In Re Kudlacek

109 B.R. 424 (1989)

In re Michael J. & Joanne KUDLACEK, Debtors.

Bankruptcy No. BK-S-89-0602-LBR.

United States Bankruptcy Court, D. Nevada.

December 13, 1989.

Barbara Taves, Las Vegas, Nev. for debtor.

Matthew Callister, Callister & Reynolds, Las Vegas, Nev. for movant.

MEMORANDUM DECISION AND ORDER

LINDA B. RIEGLE, Bankruptcy Judge.

This matter came before the court on the creditor's Motion for Reconsideration of Order Disallowing Claim. The issue was argued at a hearing and the court took the matter under submission.

FACTS

On March 3, 1989, Michael and Joanne Kudlacek (debtors) filed a Chapter 13 bankruptcy petition. Fireman's Fund Mortgage Corp. (Fireman's) filed a proof of claim, claiming they were owed $105,076.33 ($92,564.76 in principal and $12,001.49 in prepetition arrearages). This claim was based on a note secured by a deed of trust on the debtors' residence, presumably assumed by the debtors.^[1] The deed of trust and the deed of trust note are both standard form HUD documents (HUD-92146 and HUD-99146 respectively). (See Exhibits A and B attached hereto).

The note itself contains no provision for attorney fees. The only provision in the deed of trust arguably dealing with attorney fees provides that upon default, the Trustee has the power to sell the property, and then apply the proceeds of sale "to pay all proper costs, charges and expenses, including all attorneys' and other fees, and costs herein provided for, and all moneys advanced for costs or expenses, or expense of litigation as aforesaid. . . ." There is also a provision for Trustee fees, in the amount of one half percent of the principal, to be paid by the Grantor/Mortgagor if a foreclosure sale is advertised but never consummated.

Fireman's claims they are owed $12,001.49 in arrearages, including attorneys fees, pursuant to N.R.S.Ann. § 107.030 (Michie 1986). These attorneys fees are broken down in a later document filed with the court. These fees include trustee fees of $725.00, a guarantee fee of $453.60, and a bankruptcy fee of $100.00, all under the general rubric of attorney fees. The court specifically requested that Fireman's provide the basis for these fees and to whom they were paid. Despite the court's request, all that was submitted was an affidavit of Ann Renee Edgerly, an employee of Fireman's counsel in Michigan stating that trustee fees of $725.65 were charged pursuant to N.R.S. § 107.030. There is no elaboration as to whom these fees were paid, if they were paid, or any basis or justification for them. There is no evidence that foreclosure proceedings were even commenced in this case.

This claim was denied initially, however, no order denying the claim was ever entered. Fireman's has now brought this motion for reconsideration. There seems to be no dispute that the principal amount owing is $92,564.76. The debtors have, however, objected to certain other fees claimed. First, there is a discrepancy in the number of months of arrearages. The Proof of Claim lists 11 months of defaulted payments, May, 1988 through March, 1989. At the hearing the debtors conceded that they did not make the payments on the note from April, 1988 to March, 1989, a 12 month period.

Secondly, the debtors pointed out a discrepancy in the amount of attorney fees claimed. At the top of the proof of claim an amount of $1,486.05 is listed. At the bottom, an amount of $1,466.25 is listed. The debtors assume these are for the same services, and therefore the amount should be $1,466.25. The debtors object to these fees as unreasonable. At some prior time the court allowed $400 of these fees, however, no order to this effect was ever entered. Debtors have no objection to the $400 fee, as that is reasonable. The debtors had not seen Fireman's breakdown of those fees prior to the hearing on the Motion for Reconsideration.

Thirdly, the debtors objects to Fireman's claim of interest on the interest owed on the note. There is a claim in Fireman's Proof of Claim for interest at $25.36 per month, but there is no label indicating if this is interest on interest. The debtors cite no support for this proposition, merely stating that it is settled law. Late fees are charged, but these are not objected to.

