Memorandum of Decision Re: Secured Creditor's Attorney Fees

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re ROSETTI & NICOLAS,                                       No. 91-12096 Debtor. ___________________________/
Memorandum of Decision
     When the debtor filed its Chapter 11 petition, it was the vendee under a land installment contract with Jonathan Blakeslee. Land installment contracts were a popular method of retaining a purchase money security interest in real property for a time in the late 1970's and early 1980's, but are not now in common use.      During the course of the Chapter 11, Blakeslee retained an attorney who obtained an order regarding assumption or rejection of the contract and a conditional order for relief from the automatic stay. In addition the trustee appointed during the Chapter 11 proceedings brought suit against Blakeslee alleging that he caused certain environmental problems on the property. The trustee eventually dismissed the suit voluntarily.      Before Blakeslee was able to foreclose using the power of sale contained in the land sale contract, the trustee sold the property and was able to pay off Blakeslee in full. Blakeslee's demand into escrow, in addition to the approximately $125,000.00 in principal and interest owed, included attorneys' fees of $25,040.82. The demand was paid in full in order to close the escrow. By the present motion, the trustee seeks a review of these fees and a return of most of them to the estate.1      1. The parties have stipulated that this dispute may be heard as a contested matter rather than as an adversary proceeding.      Pursuant to section 506(b) of the Bankruptcy Code, an oversecured creditor is entitled to recover his attorneys' fees from his collateral to the extent that those fees are provided for under the security agreement and are reasonable. At first, it looked like the task for the court was merely to determine whether or not the fees paid to Blakeslee's counsel were reasonable. See, e.g., Matter of 268 Ltd., 789 F.2d 674 (9th Cir.1986). However, a more careful review shows that the agreement in this case was very poorly drafted. As a result Blakeslee may not have been entitled to recover some or all of his attorneys' fees as a matter of law. Section 506(b) only allows a secured creditor to recover fees which are expressly provided for in the agreement. In the absence of an express provision, no attorney fee can be recovered. In re Mills, 77 B.R. 413, 417 (Bkrtcy.S.D.N.Y.1987). This is rarely an issue in real property security agreements, as they are normally prepared by sophisticated institutions and have sweeping provisions for recovery of any attorneys' fees incurred by the secured creditor in enforcing his rights. Such security agreements typically allow the secured creditor to recover all fees incurred in appearing in any proceeding affecting his rights or powers. These provisions give an oversecured creditor the right to recover fees incurred asserting its rights in bankruptcy. See, e.g., In re Le Marquis Associates, 81 B.R. 576, 578-79 (9th Cir.BAP 1987); In re Spirtos, 103 B.R. 240, 242n3 (Bkrtcy.C.D.Cal.1989); In re Sheppley & Co., 62 B.R. 279, 281 (Bkrtcy.N.D.Ia.1986).      In this case, however, there is no such language in the agreement. Paragraph 12 of the agreement has similar language, but for some reason limits its applicability to "any action or proceeding brought against Vendor or trustee by a third person arising by reason of the relationship between the parties herein created by this contract or purporting to affect the security or rights of the Vendor . . . . " [emphasis added]. The bankruptcy proceedings were commenced by the vendee, not a third party. The trustee is the vendee's successor in interest, not a third party. Since paragraph 12 is limited by its own terms to third party actions, it cannot be a basis for recovery of attorneys' fees under section 506(b) of the Code in a bankruptcy proceeding.      The only remaining basis for recovery of attorneys' fees is paragraph 19 of the agreement, which provides:
         If any party to this agreement . . . shall bring          an action in any court . . . to enforce any covenant          of this agreement . . . , it is hereby mutually agreed          that the prevailing party shall be entitled to reason-          able attorney's fees and all costs and expenses in          connection with said action, which sums shall be in-          cluded in any judgment or decree entered in such action          in favor of the prevailing party.
     Being forced to rely on a "prevailing party" clause rather than an "appearing in any proceeding clause" raises numerous problems for Blakeslee. For one thing, it means that all fees associated with the lawsuit brought by the trustee must be disallowed because Blakeslee was not the prevailing party in that action. Where a complaint is voluntarily dismissed, there is no prevailing party and no right to recovery of attorneys' fees. D & J, Inc. v. Ferro Corp. (1986) 176 Cal.App.3d 191.      Moreover, it is not entirely clear that either a motion for relief from the stay or a motion to compel assumption or rejection of an executory contract is an "action" or, if either is an action, whether Blakeslee was the prevailing party.      The court is aware of no case holding that an motion to assume or reject an executory contract is an "action." Section 365(d)(2) of the Code gives the creditor the right to ask the court to set a deadline by which the debtor must exercise its rights. Just because the court granted such a motion does not mean the creditor "prevailed" in an "action" against the debtor. Moreover, the motion was brought to enforce Blakeslee's rights under the Bankruptcy Code, not the agreement. Accordingly, paragraph 19 does not establish a right to attorneys' fees for bringing such a motion.      There is more authority for calling a motion for relief from the automatic stay an action against the debtor. For one thing, prior to amendment to the Federal Rules of Bankruptcy procedure in 1984 relief from the stay was obtained by adversary proceeding. For another, some courts have interpreted "action" liberally as including contested matters. See In re Mills, supra, at 418. The court accordingly finds that Blakeslee's motion for relief from the automatic stay was an action to enforce his rights under the agreement and that he prevailed, in that the motion was granted if the trustee did not sell the property and pay off Blakeslee by a certain time.      Based on the foregoing analysis, Blakeslee cannot recover most of his attorneys' fees because the term in the agreement which would have given rise to a general right to recovery of all fees was drafted so as to cover only third party actions and cannot, by any reasonable interpretation, be construed as covering bankruptcy proceedings. Blakeslee cannot recover for fees associated with the trustee's lawsuit against him because he was not the prevailing party in that lawsuit. He cannot recover for the costs of bringing a motion to compel assumption or rejection of the agreement, because that motion was not an action and because it was brought to enforce his rights under the Bankruptcy Code, not the agreement. The only action for which Blakeslee can recover his attorneys' fees is his motion for relief from the automatic stay.      It appears from the declaration of Blakelee's counsel that approximately $6,000.00 of his fees were incurred in bringing the motion for relief from the automatic stay. The fees for this motion seem reasonable under the circumstances, and they are accordingly found recoverable under section 506(b). The balance of the fees paid through the escrow of $19,040.82 shall be returned to the trustee.      Counsel for the trustee shall submit an appropriate form of order forthwith.
Dated: December 27, 1993                                                                        _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy