§ 78.5 — Oversecured Claim Holders

Revised: June 7, 2004

[1]

Oversecured claim holders—claim holders that have collateral valued in excess of the creditor’s claim—have special rights defined in 11 U.S.C. § 506(b):

(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose.
[2]

The oversecured claim holder’s entitlement to postpetition interest, fees, costs and charges in § 506(b) is sometimes confused with the right of a secured claim holder to receive the present value of its allowed secured claim at confirmation under § 1325(a)(5)(B).1 The interest provided to a secured claim holder to preserve value “as of the effective date of the plan” under § 1325(a)(5)(B) is not allowed as part of the creditor’s claim under § 506(b) but is calculated and added to payments under the plan after confirmation. In other words, a secured claim does not grow in amount as interest accrues under § 1325(a)(5)(B); however, an oversecured claim is allowed in an amount that is increased to include postpetition interest, fees, costs and charges as provided in § 506(b). The rate of interest required to provide an allowed secured claim holder present value under § 1325(a)(5)(B)2 may or may not be the rate of interest allowed as part of an oversecured claim under § 506(b).3

[3]

In Rake v. Wade,4 the Supreme Court discussed how § 506(b) works with respect to an oversecured claim holder in a Chapter 13 case. The issue in Rake was whether an oversecured claim holder is entitled to interest on arrearages when the Chapter 13 plan cures default and maintains payments under § 1322(b)(5).5 The Supreme Court held in Rake that § 506(b) applies in Chapter 13 cases to allow an oversecured mortgage holder interest on its arrearages to the extent of the value of its collateral, and “such interest accrues as part of the allowed claim from the petition date until the confirmation or effective date of the plan.”6 After confirmation, the oversecured creditor is entitled to present value interest under § 1325(a)(5)(B)(ii) on its arrearages until paid through the plan. In Rake, the Supreme Court reserved the question of what is the proper interest rate for § 506(b) purposes.7

[4]

In 1994, Congress amended § 1322(e) to overrule Rake. Section 1322(e) provides, “Notwithstanding . . . sections 506(b) and 1325(a)(5),” if a Chapter 13 plan cures default, “the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”8 This new provision is effective with respect to agreements entered into after October 22, 1994.9 In Chapter 13 cases involving oversecured claims entered into after October 22, 1994, when the plan cures default, the allowance of interest or other charges is determined in accordance with the underlying contract and applicable nonbankruptcy law.10 When curing default is not at issue, only § 506(b) applies to an oversecured claim, and § 506(b) contains no cross-reference to nonbankruptcy law.11

[5]

Calculating the allowed amount of the oversecured claim under § 506(b) requires fixing an appropriate interest rate and the period of time during which § 506(b) operates. The Bankruptcy Code does not clearly define either the interest rate or the time during which § 506(b) adds interest (fees, costs and charges) to the oversecured claim holder’s allowed secured claim.12

[6]

In an effort to give meaning to both § 506(b) and § 1325(a)(5)(B), some courts, including the U.S. Court of Appeals for the Second Circuit, have held that an oversecured claim holder is entitled to add postpetition interest to its allowed secured claim through confirmation of the plan; after confirmation, the creditor is entitled to present value of the allowed secured claim, including the present value of the accrued postpetition interest, determined by applying the appropriate discount factor under § 1325(a)(5)(B)(ii).13 This approach preserves the § 506(b) right of the oversecured claim holder to add interest, fees, costs and charges to its allowed claim and preserves present value for the allowed secured claim at confirmation under § 1325(a)(5)(B). This approach results in application of two interest rates that may be different in Chapter 13 cases—one rate to determine the allowed amount of the oversecured claim; a second rate to preserve the present value of the allowed secured claim as it is paid in installments through the plan.

