Triad Financial Corp v. O'Connell

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
October 18, 2006
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk

No. 05-20940

Summary Calendar

In The Matter of RAJITHA K NAIR
Debtor,

TRIAD FINANCIAL CORP.,
Appellant

versus

DAVID G. PEAKE,
Appellee

Appeal from the United States District Court
For the Southern District of Texas

Before KING, HIGGINBOTHAM, and BARKSDALE, Circuit Judges.

PER CURIAM:*

Triad Financial appeals from the district court’s order

affirming, in part, a Bankruptcy court sanction of appellant’s

counsel, prohibiting him from filing section-362 orders that

include attorneys’ fees on undersecured claims. We affirm.

*
Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
 Rajitha Nair’s Chapter 13 plan was confirmed in May of 2003.

When Nair subsequently failed to meet payments on a 2001 Mazda

Tribute, Triad Financial, the undersecured lienholder, filed a

motion for relief from the automatic stay in order to repossess the

Mazda. Prior to the resolution of that motion, Triad and Nair

filed a proposed agreed order, modifying the automatic stay and

requiring Nair to: (1) maintain insurance on the car; (2) pay the

arrears due on the note; and (3) pay Triad’s attorneys’ fees.

The bankruptcy court signed the order, but only after striking

the attorneys’ fees provision. The court then ordered Triad’s

counsel to show cause why the offending provision was not

sanctionable.

At the hearing, appellants counsel argued, as they argue here

on appeal, that the Bankruptcy Code is silent on the question of

whether an unsecured creditor may assert a priority claim for

attorneys’ fees. We disagree. Section 506(b) allows an

oversecured creditor to obtain full payment of its attorneys’ fees,

but only to the extent that it is oversecured.1 By negative

implication, undersecured creditors are not entitled to full

payment of attorneys’ fees. Indeed, while interpreting the

identical provision in the context of interests payments, the

Supreme Court reached this same conclusion, holding that section

1
11 U.S.C. § 506(b).

2
506(b) has “the substantive effect of denying undersecured

creditors postpetition interest on their claims.”2

The cases cited by the appellant do not hold otherwise. Those

cases, beginning with In re United Merchants, allow an unsecured

creditor only an unsecured claim for post-petition attorneys’

fees.3 Here, however, the undersecured creditor seeks a secured

claim for attorneys fees. As the bankruptcy court correctly noted

below, no published opinion has ever granted such a claim.

Reaching this conclusion at the show-cause hearing, the

bankruptcy court sanctioned counsel under Bankruptcy Rule 9011.4

Rule 9011(b) requires counsel to conduct a reasonable inquiry into

the contents of every petition, pleading, written motion or other

paper submitted to the court, and Rule 9011(c) authorizes sanctions

upon counsel who fail to discharge this duty. Under Rule

9011(c)(2), “[a] sanction . . . shall be limited to what is

sufficient to deter repetition of such conduct . . . .” We review

the Bankruptcy Court’s decision to impose sanctions for abuse of

discretion.5

2
United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associated, 108
S.Ct. 626 (1988).
3
In re United Merchants and Mfrs., Inc., 674 F.2d 134, 137 (2d Cir.
1982).
4
FED.R.BANKR.P. 9011(b).
5
In re First City Bancorporation of Texas, 282 F.3d 864, 867 (5th Cir.
2002).

3
 On this record, the bankruptcy court did not abuse its

discretion. The bankruptcy court found that “Triad’s request for

attorneys’ fees was not justified by existing law or by a

nonfrivolous argument for the extension, modification, or reversal

of existing law or the establishment of new law.” Worse yet, the

court found that Traid’s request for attorneys’ fees “was made in

the anticipation that it would not be scrutinized by the Court

because it was filed as an agreed order.” Finally, rather than

impose monetary sanctions, the district court merely required

appellant’s counsel, who appears frequently before the court, to

discontinue such requests for attorneys’ fees. Because we are

shown no error in the bankruptcy court’s disposition of this case,

we AFFIRM the judgment of the district court.

4