In re No. 00-46099 T
Chapter 11
1196 BOULEVARD WAY ASSOCIATES,
etc.

Debtor.
_____________________________/
Alma Gardner (“Gardner”), a secured creditor, seeks a determination of her right to pre- and post-petition attorneys’ fees and costs as part of her secured claim. For the reasons stated below, the Court concludes that Gardner is not entitled to include any pre-petition attorneys’ fees and costs or foreclosure costs in her secured claim. However, Gardner’s secured claim does include her reasonable post-petition attorneys’ fees and costs in the total amount of $18,609.03, consisting of $18,591.57 in fees and $17.46 in costs. On October 31, 2000, the above-captioned debtor (the “Debtor”) filed a chapter 11 bankruptcy petition. On March 22, 2001, the Court signed an order confirming the Debtor’s plan of reorganization (the “Plan”). The Debtor’s principal asset is commercial real property (the “Property”). The Plan provides that the Debtor will retain the Property and extends the time by which the Debtor must pay the secured debt encumbering the Property. The Property is encumbered by two deeds of trust. The junior deed of trust is held by Gardner (the “Deed of Trust”). The Deed of Trust secures a debt evidenced by a promissory note (the “Note”). The value of the Property exceeds the secured debt.
On December 26, 2000, Gardner filed a proof of claim (the “Proof of Claim”). On February 2, 2001, the Debtor filed an objection to the Proof of Claim (the “Objection”). Among other things, the Objection challenged Gardner’s calculation of interest. Gardner filed a response to the Objection on March 6, 2001 and requested a hearing. Hearings were conducted on April 2 and April 30, 2001. At the conclusion of the April 30, 2001 hearing, the Court ruled that Gardner’s calculation of interest was correct, but that she was not entitled to any late charges. An order was filed memorializing this decision on June 29, 2001.
On July 17, 2001, Gardner filed two motions, one seeking pre-petition attorneys’ fees and costs and foreclosure costs (the “Pre-Petition Fee Motion”) and the other seeking post-petition attorneys’ fees and costs (the “Post-Petition Fee Motion”). The Debtor filed an opposition to each motion on August 8, 2001, and Gardner filed replies on August 10, 2001. The Court heard oral argument with respect to the motions on August 20, 2001. At the conclusion of the hearing, the Court directed Garnder to provide the Court and opposing counsel with a complete copy of the Deed of Trust and took the matters under submission.
Thereafter, the Ninth Circuit issued its decision in In re Cukierman, 2001 WL 1020783. At the Court’s request, both parties submitted letter briefs discussing the relevance of that decision to the issues presented in the instant proceeding. In his letter brief, counsel for the Debtor discussed the relevance of the attorneys’ fee clause in the Deed of Trust to Gardner’s right to attorneys’ fees.A. SUMMARY OF CONTENTIONS
In her two motions, Gardner seeks: (1) $16,445.98 in attorneys’ fees and costs and $5,102.75 in foreclosure costs incurred prior to the commencement of the bankruptcy case and (2) $22,206 in attorneys’ fees and costs incurred after the commencement of the bankruptcy case. Gardner originally sought accounting fees as well. She does not refer to these fees in these motions. It appears that either the Debtor no longer disputes her right to these fees or Gardner has abandoned her attempt to recover them. As discussed below, the parties advance different arguments with respect to the fees and costs incurred during each of these two time frames.
1. Pre-Petition Fee Motion
With respect to the fees and costs incurred pre-petition, the Debtor contends that Gardner waived any right to these amounts by failing to include them in the Proof of Claim. According to the Debtor, Gardner also waived her right to recover these amounts by failing to have them adjudicated until four months after confirmation of the Plan and several months after the adjudication of her right to interest and late charges. The Debtor characterizes this motion as an untimely attempt to amend the Proof of Claim.
Second, the Debtor contends that, in any event, Gardner is not entitled to her attorneys’ fees and costs and foreclosure costs as a contractual matter. The Debtor asserts that the relevant provisions in the Note and Deed of Trust are not broad enough to cover attorneys’ fees and costs incurred under these circumstances and that these documents contain no provision for recovery of foreclosure costs. The Debtor claims to be unaware of any statute that provides for reimbursement of foreclosure costs.
Finally, the Debtor contends that the attorneys’ fees are unreasonable in amount. The parties’ only disputes pre-petition were whether Gardner had calculated interest correctly and whether she was entitled to attorneys’ fees. According to the Debtor, Gardner’s claim for $16,445.98 in attorneys’ fees and costs is excessive given the limited nature of these disputes. Moreover, the Debtor notes that, when these disputes were ultimately resolved by the Court post-petition, Gardner prevailed on only one of the issues: i.e., the calculation of interest. The Debtor prevailed on the other: i.e., whether Gardner was entitled to late charges.
Gardner concedes that the Note does not provide for recovery of foreclosure costs. She cites no state statute or case authority that permit her to recover these amounts. In fact, state statutory law does permit the recovery of certain foreclosure costs. See Cal. Civ. Code § 2924(b)(2)(c). However, as discussed below, section 506(b) of the Bankruptcy Code requires the Court to consider only whether the fees and costs are provided for by the contract and whether they are reasonable. Rather, she argues that section 502 permits her to recover these costs as part of her secured claim as long as they are related to her claim. She cites no case authority for this proposition.
To the extent the Court determines that a contractual basis for recovery of her pre-petition fees and costs is required, Gardner contends that the Note does support a recovery of these amounts. As discussed below, the Note permits recovery of reasonable attorneys’ fees and costs if “suit” is commenced to collect the Note. She asserts that the term “suit” is broad enough to encompass a bankruptcy proceeding. In Gardner’s letter brief, she does not discuss whether the attorneys’ fee clause in the Deed of Trust strengthens the contractual basis for her claim for pre–petition attorneys’ fees and costs.
Gardner concedes that she did not specifically refer to attorneys’ fees and costs and foreclosure costs in the Proof of Claim. However, she claims that she advised the Debtor’s counsel that she was seeking such fees and costs at the time she filed the Proof of Claim. Moreover, she contends that she was not required to specifically plead such amounts in the Proof of Claim. She also argues that the Debtor will suffer no prejudice if these amounts are allowed since the Debtor was on notice of them and because the value of the Property is sufficient to cover them.
2. Post-Petition Fee Motion
Prior to trial, the Debtor also contended that Gardner had no contractual right to her post-petition attorneys’ fees and costs as required by section 506(b) of the Bankruptcy Code, relying on the attorneys’ fee clause in the Note. In its letter brief, after reviewing the complete copy of the Deed of Trust, the Debtor concedes that the attorneys’ fee clause in that document does support Gardner’s contractual claim. However, it contends that the amount requested is excessive. The Debtor contends that Gardner may not reasonably request $22,206 in attorneys’ fees and costs for litigating disputes involving less than $50,000. It notes that the litigation required only attendance at two hearings, no discovery, and preparation of briefs of less than ten pages. Gardner contends that her attorneys’ fees and costs are reasonable in amount.
B. ANALYSIS
1. Section 506(b) Governs Gardner’s Right to Both Pre- and Post-Petition Fees and Costs

