Daniel Welzel v. Advocate Realty Investments , 255 F.3d 1266 ( 2001 )

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT U.S. COURT OF APPEALS
_________________________ ELEVENTH CIRCUIT
MAR 29, 2001
THOMAS K. KAHN
No. 99-14875 CLERK
_________________________
D.C. Docket No. 99-00142-CV-4
DANIEL A. WELZEL,
Debtor.
-----------------------------------------------------------------------------------------------
DANIEL A. WELZEL,
Plaintiff-Appellee,
versus
ADVOCATE REALTY INVESTMENTS, LLC,
Defendant-Appellant.
_______________________
No. 99-14876
________________________
D.C. Docket No. 99-00145-CV-4
DANIEL A. WELZEL,
Debtor.
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ADVOCATE REALTY INVESTMENTS, LLC,
Plaintiff-Appellant,
versus
DANIEL A. WELZEL,
Defendant-Appellee.
_________________________
Appeals from the United States District Court
for the Southern District of Georgia
_________________________
(March 29, 2001)
Before WILSON, COX and GIBSON*, Circuit Judges.
GIBSON, Circuit Judge:
The issue in this case is whether the Bankruptcy Code preempts a Georgia
statute authorizing a creditor to collect a fifteen-percent attorney's fee upon default
and with proper notice. The debtor Daniel A. Welzel, Jr. objected to that portion of
Advocate Realty Investments, LLC's claim which represents the statutory attorney's
* Honorable John R. Gibson, U.S. Circuit Judge for the Eighth Circuit, sitting by
designation.
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fees. The bankruptcy court sustained the objection in part and overruled it in part.
The district court reversed and held that the Georgia statute is preempted. We affirm
the judgment of the district court.
Welzel borrowed more than $1 million from the Darby Bank and Trust
Company secured by mortgages on real estate in the historic district of Savannah,
Georgia. Advocate purchased the notes from the bank shortly after the bank had given
written notice to Welzel that the indebtedness was in default and immediately due and
payable, and that in accordance with Ga. Code Ann. § 13-1-11 (1982) the bank would
enforce certain provisions of the notes such that Welzel had ten days in which to pay
the principal and interest to avoid incurring liability for attorney's fees. The parties
stipulated that Welzel failed to pay within the ten-day period. Welzel filed for relief
under Chapter 11 of the Bankruptcy Code after the ten-day grace period expired, and
the case was later converted to a Chapter 7 liquidation.
Welzel stipulated that Advocate's right to fifteen percent of the indebtedness for
attorney's fees vested as a matter of state law upon his failure to satisfy the debt within
ten days of the written notice. Advocate filed a secured claim in the amount of
$1,125,464.47, which included $146,799.71 in statutory attorney's fees.1 The
1
The bankruptcy court found that Advocate's total claim, after the application of
proceeds for previously court-approved sales of property, was $748,724.79. Even though the
amount of its claim diminished, Advocate continues to claim $146,799.71 (fifteen percent of
$978,664.76) as attorney's fees.
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bankruptcy court noted in its order that an estimate of the attorney's fees Advocate had
actually incurred at the time of the hearing was $40,000. Welzel objects to the
allowance of any attorney's fees beyond those actually incurred and determined to be
reasonable.
I.
The parties contest only the conclusions of law reached by the bankruptcy court
and the district court, and therefore our review is de novo. Charles R. Hall Motors,
Inc. v. Lewis (In re Lewis), 137 F.3d 1280, 1282 (11th Cir. 1998). We address an
issue not yet decided in this circuit, namely whether the amount of attorney's fees an
oversecured creditor may recover is determined under state law or under the
"reasonable amount" standard contained in section 506(b) of the Bankruptcy Code,
11 U.S.C. § 506(b) (1994). We conclude that the latter controls by virtue of
preemption.
Under section 506(b), a holder of a secured claim is entitled to reasonable
attorney's fees if the creditor is oversecured2 and the underlying agreement upon
which the claim is based provides for the fees. Welzel acknowledges that Advocate's
claim is an allowed secured claim, that Advocate is oversecured, and that the notes
2
An oversecured creditor is one whose claim is secured by property whose value
exceeds the principal amount of the claim.
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which form the basis of its claim provide for attorney's fees upon collection. Welzel
claims that the attorney's fees must be "reasonable" under section 506(b); Advocate
argues that it is entitled to collect the fifteen percent set forth in the notes because its
right to that amount vested under Georgia law.