[7]

Rake reserved the question of proper interest rate for § 506(b) purposes. The Second Circuit, the only court of appeals to directly address the question in the Chapter 13 context, stated that § 506(b) interest would be added to an oversecured claim prior to confirmation “often, although not necessarily, at the contract rate.”14 One bankruptcy court stated the rule in the Sixth Circuit that oversecured claim holders are entitled to interest at the contract rate between the petition and confirmation and at the market rate, capped by the contract rate, after confirmation.15 Other bankruptcy courts have approved of contract rate for § 506(b) purposes in Chapter 13 cases without limitations.16 Many § 506(b) decisions in cases under other chapters have endorsed contract rate, though there is some controversy whether the default rate of interest in some contracts should be used.17 A few courts, typically in the context of nonconsensual, oversecured claims such as tax liens, have rejected the contract rate in favor of statutory rates for purposes of § 506(b).18

[8]

There has to be a time after which the allowed (oversecured) claim stops accumulating § 506(b) interest and begins to be paid present value at the confirmation rate. Otherwise, the secured claim would be twice accruing interest—once as part of the claim under § 506(b) and again to realize present value for § 1325(a)(5)(B) purposes. In Rake, Justice Thomas stated that § 506(b) interest would be allowed as part of an oversecured mortgage holder’s claim “until the confirmation or effective date of the plan.”19 This disjunctive description of the end point for an oversecured creditor’s entitlement to § 506(b) interest, fees, costs and other charges leaves some room for further litigation of how § 506(b) operates in Chapter 13 cases.20

[9]

To eliminate the uncertainty, a Chapter 13 plan that includes payment of an oversecured claim could specify the date through which § 506(b) allowances will be added to the secured claim. Using the plan to limit the accrual of § 506(b) interest and other charges to an identified date and applying the confirmation interest rate thereafter is a sensible accommodation of §§ 506(b) and 1325(a)(5)(B) that avoids litigation, avoids amended claims and avoids difficulties of calculation, especially when the two interest rates are different.

[10]

Section 506(b) allows postpetition interest, fees, costs and charges only to the extent “provided for under the agreement under which such claim arose.”21 Prior to 1989, it had been held that a nonconsensual lienholder was not entitled to postpetition interest and other charges under § 506(b).22 In 1989, in United States v. Ron Pair Enterprises, Inc.,23 the Supreme Court held that even a nonconsensual oversecured lienholder is entitled to interest under § 506(b).24 This means that oversecured judgment lienors, tax lienholders and mechanic’s and materialman’s lienholders add interest to their claims through the confirmation or effective date of the plan under § 506(b). Nonconsensual lienholders typically are not entitled to include fees, costs and other charges, because a nonconsensual lienholder does not have an agreement under which such fees and charges could arise for § 506(b) purposes.25 It has to be admitted that the same logic should have led the Supreme Court to deny postpetition interest to the nonconsensual lienholder in Ron Pair.

[11]

An oversecured claim holder is entitled to add to its claim late charges,26 attorneys’ fees27 and other costs if described in an agreement with the debtor and justified by the creditor.28 This outcome was approved by the Supreme Court, albeit in dicta, in a footnote in Rake v. Wade.29 These additional charges, fees and costs must be “reasonable.”30 When an oversecured creditor seeks attorney fees from the Chapter 13 estate, some courts have held that the creditor must file an application pursuant to Bankruptcy Rule 2016 and get court approval—just adding fees to a proof of claim may forfeit recovery of fees and subject the creditor to other jeopardy.31

[12]

Outside the curing default context,32 an oversecured claim holder is entitled to reasonable fees, late charges and other costs provided for by contract without regard to state law—there is no incorporation of nonbankruptcy law in § 506(b) like the reference to nonbankruptcy law in § 1322(e). When § 1322(e) is not in play, several courts have observed that the reasonableness of attorney fees, costs and other expenses under § 506(b) is controlled by federal law with the sometimes important result that state law allowances or limitations do not apply.33

[13]

The cross-reference to nonbankruptcy law in § 1322(e) that is missing from § 506(b) could influence the design of the Chapter 13 plan. When dealing with an oversecured claim holder, the debtor may have choices—for example, to modify the claim under § 1322(b)(2) or to cure default under § 1322(b)(3) or (b)(5). If there are limitations under state law that would apply, for example, to the amount of attorney fees that could be added to the oversecured claim, curing default would trigger § 1322(e) and invoke those state law rules. A smaller claim might result. This outcome might be especially attractive in a jurisdiction like Ohio that prohibits the recovery of attorney fees in consumer credit transactions. As the bankruptcy court observed in In re Shaffer,34 ordinarily § 506(b) permits an oversecured creditor to recover postpetition attorney’s fees that are reasonable and contemplated by contract, but when postpetition attorney’s fees are part of an arrearage claim and the debtor proposes to cure default and maintain payments under § 1322(b)(5), § 1322(e) controls and the public policy of Ohio voids the contract provision for attorney’s fees.35