The Debtor and Gardner both erroneously assume that Gardner’s two motions are governed by different sections of the Bankruptcy Code. They assume that Gardner’s request for pre-petition fees and costs is governed by section 502 whereas her post-petition request is governed by section 506(b). In fact, the Court concludes that both categories of claim are governed by section 506(b).
Gardner correctly notes that, in In re Kord Enterprises II, 139 F.3d 684 (9^th Cir. 1998), the Ninth Circuit held that section 506(b) preempts state law with respect to the right of a secured creditor to recover its attorneys’ fees and costs in a bankruptcy case. The Kord court notes that this principle was established in Matter of 268 Limited, 789 F.2d 674, 675-677 (9^th Cir. 1986). While the attorneys’ fees in both Kord and 268 Limited were incurred post-petition, nothing in the rationale of either case suggests that this principle applies only to post-petition fees and costs. Notably, section 506(b) contains no such limitation.
The Debtor and Gardner both assume that section 502 and section 506(b) are mutually exclusive: i.e., that section 506(b) applies to post-petition fees and costs and that section 502 applies to pre-petition fees and costs. However, the rationale of 268 Limited does not support such an interpretation. 268 Limited involved a claim for attorneys’ fees in a Nevada bankruptcy case. Nevada law did not impose a reasonableness requirement on attorneys’ fees nor did the applicable contract contain such a limitation. Nevertheless, because section 506(b) preempted state law, the 268 Limited court concluded, the secured creditor was limited to its reasonable attorneys’ fees as part of its secured claim pursuant to section 506(b). This rationale applies equally to fees and costs incurred pre-petition.
The 268 Limited court then concluded that any “unreasonable” attorneys’ fees that could have been recovered under state law (but could not be included in the creditor’s secured claim under section 506(b)) could be asserted as a general unsecured claim under section 506(b). Id. Thus, 268 Limited supports the conclusion that section 502 and 506(b) apply to different types of attorneys’ fee claims. However, the difference between the two is whether the claim is secured or unsecured, not whether the fees were incurred pre- or post-petition.


