Mortgage Creditor Denied Bankruptcy Attorneys Fees

A mortgage creditor may not include attorneys fees in its chapter 13 bankruptcy proof of claim unless the loan documents expressly allow creditor attorneys fees for bankruptcy proceedings, Judge Janice Miller Karlin ruled this week.

U.S. Bank Home Mortgage relied on the “do and pay whatever is necessary to protect the value of the Property and Lender’s rights in the Property,” language, typical of promissory notes and mortgages, to add $350 in attorneys fees to its proof of claim in the debtor’s chapter 13 bankruptcy proceeding.

If [Debtors] fails to make these payments or the payments required by paragraph 2, or fails to perform any other covenants and agreements contained in this Security Instrument, or there is a legal proceeding that may significantly affect [U.S. Bank’s] rights in the Property (such as a proceeding in bankruptcy,for condemnation or to enforce laws or regulations), then [U.S. Bank] may do and pay whatever is necessary to protect the value of the Property and Lender’s rights in the Property, including payment of taxes, hazard insurance and other items mentioned in paragraph 2.

Judge Karlin ruled in In Re Tabares, 08-40324-13, (Bankr. D. Kan. December 15, 2008), the contract between the debtor and creditor was ambiguous as to bankruptcy attorney fees and ruled U.S. Bank and disallowed the credtior attorney fees included in the proof of claim.

“Although the mortgage does state that U.S. Bank can “do and pay whatever” is necessary to protect its interest in the property, when that phrase is read together with other provisions of the contract, and with other documents executed during the transaction, it is clear to the Court that the most reasonable interpretation of paragraph 7 is that attorney fees are not included in the items to which U.S. Bank is entitled on a debt that has not yet been accelerated,” Judge Karlin said.

A creditor may not charge a debtor attorneys fees for bankruptcy unless it can prove it is entitled to fees under 11 U.S.C. 506(b), the Court ruled, which requires

1. the creditor must be oversecured (value of property exceeds debt),
2. the requested fees must be reasonable, and
3. the agreement under which the claim arose (the note and mortgage) allows for the collection of those fees.

In Tabares, the Court declined to determine whether or not $350 was a reasonable attorneys fee because the  ruling turned on lack of agreement for fees.  Jan Hamilton, the chapter 13 bankruptcy trustee who objected to the fees, also questioned the creditor’s equity position but did not pursue the valuation issue.  The Court left open the door for a claim of creditor attorneys fees if the loan was accelerated and the entire amount declared due prior to the bankruptcy filing.