[14]

The interaction of §§ 506(b) and 1325(a)(5)(B)(ii) allows oversecured claim holders to recover “interest on interest” and interest on fees, costs and other charges in Chapter 13 plans. Section 506(b), as interpreted by the Supreme Court in Rake, adds postpetition interest, fees, costs and other charges to the allowed amount of an oversecured claim until the confirmation or effective date of the plan and § 1325(a)(5)(B)(ii) requires postconfirmation interest on that total amount through the plan. The payment of interest after confirmation to ensure present value under § 1325(a)(5)(B)(ii) includes the payment of interest on the portion of the oversecured claim that is interest that accrued after the petition and before confirmation (or the effective date of the plan). Although there may be state law or state court decisions prohibiting recovery of interest on interest, when § 1322(e) is not applicable—when the plan does not cure default—only § 506(b) applies and there is no incorporation of state law to limit interest on interest.36 In Vanston Bondholders Protective Committee v. Green,37 the Supreme Court recognized that there may be equitable exceptions to the right of an oversecured claim holder to receive postpetition interest on interest. There are no reported Chapter 13 decisions refusing interest on interest to an oversecured claim holder after Rake when only § 506(b) is at work.

[15]

State law arguments about interest on interest will have additional force when the plan cures default under § 1322(b)(3) or (b)(5) with respect to an oversecured claim. Sections 506(b) and 1322(e) collide in this situation. The ordinary application of § 506(b) as interpreted by the Supreme Court in Rake permits the oversecured claim holder to add to its claim interest, fees, costs and other charges “provided for under the agreement.” These additions become part of the default that must then be paid to cure default through the plan under § 1322(b)(3) or (b)(5).

[16]

But with respect to agreements after October 22, 1994, § 1322(e) determines the amount necessary to cure default through a Chapter 13 plan “in accordance with the underlying contract and applicable nonbankruptcy law.38 Section 1322(e) may be a limit on an oversecured claim holder’s recovery of interest on interest that would otherwise be allowed under § 506(b) when state law would not permit a creditor to charge interest on the interest portion of a delinquent installment.39


 

1  See § 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest.

 

2  See § 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2  Interest Rate Anarchy: Present Value before Till.

 

3  See below in this section.

 

4  508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993).

 

5  Curing defaults under § 1322(b)(5) and Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) are discussed in detail beginning at § 83.1  In General: Rake and Contracts before October 22, 1994.

 

6  508 U.S. at 471.

 

7  508 U.S. at 472 n.8.

 

8  11 U.S.C. § 1322(e), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 305, 108 Stat. 4106 (1994).

 

9  See Bankruptcy Reform Act of 1994, Pub. No. 103-394, § 702, 108 Stat. 4106 (1994).

 

10  See §§ 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994 and 141.1 [ Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 ] § 84.3  Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994. See, e.g., In re Plant, 288 B.R. 635, 643 (Bankr. D. Mass. 2003) (When plan cures default on a debt incurred after October 22, 1994, arrearages are determined under § 1322(e), not § 506(b). “When a debtor seeks to cure a prepetition payment default over the life of a Chapter 13 plan pursuant to § 1322(b)(5), the amount of the arrearage must be ‘determined in accordance with the underlying agreement and applicable nonbankruptcy law.’ 11 U.S.C. § 1322(e) . . . . By enacting § 1322(e), Congress expressly overruled the [Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993),] holding, disconnecting in this respect § 506(b)’s application where a debtor cures a default through a Chapter 13 plan. . . . [Section] 1322(e) applies with respect to interest, fees and costs to every contract effective after October 22, 1994, regardless of whether a particular claim is . . . oversecured.”).

 

11  See below in this section.

 

12  See also §§ 136.1 [ Rate of Interest to Cure Default: Contracts before October 22, 1994 ] § 83.3  Rate of Interest to Cure Default: Contracts before October 22, 1994 and 141.1 [ Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 ] § 84.3  Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994.

