Hubert N Evans and Julia C Evans

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION
In Re
HUBERT N. EVANS
JULIA C. EVANS
Debtors
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Case No. 05-12040
Judge Aug
Chapter 13
ORDER
This matter is before the Court on the Debtors’ “Objection to Proof of Claim
Filed By Bankers Trust Company of California” (Doc. 20), on the response and
memorandum filed by Bankers Trust (Docs. 27 & 35) and on the Chapter 13
Trustee’s brief and memorandum in support of the Debtors’ objection (Doc. 32). An
evidentiary hearing was held on October 26, 2005.
This Court has jurisdiction over this matter under 28 U.S.C. § 1334. This is a
core proceeding under 28 U.S.C. § 157(b)(2)(B). The following constitutes the
Court’s findings of fact and conclusions of law pursuant to Federal Rule of
Bankruptcy Procedure 7052.
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: January 20, 2006
____________________________________________________________
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Case No. 05-12040
1It was unclear whether the charges for the title work and costs were prepetition and/or
postpetition.
2
FACTS
Debtors filed their chapter 13 petition and plan on March 23, 2005. The plan
provides for the payment of a mortgage arrearage in the amount of $6,470.28. On
April 11, 2005, Bankers Trust filed a proof of claim asserting a secured claim for a
mortgage arrearage in the amount of $16,642.28. That proof of claim was amended
on July 14, 2005, to reflect a secured claim for the arrearage in the amount of
$17,397.82. Debtors’ plan was confirmed by order entered on August 4, 2005.
The Debtors object to the inclusion of the following charges in Bankers Trust’s
secured claim for the mortgage arrearage, which essentially fall into the listed
categories:
Attorney fees:
Pre-petition
Foreclosure attorney fees $1,700.00
Previous bankruptcy atty fees/costs 1,950.00 $3,650.00
Post-petition
Post-petition bankruptcy atty fees $ 550.00 550.00
Title work:1
Foreclosure title work $ 350.00
Title update work 200.00
Foreclosure title insurance 58.00 608.00
Costs:
Estimated court costs $2,809.84
Escrow advance 284.75
Property preservation 225.45
Suspense balance 13.20 $3,333.24
Total $8,141.24
Debtors request that Bankers Trust’s claim be disallowed in the amount of $8,141.24.
They assert that inclusion of these fees and costs in the amount due to Bankers Trust
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Case No. 05-12040
2This case was filed prior to the enactment of the Bankruptcy Abuse Prevention and Consumer
Protection Act (“BAPCPA”) on April 20, 2005 and prior to the October 17, 2005, effective date of
BAPCPA. The amendments to the Bankruptcy Code made by BAPCPA are not applicable in this case.
Thus, all references to the Bankruptcy Code, and all citations to, or quotations of, specific Code provisions
shall refer to the Code (or particular sections of the Code) prior to its amendment by BAPCPA–i.e., 11
U.S.C. §§ 101–1330.
3
violates §§ 1322(e) and 506(b) of the Bankruptcy Code2 and that it also violates Ohio
public policy. The Chapter 13 Trustee joins in the Debtors’ objection with respect to
the above claims with the exception of the escrow advance and the suspense balance.
On the theories discussed below, Bankers Trust asserts that the above amounts are
properly included in its proof of claim for the mortgage arrearage.
At the hearing, the parties stipulated to the following facts:
1. The loan documents executed between the parties contemplated the payment
of the charges included in Bankers Trust’s proof of claim.
2. The mortgage is undersecured.
3. Debtors stipulated for the purposes of the hearing only, that the charges
accrued by the creditor are reasonable. The Debtors reserved the right to
challenge specific charges at a later date.
ISSUES AND DISCUSSION
1. In a chapter 13 case, must a creditor meet the requirements of both § 506(b)
and § 1322(e) to be entitled to include its attorney fees, costs and charges
in its secured claim for a mortgage arrearage?
a. If the creditor does not meet the requirements of § 506(b) does that mean
that it may still have a claim for attorney fees, costs and charges but that
those amounts are unsecured?
b. Can an unsecured claim be part of an arrearage claim pursuant to
§ 1322(e)?
2. Is a cure of a mortgage default pursuant to § 1322(b)(3) the equivalent of a
reinstatement of a mortgage under the terms normally found in a residential
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mortgage?
