IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
CABRELA WINES OF CALIFORNIA, No. 91-10521
JOSEPH and REBECCA LEPETICH,
v. A.P. No. 93-1313
RAYMOND A. CAREY, Trustee, et
Memorandum of Decision
The bankruptcy of debtor Cabrela Wines of California is a Chapter 11 case with a trustee.
There has been no confirmed plan. During the pendency of the case, the trustee sold real
property free and clear of certain liens for $2.2 million.
Plaintiffs Joseph and Rebecca Lepetich held the first lien on the property. They were paid
$720,637.92 from escrow, which represented their principal, interest, and $12,440.00 in
attorneys' fees. The issue now before the court, on cross-motions for summary judgment, is
whether the Lepetiches are entitled to an additional $144,921.96, mostly representing
contractual late charges.
Section 506(b) of the Bankruptcy Code provides that a secured creditor may recover any
reasonable fee or charge provided in the contract so long as it is reasonable. Case law, both
before and after the enactment of the Bankruptcy Code, has held that a plan of reorganization
may provide for a cure of a default to a secured creditor and thereby avoid late charges and like
penalties. Vanston v. Bondholders Protective Committee
, 329 U.S. 156 (1947); In re
Entz-White Lumber and Supply, Inc.
, 850 F.2d 1338 (9th Cir. 1988).
The rationale behind Entz-White
is that section 1123(a)(5)(G) of the Code provides that a
plan may provide for the curing of a default. Defendants' argument is that section 1123 trumps
section 506, even if there is no plan
. The court does not buy this argument. The court finds
entirely unpersuasive the ruling in In re South Beverly Drive
, 117 B.R. 563, 566
(Bkrtcy.C.D.Cal.1990), that a plan is not needed to invoke the applicability of section 1123.
There is no other way than confirmation of a plan to cure a default. Outside the confines of a
confirmed plan, payment to a secured creditor is nothing more than payment on account; the
creditor is entitled to all reasonable charges.
Moreover, it appears at this time that there will be no equity for the estate as a result of the
sale; this adversary proceeding is essentially a wrangle between senior and junior creditors,
none of whom are debtors, as to their respective shares of the proceeds. The only reason the
trustee is remotely interested is that he thinks he may be able to avoid one of the junior interest
and thereby step into the shoes of the lienholder. Under these circumstances, it would be
entirely inequitable to give the junior lienholders one dime more than they would get under
state law. It would appear that the charges sought by the Lepetiches are permitted under state
law. See Bernhardt, California Mortgage and Deed of Trust Practice
, 1991 Supplement section
It remains to be determined if the fees sought by the Lepetiches are clearly provided for in
the contract and are reasonable. However, to the extent they are, the court deems it without
substantial controversy pursuant to FRCP 56(d) that the Lepetiches are entitled to them.
Counsel for the Lepetiches shall submit an appropriate form of order.
Dated: June 9, 1994 _______________________