Finally, debtors' counsel claims attorney fees for herself. She claims she made two court appearances and opposing counsel did not appear at those hearings. She claims one hour's worth of fees for each of these appearances. Also, in her supplemental information to the court, she claims an additional three hours worth of fees, for a total of $750.00. Thus the debtor's attorney claims the total debt is only $101,551.76 plus attorney fees owed of $400.00, but that she is owed $750.00 in attorney fees.

ISSUES

Whether attorneys fees are allowed pursuant to a HUD deed of trust and note, which award attorneys fees from the proceeds of a foreclosure sale, when there had been no actual foreclosure sale.

DISCUSSION

The traditional American Rule is that each party pays its own attorneys' fees. This rule can be altered by statute or the parties' agreement. In Nevada, attorney's fees can be awarded pursuant to an agreement between the parties. N.R.S. Ann. § 18.010 (Michie 1986). Section 506(b) of the Bankruptcy Code is also applicable. That section states that in the event a claim is over secured, the holder of the claim is entitled to "interest on such claim, and any reasonable fees, costs or charges provided for under the agreement under which the claim arose". Using either state law or bankruptcy law, the availability of attorney's fees depends on how the parties' agreement, the note and deed of trust, is interpreted.

The specific documents at issue contain no general right to attorney fees. It is only upon the happening of the foreclosure sale that the proceeds may be used to pay attorney fees. Counsel for all parties have assumed that the right to receive attorney fees under these notes applies, even without a foreclosure sale. Trustee fees are payable even if no foreclosure sale occurs, so long as one was commenced.

The Bankruptcy Appellate Panel set forth criteria for awarding attorney fees in such circumstances in Meritor Mortgage Corp., West v. Salazar (In re Salazar), 82 B.R. 538 (9th Cir.BAP 1987). In that case, the court construed § 506(b) to mean that the right to attorney's fees in the parties' agreement could not be contradicted by other law. If the parties' agreement provides for attorney fees, they must be awarded if the fees are reasonable and the creditor holds an oversecured claim. Id. at 540. The court stated a four part test that must be met in order for such fees to be awarded. The claim must be an allowed secured claim; the creditor must be oversecured; the fees must be reasonable; and the fees must be provided for in the agreement. Id. Since the note and deed of trust in Salazar provided for the payment of attorney's fees in the event "legal action" was instituted on the note, and a Motion for Relief from the Automatic Stay was a legal action, reasonable fees were recoverable. The court remanded the case for a consideration of the reasonableness of the fees.

See also Dalessio v. Pauchon (In re Dalessio), 74 B.R. 721 (9th Cir.BAP 1987), where a mortgage contained the language, "If an action is instituted on this note, the undersigned promise to pay such sum as the court may adjudge as attorney's fees." The creditor requested attorney fees for initiating foreclosure proceedings. The court was prepared to award the fees, but remanded for a determination of the reasonableness of the fees. See also In re Gladstone Glen, 739 F.2d 1233 (7th Cir. 1984).

A series of Pennsylvania cases discussed the same issue regarding documents containing less broad language. In re Tashjian, 72 B.R. 968 (Bankr.E.D.Pa.1987), involved a mortgagee seeking relief from the automatic stay to pursue a foreclosure action against the defaulting debtor. The mortgagee had filed a proof of claim. The mortgagee requested attorney's fees incurred in bringing the Motion for Relief from Stay. The court set out four requirements to be met before a mortgagee would be entitled to attorney fees from the debtor/mortgagor. The fees must be 1) allowable under § 506(b); 2) provided for in the parties' agreement; 3) reasonable; and 4) allowable under state law. Id. at 974.

