Memorandum of Decision Re: Constructive Trust

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Decisions
UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA
In re THEODORE W. CONNOLLY,                                                                              No. 95-11748      Debtor(s). ______________________________________/
Memorandum of Decision
     The Creditors' Committee, on behalf of the bankruptcy estate, brought a preference action against creditor Robert J. Williams, Inc., the debtor's attorney. The complaint alleged that within one year of the filing of the bankruptcy the debtor had given Williams a security interest in a promissory note owned by the debtor. If the complaint had been successful, Williams' security interest in the note would have been preserved for the benefit of the estate pursuant to § 551 of the Bankruptcy Code. However, the court entered judgment in favor of Williams, finding that he was not an insider and therefore not subject to the one-year recovery period. The issue now before the court is Williams' right to attorneys' fees.      A preference action is not an action on the contract. Ordinarily, attorneys' fees are not recoverable for a successful defense of a preference action, notwithstanding an attorneys' fee provision in the underlying contract. In re LCO Enterprises, Inc., 180 B.R. 567 (9th Cir.BAP 1995). However, there is one exception. Where the prevailing defendant in a preference action is an oversecured creditor, it may add its attorneys' fees to the amount of its secured claim if three conditions are present. First, the value of the lien must exceed the amount sought. Second, the security agreement must clearly provide for the recovery of the fees. Third, the fees must be reasonable. 11 U.S.C. § 506(b); In re Kord Enterprises II, 139 F.3d 684, 689 (9th Cir.1998); In re Moran, 188 B.R. 492, 498 (Bkrtcy.E.D.N.Y.1995). In this case, the parties have stipulated that the value of the lien is sufficient. The issue of reasonableness has been deferred. The question now before the court is whether the security agreement covers defending a preference action.
     The only mention of attorneys' fees in the security agreement is as follows:
         7. In any action or proceeding brought to enforce or interpret the terms          of this agreement, the prevailing party shall be entitled to reasonable costs and          expenses thereof, including attorneys' fees, as may be determined by the court.
     This provision is clearly not sufficient to cover defending a preference action. Such an action is not a proceeding to enforce or interpret the agreement; a preference action is not a contract action . In re LCO Enterprises, Inc., supra, at 570-71. The language in the security agreement now before the court is clearly nowhere near the language of the agreement in Moran, which provided for fees necessary to "defend or uphold the lien of this mortgage."      As a secondary position, Williams argues that the language in the his attorney-client agreement entitles him to fees. That agreement provides:
         The prevailing party in any legal proceeding brought to enforce or determine          rights arising out of this agreement shall be entitled to reasonable attorney's          fees and reasonable disbursements, to be awarded as costs.
     The main problem with this argument is that the attorney-client agreement was signed more than two years before the granting of the security interest. "This agreement" can only refer to the attorney-client agreement, not the security agreement. There is no connection between the attorney-client agreement and the security interest in the note; it was only the latter which was at issue in the preference action.      Neither the security agreement nor the attorney-client agreement were drafted with bankruptcy proceedings in mind. Unlike the documents in Kord II, which were detailed in nature and specifically mentioned bankruptcy proceedings, the documents drafted by Williams are vague and ambiguous at best when applied to bankruptcy proceedings. Vagueness and ambiguity are fatal to a claim asserted under § 506(b). See, e.g., In re Woodham, 174 B.R. 346, 347-48 (Bkrtcy.M.D.Fla.1994); In re LaRoche, 115 B.R. 93, 96 (Bkrtcy.N.D. Ohio 1990); In re Cervantes, 67 B.R. 816, 820-21 (Bkrtcy. E.D.Pa.1986).      Williams could have drafted a provision in his security agreement which would have entitled him to fees incurred in defending his lien against attack as a preference. Having failed to do so, he is not entitled to recover his attorneys' fees. The court may not, as a matter of both law and equity, rewrite the contract to expand the scope of the fee provision. To do so would penalize the innocent creditors, represented by the Creditors' Committee, and unfairly enrich Williams at their expense.      For the foregoing reasons, Williams' motion for attorneys' fees will be denied. Counsel for the Committee shall submit an appropriate form of order.
Dated: October 20, 1998                                                                               ____________________________                                                                                                                       Alan Jaroslovsky                                                                                                                      United States Bankruptcy