11 U.S.C. § 506 determines when a claim is entitled to secured status but does
not govern the actual allowance or disallowance of a claim. It provides:
§ 506. Determination of secured status.
. . .
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 provided for under the agreement
under which such claim arose.
11 U.S.C. § 506(b). Based on the parties’ stipulation that Bankers Trust is
undersecured, Bankers Trust does not meet the requirements of § 506(b) to include
the above charges and costs as a secured part of its claim. However, Bankers Trust
argues that the plain language of § 1322(e) provides that only the provisions of
§ 1322(e) are relevant to determine the amount of the arrearage owed by a debtor to
a creditor and that the requirements of § 506(b) do not apply. On the other hand, the
Debtors and the Chapter 13 Trustee assert that the requirements of both sections must
be met.
Pursuant to § 1322(b)(3), the Debtors’ plan may include provisions to cure its
default with Bankers Trust. The amount necessary to cure the default is established
by § 1322(e) which provides:
Notwithstanding subsection (b)(2) of this section and sections 506(b)
and 1325(a)(5) of this title, if it is proposed in a plan to cure a default, the
amount necessary to cure the default, shall be determined in accordance
with the underlying agreement and applicable nonbankruptcy law.
Case Law Analysis
Many oversecured creditors in this district, as noted in the cases below, have
argued that only § 506(b) applies and the courts have found that the oversecured
creditors must in fact meet the requirements of § 1322(e). We now have an
undersecured creditor arguing that § 506(b) does not apply at all and that it only needs
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Case No. 05-12040
5
to meet the requirements of § 1322(e). Our research shows that the language of
§ 1322(e) is far from plain and clear. There is case law on both sides of this issue and
the interplay between the sections is in a confusing state.
The Bankruptcy Appellate Panel for the Ninth Circuit found that
Although § 1322(e) appears to trump § 506(b), both sections
potentially pertain when a secured creditor files a proof of claim, because
it will not always be apparent that the debtor’s chapter 13 plan will cure
the default, and the case may be converted to or from chapter 7. The
Code does not establish specific procedures for determining § 506(b)
claims and § 1322 cure amounts.
Atwood v. Chase Manhattan Mortgage Co. (In re Atwood), 293 B.R. 227, 231
(B.A.P. 9th Cir. 2003) (reversing bankruptcy court where it failed to make a
determination of reasonableness of attorney fees awarded in cure amount).
Cases in Ohio that have dealt with both § 506(b) and § 1322(e) involve a
creditor that was oversecured and are thus, distinguishable from the case before us.
In re Lake, 245 B.R. 282 (Bankr. N.D. Ohio 2000) and In re Landrum, 267 B.R. 577
(Bankr. S.D. Ohio 2001) (Hopkins, J.) are cited by Banker’s Trust as support for the
position that § 506(b) does not apply. However, the applicability of § 506(b) was not
at issue or analyzed in In re Lake, and as noted, the creditor in In re Landrum, was
oversecured. See also In re Shaffer, 287 B.R. 898 (Bankr. S.D. Ohio 2002) (Hopkins,
J.) (oversecured creditor who met the requirements of § 506(b) must still meet the
requirement of § 1322(e) that the attorney fees incurred with respect to an arrearage
must be permitted by state law); In re Tudor, No. 03-68935, (Bankr. S.D. Ohio
Dec. 9, 2005) (Hoffman, J.) (same). These cases have not dealt squarely with the
argument that the creditor must meet the requirements of both sections.
Other courts have stated that both sections must be considered but the creditor
may be entitled to attorney fees on the basis of § 1322(e) even if it does not meet all
the requirements of § 506(b). In re Taylor, No. 02-10695, 2003 WL 22282173, at *3
(Bankr. D. Vt. Oct. 1, 2003) (considering both §§ 506(b) and 1322(e) on an alternative
basis and finding that “the fact that [the creditor] was not an oversecured creditor does
not disqualify it from collecting attorney’s fees under § 1322(e).”).
Still other courts have held that § 506(b) does not apply when determining a
creditor’s claim to cure a default. See Smiriglio v. Hudson United Bank, 2004 WL
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1059831 (3d Cir. 2004) (§ 1322(e) supersedes § 506(b) at least in cases involving fees
included in a claim for arrears); Key Bank of N.Y. v. Harko (In re Harko), 211 B.R.
