First Western v. Wayne Drewes ( 1997 )

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No. 95-4005
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In re: Schriock Construction, *
Inc., *
*
Debtor. *
*
______________________________ *
*
First Western Bank & Trust, * Appeal from the United States
* District Court for the
Appellant, * District of North Dakota.
*
v. *
*
Wayne Drewes, as bankruptcy *
trustee for Schriock *
Construction, Inc., *
*
Appellee. *
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Submitted: October 21, 1996
Filed: January 8, 1997
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Before RICHARD S. ARNOLD, Chief Judge, McMILLIAN and BEAM, Circuit Judges.
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BEAM, Circuit Judge.
First Western Bank & Trust appeals the district court's conclusion
that the bankruptcy court properly denied First Western's request for
attorney's fees and costs pursuant to 11 U.S.C. § 506(b). We reverse.
I. BACKGROUND
Beginning in 1991, First Western Bank & Trust extended several loans
to Schriock Construction. The security agreement provided that Schriock
would reimburse First Western "on demand for all
costs of collection [of the loans] (including in each case all reasonable
attorneys' fees) incurred by [First Western] . . . , including expenses
incurred in any litigation or bankruptcy or insolvency proceeding." The
security agreement also contained a choice of law clause, specifying that
the law of the borrower's state, in this case North Dakota, would govern
the note. The loans were secured by certain of Schriock's equipment.
Schriock filed for bankruptcy under Chapter 11 in April of 1993. In
May of 1994, the bankruptcy court converted the proceeding to a Chapter 7
liquidation. At that time, Schriock still owed First Western $441,602.26.
The Chapter 7 bankruptcy trustee liquidated Schriock's equipment for
$1,080,175. First Western's claim on the note was fully satisfied from the
proceeds of the sale.
First Western then filed an application under 11 U.S.C. § 506(b),
seeking reimbursement for $38,052.63 in attorney's fees and costs. The
bankruptcy trustee argued that First Western was not entitled to fees
because its security agreement with Schriock did not, under North Dakota
law, provide for such reimbursement. The bankruptcy court agreed with the
trustee, and the district court affirmed. First Western now appeals.
II. DISCUSSION
We review the district court's legal conclusions in bankruptcy
proceedings de novo. Hammrich v. Lovald (In re Hammrich), 98 F.3d 388,
390 (8th Cir. 1996). Our review of the district court's interpretation of
the Bankruptcy Code is also de novo. Graven v. Fink (In re Graven), 936
F.2d 378, 384-85 (8th Cir. 1991).
Section 506(b) of the Bankruptcy Code allows oversecured creditors
to recover certain postpetition costs:
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To the extent that an allowed secured claim is secured by
property the value of which, after any recovery under
subsection (c) of this section, is greater than the amount of
such 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 under which such claim
arose.
11 U.S.C. § 506(b). As the Supreme Court has noted, "[r]ecovery of fees,
costs, and charges . . . is allowed only if [such fees] are reasonable and
provided for in the agreement under which the claim arose. Therefore, in
the absence of an agreement, postpetition interest is the only added
recovery available." United States v. Ron Pair Enters., Inc., 489 U.S.
235, 241 (1989). To recover attorney's fees under section 506(b), then,
a creditor must establish: (1) that it is oversecured in excess of the fees
requested; (2) that the fees are reasonable; and (3) that the agreement
giving rise to the claim provides for attorney's fees. In re Foertsch, 167
B.R. 555, 562 (Bankr. D.N.D. 1994) (citations omitted).
The parties agree that First Western is an oversecured creditor. The
trustee, however, argues even though the bank's security agreement with
Schriock states explicitly that Schriock must pay "all costs of collection
. . . including expenses incurred in any litigation or bankruptcy or
insolvency proceeding," the underlying agreement does not provide for the
recoupment of attorney's fees. According to the trustee, the security
agreement's fee provision is void under North Dakota law, which the
agreement's choice of law clause makes applicable to the loan documents.
North Dakota Century Code § 28-06-04 provides that:
Attorney's fee in instrument void. Any provision contained in
any note, bond, mortgage, security agreement, or other evidence
of debt for the payment of an attorney's fee in case of default
in payment or in proceedings had to collect such note, bond, or
evidence of debt, or to foreclose such mortgage or security
agreement, is against public policy and void.
