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An Oversecured Creditor’s Post-Petition Attorneys’ Fees: Determined by Federal Law or State Law?

Charles Lazo

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in Wells Fargo Bank, N.A. v. 804 Congress, L.L.C. (In re 804 Congress, L.L.C.),[i] the Fifth Circuit held that federal law governs an oversecured creditor’s recovery of post-petition attorneys’ fees from the proceeds from the sale of the creditor’s collateral.[ii] In In re 804 Congress, L.L.C., a bank financed the debtor’s purchase of an office building.[iii] The loan was secured by a deed of trust.[iv] The deed of trust provided, among other things, that the debtor was required to pay the bank it attorneys’ fees following a foreclosure of the property.[v] After the bank scheduled a foreclosure sale of the property, the debtor filed for bankruptcy.[vi] Subsequently, the bankruptcy court granted the bank’s motion for relief from the automatic stay in order to complete the non-judicial foreclosure sale.[vii] Following the sale, the bankruptcy court exercised jurisdiction over the sales proceeds, and therefore, the bank filed proofs of claim for the amount it was owed under the deed of trust.[viii] The debtor objected to the bank’s proofs of claims and moved to require the trustee under the deed of trust to distribute the principal and interest due the bank and a second-lien holder and to pay the remaining amount to the debtor pending resolution of the claims against those funds.[ix] The bankruptcy court ruled that (1) the second-lien holder was entitled to be paid in full, (2) the bank was entitled to full payment except for the attorneys’ fees because the bank did not file the “proper application for [the] fees” and “provided no supporting documentation or testimony that the fees were reasonable”[x] under section 506(b),[xi] and (3) the trustee was entitled to a fee in the amount equal to twenty hours at her hourly rate instead of five percent of the total sale price.[xii] On appeal, “[t]he district court remanded ‘for further proceedings with instructions that [trustee] disburse the foreclosure-sale proceeds in accordance with Texas law and the [d]eed of [t]rust.’”[xiii] On appeal to the Fifth Circuit, the bank argued that state law governed its recovery of attorneys’ and other fees from the sale proceeds or, in the alternative, that the attorney fees should be recoverable under section 502.[xiv] The Fifth Circuit reversed the district court, concluding that “[b]ased on this record, [the court could not] say that the bankruptcy court erred in finding under [section] 506(b) that the amount of attorneys’ fees [the bank] sought [were] not substantiated and therefore [were] not shown to be reasonable.”[xv] Further, since it was unclear whether the issue had been raised below, the Fifth Circuit remanded the case to the bankruptcy court to determine whether the bank was entitled to an unsecured claim for its attorneys’ fees under section 502.[xvi]