Almost all loan documents that we enforce on behalf of our lender clients contain an attorneys’ fees clause that requires the borrower to pay the bank’s attorneys’ fees, whether or not litigation or bankruptcy is required to enforce the loan. In California, Civil Code Section 1717 makes such clauses reciprocal. In other words, if a bank brings a lawsuit against the borrower and loses, the bank may be obligated to pay the borrower’s attorneys’ fees. Usually, because there is little doubt that the borrower does owe the money to the bank, the bank prevails and the borrower has to pay the bank’s fees on top of the loan balances.
In bankruptcy court, secured lenders take the position that under Bankruptcy Code § 506(b), they are entitled to attorneys’ fees if the loan agreements provide for them. Prior to 2007, the prevailing view in the Ninth Circuit, which includes California, was that unsecured creditors could not be awarded attorneys’ fees. However, in 2007, the United States Supreme Court held that attorneys’ fees should not be denied in bankruptcy, whether or not the lender was secured. Travelers Cas. & Sur. Co. of America v. Pacific Gas & Elec. Co. (In re Travelers), 549 U.S. 442 (2007).
The Travelers opinion has created uncertainty for creditors seeking relief from the automatic stay. On the one hand, a stay relief motion is not an action by itself, but rather simply a motion that is part of a larger case, usually a Chapter 7 or Chapter 11 bankruptcy case. On the other hand, stay relief can be the determining factor as to whether or not the lender or the debtor prevails. My partner, Bob Kaplan, notes that the Travelers decision has now been held to affect motions for stay relief and cautions lenders to consider this factor:
Recently, the United States Bankruptcy Court for the Eastern District of California awarded attorneys’ fees to a debtor who prevailed on a relief from stay motion based upon the Travelers decision. Another opinion by the Ninth Circuit Bankruptcy Appellate Panel, Hoopai v. Countrywide Home Loans, Inc. (In re Hoopai), 369 B.R. 506 (BAP Ninth Cir. 2007), also held that the debtor was the prevailing party in a dispute over a creditor’s motion for relief from stay. In both cases, the courts held that under Travelers, attorneys’ fees incurred in the course of litigating the automatic stay, an issue of Federal bankruptcy law, may be awarded under the state law provision set forth in Civil Code Section 1717 and the contractual provision awarding attorneys’ fees to the prevailing party found in most loan agreements.
While most motions for stay relief involve a simple determination as to whether there is sufficient equity in the property and whether the property is necessary to an effective reorganization, some motions for stay relief can be heavily litigated and very costly. Expert appraisers may be called in to prepare detailed appraisal reports and to testify, and numerous witnesses may be called. The cost in attorneys’ fees, expert witness fees, and other expenses, can be significant for both creditor and debtor.
In view of these recent rulings, creditors should be aware of the possibility that should they file relief from stay motions and lose, there is a possibility that the bankruptcy court will order the creditor to pay the debtor’s fees, even though the debtor has failed to pay the loan. These decisions are relatively new, and it is to be expected that further case law developments will be forthcoming in the near future.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.
Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.
Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.
Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.
JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.
NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]
JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.