2. Gardner’s Right to Attorneys’ Fees and Costs Under 11 U.S.C. § 506(b)

Section 506(b) permits a secured creditor to recover its fees and costs provided four elements are met: (1) the claim is an allowed claim, (2) the value of the collateral is adequate to cover the claim, (3) the contract provides for the fees and costs, and (4) the fees and costs are reasonable. Kord, 139 F.3d at 689. The Debtor does not contest Gardner’s ability to satisfy the first two elements. Moreover, having reviewed the attorneys’ fee clause in the Deed of Trust, the Debtor concedes that Gardner is entitled to her reasonable post-petition attorneys’ fees and costs. However, it contests her right to any pre-petition attorneys’ fees and costs on the ground that they are not authorized by either the Note or the Deed of Trust as required by section 506(b).
The Note contains the following relevant provision:
Should suit be commenced to collect this note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorney’s fees.

The Deed of Trust contains the following relevant provision:

A. To protect the security of this Deed of Trust, Trustor agrees:...(3) ...to pay all costs and expenses including...attorney’s fees in a reasonable sum, in any such action or proceeding in which Beneficiary or Trustee may appear, and in any suit brought by Beneficiary to foreclose this deed.

Gardner concedes that she never commenced or appeared in a suit against the Debtor or to foreclose her security interest in the Property prior to the commencement of the bankruptcy case. The only “legal action” she commenced prior to the bankruptcy filing was a nonjudicial foreclosure action. Gardner apparently contends that her nonjudicial foreclosure action qualifies as a suit to collect the Note or to foreclose the Deed of Trust or the appearance in an action or proceeding to protect her security interest in the Property.
In support of their contrary positions on this issue, each of the parties relies primarily on a single bankruptcy court decision. The Debtor relies on In re Trombley, 31 B.R. 386 (Bankr. D. Vt. 1983). In Trombley, the language of the note was virtually identical to the provision in the Note quoted above. The secured creditor had not filed a lawsuit against the Debtor pre-petition and sought attorneys’ fees and costs incurred in the bankruptcy case, prosecuting its secured claim and seeking its fees and costs. The Trombley court noted that the term “suit” had generally been replaced by the term “action.” However, it concluded without much discussion that the actions taken in the bankruptcy case giving rise to the fees in question did not qualify as either a “suit” or an “action.” Trombley, 31 B.R. at 388.
Gardner relies on In re Foster, 84 B.R. 707 (Bankr. D. Mont. 1988). The Foster court reached a different conclusion from the Trombley court on similar facts. In Foster, the note provided for attorneys’ fees only in the case of a suit or foreclosure. The mortgage provided for fees only in a suit: (1) to foreclose the mortgage, (2) to collect any charges due under the mortgage, or (3) to prosecute, defend, effect, or protect the lien. No foreclosure action or suit had been commenced. The fees requested were for activities in the chapter 12 bankruptcy case, protecting the mortgage. Nevertheless, the Foster court concluded that the contractual language was broad enough to provide for the fees. Foster, 84 B.R. at 708-709.
In reaching this conclusion, the Foster court relied heavily on the following passage in Kohl v. United States, 91 U.S. (1 Otto) 367, 375 (1875):
“The term [suit] is certainly a very comprehensive one, and is understood to apply to any proceeding in a court of justice by which an individual pursues that remedy which the law affords. The modes of proceeding may be various but, if a right is litigated in a court of justice, the proceeding by which the decision of the court is sought is a suit.”

