Welzel v. Advocate Realty Investments, LLC (In re Welzel)

GIBSON, Circuit Judge:

The issue in this case is whether the Bankruptcy Code preempts a Georgia statute authorizing a creditor to collect a fifteen-percent attorney’s fee upon default and with proper notice. The debtor Daniel A. Welzel, Jr. objected to that portion of Advocate Realty Investments, LLC’s claim which represents the statutory attorney’s fees. The bankruptcy court sustained the objection in part and overruled it in part. The district court reversed and held that the Georgia statute is preempted. We affirm the judgment of the district court.

Welzel borrowed more than $1 million from the Darby Bank and Trust Company secured by mortgages on real estate in the historic district of Savannah, Georgia. Advocate purchased the notes from the bank shortly after the bank had given written notice to Welzel that the indebtedness was in default and immediately due and payable, and that in accordance with Ga.Code Ann. § 13-1-11 (1982) the bank would enforce certain provisions of the notes such that Welzel had ten days in which to pay the principal and interest to avoid incurring liability for attorney’s fees. The parties stipulated that Welzel failed to pay within the ten-day period. Welzel filed for relief under Chapter 11 of the Bankruptcy Code after the ten-day grace period expired, and the case was later converted to a Chapter 7 liquidation.

Welzel stipulated that Advocate’s right to fifteen percent of the indebtedness for attorney’s fees vested as a matter of state law upon his failure to satisfy the debt within ten days of the written notice. Advocate filed a secured claim in the amount of $1,125,464.47, which included $146,799.71 in statutory attorney’s fees.1 The bankruptcy court noted in its order that an estimate of the attorney’s fees Advocate had actually incurred at the time of the hearing was $40,000. Welzel objects to the allowance of any attorney’s fees beyond those actually incurred and determined to be reasonable.

I.

The parties contest only the conclusions of law reached by the bankruptcy court and the district court, and therefore our review is de novo. Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280, 1282 (11th Cir.1998). We address an issue not yet decided in this circuit, namely whether the amount of attorney’s fees an oversecured creditor may recover is determined under state law or under the “reasonable amount” standard contained in section 506(b) of the Bankruptcy Code, 11 U.S.C. § 506(b) (1994). We conclude that the latter controls by virtue of preemption.

Under section 506(b), a holder of a secured claim is entitled to reasonable attorney’s fees if the creditor is oversecured2 and the underlying agreement upon which the claim is based provides for the fees. Welzel acknowledges that Advocate’s claim is an allowed secured claim, that Advocate is oversecured, and that the notes which form the basis of its claim provide for attorney’s fees upon collection. Welzel claims that the attorney’s fees must be “reasonable” under section 506(b); Advocate argues that it is entitled to collect the fifteen percent set forth in the notes because its right to that amount vested under Georgia law.

Advocate relies on Ga.Code Ann. § 13-1-11, which governs the procedure for validating and enforcing an attorney’s fee provision in a note. Under the Georgia statute, if the creditor gives written notice of default and the debtor does not cure the default within ten days of receipt of the notice, the contractual obligation is valid and enforceable. Here, Advocate’s predecessor adhered to this procedure and Wel-zel failed to cure the default within the notice period. After the notice period passed, Welzel sought protection under the bankruptcy laws. Advocate asserts that the timing of events renders the fifteen-percent charge for attorney’s fees enforceable as part of Welzel’s principal obligation because its right to collect those fees vested pre-petition, relying on Mills v. East Side Investors (In re East Side Investors), 694 F.2d 242, 246 (11th Cir.1982). Although it is correct that East Side Investors held that attorney’s fees were enforceable as a part of the debtor’s principal obligation, the case was decided as the law was applied before the enactment of the Bankruptcy Reform Act of 1978 (of which section 506(b) was a part). Because there has been a change in the applicable statute, we are no longer bound by East Side Investors.