116, 122 (B.A.P. 2d Cir. 1997) (“the introductory language [of § 1322(e)], which
specifically references §§ 506(b) and 1325(a)(5), makes clear that these sections have
no applicability in a cure situation.”); In re Plant, 288 B.R. 635 (Bankr. D. Mass.
2003) (§ 506(b) is inapplicable to a court’s review of attorney fees in a case where a
debtor seeks to cure a prepetition default over the life of a chapter 13 plan pursuant
to § 1322(b)(5)). One commentator has stated,
For contracts entered into after October 22, 1994, 11 U.S.C.
§ 1322(e) makes no distinction between oversecured and undersecured
claims. If a Chapter 13 plan cures default on an undersecured residential
mortgage that was entered into after October 22, 1994, the amount
necessary to cure default includes fees, expenses and other charges and
interest to the extent allowed by the agreement and by nonbankruptcy
law. The extent of security is irrelevant to new § 1322(e)--even if the
residential mortgage is entirely unsecured, if the plan cures default, the
mortgage holder will be entitled to recover whatever charges are allowed
by the underlying agreement and nonbankruptcy law.
Keith M. Lundin, Chapter 13 Bankruptcy, 3d Edition § 138.1, at 138-5 (2000 &
Supp. 2004).
We note that a fundamental problem with finding that § 506(b) is totally
inapplicable when determining the amount of cure to be included in a chapter 13 plan,
is that we write reasonableness of the fees and charges totally out of the requirements
for the creditor to obtain those amounts. This concept is totally foreign to the
Bankruptcy Code. Reasonableness of charges made against the debtor’s estate is
always of importance in the Bankruptcy Code. Nevertheless, it has been stated
For contracts after October 22, 1994, a “reasonableness” limitation
on late charges must be found in the contract or in nonbankruptcy law to
fit within § 1322(e). The reasonableness requirement in § 506(b) or
otherwise implied by federal law is not applicable under § 1322(e), except
as provided in the contract or state law.
Chapter 13 Bankruptcy § 138.1, at 138-14.
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Case No. 05-12040
3“Notwithstanding” means “without prevention or obstruction from or by; in spite of.” As a
conjunction “notwithstanding” means “although.” Webster’s Third New International Dictionary, 1545
(2002). In Black’s Law Dictionary “notwithstanding” is defined as “[d]espite; in spite of” with the
following example “<notwithstanding the conditions listed above, the landlord can terminate the lease if the
tenant defaults>.” Black’s Law Dictionary, 1091 (7th ed. 1999).
7
Meaning of “Notwithstanding”
The key to unraveling this jumble of case law lies in defining one word. To
determine whether Bankers Trust must meet the requirements of both § 506(b) and
§ 1322(e) we must determine the meaning of “notwithstanding” in § 1322(e)?3 Does
it mean that in spite of the fact that the creditor meets the requirements of § 506(b) with
respect to its secured claim, that creditor must also meet the state law requirement of
§ 1322(e)?
Or does “notwithstanding” mean we ignore the fact that the creditor does not
meet the requirements of § 506(b), and the amount to cure the creditor’s arrearage only
needs to be included in the agreement between the parties and allowed by state law?
According to one author,
The two sections differ in two respects: there is no “reasonableness”
condition on curing default in § 1322(e); there is no requirement of
compliance with “applicable nonbankruptcy law” in § 506(b).
Whatever potential there may be for conflict between § 506(b) and
§ 1322 (e) is dissipated by statutory construction and the history of
enactment. . . . Ordinary canons of statutory construction would
interpret the “notwithstanding” in § 1322(e) to mean that § 1322(e)
controls whether and to what extent fees, costs and other charges are
allowed to cure default with respect to all mortgages entered into after
October 22, 1994–including oversecured mortgages and including
entitlements during the period between the petition and confirmation of
a plan.
Chapter 13 Bankruptcy § 138.1, at 138-6.
We do not think the issue can be resolved that simply. Given the ambiguity in
the language of the statute as shown by the above case law and the question of the
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meaning of “notwithstanding,” it is appropriate to consider the legislative history which
states that
This section will have the effect of overruling the decision of the Supreme
Court in Rake v. Wade, 113 S. Ct. 2187 (1993). In that case, the Court
held that the Bankruptcy Code required that interest be paid on mortgage
arrearages paid by debtors curing defaults on their mortgages.
