.1 million which were secured by farmland he owned in North Carolina. The loan documents contained a provision stating that the lender would be entitled to “all costs of collection, including but not limited to reasonable attorneys’ fees” if the notes were placed with an attorney for collection. BB&T filed claims in the Debtor’s bankruptcy case and subsequently assigned its claims to Summitbridge National Investments III, LLC (“Summitbridge”).
The Debtor filed his plan of reorganization (the “Plan”) which contemplated paying Summitbridge’s secured claims up to $1,715,000 (based on the value of the Debtor’s farmland that secured the debt). The amount proposed to be paid to Summitbridge through the Plan covered the outstanding principal, pre-petition interest, “as well as a portion of Summitbridge’s post-petition interests and attorneys’ fees.” The Plan also made clear that Summitbridge could file an unsecured claim to recover any post-petition fees incurred that exceeded the amount of its collateral. However, the Debtor objected to Summitbridge’s claim for attorneys’ fees once the claim was filed on the basis that, among other things, “the Bankruptcy Code does not provide for allowance of an unsecured claim for post-petition attorneys’ fees or costs.” The Bankruptcy Court for the Eastern District of North Carolina agreed with the Debtor’s argument, and the District Court subsequently affirmed. However, on appeal, the Fourth Circuit reversed and remanded.
In reaching its decision, the Fourth Circuit relied heavily on the Supreme Court’s opinion in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007) noting, “[W]e generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.” Id. at 452. Furthermore, since the Travelers opinion was issued, both the Second and Ninth Circuits concluded that no basis exists in the Bankruptcy Code to bar creditors from asserting unsecured claims for post-petition attorneys’ fees that arise out of pre-petition contracts.
Although the Debtor pointed the Court to Sections 502(b) and 506(b) as the basis for barring a creditor from asserting an unsecured claim for post-petition attorneys’ fees, the Court analyzed each provision and concluded that neither statute expressly disallowed such a claim.
First, the Court noted that Section 502(b) does not prohibit a creditor’s claim for post-petition attorneys’ fees so long has (1) it had a claim to the fees as of the debtor’s petition date and (2) the claim does not fall within one of Section 502(b)’s nine exceptions. Here, the Debtor did not argue that one of the nine exceptions applied. Consequently, the Court’s focus was limited to whether Summitbridge had a claim for attorneys’ fees as of the petition date. The Court determined that Summitbridge’s right to payment of attorney’s fees was pre-petition in nature by virtue of the language of the loan documents. Although the amount of the claim was not known as of the petition date because it was contingent on the fees being incurred, the Court noted that contingent rights to payment fit within the Bankruptcy Code’s broad definition of the term “claim”. Therefore, the Debtor’s argument that Section 502(b) disallows Summitbridge’s unsecured claim for post-petition attorneys’ fees was overruled.
The Debtor next argued that because Section 506(b) expressly allows creditors with over-secured claims to include attorneys’ fees, the Court should imply that unsecured claims for attorneys’ fees incurred post-petition should be disallowed. The Court remarked that Section 506(b) “never mentions, let alone expressly disallows, unsecured claims for post-petition attorneys’ fees.” Moreover, as the Court noted, Section 506(b) “has nothing to do with the allowance or disallowance of claims” – it only discusses the secured status of claims. It is Section 502(b) that addresses the allowance of claims and, as discussed above, that section does not expressly disallow unsecured claims for post-petition attorneys’ fees.
Lastly, the Debtor argued that policy considerations should dictate that creditors should not be entitled to assert unsecured claims for post-petition attorneys’ fees. The Court was unmoved however and noted that because the Bankruptcy Code does not prohibit unsecured claims for post-petition attorneys’ fees, the Court could not consider reaching an alternative result on equitable grounds.
Loan documents typically include provisions permitting a lender to collect reasonable attorneys’ fees if the loan is placed in the hands of an attorney for collection. The Faison decision makes clear that creditors do not have to be over-secured to assert them if a borrower files for bankruptcy. This result may encourage debtors to resolve issues with the lenders – even if they are unsecured or under-secured – in bankruptcy and avoid costly litigious alternative strategies. Regardless, the Faison decision constitutes a victory for those who extend credit to borrowers in the Fourth Circuit and are a reminder of the importance of attorneys’ fee clauses in loan documents.
Download the burr alert, “Fourth Circuit Green Lights Lender Claims for Post-Petition Attorneys’ Fees” written by Michael H. Weaver
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