Advocate relies on Ga. Code Ann. § 13-1-11, which governs the procedure for
validating and enforcing an attorney's fee provision in a note. Under the Georgia
statute, if the creditor gives written notice of default and the debtor does not cure the
default within ten days of receipt of the notice, the contractual obligation is valid and
enforceable. Here, Advocate's predecessor adhered to this procedure and Welzel
failed to cure the default within the notice period. After the notice period passed,
Welzel sought protection under the bankruptcy laws. Advocate asserts that the timing
of events renders the fifteen-percent charge for attorney's fees enforceable as part of
Welzel's principal obligation because its right to collect those fees vested pre-petition,
relying on Mills v. East Side Investors (In re East Side Investors), 694 F.2d 242, 246
(11th Cir. 1982). Although it is correct that East Side Investors held that attorney's
fees were enforceable as a part of the debtor's principal obligation, the case was
decided as the law was applied before the enactment of the Bankruptcy Reform Act
of 1978 (of which section 506(b) was a part). Because there has been a change in the
applicable statute, we are no longer bound by East Side Investors.
5
Four circuits have addressed this issue since the adoption of the 1978 Act, and
all have determined that the award of attorney's fees is governed by section 506(b)
rather than by state law. First W. Bank & Trust v. Drewes (In re Schriock Constr.,
Inc.), 104 F.3d 200 (8th Cir. 1997); Joseph F. Sanson Inv. Co. v. 268 Ltd. (In re 268
Ltd.), 789 F.2d 674 (9th Cir. 1986); Blackburn-Bliss Trust v. Hudson Shipbuilders,
Inc. (In re Hudson Shipbuilders, Inc.), 794 F.2d 1051 (5th Cir. 1986); Unsecured
Creditors' Comm. v. Walter E. Heller & Co. Southeast, Inc. (In re K. H. Stephenson
Supply Co.), 768 F.2d 580 (4th Cir. 1985). Some of these cases include a thorough
recitation of the legislative history insofar as it relates to Congress's intent that state
law should no longer govern the enforceability of attorney's fee agreements. See, e.g.,
In re 268 Ltd., 789 F.2d at 676-77; In re K. H. Stephenson Supply Co., 768 F.2d at
582-85. Two circuits have applied preemption to allow fees to be awarded where state
law would have denied recovery. In Schriock, the Eighth Circuit held that an
attorney's fees provision in a contract was enforceable under section 506(b) even
though it was invalid under state law. 104 F.3d at 202-03. In K.H. Stephenson, the
Fourth Circuit held that an oversecured creditor should be awarded its reasonable
attorney's fees in spite of its failure to comply with the provisions of state law. 768
F.2d at 585.
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We agree with the analyses and uniform conclusions of these courts,3 and we
hold that Advocate is entitled to its reasonable attorney's fees under section 506(b) and
not the fifteen-percent fee that Georgia law would provide. We therefore affirm the
district court's judgment.
II.
The district court rejected the bankruptcy court's bifurcation of Advocate's
claim as it relates to attorney's fees. The bankruptcy court allowed the claim and
determined that the reasonable fees actually incurred by Advocate would be treated
as a secured claim, and the balance of the fifteen percent would be treated as a general
unsecured claim for the purposes of distribution. Although there is less unanimity
among the courts on this issue, we hold that Advocate is entitled to recover in full its
reasonable attorney's fees as a secured claim but that any additional amount is not
recoverable in a bankruptcy proceeding. "The federal courts have recognized that
percentage fee assessments under [Ga. Code Ann.] § 13-1-11 are grossly
disproportionate to the amount of fees actually incurred and that they in fact provide
3
A number of bankruptcy courts have reached the same conclusion. See, e.g., In re
McGaw Prop. Mgmt., Inc., 133 B.R. 227, 229-30 (Bankr. C.D. Cal. 1991); In re Smith, 109 B.R.
421, 422-23 (Bankr. D. Mont. 1988); In re Wonder Corp., 72 B.R. 580, 586-88 (Bankr. D. Conn.
1987); In re B & W Mgmt., Inc., 63 B.R. 395, 401 (Bankr. D.C. 1986). Two bankruptcy courts
have also determined that section 506(b) specifically trumps Ga. Code Ann. § 13-1-11, the state
statute at issue in this case. In re Centre Court Apts., Ltd., 85 B.R. 651, 659-61 (Bankr. N.D. Ga.
1988); Curtis v. Pilgrim Health and Life Ins. Co. (In re Curtis), 83 B.R. 853, 858-61 (Bankr. S.D.
Ga. 1988).