 

13  Key Bank of N.Y. v. Harko (In re Harko), 211 B.R. 116, 118–22 (B.A.P. 2d Cir. 1997) (Oversecured car lender adds contract interest through the effective date of the plan to determine the allowed secured claim, then is entitled to a discount factor through the plan under § 1325(a)(5)(B)(ii). Under § 502(b)(2), “interest on prepetition claims stops accruing as of the date of the filing of the bankruptcy petition.” Section 506(b) “provides the exception to the general rule that interest stops accruing. . . . [Section] 506(b) provides that an oversecured creditor is ordinarily entitled to postpetition interest on his claim. Such interest becomes part of the creditor’s allowed claim. . . . Thus, the ‘allowed amount’ of the oversecured creditors’ claim will include, for purposes of § 1325(a)(5)(B)(ii), a sum representing postpetition interest. . . . [F]ull payment under § 1325(a)(5)(B)(ii) includes a ‘present value’ component. . . . [I]f, as Key Bank argues, § 506(b) interest continues to accrue postconfirmation, we would observe that it follows from our foregoing discussion that a sum for such unmatured interest would have to be calculated as part of the ‘allowed amount’ of the claim and the secured creditor would be entitled to the present value of this enhanced sum with the result that the debtor would be obligated to pay present value interest on unmatured interest. . . . Such a result would produce a windfall to oversecured creditors and be wholly at odds with the objective of § 1325(a)(5)(B)(ii), which is ‘to put the creditor in the same economic position that it would have been in had it received the value of its allowed claim immediately.’ . . . The substitution of a contract rate of interest for present value interest, on the other hand, would be inconsistent with the objective of § 1325(a)(5)(B)(ii) as stated in [GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997)] and the rejection by the Valenti court of the ‘forced loan’ approach. . . . Section 1322(b)(2) authorizes debtors to modify the rights of secured claim holders . . . . There is no . . . exception for oversecured creditors. . . . For all these reasons, we would hold that an oversecured creditor is entitled to receive interest pursuant to § 506(b) only until the effective date of the relevant Chapter 13 plan. At that time, the accumulated interest becomes part of its allowed secured claim and the plan must provide for payment to it of at least the present value of such allowed claim.”), aff’d sub nom. Key Bank N.A. v. Milham (In re Milham), 141 F.3d 420, 425 (2d Cir. 1998) (“‘To the extent’ means that pendency interest runs (often, although not necessarily, at the contract rate) until the time of confirmation unless the equity cushion is exhausted before that . . . . [A]n oversecured creditor . . . is entitled to receive § 506(b) interest only until the confirmation date of the Chapter 13 reorganization plan. At that time, the accumulated pendency interest becomes a part of the allowed secured claim, and the plan must provide for payment of the present value of such allowed claim as of the effective date of the plan. Present value is achieved by the payment of interest at a rate calculated in accordance with our holding in In re Valenti.”). Accord In re Chang, 274 B.R. 295, 303 (Bankr. D. Mass. 2002) (“An oversecured claim . . . gives rise to two separate postpetition interest periods. The first period runs from the petition date to generally either confirmation or the effective date of the plan pursuant to section 506(b). . . . It is the sum of the claim at the petition date plus interest awarded pursuant to section 506(b) on which the post-confirmation interest is paid. . . . The second interest period commences on confirmation or the effective date and runs until the last payment of the claim.”); In re Walsh, 264 B.R. 482 (Bankr. N.D. Ohio 2001) (Purchaser of tax certificates is an oversecured claim holder entitled to postpetition interest under § 506(b).); In re Dominick, 244 B.R. 51, 52–55 (Bankr. N.D.N.Y. 2000) (Oversecured tax creditor is entitled to preconfirmation interest at the state statutory rate and to a postconfirmation discount factor equivalent to the interest rate of a Treasury instrument with an equivalent maturity to the plan, plus a risk factor of 1%. “For over a decade it has been established that a non-consensual, oversecured creditor is entitled to receive post-petition interest on its claim. [United States v. Ron Pair Enterprises, 489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989).] This is true even if the underlying agreement that has given rise to the claim is silent with respect to interest.” In a footnote, “[t]his court is mindful that there are three separate and distinct time periods implicated in this case. The first is pre-petition. The second is post-petition but pre-confirmation. The third is post-confirmation. In previous cases this court and the Second Circuit have combined the first and second time periods and have issued rulings concerning pre- and post-confirmation. . . . The facts of this case do not compel a different analysis and this court’s findings with respect to pre-confirmation interest includes both pre-petition and post-petition until confirmation.” With respect to the preconfirmation period, the debtors conceded that interest was payable at the 12% statutory interest rate. However, with respect to the postconfirmation period, the bankruptcy court applied Key Bank, N.A. v. Milham (In re Milham), 141 F.3d 420 (2d Cir. 1998), and GMAC v. Valenti (In re Valenti), 105 F.3d 55 (2d Cir. 1997), to conclude that “the appropriate rate of post-confirmation interest is the amount equal to the interest rate of a Treasury instrument with an equivalent maturity to the plan, plus a risk factor of 1%.”); Ford Motor Credit v. Carpenter (In re Carpenter), 223 B.R. 114 (Bankr. S.D. Ohio 1998); In re Gladdin, 107 B.R. 803 (Bankr. M.D. Ga. 1989); In re Busone, 71 B.R. 201 (Bankr. E.D.N.Y. 1987); In re Hugee, 54 B.R. 676 (Bankr. D.S.C. 1985); In re Corliss, 43 B.R. 176 (Bankr. D. Or. 1984).