In discussing the second requirement, the court noted that provisions granting creditor's attorney's fees must be strictly construed to not contradict the traditional American Rule that counsel bear their own fees and costs. Id. at 975, 974-75, citing, In re Robert, 20 B.R. 914, 920 (Bankr.E.D. N.Y.1982). The mortgage provision in Tashjian stated that the defaulting party was liable to pay "all expenses . . . including reasonable attorneys' fees, incurred in the collection of the delinquent Assessment by legal proceedings or otherwise." The court held that the Motion for Relief from the Automatic Stay could not be classified as a collection activity and therefore denied the fees. It was not necessary to discuss the other requirements and the attorney fees were therefore denied.

In In re Nickleberry, 76 B.R. 413 (Bankr. E.D.Pa.1987), in three consolidated cases, the debtors sought to cure arrearages on their mortgages. The mortgagee requested attorney's fees for post petition services in bankruptcy court for filing a Proof of Claim and a Motion for Relief from the Automatic Stay.

The court used the four requirements from Tashjian to decide that fees were not recoverable. The parties' agreement stated that upon default the lender "may foreclose [on the mortgage] by judicial proceeding. Lender shall be entitled to collect in such proceeding all expenses of foreclosure, including . . . reasonable attorney's fees. . . ." The court noted that such contract clauses are to be strictly construed and thus read the term "foreclosure proceeding" narrowly. Filing a Proof of Claim or filing a Motion for Relief from the Automatic Stay were not foreclosure proceedings. Attorney's fees were thus denied. Id. at 425.

In In re Smith, 76 B.R. 426 (Bankr.E.D. Pa.1987), the debtor again objected to attorney fees claimed by the mortgagee when the mortgagee filed its Proof of Claim. The parties' agreement stated that upon commencement of foreclosure or other legal action with respect to a residential mortgage, attorney's fees which are reasonable and actually incurred . . . may be charged to the residential mortgage debtor. Since the mortgagee had actually incurred $500 for instituting a foreclosure action, those fees were justified. Id. at 430. They were, however, subject to the third requirement that they be reasonable. Attorney's fees were actually denied as the parties failed to submit to the court the mortgage, the parties' agreement, which would show whether or not the creditor was entitled to attorney's fees.

Allowed and Oversecured Claim

In the case before this court, the amount of the claim is the principal amount owing as of the date of default, $92,564,76, plus interest from that date to the date of filing, plus escrow fees and late charges pursuant to ¶ 2 of the deed of trust. The prepetition arrearages calculated in the Proof of Claim are correct, other than the amounts for attorney fees. This claim has been objected to and therefore is not automatically an allowed claim pursuant to 11 U.S.C. § 502. There has, however, been no order entered specifically denying the claim. Although the schedules indicate the property is only worth $100,000, the debtor has not argued that the creditor is not entitled to fees due to the undersecured nature of its claim.^[2]

Fees provided for in the Agreement

The "agreement" in question is the note and the deed of trust, the standard HUD forms. The note contains no provision for attorney fees and relevant portions of the deed of trust provide that the proceeds of a foreclosure may be used to pay attorney's fees of the mortgagee, Fireman's. This provision is very narrow. It does not authorize attorney's fees for "any action" as did the documents in Gladstone Glen, Salazar and Dalessio.^[3] The courts in Tashjian and Nickleberry indicate such provisions are to be strictly and narrowly construed. The provision in the HUD form states that the proceeds of a foreclosure sale may be used for attorney's fees. There is no general "any legal action" language. Therefore, unlike the courts in Dalessio and Gladstone Glen, without a foreclosure sale, there can be no right to attorney's fees. As the Nickleberry court indicated, neither a Proof of Claim nor a Motion for Relief from the Automatic Stay are foreclosure proceedings. Therefore, due to the narrowness of the language in the HUD deed of trust, there can be no award of attorney's fees to Fireman's without a foreclosure sale and proceeds to pay such claims.

