[1] Hon. Jeff Bohm of the U.S. Bankruptcy Court for the Southern District of Texas recently issued an opinion holding that an undersecured creditor is entitled to post-petition attorneys’ fees as part of its secured claim where (1) the creditor holds a bifurcated claim based on pre-petition agreements that allow the creditor to recover its reasonable attorneys’ fees, and (2) the creditor has made the § 1111(b)(2) election.[2]
Background
In October 2016, debtor Pioneer Carriers LLC executed a note in favor of Equify Financial, LLC in the principal amount of $389,268.93 (the “note”) secured by a security agreement on the debtor’s non-real property assets. The note and security agreement provided that the debtor would pay Equify’s attorneys’ fees incurred upon default and enforcement of the note.
On Dec. 12, 2016 (the “petition date”), the debtor filed a chapter 11 petition. Equify filed a proof of claim asserting that it was owed $343,939.96 as of the petition date, excluding post-petition attorneys’ fees. Equify’s claim was bifurcated, with its secured claim being $267,500 and its unsecured claim being $76,439.96. In August 2017, Equify timely filed its notice of election under § 1111(b)(2), asserting that by making such an election, its total claim must be treated as a fully secured claim for purposes of plan confirmation.
In November 2017, the debtor filed a second amended plan, which expressly recognized Equify’s § 1111(b)(2) election and treated Equify’s claim as fully secured. Equify filed an objection to the plan, asserting that the plan did not include Equify’s post-petition attorneys’ fees of $19,839.50 as part of its secured claim. Prior to the continued confirmation hearing, Equify filed an amended proof of claim, which included its post-petition attorneys’ fees.
The debtor argued that the only circumstance under which Equify could receive post-petition attorneys’ fees would be pursuant to § 506(b) if the value of Equify’s collateral exceeded the amount of its claim. Equify argued that when §§ 1111(b)(2) and 502 are read together, its secured claim includes all of the attorneys’ fees expressly provided for under the note and security agreement.
Analysis
The court’s analysis of the arguments focused on two main inquiries: (1) whether Equify had an allowed claim for its post-petition attorneys’ fees; and if it did, (2) whether Equify’s allowed claim for its attorneys’ fees, rather than being an allowed unsecured claim, was an allowed secured claim.
An Undersecured Creditor May Be Entitled to Post-Petition Attorneys’ Fees
Judge Bohm noted that courts generally discuss four key issues to determine whether an unsecured creditor is entitled to post-petition attorneys’ fees. The first is whether § 506(b) disallows post-petition attorneys’ fees for all creditors except oversecured creditors. The Supreme Court in Travelers and the Fifth Circuit in 804 Congress L.L.C. had expressly declined to resolve that specific issue.[3] Section 506(b) provides, in relevant part, that “to the extent that an allowed secured claim is secured by property the value of which … 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.”[4] One line of cases holds that § 506(b) does not entitle unsecured creditors to post-petition attorneys’ fees, and had Congress intended those creditors to receive post-petition attorneys’ fees, then it would have done so explicitly.[5] The other line of cases holds that § 506(b) does not disallow post-petition attorneys’ fees for unsecured creditors because “§ 506 deals with whether a claim is secured or not, as opposed to the larger question of whether the claim is allowed or disallowed, as addressed by § 502.”[6] The latter line of cases includes the Second Circuit decision of Ogle v. Fid. Dep. Co. of Maryland, in which the court stated that “section 506(b) does not implicate unsecured claims for post-petition attorneys’ fees.”[7]