 

14  Key Bank N.A. v. Milham (In re Milham), 141 F.3d at 425.

 

15  See Ford Motor Credit v. Carpenter (In re Carpenter), 223 B.R. 114, 115–16 (Bankr. S.D. Ohio 1998) (In the Sixth Circuit, oversecured claim holder is entitled to interest at the contract rate between the petition and confirmation and at confirmation to the market rate capped by the contract rate. Ford had a lien on a 1994 Mustang worth $14,087.50. Loan balance was $11,474.70. Contract rate of interest was 13.75%; plan proposed to pay postconfirmation interest at “the current market rate of 8.47%.” Court cites United States v. Arnold, 879 F.2d 925 (6th Cir. 1989), and Cardinal Federal Savings & Loan Ass’n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir. 1985), for the proposition, “When a creditor is undersecured, the market rate of interest should be used without limitation because courts do not want to further impair a creditor’s claim. But when the creditor is fully secured, the market rate should be used to the extent that it does not exceed the contract rate. This lesser amount is appropriate because the creditor will receive the full value of the claim.” Because Ford was oversecured, Ford “can and will receive postpetition interest at the contract rate under § 506(b).” But after confirmation, because Ford is oversecured, Colegrove establishes the rule in the Sixth Circuit that the “‘most equitable rate . . . is the prevailing market rate of interest on similar types of secured loans at the time of allowance of the creditors [sic] claim and the confirmation of the plan in bankruptcy with a maximum limitation on such rate to be the underlying contract rate of interest.’” Citing Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir. 1982), if Ford Credit were an undersecured creditor, “Memphis Bank would require the court to use the current market rate for similar loans in the region.”).

 

16  See In re Corliss, 43 B.R. 176 (Bankr. D. Or. 1984) (Oversecured creditor is entitled to postpetition interest at the contract rate through the effective date of the plan. Creditor is then entitled to receive the present value of the allowed secured claim, including the present value of the accrued postpetition interest, determined by applying the appropriate “discount” factor under § 1325(a)(5)(B)(ii).). Accord In re Gladdin, 107 B.R. 803 (Bankr. M.D. Ga. 1989); In re Busone, 71 B.R. 201 (Bankr. E.D.N.Y. 1987); In re Hugee, 54 B.R. 676 (Bankr. D.S.C. 1985).

 

17  See § 136.1 [ Rate of Interest to Cure Default: Contracts before October 22, 1994 ] § 83.3  Rate of Interest to Cure Default: Contracts before October 22, 1994.

