Foreclosing Mortgagee's Counsel Fees Under Chapter 13
by Thomas V. Bennett and Joseph G. Butler

One of the most frequently utilized vehicles to "save the homestead" is the filing (generally on the eve of an auction sale) of a petition under Chapter 13 of the U.S. Bankruptcy Code. The filing of a petition provides the debtor with the benefit of the automatic stay and prevents the creditor, at least for a period of time, from proceeding with a foreclosure sale. At the same time the debtor has the opportunity to file a plan which may enable the debtor to repay the obligation to the lender over time and under the applicable provisions of the Bankruptcy Code.

A recent decision by the United States Bankruptcy Court for the District of Massachusetts (February 10, 2003)*, of a case of first impression in that District, answered the question of whether or not the Bankruptcy Court could compel a mortgagee's counsel to file a fee application conforming to Federal Rule of Bankruptcy Procedure 2016 ("FRBP 2016") and Massachusetts Bankruptcy Local Rule 2016-1 ("MBLR 2016-1") as a condition to inclusion of the mortgagee's attorneys' fees and expenses in the default cure amount of a debtor's Chapter 13 plan. More specifically, the decision dealt with the issue of whether or not FRBP 2016 and MBLR 2016-1 (which are concerned with applications for fees in the bankruptcy courts) apply in this circumstance notwithstanding 11 U.S.C. Section 1322(e)'s requirement that interest, fees and costs added by a creditor to the default cure amount pursuant to Section 1322(b)(5) be determined in accordance with the underlying contract and nonbankruptcy law.

The facts involved a note secured by a first mortgage on the debtor's home. The debtor defaulted. The lender engaged counsel to proceed with a foreclosure. The debtor filed a chapter 13 petition and a plan to pay the estimated prepetition arrearage. The lender filed an objection to confirmation of the plan, on the basis that the plan did not provide for payment in full of the prepetition arrearage, as the estimated amount did not include the attorneys' fees and costs incurred in connection with the foreclosure. The debtor objected to the fees in the arrearage. The Court found that the value of the property exceeded the amount of the lender's claim and that the lender was therefore entitled to payment in full of its claim. At issue were the requirements of the bankruptcy code and the local rules of the Bankruptcy Court concerning the calculation of attorneys' fees and costs. The attorney for the lender had charged the lender a "flat fee" for his services and had not kept contemporaneous time records. The attorney for the lender did provide the Bankruptcy Court with an estimate of such time. The lender's counsel argued that its fees were consistent with guidelines established by HUD and that, as such, the Bankruptcy Court should find the amount to be reasonable. The attorney noted that if he had charged his customary rates on an hourly basis, the total fees would have been significantly higher. The Bankruptcy Court, in its analysis of the history of this issue under federal bankruptcy law, concluded that Massachusetts contract law would prevail. Massachusetts contract law provides that fees can be collected if they are "reasonable." The Bankruptcy Court further ruled that although the substantive law of Massachusetts would be applied to whether the fees were "reasonable", the procedural law in making that determination rests solely on federally prescribed rules of procedure. The Bankruptcy Court held that the allowance of creditor's attorneys' fees and costs for the purposes of calculating the arrearage to be cured under a Chapter 13 plan may be conditioned on the filing and allowance of a fee application by the creditor's counsel. The Court noted that the operative word was "may". Where the amount sought to be added to the arrearage claim by the creditor is not challenged by the debtor, there would be no reason for the creditor to incur the time and expense involved in preparing and filing a fee application. The Court ruled that where a secured creditor is compelled, after a specific request by the debtor, to file a fee application to prove its charges, the secured creditor is entitled to add to the amount of its requested cure the expense of preparing and filing the application and appearing in defense thereof so long as the amount originally sought to be charged is materially correct. The Court noted that the reverse would also be true. Where the debtor succeeds in proving that the amount charged is materially inappropriate, the challenged amount should be disallowed and the cost of preparing a fee application and appearing at a hearing thereon should be borne by the creditor.

With respect to the specifics of this matter, the Court found that because the attorney had not maintained contemporaneous records of the time spent, he could not prove the reasonableness of his fee based upon bankruptcy procedure as proscribed by the rules. The Court, in recognizing that there was no prior case law to give guidance in this area, determined that the fees charged by the attorney in this specific case were, in fact, reasonable. The Court noted that, but for the fact that the attorney was limited by his agreement with his client to the HUD fee schedule, the total fees would have been greater. The Court, citing another bankruptcy case, noted that "Where [a mortgagee] agree[s] to employ [a law firm] at a negotiated rate that [is] less than a firm's standard hourly rates, the actual negotiated rate displaces the standard rate and becomes the presumptive reasonable rate."

The Court stopped short of flatly ruling that, if the attorney representing the lender was charging a fee based upon a fee schedule authorized by such organizations as HUD, Freddie Mac, Ginnie Mae and Fannie Mae, the attorney would not have to follow bankruptcy rules and procedures relative to providing contemporaneous time records with respect to a fee application. Probably the most appropriate and safest course of action for foreclosing attorneys and their clients would be for those attorneys to keep contemporaneous records of the time spent even in cases where there is an agreement to charge a "flat fee" and, at the same time, if the fee is challenged by the debtor, argue that the fee schedules are presumptively reasonable, at least until there is some further clarification by the Bankruptcy Courts in this area.

*United States Bankruptcy Court District of Massachusetts in re Timothy L. Plant, Debtor Chapter 13 Case No. 02-40732

If you have questions regarding this or any real estate or bankruptcy matter, please contact Thomas V. Bennett at tvb@barronstad.com or (617) 531-6574, or contact Joseph G. Butler at jgb@barronstad.com or (617) 531-6558.

Read more about real estate law - Thomas V. Bennett's weekly column "Open House" in The Boston Courant.