Creditor gets fees incurred after bankruptcy filing

Where a debtor agreed to pay attorneys’ fees incurred in attempts to recover money owed under a loan in a contract signed prior to his filing for bankruptcy, the creditor was entitled to recover attorneys’ fees that were incurred after the bankruptcy petition was filed.

Background

From 2003 through 2012, Branch Banking and Trust Company loaned $2.1 million to Ollie William Faison. Faison effectuated the loans by signing three promissory notes secured by deeds of trust for farmland that he owned in North Carolina. Faison agreed that if the notes were placed with an attorney for collection, he would pay all costs of collection including reasonable attorneys’ fees.

On Jan. 3 2014, Faison filed a petition for relief under Chapter 11 of the Bankruptcy Code. During the ensuing bankruptcy proceeding, the company filed three proofs of claims for the principal and interest due on the promissory notes. Because the promissory notes were secured by collateral, the company’s claims were entitled to preferential treatment. This meant that the claims would be satisfied from the value of the farmland before any distributions were made to lower-priority unsecured claims.

In January 2015, the company assigned the notes to SummitBridge National Investments III LLC. Nearly two years later, Faison proposed a plan for repayment that treated the promissory notes as one aggregate secured claim for $1,715,000, the value of the farmland securing the notes. This amount was sufficient to cover the outstanding amount, pre-petition interest, and a portion of SummitBridge’s post-petition attorneys’ fees. SummitBridge then filed an unsecured claim for the remaining attorneys’ fees.

Faison objected to the unsecured claim and the bankruptcy court held that the code does not allow creditors to assert unsecured claims for attorneys’ fees. The district court affirmed and SummitBridge appeals that decision.

Analysis

There is a general presumption that claims enforceable under state law will generally be allowed in bankruptcy unless they are expressly disallowed. The district court erred in concluding that §§ 502(b) and 506(b) expressly disallow unsecured claims for post-petition attorneys’ fees based on pre-petition contracts.

Section 502(b) provides that when a debtor objects to a creditor’s claim, the court must hold a hearing with notice, determine the amount of the claim as of the date of the filling of the petition and allow the claim unless one of nine enumerated exceptions applies. There is no dispute that none of the nine exceptions applies.

Although the fees were not incurred until after the bankruptcy proceedings began, the right to those fees arose pre-petition, when Faison signed the promissory notes. This is enough to make the fees pre-petition in nature. Moreover, the requirement that the court determine the amount of the claim as of the date of the filing of the petition does not bar recovery of post-petition attorneys’ fees under existing Supreme Court precedent.

Section 506(b) permits creditors with collateral exceeding the amount of their claims to add interest and reasonable attorneys’ fees to their secured claims. To the extent this express allowance of attorneys’ fees for creditors with over-secured claims implies that unsecured or under-secured creditors may not assert such claims, an implied disallowance is insufficient. Unless they are expressly disallowed under the code, the claims may be asserted in bankruptcy court.

Reversed and remanded.

Summitbridge National Investments III LLC v. Faison, Case No. 17-2441, Feb. 8, 2019. 4th Cir. (Harris), Appeal from EDNC at Raleigh (Boyle). Christopher Paul Schueller for Appellant; John Arlington Northen for Appellee. VLW 019-2-051. 17 pp.