 

18  See, e.g., In re Chang, 274 B.R. 295, 304–05 (Bankr. D. Mass. 2002) (Oversecured tax lien accrues postpetition, preconfirmation interest at the state statutory rate for delinquent taxes and postconfirmation interest at the market rate plus a risk factor. “Section 506(b) does not proscribe the rate of interest to be applied . . . . [T]he Court must determine the rate in light of the equities of each case . . . . [F]or the reasons stated in [In re St. Cloud, 209 B.R. 801 (Bankr. D. Mass. 1997)], this Court agrees that the approach that best ensures compliance with the requirement of Section 1325(a)(5)(B) is the ‘market rate plus’ approach even in cases where the secured claim arises by operation of law instead of a voluntary loan. . . . [T]he annual rate of interest for a 30 year fixed rate of mortgage at the time of confirmation of the Original Plan was 7.135%. Given the Debtor’s history of defaults, the Court finds the addition of 1% appropriate.”); In re Dominick, 244 B.R. 51, 52–55 (Bankr. N.D.N.Y. 2000) (Oversecured tax creditor is entitled to preconfirmation interest at the state statutory rate and to a postconfirmation discount factor equivalent to the interest rate of a Treasury instrument with an equivalent maturity to the plan, plus a risk factor of 1%.); In re DeMaggio, 175 B.R. 144, 149–52 (Bankr. D.N.H. 1994) (Oversecured property tax lienholder is entitled to interest between the petition and confirmation under § 506(b) at the federal judgment rate; thereafter, § 1325(a)(5)(B)(ii) requires interest at the “riskless rate”—the U.S. government five-year bond rate—plus an additional 1% risk increment under the facts of the case. “[S]tate property tax liens are not entitled as a matter of law to state statutory interest rate provisions as part of their treatment. . . . The New Hampshire statutory rate was established at a 18 percent rate in 1987. . . . Now that commercial rates have dropped into single figures the state statute in a sense is an aachronism. . . . [T]he town taxing authority . . . is now getting in effect a windfall. . . . On balance, considering this debtor’s financial situation . . . the Court concludes that the use of the federal judgment rate for § 506(b) purposes is appropriate. . . . Although § 506(b) and § 1325(a)(5)(B)(ii) both mandate a calculation of interest, there are different objectives underlying the actual selection of the interest rate. . . . As a result, the interest rate that will return the present value under the plan under § 1325(a)(5)(B)(ii) is not necessarily the same interest rate used to determine the allowed amount of the claim under § 506(b). . . . Courts are generally in agreement that an interest rate to compute present value must be responsive to current economic conditions. . . . [T]he court will utilize the riskless rate as the basis for a present value analysis of the value of a secured creditor’s claim for purposes of determining the appropriate treatment of the claim in a chapter 13 plan. . . . While the risk involved is minimal . . . the Town does run the chance of some delay and administrative costs not recoverable should the debtor fail to perform under the plan. . . . [A]ccordingly . . . the riskless rate plus an additional 1 percent risk increment rate is appropriate for treatment of unpaid property tax.”).

 

19  508 U.S. at 471.

 

20  See § 136.1 [ Rate of Interest to Cure Default: Contracts before October 22, 1994 ] § 83.3  Rate of Interest to Cure Default: Contracts before October 22, 1994.

 

21  11 U.S.C. § 506(b).

 

22  See, e.g., In re Trent, 42 B.R. 279 (Bankr. W.D. Va. 1984).

 

23  489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989).

 

24  Accord In re Chang, 274 B.R. 295 (Bankr. D. Mass. 2002) (Oversecured tax lien accrues postpetition, preconfirmation interest notwithstanding that it cannot recover statutory attorney fees or costs because there is no agreement as required by § 506(b); In re Dominick, 244 B.R. 51, 52 (Bankr. N.D.N.Y. 2000) (“For over a decade it has been established that a non-consensual, oversecured creditor is entitled to receive post-petition interest on its claim. United States v. Ron Pair Enterprises, 489 U.S. 235 . . . (1989).”); In re Hall, 117 B.R. 425 (Bankr. S.D. Ind. 1990) (Citing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989), oversecured claim holder is entitled to postpetition interest even if it is not provided for in any agreement. Postpetition interest is governed by § 506(b) from the date of the petition to the effective date of the plan. Thereafter, § 1325(a)(5) controls and requires the plan to pay the present value of the allowed secured claim.).