Foster, 84 B.R. at 709. The Foster court noted that the secured creditor’s action had been “in a court of law....” and had been necessary to defend the creditor’s lien. Based on these considerations, the Foster court concluded that the fees were provided for by the contract. Id.
In the instant case, however, unlike Foster, Gardner’s pre-petition activities did not take place in a court of law or equity. Therefore, adopting the Foster court’s rationale but reaching a different result under these facts, the Court concludes that Gardner is not entitled to include her pre-petition attorneys’ fees and costs in her secured claim.
The recent Ninth Circuit case, In re Cukierman, supra, does not change the Court’s opinion on this issue. Cukierman does not address the right of an oversecured creditor to attorneys’ fees and costs pursuant to section 506(b). It concerns the right of a lessor to administrative priority claim for attorneys’ fees incurred in post-petition litigation concerning the lease. In Cukierman, the attorneys’ fee clause in the lease read as follows:
If either party shall bring an action or proceeding against the other party to enforce the terms of this Lease or to declare their respective rights hereunder, the prevailing party in any such action, proceeding, trial or appeal thereof, shall be entitled to its reasonable attorney’s fees and court costs to be paid by the losing party as fixed by the court as party of the judgment in said action or proceeding.

Cukierman, at *5. According to the Cukierman court, whether the lessor had a right to an administrative priority for its attorneys’ fees depended on whether the trustee had an obligation to pay the lessor’s attorneys’ fees prior to the rejection of the lease. See 11 U.S.C. §§ 365(d)(3), 503(b)(1); In re Pacific-Atlantic Trading Co., 27 F.3d 401 (9^th Cir. 1994)-–holding that, if trustee failed to pay post-petition lease obligations pending rejection of lease as required 11 U.S.C. § 365(d)(3), the unpaid obligation was entitled to administrative priority under section 503(b)(1). See In re Cukierman at *5-6.
The Ninth Circuit observed that, until the lease was rejected, the trustee had no obligation to pay the lessor’s attorneys’ fees. It stated that, as of the time the lease was rejected, “no action or proceeding had been brought to enforce the terms of the lease or to declare the parties’ respective rights, and no judgment had been entered determining who was the prevailing party and fixing the amount of attorney’s fees, all of which, according to the lease, are pre-conditions to the obligation to pay attorney’s fees.” Id. at *5-6. It distinguished reported cases in which attorneys’ fees were given administrative priority on the ground that they involved lease agreements requiring a delinquent lessee “to pay the lessor’s attorney’s fees on demand as the fees were incurred.” Id.
Gardner contends that Cukierman has no application to this case and that any language in the decision that does appear relevant is mere dicta. The Debtor contends that Cukierman is relevant and that it supports its argument that Gardner is not entitled to her pre-petition attorneys’ fees and costs as part of her secured claim. If the Court had not concluded that the language in question was dicta, the Court would agree. However, the Court reaches the same conclusion without the aid of Cukierman. The Debtor does not contend that Cukierman has any application to Gardner’s request for post-petition attorneys’ fees and costs. As noted above, the Debtor concedes that Gardner is entitled to her reasonable fees and costs as part of her secured claim. The Court agrees. The Cukierman court’s statement that, prior to the rejection of the lease, no action or proceeding had been brought arguably supports the Debtor’s contention that Gardner’s pre-petition activities do not entitle her to attorneys’ fees and costs even under the broader attorneys’ fee clause in the Deed of Trust. However, clearly the gist of the Cukierman decision is that no obligation arose to pay attorneys’ fees until there was a prevailing party. Until the motion to reject the lease was adjudicated, there was no prevailing party. Since there was no obligation to pay attorneys’ fees under section 365(d)(3), the unpaid attorneys’ fees were not entitled administrative priority under section 503(b)(1) and In re Pacific-Atlantic Trading Co., 27 F.3d 401 (9^th Cir. 1994). The statement that no action or proceeding had been brought before the lease was rejected is mere dicta.
3. Gardner’s Reasonable Post-Petition Attorneys’ Fees and Costs