Notwithstanding State law, this case has had the effect of providing a
windfall to secured creditors at the expense of unsecured creditors by
forcing debtors to pay the bulk of their income to satisfy the secured
creditors' claims. This had the effect of giving secured creditors interest
on interest payments, and interest on the late charges and other fees, even
where applicable laws prohibit[] such interest and even when it was
something that was not contemplated by either party in the original
transaction. This provision will be applicable prospectively only, i.e., it
will be applicable to all future contracts, including transactions that
refinance existing contracts. It will limit the secured creditor to the
benefit of the initial bargain with no court contrived windfall. It is the
Committee's intention that a cure pursuant to a plan should operate to
put the debtor in the same position as if the default had never occurred.
H.R. Rep. No. 103-835 at 55 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3364
(emphasis added). If § 506(b) has no effect, then a creditor’s claim for arrearage
charges may be elevated from an unsecured to a secured position when there is
insufficient equity in the collateral to warrant secured status. Further, once
transformed to a secured claim, Bankers Trust’s fees and expenses will be paid ahead
of the remaining unsecured creditors in the bankruptcy case. This is certainly
providing the creditor with a windfall particularly if the case is later converted to a
chapter 7. See In re Atwood, 293 B.R. at 231
What is important to consider in the legislative history is that § 1322(e) was
added to the Bankruptcy Code to address the Supreme Court’s decision in Rake that
in effect required the bankruptcy courts to grant mortgagees interest on interest. The
concept of the legislators in adopting § 1322(e) was to add a requirement that if a
creditor was to receive interest on interest, then it also had to be allowed by the laws
of the relevant state. This indicates to this Court that the purpose of § 1322(e) was not
to supplant but to supplement the requirements of § 506(b). Section 506(b) first
establishes the amount of the creditor’s claim that is secured. If a fee cannot be part
of a creditor’s secured claim in the first instance, how can it become a part of the
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4Section 506(b) requires that: (i) the charges are provided for in the agreement between the
parties; (ii) the creditor is oversecured, and (iii) the charges are reasonable.
9
secured arrearage claim?
Based on our review of the two statutes, we find that the appropriate analysis
of these two statutes is: Notwithstanding the fact that the creditor has met the
requirements of § 506(b)4 entitling it to secured status for its claim for attorney fees or
other expenses, when determining the amount required to cure a default, the creditor
must also show that such expenses meet the additional requirement of § 1322(e) that
such fees and expenses are permitted by state law. In analyzing the statute in this
manner, we give effect to the rule of statutory construction that when two statutes
appear to be in conflict, an interpretation should be made that gives effect to both
statutes. Shumate v. Patterson, 943 F.2d 362 (4th Cir. 1991), aff’d,504 U.S. 753
(1992); In re Andrews, 301 B.R. 211 (Bankr. N.D. Ohio 2003). Section 506(b)
provides when a claim is entitled to secured status and § 1322(e) provides when such
secured claim should be included in the mortgagee’s arrearage claim.
Our analysis further gives effect to the rule of construction that a statute should
not be interpreted so that the result is absurd. See Deere Credit Servs. v. Tenn. Dept.
of Agric. (In re Hollingshead), 286 B.R. 622 (B.A.P. 6th Cir. 2002) (court may look
beyond the statutory text where the plain statutory meaning leads to an absurd result).
If we were to find that the language of the statute is plain and interpret the statute as
Bankers Trust suggests, this would indeed lead to an absurd result. It is certainly
absurd to read into the Bankruptcy Code the theory that reasonableness of fees does
not apply in calculating cure amounts or that an unsecured debt could be elevated to
the status of a secured debt when the debtor has no equity in the collateral. Both of
these concepts are totally contrary to the policy and purpose of the Bankruptcy Code.
Section 506(b) applies only from the date of the filing of the petition through the
confirmation date. Telfair v. First Union Mortgage Corp., 216 F.3d 1333 (11th Cir.
2000), cert. denied 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666 (2001). Under
this analysis, since Bankers Trust does not meet the requirement of § 506(b) that it is
oversecured, then it is not entitled to secured status for any of its fees and expenses
incurred prepetition through the confirmation date. This is not to say that Bankers
Trust does not have a claim for these expenses. We hold merely that such claim is not
entitled to a secured status and therefore, cannot be included in the amount due
Bankers Trust for its arrearage.