 

25  See, e.g., In re Chang, 274 B.R. 295, 305 (Bankr. D. Mass. 2002) (Oversecured tax lien accrues postpetition, preconfirmation interest, but taxing authority is not entitled to statutory attorney fees or costs. “While a holder of oversecured claim is entitled to interest without regard to whether the claim arose by agreement or operation of law, only a holder of an oversecured claim that arose under an agreement that provides for fees, costs, and other charges, is entitled to the same. That Florida law may provide for the collection of costs, including attorneys’ fees, as part of the collection of delinquent taxes is irrelevant in a bankruptcy. A state statute is not an agreement contemplated by the language of Section 506(b).”). But see In re Murphy, 279 B.R. 163, 165 (Bankr. M.D. Pa. 2002) (Prepetition tax penalties became liens on the debtors’ real estate and are allowable under § 506(b) notwithstanding the absence of an agreement. Distinguishing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 103 L. Ed. 2d 290 (1989), “pre-petition penalty amounts included in nonconsensual, secured claims are not prohibited by § 506(b).”).

 

26  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges. See, e.g., In re Richardson, 63 B.R. 112 (Bankr. W.D. Va. 1986) (Relying on Mack Fin. Corp. v. Ireson, 789 F.2d 1083 (4th Cir. 1986), oversecured claim holder is entitled to late charges as part of its arrearage claim.). Accord In re Lejeune, 73 B.R. 98 (Bankr. N.D. Ga. 1987); In re Harmon, 72 B.R. 458 (Bankr. E.D. Pa. 1987).

 

27  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges. See, e.g., Telfair v. First Union Mortgage Corp. (In re Telfair), 216 F.3d 1333 (11th Cir. 2000), cert. denied, 531 U.S. 1073, 121 S. Ct. 765, 148 L. Ed. 2d 666 (2001) (Oversecured mortgage holder did not violate automatic stay or discharge injunction by reimbursing itself for postconfirmation attorney’s fees and premiums for force-written hazard insurance.); Longwell v. Banco Mortgage Co., 38 B.R. 709 (N.D. Ohio 1984) (Oversecured creditor is entitled to pre- and postpetition attorneys’ fees as an element of curing default.); Clark v. Washington Mut. Home Loans (In re Clark), 299 B.R. 694 (Bankr. S.D. Ga. 2003) (Oversecured mortgage holder is usually entitled to add postpetition attorney fees to its claim.); In re Crowley, 293 B.R. 628 (Bankr. D. Vt. 2003) (Oversecured mortgage holder’s attorney fees are reduced by reasonableness limitation in § 506(b).); In re Center, 282 B.R. 561 (Bankr. D.N.H. 2002) (Oversecured mortgage holder adds attorney fees to its claim as provided in its agreement without regard to state law.); In re Tomasevic, 275 B.R. 86 (Bankr. M.D. Fla. 2001) (Under § 506(b), oversecured mortgage holder is entitled to add prepetition attorney fees and other charges to its claim consistent with the mortgage contract.); In re Nash, No. 97-30711, 1997 WL 33421073 (Bankr. D.N.D. Oct. 17, 1997) (unpublished) (Section 506(b) entitles oversecured mortgage holder to reasonable fees provided for under its agreement.); In re Smith, 230 B.R. 437 (Bankr. N.D. Fla. 1999) (Oversecured mortgage holder is entitled by contract to attorney fees; however, $800 for supervising and filing a proof of claim is not reasonable. Attorney fees are reduced to $305 and $20 for inspection that never occurred is disallowed.); In re Scott, 229 B.R. 811 (Bankr. E.D. Okla. 1999) (Oversecured claim holder is entitled to include postpetition fees and expenses in its arrearage claim notwithstanding that plan did not propose to pay postpetition fees and expenses because the creditor did not receive adequate notice that the plan was inconsistent with its contract rights.); In re Olick, 221 B.R. 146 (Bankr. E.D. Pa. 1998) (Oversecured mortgage holder with liens on Chapter 13 debtors’ commercial and residential property is entitled to interest at the contract rate but is not entitled to a 15% flat rate collection fee, attorney fees are reduced to lodestar amounts and no attorneys’ fees are permitted for services performed in bankruptcy court.); In re Josephs, 108 B.R. 654 (Bankr. N.D. Ill. 1989) (Oversecured claim holder’s entitlement to attorney fees is limited to “reasonable” fees as allowed by the mortgage instrument and § 506(b). Fees for unsuccessful appeal of issue of first impression concerning automatic stay are not reasonable and are not allowed.); In re Hart, 80 B.R. 107 (Bankr. E.D. Tenn. 1987) (Oversecured mortgage holder is not entitled to add $150 attorney fee for filing of proof of claim and attending meeting of creditors where debtor was not in default at time of filing, Chapter 13 plan proposes to make the regular monthly payments directly to creditor, and nothing done by creditor’s counsel required the attention of an attorney. Filing of Chapter 13 case did not impair lien of the deed of trust, corporation is not required to have an attorney to file a proof of claim or to appear at the meeting of creditors and creditor has not proved that it was reasonable for its attorney to do anything that would justify a $150 attorney fee.); In re Harmon, 72 B.R. 458 (Bankr. E.D. Pa. 1987) (Oversecured mortgage holder is normally entitled to reasonable attorney fees, but creditor’s failure to keep adequate time records results in denial of all fees.).

