By Mackenzie Bluedorn
Relevant Facts
The original dispute stemmed from secured loans made from BB&T to Ollie William Faison (“Faison”). Conditions of the loan included that, should the loans need to be handed over to an attorney for collection, Faison would be responsible for collection costs and reasonable attorneys’ fees.[1] However, Faison later petitioned for bankruptcy before repayment of the loans.[2] Shortly thereafter, the bank sold its interests in the loans to a third party, SummitBridge National Investments III, LLC (“SummitBridge”).[3] Following this transfer, SummitBridge began legal proceedings to enforce the secured claim against Faison. Although Faison ultimately created a plan for repayment based on the farmland collateral securing his loans, which was approved by the bankruptcy court, SummitBridge was still left with the attorneys’ fees it had incurred while pursuing the claim.[4] These fees exceeded the amount that was secured by the collateral, effectively making SummitBridge an under-secured creditor. As such, SummitBridge subsequently filed an unsecured claim for the recovery of its attorneys’ fees in the previous action.[5]
Issue
Under the Bankruptcy Code, can a creditor pursue an unsecured claim for attorneys’ fees when those fees were guaranteed by the debtor prior to filing for bankruptcy but only incurred subsequent to the bankruptcy petition?
Procedural Posture
SummitBridge filed an unsecured claim against Faison in the District Court for the Eastern District of North Carolina, a bankruptcy court. The court found, under the Bankruptcy Code, that a creditor like SummitBridge could not assert an unsecured claim for attorneys’ fees subsequent to Faison filing a bankruptcy petition.[6] SummitBridge then appealed the ruling, bringing the case now before the Court of Appeals for the Fourth Circuit.
Defendant-Appellee Argument – Faison
Faison argued that SummitBridge’s claim was directly barred by the Bankruptcy Code. Under §502, a claim for fees should be determined “as of the date of the filing of the petition . . . .”[7] Per this language, Faison argued, SummitBridge’s claim could not be determined as of the date of the petition, and was therefore not valid as of that date, because the fees were not incurred until after he filed for bankruptcy.[8] He also argued under §506, which speaks to identifying whether claims are secured and the recovery of attorneys’ fees for over-secured claims.[9] He argued that this section implicated a conclusion that attorneys’ fees could be recovered for secured claims but not unsecured claims, such as the one SummitBridge had against him.
Faison also made a policy argument. He insisted that SummitBridge was a secured creditor and was guaranteed recovery on the principal loan by the collateral securing the debt.[10] Because the principal loan was secured, it would be unfair to allow the creditor to also pursue additional unsecured claims against him.[11] Furthermore, he argued that allowing an otherwise secured creditor to bring unsecured claims for fees would come at the direct expense of other unsecured creditors, who thus might not be able to recover their own principal as a result of the additional claims.[12]
Holding & Rationale
The Court of Appeals for the Fourth Circuit first took a textual approach, reviewing the explicit language of the Bankruptcy Code in §§ 502 and 506, as it responded to Faison’s arguments. Under §502, the court rejected Faison’s argument by stating that the claim itself need not be evaluated as of the date of the bankruptcy petition; rather, the right to that claim need only have been created as of the date of the petition.[13] A previous Supreme Court ruling precluded that the actual amount of the claim needed to be known as of the date of the petition.[14] Furthermore, Faison’s argument would be inconsistent with the §502, which enumerated specific exceptions; this scenario was not an enumerated exception, leading to the conclusion that recovery of attorneys’ fees incurred post-petition were not meant to be excepted from the claims that could be brought.[15] The court also rejected an analogy to another case that rejected an unsecured claim for interest following the debtor’s petition for bankruptcy. The court indicated this case was inapplicable because §502 expressly disallows claims for unmatured interest, but it does not expressly disallow claims for attorney’s fees.[16]
The court next responded to Faison’s argument under §506. It indicated that his negative inference was inappropriate. Although this section speaks to recovery of fees under a secured claim, it simply does not speak to allowing or disallowing similar recovery for unsecured claims.[17] This section should be used primarily for determining whether certain types of claims are secured or unsecured, not for deciding whether certain claims are permitted or prohibited.[18]
Lastly, the court addressed Faison’s argument that allowing this kind of unsecured claim for an otherwise secured creditor would create bad policy. The court stated that the Bankruptcy Code’s lack of specific disallowance on the issue indicates Congress did not believe allowing such claims would be unfair.[19] Similarly, the court further indicated that this claim did not come unjustly at the expense of other unsecured creditors. The claim might impair their recovery of principal loans, but by disallowing SummitBridge’s claim, the court would effectively be protecting unsecured creditors at the expense of an under-secured creditor, upsetting the necessary hierarchy of repayment.[20] Ultimately, the court joined the Second and Ninth Circuits to reverse the finding of the district bankruptcy court and remand for further proceedings.[21]
Conclusion
The Fourth Circuit joined other
courts in finding that a creditor can sue for fees incurred post-petition so
long as the creditor’s right to sue for those fees was established
pre-petition. This holding protects contractual
rights of creditors even during a debtor’s bankruptcy filing, where many rights
of creditors can be suspended.
[1] SummitBridge Nat’l Invs III, LLC v. Ollie William Faison, 2019 U.S. App. LEXIS 3967, at *1, 2 (4th Cir. 2019).
[2] Id.
[3] Id. at *3.
[4] Id.
[5] Id.
[6] Id. at *4.
[7] Id. at *7.
[8] Id.
[9] Id. at *11.
[10] Id. at *15.
[11] Id.
[12] Id. at *17.
[13] Id. at *8.
[14] Id. at *9.
[15] Id. at *10–11.
[16] Id. at *14–15.
[17] Id. at *12.
[18] Id. at *13.
[19] Id. at *16.
[20] Id. at *17.
[21] Id. at *19.