The court next rejected the debtor’s argument that post-petition attorneys’ fees are disallowed under § 502 because that section directs the court to “determine the amount of such claim … as of the date of the filing of the petition.”[8] In so holding, the court relied on § 101(5)(A), which defines a “claim” as any right to payment, whether or not that right is liquidated or contingent. The court stated that a claim for post-petition attorneys’ fees based on a pre-petition agreement is a contingent right to payment that arose pre-petition. Additionally, the court relied on the Supreme Court’s decision in Travelers, which held that post-petition attorneys' fees provided for in a pre-petition contract must be allowed under § 502, unless one of the exceptions enumerated in § 502(b)(1)-(9) disallows such a claim.[9]
The court next addressed the argument that the Supreme Court’s decision in Timbers, which disallowed post-petition interest for undersecured creditors under § 506(b), has the same effect on post-petition attorneys’ fees.[10] The court stated that Timbers does not apply to post-petition attorneys’ fees because § 502(b)(2) expressly disallows a claim for unmatured interest, whereas there is no provision in § 502(b) expressly prohibiting attorneys’ fees. The court went on to state that “if anything, Timbers reinforces the argument that courts should look to § 502 to determine whether a claim for a creditor's post-petition attorneys’ fees is allowed.”[11]
Finally, the court declined to accept the public policy argument that “allowing post-petition attorneys’ fees to unsecured creditors based on pre-petition contractual obligations would give these creditors an advantage over other unsecured creditors who have no such contracts, such as tort creditors.”[12] In disagreeing with the public policy argument, the court cited cases stating “that it is the province of Congress to correct statutory dysfunctions and to resolve difficult policy questions embedded in the statute.”[13]
Thus, under the first inquiry, the court concluded that an unsecured creditor can, under the right circumstances, have an allowed claim for post-petition attorneys’ fees and that here Equify had at a minimum an allowed unsecured claim.
The Effect of an Undersecured Creditor’s § 1111(b)(2) Election on an Allowed Unsecured Claim
Under the second inquiry, the court addressed Equify’s argument that by making the § 1111(b)(2) election, its allowed unsecured claim for post-petition attorneys’ fees became a secured claim. The court adopted the reasoning in In re Castillo, which had similar facts to Pioneer Carriers and concluded that Equify had an allowed unsecured claim under § 502 for its post-petition attorneys’ fees and that in making the § 1111(b) election, Equify was entitled to include these fees as part of its secured claim.[14]
Conclusion
In light of the Pioneer Carriers decision, here is a word to the wise: Don’t have the “knee-jerk reaction” that an undersecured creditor is not entitled to a secured claim for its post-petition attorneys’ fees; take a step back and think about what the parties bargained for pre-petition and the effect of making the § 1111(b) election.
[1] None of the statements contained in this paper constitute the official policy of any judge, court, agency or government official or quasi-governmental agency. The author would like to thank Hon. Alan S. Trust for his help in the preparation of this article.
[2] In re Pioneer Carriers LLC, 581 B.R. 809, 811 (Bankr. S.D. Tex. 2018).
[3] Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 448-50 (2007); Wells Fargo Bank N.A. v. 804 Congress L.L.C. (In re 804 Congress L.L.C.), 756 F.3d 368, 380 (5th Cir. 2014).
[4] 11 U.S.C. § 506(b).
[5] In re Elec. Mach. Enters. Inc., 371 B.R. 549, 554 (Bankr. M.D. Fla. 2007).
[6] Welzel v. Advocate Realty Invc. L.L.C. (In re Welzel), 275 F.3d 1308, 1317 (11th Cir. 2001).
[7] 586 F.3d 143, 147-49 (2d Cir. 2009).
[8] See Elec. Mach. Enters., 371 B.R. at 551 (emphasis in original).
[9] 549 U.S. at 448-53.
[10] In Timbers, the Supreme Court held that because § 506(b) “permits postpetition interest to be paid only out of the ‘security cushion,’ the undersecured creditor, who has no such cushion, falls within the general rule disallowing postpetition interest.” United Sav. Ass'n. of Tex. v. Timbers of Inwood Forest Assocs. Ltd., 484 U.S. 365 (1988).
[11] Pioneer Carriers LLC, 581 B.R. at 820.
[12] Id. at 820-21.
[13] SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826, 845 (9th Cir. 2009).
[14] In re Castillo, 488 B.R. 441 (Bankr. C.D. Cal. 2013).