Four circuits have addressed this issue since the adoption of the 1978 Act, and all have determined that the award of attorney’s fees is governed by section 506(b) rather than by state law. First W. Bank & Trust v. Drewes (In re Schriock Constr., Inc.), 104 F.3d 200 (8th Cir.1997); Joseph F. Sanson Inv. Co. v. 268 Ltd. (In re 268 Ltd.), 789 F.2d 674 (9th Cir.1986); Blackburn-Bliss Trust v. Hudson Shipbuilders, Inc. (In re Hudson Shipbuilders, Inc.), 794 F.2d 1051 (5th Cir.1986); Unsecured Creditors’ Comm. v. Walter E. Heller & Co. Southeast, Inc. (In re K.H. Stephenson Supply Co.), 768 F.2d 580 (4th Cir.1985). Some of these cases include a thorough recitation of the legislative history insofar as it relates to Congress’s intent that state law should no longer govern the enforceability of attorney’s fee agreements. See, e.g., In re 268 Ltd., 789 F.2d at 676-77; In re K.H. Stephenson Supply Co., 768 F.2d at 582-85. Two circuits have applied preemption to allow fees to be awarded where state law would have denied recovery. In Schriock, the Eighth Circuit held that an attorney’s fees provision in a contract was enforceable under section 506(b) even though it was invalid under state law. 104 F.3d at 202-03. In K.H. Stephenson, the Fourth Circuit held that an oversecured creditor should be awarded its reasonable attorney’s fees in spite of its failure to comply with the provisions of state law. 768 F.2d at 585.

We agree with the analyses and uniform conclusions of these courts,3 and we hold that Advocate is entitled to its reasonable attorney’s fees under section 506(b) and not the fifteen-percent fee that Georgia law would provide. We therefore affirm the district court’s judgment.

II.

The district court rejected the bankruptcy court’s bifurcation of Advocate’s claim as it relates to attorney’s fees. The bankruptcy court allowed the claim and determined that the reasonable fees actually incurred by Advocate would be treated as a secured claim, and the balance of the fifteen percent would be treated as a general unsecured claim for the purposes of distribution. Although there is less unanimity among the courts on this issue, we hold that Advocate is entitled to recover in full its reasonable attorney’s fees as a secured claim but that any additional amount is not recoverable in a bankruptcy proceeding. “The federal courts have recognized that percentage fee assessments under [Ga.Code Ann.] § 13-1-11 are grossly disproportionate to the amount of fees actually incurred and that they in fact provide a windfall to the creditor.... ” In re Centre Court Apts., Ltd., 85 B.R. 651, 655 (Bankr.N.D.Ga.1988) (collecting cases). Moreover, as Advocate argued to the district court and continues to argue here, there is no statutory authority for bifurcation. Section 506(b) is the preempting statute, and it completely displaces state law to the contrary.

Because the bankruptcy court is a court of equity, Advocate makes much of the notion that its right to collect the fifteen-percent attorney’s fees vested before Wel-zel filed his bankruptcy petition. We recognize how the Georgia statute operates, and we conclude that the word “vested” overstates the sequence of events. Advocate held several notes from Welzel, all of which contained the same boilerplate language about attorney’s fees. The Georgia statute directs that such fee agreements are enforceable, valid, and collectible with the proper notice. The statute does not itself award fees-it only validates already-existing fee agreements. Here, the fee-agreement portion of the notes also cautions that Advocate’s ability to collect attorney’s fees of fifteen percent is “subject to any limits under applicable law.” Although Advocate asserted its rights under the fee agreement pre-petition, it did not file suit and no services were rendered until post-petition. Thus, because section 506(b) is an “applicable law” that limits recovery to reasonable fees, there is no compelling reason to bifurcate Advocate’s claim for fees because it incurred fees only in connection with the bankruptcy.

Conclusion

We AFFIRM the judgment of the district court, and we REMAND so that Advocate may petition the bankruptcy court for the allowance of reasonable attorney’s fees as an oversecured creditor.

1 The bankruptcy court found that Advocate's total claim, after the application of proceeds for previously court-approved sales of property, was $748,724.79. Even though the amount of its claim diminished, Advocate continues to claim $146,799.71 (fifteen percent of $978,664.76) as attorney's fees.

2 An oversecured creditor is one whose claim is secured by property whose value exceeds the principal amount of the claim.

3 A number of bankruptcy courts have reached the same conclusion. See, e.g., In re McGaw Prop. Mgmt., Inc., 133 B.R. 227, 229-30 (Bankr.C.D.Cal.1991); In re Smith, 109 B.R. 421, 422-23 (Bankr.D.Mont.1988); In re Wonder Coip., 72 B.R. 580, 586-88 (Bankr. D.Conn.1987); In re B & W Mgmt., Inc., 63 B.R. 395, 401 (Bankr.D.C.1986). Two bankruptcy courts have also determined that section 506(b) specifically trumps Ga.Code Ann. § 13-1-11, the state statute at issue in this case. In re Centre Court Apts., Ltd., 85 B.R. 651, 659-61 (Bankr.N.D.Ga.1988); Curtis v. Pilgrim Health and Life Ins. Co. (In re Curtis), 83 B.R. 853, 858-61 (Bankr.S.D.Ga.1988).