The Court has reviewed the itemization of time and charges provided by Gardner in support of the Post-Petition Fee Motion (the “Post-Petition Itemization”). The Post-Petition Itemization includes time entries from November 1, 2000 through May 29, 2001 totaling 92.9 hours and $22,205.50 in fees plus $17.46 in costs for a total of $22, 222.96.
The description of services indicates that these fees were incurred as follows: i.e., reviewing the initial documents filed in the bankruptcy case, preparing and filing the Proof of Claim, drafting a statement of secured creditor, reviewing and responding to the Objection, reviewing and responding to the Plan (and disclosure statement), preparing further responses to the Objection, appearing at two hearings on the Objection, preparing a declaration in support of Gardner’s claim for reimbursement of payments made for property taxes and insurance, and drafting a supplemental claim regarding foreclosure costs and attorneys’ fees.
The Debtor contends that the fees are unreasonable because the issues litigated in connection with the Objection involved only $50,000. The Debtor ignores the fact that a good portion of these fees were incurred on matters other than the Objection, for example, reviewing and objecting to the Plan and disclosure statement. According to the Court’s rough calculation, FAB spent slightly less than 63.4 hours, representing $15,956.50 in attorneys’ fees, litigating the Debtor’s objection to the Proof of Claim. The Court does not find this amount particularly unreasonable as compared to an amount in controversy of $50,000.
However, having scrutinized the time sheets closely, the Court concludes that some reduction of the fees requested is appropriate. The tasks undertaken appear reasonable in nature. The hourly rates appear reasonable as well. However, too many attorneys and other professionals worked on the case: i.e., a total of ten professionals. This necessarily led to inefficiencies and increased fees.
In particular, the fees were increased by the excessive involvement of two senior counsel after the bankruptcy case was filed. The Court assumes that SMJ became involved to provide bankruptcy expertise. Nevertheless, given the relatively modest size of the case, either his involvement should have been more limited or he should have been given full charge over the case with LRS available only for consultation as needed. SMJ’s fees total $3,875. The Court will reduce these fees by 50 percent or $1,937.50. The Court will also reduce the fees for other professionals (other than SMJ and LRS) by 20 percent or $492.10 due to the excessive staffing.
The Court also concludes that LRS spent an excessive number of hours preparing Gardner’s three page declaration in May 2001. His fees for this task total $2,447.50. This is too much even taking into account the numerous exhibits. The Court will reduce these fees by one-third or $815.83.
Finally, the Court will also reduce the fees requested by the amounts attributable to the following tasks:
(1) .4 hour for $120 in fees spent by LRS on 4/16/01 to fax documents. This was a clerical task that should not have been performed by an attorney, particularly senior counsel.
(2) .5 hour for $175 in fees spent by JS on 4/19/01 in conference with LRS. This was the only time spent by this attorney on the case. It is unclear what benefit his discussion with LRS provided.
(3) .7 hour for $63 in fees spent by HHC on 5/9/01 reproducing documents. This was also a clerical task that should be covered by overhead, not billed as a fee by an attorney or paralegal.
(4) .3 hour spent for $10.50 in fees by “mail” spent for organizing a mailing. This was also a clerical task that should not be billed as a fee.
These fees total $368.50.
Thus, the fees requested, totaling $22,205.50, will be reduced by $3,613.93 to $18,591.57. The costs are reasonable and will be allowed in full. The attorneys’ fees and costs allowed total $18,609.03.
4. Did Gardner Waive Her Right to Post-Petition Attorneys’ Fees and Costs?