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We assume for the sake of discussion that the North Dakota statute
would apply to the fees provision in the First Western-Schriock security
agreement. With this assumption, we are presented with the odd
circumstance that the contract specifically allows for recovery of fees,
yet purports to apply state law that would render the parties' express
provision void. The trustee argues that the fee provision is therefore
void ab initio, and the underlying agreement thus does not provide for
fees. The bankruptcy court agreed, concluding that "if an attorney fee
provision is not valid and enforceable by an oversecured creditor outside
of the bankruptcy context, it does not become enforceable merely as a
consequence of being asserted in the context of a bankruptcy case." In re
Schriock Constr., Inc., No. 93-30366, slip op. at 7 (Bankr. D.N.D. filed
Dec. 19, 1994).
But this case concerns the allowance of attorney's fees under federal
law, not state law. The appropriate question is not whether we should
choose the North Dakota statute (which would void the fee agreement) or the
federal bankruptcy code (which would allow it). Rather, we must consider
whether the state statute can trump the federal statute. The trustee's
position, and the district court's conclusion, would effectively convert
the parties' choice of law clause to an "anti-preemption" clause. Neither
the plain language of section 506(b) nor its legislative history supports
such an interpretation.
Section 506(b) itself does not direct us to state law. Rather, the
statute provides that "there shall be allowed to [oversecured creditors]
any reasonable fees, costs, or charges provided for under the agreement
under which such claim arose." The trustee asserts that the validity of
the underlying agreement for recoupment of attorney's fees must
nevertheless be determined according to state law. It is true that
"Congress has generally left the determination of property rights in the
assets of a bankrupt's estate to state law." Butner v. United States, 440
U.S.
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48, 54 (1979); see also Chiu v. Wong, 16 F.3d 306, 309 (8th Cir. 1994).
But such state law inquiries are not appropriate when "some federal
interest requires a different result." Butner, 440 U.S. at 55. Here, the
plain language of section 506(b) expressly provides for the award of
attorney's fees in bankruptcy proceedings, without reference to contrary
state law. See Joseph F. Sanson Invest. Co. v. 268 Ltd. (In re 268 Ltd.),
789 F.2d 674, 677 (9th Cir. 1986) (concluding that Butner does not require
determination of section 506(b) claims according to state law).
The legislative history of section 506(b) supports this common sense
reading of its text. As numerous courts have pointed out, the House and
Senate passed different drafts of the provision. See, e.g., Blackburn-
Bliss Trust v. Hudson Shipbuilders, Inc. (In re Hudson Shipbuilders), 794
F.2d 1051, 1056 (5th Cir. 1986); 268 Ltd., 789 F.2d at 676; Unsecured
Creditors' Comm. v. Walter E. Heller & Co. (In re K.H. Stephenson Supply
Co.), 768 F.2d 580, 584 (4th Cir. 1985). The amended House version of the
statute provided that "[t]here shall be allowed to the holder of such
claim, to the extent collectible under applicable law . . . any reasonable
fees." H.R. 8200, 95 Cong., 1st Sess. § 506(b) (1977). The Senate bill
made no such reference to "under applicable law." See S. 2266, 95 Cong.,
2d Sess. § 506(b) (1978). The conference committee adopted and Congress
enacted the Senate language. Furthermore, the floor managers of the bill,
Representative Edwards and Senator DeConcini, both reported to Congress
during consideration of the conference committee version that the committee
had rejected the House's qualifying language:
Section 506(b) of the House amendment adopts language contained
in the Senate amendment and rejects language contained in H.R.
8200 as passed by the House. If the security agreement between
the parties provides for attorneys' fees, it will be
enforceable under title 11, notwithstanding contrary law . . .
.
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124 Cong. Rec. 32,350, 32,398 & 33,989, 33,997 (1978) (emphasis added).
The statements by Senator DeConcini and Representative Edwards are fully
consistent with our view of the text of section 506(b), and we believe that
the statements are entitled to considerable weight. Cf. Wamsganz v.
Boatmen's Bank, 804 F.2d 503, 505 (8th Cir. 1986) (relying in part on
statements by DeConcini and Edwards in interpreting the Bankruptcy Code).