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a windfall to the creditor. . . ." In re Centre Court Apts., Ltd., 85 B.R. 651, 655
(Bankr. N.D. Ga. 1988) (collecting cases). Moreover, as Advocate argued to the
district court and continues to argue here, there is no statutory authority for
bifurcation. Section 506(b) is the preempting statute, and it completely displaces
state law to the contrary.
Because the bankruptcy court is a court of equity, Advocate makes much of the
notion that its right to collect the fifteen-percent attorney's fees vested before Welzel
filed his bankruptcy petition. We recognize how the Georgia statute operates, and we
conclude that the word "vested" overstates the sequence of events. Advocate held
several notes from Welzel, all of which contained the same boilerplate language about
attorney's fees. The Georgia statute directs that such fee agreements are enforceable,
valid, and collectible with the proper notice. The statute does not itself award feesSit
only validates already-existing fee agreements. Here, the fee-agreement portion of the
notes also cautions that Advocate's ability to collect attorney's fees of fifteen percent
is "subject to any limits under applicable law." Although Advocate asserted its rights
under the fee agreement pre-petition, it did not file suit and no services were rendered
until post-petition. Thus, because section 506(b) is an "applicable law" that limits
recovery to reasonable fees, there is no compelling reason to bifurcate Advocate's
claim for fees because it incurred fees only in connection with the bankruptcy.
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Conclusion
We AFFIRM the judgment of the district court, and we REMAND so that
Advocate may petition the bankruptcy court for the allowance of reasonable attorney's
fees as an oversecured creditor.
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COX, Circuit Judge, concurring in part and dissenting in part:
Responding to Advocate Realty Investments’ arguments, the majority reaches
three conclusions. The first is that federal law trumps Georgia law by deeming the
contractual attorney fee, which is enforceable under O.C.G.A. § 13-1-11, to be a
severable part of Advocate’s claim. The second is that federal law provides the
standard of “reasonableness” under 11 U.S.C. § 506(b), without regard to the opinion
of the Georgia legislature. Finally, it holds that § 506(b)’s allowance of “reasonable
fees” to an oversecured creditor prohibits the creditor from ever collecting — even if
the debtor is solvent — the “unreasonable” fees that a willing and sophisticated debtor
agreed to pay in case of default. I agree with the first two holdings. But the third is
inconsistent with the Bankruptcy Code.
For the first and second holdings, the majority is in good company: The Fourth,
Fifth, Eighth, and Ninth Circuits have all held that federal law, not state law, dictates
whether a contractual fee is awardable as part of a secured claim and how much is a
“reasonable” fee. See First W. Bank & Trust v. Drewes (In re Schriock), 104 F.3d
200, 203 (8th Cir. 1997) (§ 506(b) authorized award of fee notwithstanding contrary
North Dakota law); Blackburn-Bliss Trust v. Hudson Shipbuilders, Inc. (In re Hudson
Shipbuilders, Inc.), 794 F.2d 1051, 1058 (5th Cir. 1986) (federal law determines
reasonableness of fee); Joseph F. Sansom Investment Co. v. 268 Ltd. (In re 268 Ltd.),
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789 F.2d 674, 677 (9th Cir. 1986) (federal law determines fee’s reasonableness);
Unsecured Creditors’ Comm. v. Walker E. Heller & Co. S.E., Inc. (In re Walker E.
Heller & Co. S.E., Inc.), 768 F.2d 580, 581 (4th Cir. 1985) (reasonable fee allowed
to oversecured creditor under agreement notwithstanding failure to comply with state-
law notice provision). And if you have decided that federal law controls, it follows
that the part of the claim called an attorney fee must be severed from the rest of the
claim and trimmed, as necessary, to meet a federal standard of reasonableness. United
States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S. Ct. 1026, 1030 (1989)
(dictum).
Section 506(b) does not, however, explicitly disallow or avoid the
“unreasonable” part of the attorney-fee claim. In re 268 Ltd., 789 F.2d at 678. It
powerfully implies, of course, that the “unreasonable” part of the fee may not be
collected from the collateral; such a rule is an obvious and necessary corollary to the
statute’s explicit authorization to collect only a “reasonable fee” as part of the secured
claim. But § 506(b) is otherwise silent about what happens to the rest of the fee.