Finally, the Debtor contends that Gardner waived her right to attorneys’ fees and costs: (1) by failing to request them specifically in the Proof of Claim and (2) by failing to seek a determination of her right to recover them at an earlier date. For several reasons, the Court finds that neither contention has merit. First, because Gardner’s claim was secured, the Proof of Claim has no significance in determining the amount of her secured claim as a lien against the Property. Gardner was not required to file a proof of claim to preserve her lien. The Plan would still have been required to deal with her lien in a manner that complied with the Bankruptcy Code.
Second, the Proof of Claim did refer to $84,806.72 in arrears “and other charges.” Gardner contends that she advised the Debtor that she would be seeking attorneys’ fees and costs when she filed the Proof of Claim. The Debtor does not dispute this contention. Moreover, the truth of the contention is supported by the fact that the Debtor objected to Gardner’s right to attorneys’ fees and costs as part of her secured claim in its initial objection filed on February 2, 2001.
Finally, the Debtor’s contention that Gardner waived her right to attorneys’ fees and costs by failing to specifically request them in the Proof of Claim was primarily directed to Gardner’s pre-petition fees and costs. Since the Court has concluded that Gardner is not entitled to any such fees and costs as a contractual matter, this issue is moot as applied to those amounts.
The Court also concludes that Gardner did not waive her right to her post-petition fees and costs by failing to seek an earlier adjudication of them. As noted above, the Debtor’s initial objection to the Proof of Claim, filed on February 2, 2001, reflected an understanding that Gardner’s right to her attorneys’ fees and costs was at issue. Moreover, to the extent the Objection was directed at Gardner’s post-petition fees and costs, it made no sense to adjudicate this dispute until the other litigation was concluded. Until Gardner had ceased incurring fees and costs, the Court could not make a determination of reasonableness as required by section 506(b).
Gardner also cannot reasonably be accused of having delayed seeking a determination of her right to attorneys’ fees and costs after the other litigation was concluded. The order memorializing the Court’s ruling on interest and late charges was filed on June 29, 2001. These motions were filed on July 17, 2001.
Gardner is not entitled to include her pre-petition attorneys’ fees and costs or her nonjudicial foreclosure costs in her secured claim. Gardner’s right to both pre-petition and post-petition attorneys’ fees and costs as a secured claim are governed by section 506(b). Neither the Note nor the Deed of Trust provides a contractual basis for Gardner’s pre–petition fees and costs. However, the Deed of Trust at least provides a contractual basis for her post-petition attorneys’ fees and costs.




However, section 506(b) limits Gardner to her reasonable attorneys’ fees and costs. The Court finds that Gardner’s reasonable attorneys’ fees and costs total $18,609.03. Counsel for Gardner is entitled to submit a proposed order in accordance with this decision.

Dated: October 10, 2001
_______________________________
United States Bankruptcy Judge


PROOF OF SERVICE
I, the undersigned, a regularly appointed and qualified clerk in the office of the United States Bankruptcy Court for the Northern District of California at Oakland, hereby certify:
That I, in the performance of my duties as such clerk, served a copy of the foregoing document by depositing it in the regular United States mail at Oakland, California, on the date shown below, in a sealed envelope bearing the lawful frank of the Bankruptcy Court, addressed as listed below.
I declare under penalty of perjury under the laws of the United States that the foregoing is true and correct.
Dated: October ___, 2001


Office of the United States Trustee
Document placed in UST mailbox at
US Bankruptcy Court
1300 Clay Street, Third Floor
Oakland, CA 94612

Lawrence R. Shepp
Fitzgerald, Abbott & Beardsley LLP
1221 Broadway, 21^st Floor
Oakland, CA 94612-1837

Jon R. Vaught
Vaught & Boutris LLP
80 Swan Way, Ste. 320
Oakland, CA 94621

CANB DocumentsNorthern District of California