The attorneys here are claiming fees for various things under the general rubric of attorney fees. There is a one percent trustee fee, paid to the trustee. There is a Trustee Sale Guarantee fee of $453.60; a bankruptcy fee of $100.00 and other miscellaneous fees for recording, mailing, posting, etc., of $187.00. The affidavit of Ann Edgerly, co-counsel for Fireman's indicates that the trustee fees are being charged pursuant to N.R.S. 107.030. However, that statute is a laundry list of acceptable provisions and covenants that deeds and mortgages in the state of Nevada may contain. These particular covenants must be specifically incorporated into the document in issue in order to give the mortgagee the right to claim such fees. N.R.S.Ann. § 107.040 (Michie 1986). Covenant Nos. 3 and 4 listed in N.R.S. 107.030 are not reiterated in, or stated to have been incorporated into, the deed of trust in issue. Finally, even if Covenant No. 7 had been incorporated, it too only authorizes the payment of attorney fees upon foreclosure. Furthermore, the Trustee fee award of one half percent of principal is available only if a foreclosure sale is advertised, but never consummated. This fee is also unavailable here as there is no evidence a foreclosure sale was even advertised.

Thus attorney fees and other fees and costs can only be awarded if a foreclosure is consummated and proceeds available, given the strict construction placed on such provisions by recent decisions.

Reasonableness of Fees

The above cases all require that an award of attorney's fees be reasonable, even if the parties have specified a certain amount. In In re 268 Limited, 85 B.R. 101 (9th Cir.BAP 1988), the trust deed contained a covenant providing for attorney's fees. The court upheld the award of attorney's fees, but stated that they must be reasonable. That court interpreted N.R.S. § 107.030(7) which specifically states that such fees must be reasonable. Although N.R.S. § 107.030(7) has not been incorporated into the documents in issue, any award of attorney's fees is limited by a reasonableness requirement. See also In re Salazar, 82 B.R. at 540.

The court here finds the record inadequate in showing the fees claimed are reasonable. The affidavit submitted is inadequate standing alone.

Miscellaneous Issues

The creditor cannot claim interest on interest in this jurisdiction. See In re Kooker, 106 B.R. 233 (Bankr.D.Nev.1989).

Debtor's counsel claim for attorney's fees for herself is without merit also. The only possible basis for her claim is Rule 11. Fed.R.Civ.P. 11. Although the actions of the creditor's counsel are sloppy, their actions do not rise to a level warranting sanctions.

CONCLUSION AND ORDER

The creditor's claim is allowed to the extent of the principal amount owed at default, plus the amount of interest, escrow fees and late fees owed on the date of filing. Because there is no provision in the parties' agreement for attorney's fees for work prior to a foreclosure proceeding, and because the record provides inadequate support for an award of such fees, creditor's claim for these amounts is denied. With respect to the previous grant of $400 of attorney fees for the creditor, since no order was entered for them, and in light of the court's findings that there is no basis for such fees, the court rescinds this prior decision. Debtor's motion for attorney's fees is denied also.

IT IS SO ORDERED.

EXHIBIT A

EXHIBIT B

NOTES

[1] There has been no evidence of an assumption of this mortgage filed with this court. However, the property would remain encumbered by the lien and the covenants in the mortgage anyway.

[2] The holder of a claim on account of a deed of trust on the debtor's residence may have a partially secured and partially unsecured claim pursuant to 11 U.S.C. § 506. See Hougland v. Lomas & Nettleton Co., (In re Hougland), 886 F.2d 1182 (9th Cir.1989).

[3] The recent decision in Joseph F. Sanson Investment Co. v. 268 Limited (In re 268 Limited), 789 F.2d 674 (9th Cir.1986), on remand to, 75 B.R. 37 (Bankr.Nev.1987), aff'd, 85 B.R. 101 (9th Cir. BAP 1988), question certified, 877 F.2d 804 (9th Cir.1989), seems to indicate fees are payable on default. See 268 Limited, 85 B.R. at 105 (J. Meyers, dissenting). However, the issue of the right to such fees was not before the court and thus this statement is dicta.