Section 502, on the other hand, does have something to say about the rest of the
consensual “unreasonable” fee. That section provides that a claim, even if objected
to, “shall be allowed” unless some listed exception (such as one disallowing
unenforceable claims, 11 U.S.C. § 502(b)(1), or another disallowing unreasonable fees
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charged by the debtor’s lawyer, id. § 502(b)(4)) requires it to be disallowed. Id. §
502(b). No exception appears to apply here, and indeed no one denies that Advocate’s
claim for the balance of the note and the attorney fees permitted under O.C.G.A. § 13-
1-11 is an allowed claim. No one has advanced, moreover, any reason for avoiding
the fee agreement under any other Bankruptcy Code provision. The estate is solvent,
and Advocate should thus get the fee that Welzel agreed to pay, just as other
unsecured creditors are getting paid. See In re Ridgewood Apts. of DeKalb County,
Ltd., 174 B.R. 712, 719 (Bankr. S.D. Ohio 1994) (“[T]he claim for attorney fees must
only be proper under state law [O.C.G.A. § 13-1-11, in that case] to become part of
[the creditor’s] allowed unsecured claim.”).
Section 506(b)’s silence could not trump § 502(b)’s general instructions here,
because § 506 addresses a distinct question: What kind of treatment does the allowed
claim get, preferential or ordinary? See 4 Collier on Bankruptcy ¶ 506.01, at 506-6
(Lawrence P. King, ed., 2d ed. 1999) (“[A]lthough section 506 applies a number of
important rules specifying the determination of the secured status of a claim, the
section does not govern the allowance or disallowance of the underlying claim
itself.”). Claims that § 506(a) deems “secured” get favored treatment — they do not
have to line up, for instance, with other claims in the order that § 507 directs; their
recovery from the collateral is protected in many circumstances, see 11 U.S.C. §§ 361,
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363(e), and ill treatment of secured claims can result in rejection of a plan under
Chapters 11 or 13, see id. §§ 1129(b)(2)(A), 1325(a)(5). This favored treatment for
secured claims comes at the expense of the estate, of course, and hence of unsecured
creditors; § 506(b) therefore draws a line for special treatment of certain elements of
a potentially secured claim, such as penalties and fees, making them available only
when the claim is otherwise oversecured (and even then only when “reasonable”).
This line between preferred and ordinary status is obviously not the same as the
line that § 502 draws between allowed and disallowed claims. At best, then, what §
506(b) does is relegate the part of the fee claim that does not get secured status (that
is, the “unreasonable” part of the fee) to the ordinary status of an unsecured claim.
Incidentally, splitting a claim like this is not alien to the Code; it is what explicitly
happens when a claim is undersecured. See id. § 506(a). On the contrary, reading §
506(b) to perform § 502's disallowing function, but only for secured creditors, turns
bankruptcy law upside down by putting the unsecured creditor seeking an
“unreasonable” contractual fee — who gets the benefit of § 502 and does not get
tangled up in § 506 —in a better position than a secured one.
There thus being no sound statutory basis to disallow or avoid the
“unreasonable” part of a fee claim, equitable considerations alone would have to
support the conclusion that “unreasonable” consensual fees are always disallowed —
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a view that at least one bankruptcy court in this circuit has adopted, and another has
suggested. In re Homestead Partners, Ltd., 200 B.R. 274, 277 n.3 (Bankr. N.D. Ga.
1996) (dictum); In re Centre Court Apts., 85 B.R. 651, 661-62 (Bankr. N.D. Ga.
1988). But to let equity run the show ignores bankruptcy law’s foundation in the
Code.4 Bankruptcy law is statutory, and when a statute affords relief — as § 502 does
in allowing in full a claim for contractual fees — we should not deny that relief on
equitable grounds. Cf. Lonchar v. Thomas, 517 U.S. 314, 323, 116 S. Ct. 1293, 1298
(1996) (“[T]he fact that the writ [of habeas corpus] has been called as ‘equitable’
remedy . . . does not authorize a court to ignore . . . statutes, rules, and precedents.”).
Congress has struck a balance in § 502 between respecting all creditors’ contractual
rights and protecting creditors from one another. That is not a balance that is ours to
restrike.
Replacing a rule with equitable discretion, moreover, leaves us with no bounds
and no principles. Cf. id. Why is an unreasonable, but enforceable, fee agreement
inequitable, and not an above-market interest rate? Why, indeed, should the court not
protect unsecured creditors by determining whether the debtor paid too much for the
assets he bought on credit? We can label all of these second-guesses “protection of
4
A Code that, incidentally, is not shy about explicitly conferring equitable discretion
in certain circumstances. See, e.g., 11 U.S.C. § 365(d)(10); id. § 502(j); id. § 524(g)(4)(B)(ii).
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other creditors,” too, until we are in the business of detouring around all the limited
statutory grounds (in §§ 502, 546, and 547, for instance) Congress has given the
bankruptcy courts to erase abusive and unwise deals. It’s best in the end for us to do
as the bankruptcy court did in this case and stick to the Code.
I therefore respectfully dissent.
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