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In re Nixon

June 25, 2009


The opinion of the court was delivered by: Schiller, J.



Michael T. Foster appeals from the decision of the Bankruptcy Court on Debtor Brian J. Nixon's objection to Foster's proof of claim. Foster believes that the Bankruptcy Court erred when it placed the burden of proof on him, disallowed a portion of one of his attorney's claim for fees, and tolled the running of interest on his claim. Appellant asks this Court to overturn the Bankruptcy Court's decision and thereby approve his claim in full. After a review of the record and a full and complete hearing on Foster's appeal, this Court finds no error below. This Court therefore affirms the decision of the Bankruptcy Court and dismisses Foster's appeal.


A. The Bankruptcy

On or about December 27, 1994, Debtor obtained a business loan from the Quakertown National Bank (the "Bank") for $215,000. Debtor executed a Promissory Note, a Business Loan Agreement, and a Mortgage on his property in Coopersburg, Pennsylvania. The Mortgage contained the following clause about attorneys' fees:

If Lender institutes any suit or action to enforce any of the terms of this Mortgage, Lender shall be entitled to recover such sum as the court may adjudge reasonable as attorneys' fees at trial and upon any appeal . . . Expenses covered by this paragraph include, without limitation, however subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees and expenses for bankruptcy proceedings . . .

(R. at Ex. 6 [Mortgage].) The Mortgage provided that, to the extent it was not preempted by federal law, Pennsylvania law governed, without regard to its conflicts of law provisions. (Id.) The Promissory Note stated:

Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings . . . and appeals."

(R. at Ex. 5 [Promissory Note].) The Promissory Note was also "governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the Commonwealth of Pennsylvania without regard to its conflicts of law provisions." (Id.) The Business Loan Agreement included a similar covenant regarding attorneys' fees and was also governed by Pennsylvania law.

(R. at Ex. 7 [Business Loan Agreement].)

On June 7, 2007, the Bank filed a confession of judgment for $247,067.26 in the Court of Common Pleas of Lehigh County. This judgment attached as a lien to Debtor's real property, including land he owned on Gerryville Pike in Bucks County. The Bank subsequently executed a document titled "Assignment of Mortgage, Note, Assignment of Rents and Judgment" in favor of Foster. The Mortgage, Assignment of Rents and the Judgment are all expressly referenced in this assignment. The Business Loan Agreement is not mentioned in the assignment and reference to the Note is found only in the title of the assignment.*fn1

Debtor filed a voluntary Chapter 13 bankruptcy petition on October 22, 2007. Foster immediately filed a motion for relief from stay with respect to the Coopersburg property. During the hearing on the motion, Debtor claimed that he had a buyer for the Gerryville Pike property, which would allow him to pay Foster's claim in full. Accordingly, the relief from stay motion was denied but Debtor was required to remit to Foster any rental income from the Coopersburg Property. The sale of the Gerryville Pike property was approved on January 3, 2008, and, as a result, $360,664.37 was distributed to the Chapter 13 Trustee. On October 10, 2008, Debtor filed a Second Amended Plan, which provided for full payment of Foster's allowed secured claim. Foster objected to this plan because it failed to specify that payment would be made when the Gerryville Pike property sale proceeds were received.

Foster filed an Amended Proof of Claim in the amount of $322,471.85, which, according to the Chapter 13 Trustee, needed to be liquidated before the Bankruptcy Court could determine the feasibility of the Second Amended Plan. "Notably the Foster Claim evidences a significant increase from the Judgment amount which is attributed to the post-judgment accumulation of interest and late charges ($49,097.75) and attorneys fees and costs ($26,306.84)." Foster, 400 B.R. at 31. Debtor objected to Foster's Amended Proof of Claim. Relevant to this appeal, Debtor's objection focused on what he deemed excessive and unreasonable counsel fees and excessive and unspecified interest. The Court held a hearing on Debtor's objection on September 11, 2008.

B. Bankruptcy Court Opinion*fn2

Three attorneys represented Foster throughout the course of the Chapter 13 petition. Marc Kranson, who first entered an appearance on behalf of Foster, worked on the matter for a total of 12.3 hours at an hourly rate of $185, plus costs of $150, for a total of $2,425.50. In October of 2008, Kranson withdrew and was replaced by Michael Kaliner. Kaliner handled the defense to the objection and authored memoranda of law; Foster paid Kaliner a $1500 retainer. Neither Kranson nor Kaliner's fees are before this Court. The third attorney, Ronald Clever, who never entered an appearance on Foster's behalf in the bankruptcy case, billed 106 hours at an hourly rate of $275, for a total of $29,190 in fees and costs for services rendered between September of 2007 and September of 2008. Clever did not sign any of the motions or pleadings submitted on Foster's behalf.

According to the Bankruptcy Court, "not much [ ] happened between the settlement of the Stay Motion and the objection hearing." Id. The case was monitored and various status hearings were held; "Clever appeared at most (if not all) of the hearings to object to whatever was contemplated or happening." Id. Turning to the recoverability of attorneys' fees, the Bankruptcy Court noted that the Bankruptcy Code permits an oversecured creditor -- which Foster undisputedly is -- to recover reasonable attorneys' fees if the parties' contract so provides. The Bankruptcy Court concluded that, because the Business Loan Agreement and the Mortgage expressly permitted the recovery of attorneys' fees and costs, Foster was permitted to seek reasonable fees and costs.

Foster argued that the reasonableness of the fees was irrelevant. Because Debtor's proposed Chapter 13 plan would pay even unsecured creditors 100% of their claims, fees deemed unreasonable would, under § 506 of the Bankruptcy Code, remain as allowed unsecured claims that would be paid. The Bankruptcy Court, however, concluded that § 506 must be read along with § 502 of the Bankruptcy Code, which confronts the threshold question of whether a claim should be allowed or disallowed. Accordingly, the Bankruptcy Court treated Debtor's objection as a request to disallow certain components of the Foster claim under § 502, not as an objection to their secured status under § 506. Section 502 disallows claims that are unenforceable under applicable law. Noting that both Pennsylvania and federal law require that contractually mandated attorneys' fees be reasonable, the Bankruptcy Court concluded that any unreasonable attorneys' fees could not qualify as an allowed unsecured claim.

The Bankruptcy Court used the lodestar method to review for reasonableness Clever's attorneys' fee petition. The Bankruptcy Court Judge relied on her experience and expertise and noted that Foster was a secured creditor, who held allowed judgment liens on Debtor's real property "valued comfortably in excess of his claim . . . [i]n short, Foster has never been in jeopardy of non-payment. The only question has been when that would happen." Id. at 38-39.

The Bankruptcy Court found that Clever's legal strategy and lack of bankruptcy knowledge needlessly prolonged the confirmation process. "Ironically [Clever's] complaints about the protracted nature of the case only protracted the hearings more." Id. at 39. She further found his approach and the hours he billed unreasonable. She also questioned Clever's billing credibility and decided that it was never "Clever's intention to charge Foster for these hours that he allegedly spent," because he failed to track his hours as he performed them and failed to bill Foster for his services. Id. Clever "had every incentive to use a heavy hand based ...

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