A clear majority of courts have so interpreted section 506(b) and
have rejected arguments similar to those the trustee advances. See 3
Collier on Bankruptcy § 506.05, at 506-52 to 506-54. In Heller, 768 F.2d
at 585, the court held that a creditor was entitled to attorney's fees
under section 506(b) even though it had failed to comply with a state
statute requiring creditors to give notice and a chance to cure within five
days of a debtor's default. Similarly, two circuits have held that fees
otherwise enforceable under state law were still subject to section
506(b)'s requirement that fees be "reasonable." Hudson Shipbuilders, 794
F.2d at 1058; 268 Ltd., 789 F.2d at 675.
The trustee argues that these cases are inapposite because they
involved "procedural" issues and the reasonableness of fees, rather than
the validity of the underlying agreement. This is a distinction without
a difference. The language of section 506(b) certainly draws no substance-
procedure distinction between state law prohibitions on fee recovery.
Indeed, at least two courts have held that creditors can collect fees under
section 506(b) pursuant to an agreement that would be void under otherwise
applicable state law. In In re Bristol, 92 B.R. 276, 277-78 (Bankr. S.D.
Ohio 1988), the bankruptcy court gave effect to a provision allowing for
recovery of attorney's fees contained in a mortgage deed, even when
otherwise applicable state law would not have enforced the provision.
Similarly, in In re American Metals Corp., the bankruptcy court enforced
a fee provision proscribed under arguably applicable state law. 31 B.R.
229, 234 (Bankr. D. Kansas 1983).
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Unlike Bristol and American Metals, the parties in this case
expressly provided that state law would govern the contract. In this vein,
the district court explained that its conclusions "may have been different
had the security agreement itself not said North Dakota law would govern
or if the provision for payment [of] attorney fees to the bank was
contained in a separate agreement." In re Schriock Constr., Inc., No. 93-
30366, slip op. at 5 (D.N.D. filed Nov. 1, 1995). The point of the court's
reference to a "separate agreement" is that section 28-26-04 of the North
Dakota statutes voids a provision entitling a secured creditor to
attorney's fees only if it is contained in the security agreement itself
or in some other instrument "relate[d] to the payment of a debt." Farmers
Union Oil Co. v. Maixner, 376 N.W.2d 43, 49 (N.D. 1985). As the trustee
acknowledged in the proceedings below, a side agreement providing for fees
in this case might well have been enforceable under North Dakota law.
Given this rather fine technical nicety, we are even less inclined to find
that state law overrules section 506(b).
Further, we see no reason why the parties' use of a choice of law
clause should require us to look to state law to determine whether the
security agreement provides for attorney's fees. Presumably, a court
construing the contract outside the bankruptcy context would, under
accepted choice of law principles, apply North Dakota law even in the
absence of the parties' explicit choice. But with or without the parties'
choice of law provision, we simply do not need to consider North Dakota law
in considering First Western's claim for attorney's fees. See American
Metals, 31 B.R. at 234. Section 506(b) does not require creditors to
forego the common contractual tool of choice of law provisions in order to
have the benefit of federal bankruptcy law. We disagree with the
bankruptcy court's reasoning that it is mere happenstance that a fee
provision unenforceable under state law would be given effect in bankruptcy
proceedings; rather, that is the clearly intended effect of section 506(b).
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The trustee argues that this view of section 506(b) renders the
statute's requirement of an underlying agreement to repay fees superfluous,
but such clearly is not so. Had the security agreement between First
Western and Schriock not contained a paragraph expressly providing for
recoupment of fees, or had expressly disallowed fees, there is no question
that section 506(b) would not apply. Indeed, section 506(b) would be
superfluous if the validity of an explicit fee provision were dependent on
state law. "Section 506(b) says that the oversecured creditor may get
reasonable attorney's fees if the agreement so provides. It does not say
that the right is dependent on state law. Section 506(b), therefore,
establishes a federal right to reasonable attorney's fees for the
oversecured creditor irrespective of state law." In re McGaw Property
Management, Inc., 133 B.R. 227, 230 (Bankr. C.D. Cal. 1991). The security
agreement between the bank and Schriock did, in fact, provide for
recoupment of attorney's fees in bankruptcy proceedings, and North Dakota
law cannot bar a fee recovery under section 506(b).
III. CONCLUSION
For the foregoing reasons, we reverse the district court's conclusion
that the security agreement between Schriock and First Western does not
provide for recovery of attorney's fees in bankruptcy proceedings. We
remand this case to the district court so that it may be returned to the
bankruptcy court for the award of a reasonable fee.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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