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In re McCormick

United States Court of Appeals, Eighth Circuit

July 3, 2018

In re: Stephen D. McCormick; Karen A. McCormick Debtors
v.
Starion Financial Appellee Stephen D. McCormick; Karen A. McCormick Appellants

          Submitted: March 14, 2018

          Appeal from the United States Bankruptcy Appellate Panel for the Eighth Circuit

          Before GRUENDER, BEAM, and KELLY, Circuit Judges.

          BEAM, Circuit Judge.

         Debtors, the McCormicks, appeal the ruling of the Eighth Circuit Bankruptcy Appellate Panel (BAP), affirming the bankruptcy court's order that Starion Financial was entitled to $83, 122.95 in attorney fees and costs incurred to collect on its secured debt in the course of the McCormicks' bankruptcy proceedings. We affirm.

         I. BACKGROUND

         This is the second appearance before this court by these parties with a bankruptcy-generated attorney fees dispute. In the underlying financial arrangements, the McCormicks and Starion entered into a series of loan transactions between 2004 through 2012. Pursuant to the various promissory notes and mortgages, the McCormicks were liable for payment of Starion's attorney fees and costs engendered in collection of the indebtedness. The McCormicks further executed personal guarantees for these notes. The loans were secured by mortgages totaling over $20 million covering a residential development in Bismarck, North Dakota, known as Misty Waters, as well as a deed of trust for $1.5 million on the McCormicks' condominium in Arizona. All of these notes contained provisions stating that the McCormicks would pay reasonable attorney fees incurred by Starion in the event it was required to take action to collect upon the debt. When the McCormicks defaulted on the loans, Starion and the McCormicks agreed upon a Workout Agreement wherein Starion agreed to forbear on certain defaults that had already occurred, and in return, the McCormicks executed and delivered confessions of judgments in the respective amounts of $2, 078, 034.26 and $1, 000, 000 to be filed and entered if they defaulted on the Workout Agreement. Not long after, the McCormicks defaulted on the Workout Agreement; Starion filed the confessions of judgments in North Dakota state court; and judgment liens for $2, 078, 034.26 and $1, 000, 000 were entered on July 27, 2012.

         Shortly after the North Dakota state court judgment was entered, in August 2012, the McCormicks filed a voluntary Chapter 11 bankruptcy petition. After a second amended plan of reorganization was filed in August 2013, Starion objected to confirmation, stating in relevant part that the plan did not provide for attorney fees that it was entitled to as an oversecured creditor. As a result of that objection, the McCormicks filed an addendum to the amended plan known as the Starion Addendum in which the McCormicks again agreed to pay Starion's allowable attorney fees and costs associated with the bankruptcy proceedings. Starion was required by the plan to submit an itemized statement of its claim for fees and expenses "[a]t least ten days prior to the Effective Date of the Plan." The bankruptcy plan containing this addendum was confirmed by the bankruptcy court on September 13, 2013, and the effective date of the plan was October 15, 2013. On October 3, Starion submitted an itemized statement to the McCormicks for various costs including interest, late fees, real estate taxes, and appraisal and engineering fees. On October 7, Starion submitted an updated statement that included its attorney fees. The McCormicks took the position that Starion was not entitled to attorney fees based upon the plan or 11 U.S.C. § 506(b), [1] and refused to pay the fees requested. Starion filed a motion requesting the bankruptcy court to compel payment of its fees in the amount of $125, 014.64. The McCormicks argued to the bankruptcy court that there was no agreement for the payment of fees; the fee request was untimely; and the fees were not reasonable.

         The bankruptcy court issued its order in March 2014, finding that while Starion might well be oversecured (as required for payment of fees by § 506(b)), this status arose from the judgments entered in North Dakota state court, and those judgments did not mention Starion's right to collect attorney fees.[2] The court noted that while Starion did have several secured claims in the form of properly perfected real estate mortgages that provided for fees, the value of the real estate covered by those particular mortgages did not exceed the debt owed to Starion. Because the court concluded that the state judgment liens were not part of any "agreement," Starion could not include these amounts to achieve oversecured status. Thus, it denied Starion's request for fees.

         Starion appealed to the BAP, which reversed. In re McCormick (McCormick I), 523 B.R. 151 (8th Cir. BAP 2014). The BAP held that the bankruptcy court mistakenly relied upon the state court judgments as the "agreement" under which Starion's right to payment of its fees arose. The BAP found it was undisputed that the promissory notes, mortgages, Workout Agreement and the Starion Addendum contained attorney fee provisions, and those were the provisions under which the claim arose. Id. at 155. The court also noted that both the McCormicks and the bankruptcy court erroneously "intermixed" the two requirements of § 506(b)-oversecured status and an agreement for fees-because the two requirements need not be contained in the same document. Id. at 155-56. With regard to the judgment liens, the BAP stated: "The terms of the Workout Agreement also referenced Starion's right to claim its Fees. The confessions of judgment and subsequent judgment liens merely served as the mechanism to perfect an interest in additional collateral to secure payment of all obligations to Starion." Id. at 156. The McCormicks appealed that BAP decision to us, and after briefing and argument, we held that we lacked jurisdiction because the bankruptcy court's order was not final. Instead it left the bankruptcy court with the non-ministerial tasks of resolving the timeliness and reasonableness of the fee request. In re McCormick (McCormick II), 812 F.3d 659, 661-62 (8th Cir. 2016).

         Upon remand, the bankruptcy court found that although the fee request was late, the untimeliness of the request was not a material breach and thus not a bar to Starion collecting fees. The court then reviewed the reasonableness of the fees requested, and ultimately awarded Starion approximately $83, 000 in fees. The McCormicks appealed to the BAP, which affirmed. In re McCormick (McCormick III), 567 B.R. 552 (8th Cir. BAP 2017). The McCormicks appeal, arguing that there was no agreement for fees because Starion did not become oversecured other than by operation of the nonconsensual judgment liens. They further argue the fee request was untimely.[3]

         II. DISCUSSION

         We review a decision of the BAP as a second reviewing court under the same standard as the BAP-reviewing the bankruptcy court's findings of fact for clear error and its conclusions of law de novo. In re Treadwell, 637 F.3d 855, 863 (8th Cir. 2011). A secured creditor claiming entitlement to attorney fees and costs in a bankruptcy proceeding pursuant to 11 U.S.C. § 506(b) must establish that it was oversecured and that an agreement or state statute authorized the claim for attorney fees. Further the fee must be reasonable. Finally, the claim must also involve an allowed secured claim. In re White, 260 B.R. 870, 880 (8th Cir. BAP 2001); 11 U.S.C. § 506(b).

         A.Agreement ...


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