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Case No. 05-12040
5Bankers Trust’s attorney fees total $4,200 including (i) foreclosure attorney fees of $1,700, (ii)
previous bankruptcy attorney fees and costs of $1,950, and (iii) post-petition bankruptcy attorney fees of
$550.
10
With respect to fees and charges incurred after the petition was filed and after
the plan was confirmed, Bankers Trust cannot include those amounts in the arrearage
claim since those amounts were not incurred or known at the time the plan was
confirmed. Again, that is not to say that Bankers Trust cannot assert a claim for those
expenses but merely that the claim will be a general unsecured claim.
Attorney Fees in Ohio.
There is an alternate basis for granting the Debtors’ objection with respect to
Bankers Trust claim for attorney fees. Even if Bankers Trust met the requirement of
§ 506(b) that it was oversecured, the case law in this district clearly establishes that
Bankers Trust still is not entitled under § 1322(e) to any of its attorney fees as part of
its claim for arrears.5 The case law in Ohio is very clear that attorney fee provisions
in a mortgage contract are void and unenforceable as contrary to public policy. Miller
v. Kyle, 85 Ohio St. 186, 97 N.E. 372 (1911). See In re Landrum, 267 B.R. 577; In
re Lake, 245 B.R. 282; In re Shaffer, 287 B.R. 898 (all applying Miller in chapter 13
cases and finding attorney fees provisions void and unenforceable). See also Dollar
Bank v. Petroff (In re Petroff), No. 00-8085, slip op. at 7 (B.A.P. 6th Cir. July 25,
2001) (affirming bankruptcy court’s determination that Ohio law forbids the payment
of attorney fees to mortgagee).
2. Is a cure of a mortgage default pursuant to § 1322(b)(3) the equivalent of a
reinstatement of a mortgage under the terms normally found in a residential
mortgage?
Relying on Davidson v. Weltman, Weinberg & Reis, 285 F. Supp. 2d 1093
(S.D. Ohio 2003), Bankers Trust asserts that it is entitled to its attorney fees in this
case because the “transaction” between it and the Debtors is in effect a reinstatement.
Davidson found that Ohio law does permit a mortgagee to assess its attorney fees
against a mortgagor when the mortgagee agrees to a reinstatement. Davidson,
however, dealt with a reinstatement of a mortgage pursuant to the terms of the
mortgage and did not involve curing a default through the provisions of the
Bankruptcy Code. Curing of a default through a chapter 13 plan and petition is not
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6“Reinstate” means “[t]o place again in a former state or position; to restore.” Black’s Law
Dictionary, 1290 (7th ed. 1999).
11
the equivalent of a “reinstatement.”6 See In re Tudor, No. 03-68935, slip op. at 11 &
34-40 (Bankr. S.D. Ohio Dec. 9, 2005) (providing a thorough analysis of this issue).
Unlike the mortgagee in Davidson who was dealing with reinstatement outside of
bankruptcy and strictly pursuant to the terms of the mortgage, the Debtors in this case
are curing the default through the provisions of the Bankruptcy Code. There is
nothing in the Bankruptcy Code that permits Bankers Trust to include its attorney fees
in the cure amount in this context.
CONCLUSION
Based on the foregoing, we SUSTAIN the Debtors’ objection and find that
Bankers Trust’s claim be disallowed in the amount of $8,141.24.
Copies to:
Hubert N. & Julia C. Evans
Debtors
P. O. Box 144
McDermott, OH 45652
David A Kruer, Esq.
Attorney for Debtors
Dearfield, Kruer & Company LLC
800 Gallia Street, Suite 28
Portsmouth, OH 45662
dkandw@adelphia.net
Joel K. Jensen, Esq.
Lerner, Sampson & Rothfuss
Attorneys for Bankers Trust Company
P. O. Box 5480
Cincinnati, OH 45201
SOHBK@lsrlaw.com
Margaret A Burks
Chapter 13 Trustee
36 East Fourth Street, Suite 900
Cincinnati, OH 45202
Asst. U.S. Trustee (Cin)
Office of the US Trustee
36 East Seventh Street, Suite 2050
Cincinnati, OH 45202
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