The Eighth Circuit Determines Whether There is an Agreement for Attorneys’ Fees under 11 U.S.C. § 506(b) and Whether an Untimely Request for the Same under a Chapter 11 Plan is a Material Breach

By Karl Johnson posted 10-30-2018 09:06

Karl Johnson, Hellmuth & Johnson, PLLC
Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Jackie Williams, Manty & Associates, P.A.

In McCormick v Starion Financial (In re McCormick), 894 F.3d 953 (8th Cir. 2018) (Beam, J.), the Eighth Circuit held that “the entirety of the dealings” between the debtors and the creditor provided for attorneys’ fees even if the oversecured status arose from nonconsensual judgment liens.

A creditor objected to the debtors' second amended plan of reorganization because the plan did not provide for the creditor’s attorneys’ fees as an oversecured creditor pursuant to 11 U.S.C. § 506(b). The debtors filed an addendum to the plan, agreeing to pay allowable costs and fees. The plan required the creditor to submit an itemized statement of fees and expenses at least ten days prior to the plan’s effective date. The creditor timely submitted a statement for various costs, but after the deadline submitted an updated statement that included its attorneys’ fees. The debtors disputed that the creditor was entitled to attorneys’ fees because: (i) there was not an agreement for the payment of fees; (ii) the fee request was not timely; and (iii) the fees were not reasonable.

The bankruptcy court denied the creditor’s request for fees because the creditor’s status as an oversecured creditor arose out of state judgment liens that were not part of any agreement. The creditor appealed to the Bankruptcy Appellate Panel for the Eighth Circuit. The BAP reversed the decision of the bankruptcy court and remanded to determine the fee award. The debtors appealed the fee award to the BAP and the BAP affirmed. The debtors appealed to the United States Court of Appeals for the Eighth Circuit.

The Eighth Circuit considered whether there was an agreement for fees as required under § 506(b) and whether the creditor’s request for fees was timely submitted to the bankruptcy court. The debtors maintained there was not an agreement for fees, arguing that the fees were not consensual because the judgment liens arose by operation of law. The Eighth Circuit disagreed, explaining that there were many agreements in which the debtors agreed to pay the creditor’s attorneys’ fees, including notes, mortgages and a workout agreement. In addition, the court found it significant that the confirmed bankruptcy plan provided for the payment of fees, which took place after the judgment liens were entered.

The Eighth Circuit acknowledged that the fee submission was not timely. However, the court found that it was not a material breach of the plan provisions. The court, relying on North Dakota law, found that the breach was not material because there was no prejudice, the breach was cured almost immediately and the creditor was not guilty of unfair dealing with the late submission.