 

28  See In re Fraser, 225 B.R. 511 (Bankr. D. Me. 1998) (On debtors’ objection, oversecured claim holder’s claim for interest, attorney fees and other charges is reduced to reflect unreasonable delay caused by bank’s failure to supply interest rate calculation information and creditor’s counsel’s delay in producing records of its fees. There are also discrepancies in the attorney fee request with respect to rates and services rendered.); In re Rathe, 114 B.R. 253 (Bankr. D. Idaho 1990) (Although oversecured mortgage holder is entitled to fees, costs and late charges called for in its contract, the mortgage holder must seek court approval for the payment of interest, fees, costs or charges. Failure to demand payment until after the completion of payments under the plan precludes recovery of fees or charges.).

 

29  In Rake v. Wade, 508 U.S. at 475 n.12, 113 S. Ct. at 2193 n.12, Justice Thomas noted that the arrearage portion of the oversecured mortgage holder’s claim “included the amounts past due on the notes and the ‘other charges.’” The lower court opinions indicate that these “other charges” included a charge for late payments by the debtor before the petition. This footnote is dicta, but it is a strong indication that the Supreme Court would interpret § 506(b) to add to the allowed secured claim of an oversecured claim holder “other charges” provided for in the contract with the debtor.

 

30  11 U.S.C. § 506(b). See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges. See, e.g., In re Crowley, 293 B.R. 628 (Bankr. D. Vt. 2003) (Oversecured mortgage holder’s attorney fees are reduced by reasonableness limitation in § 506(b).); In re Center, 282 B.R. 561 (Bankr. D.N.H. 2002) (Reasonableness of fees for § 506(b) purposes is determined under federal law using lodestar method.); Ballard v. Chrysler Fin. Corp. (In re Powe), 278 B.R. 539, 553–56 (Bankr. S.D. Ala. 2002) (After trial of class action: (1) under § 506(b), it was sufficient that Chrysler disclosed attorney fees in its proofs of claims; (2) after Welzel v. Advocate Realty Investments, Inc. (In re Welzel), 275 F.3d 1308 (11th Cir. 2001), the standard for reasonableness is the same for pre- and postpetition attorney fees, thus single disclosure of either or both on a proof of claim is sufficient; (3) the reasonableness of added attorney fees must be assessed on a district-by-district basis, thus nationwide class certification was not appropriate; (4) in the Southern District of Alabama, a flat fee of $225 to $275 is reasonable. Under § 506(b), “some disclosure of a postpetition/preconfirmation fee is required. . . . [P]ost-petition/preconfirmation attorneys fees must be included in a creditor’s proof of claim or an application for compensation or the fees cannot be collected from a debtor and are discharged. . . . Fees to be charged to debtors as part of a secured creditor’s claim in a case are to be ‘reasonable.’ . . . [T]he Eleventh Circuit Court of Appeals issued an en banc decision [Welzel] that held that the reasonableness standard for pre- and postpetition fees is the same. . . . If a creditor discloses that an attorneys fee has been charged regardless of whether Chrysler discloses the fee is prepetition or postpetition, that disclosure is sufficient because the review will be the same. . . . If the fees were adequately disclosed as the Court is ruling they were, the only way the fees would not be payable is if they are unreasonable per 11 U.S.C. § 506[(b)] or are postconfirmation fees. . . . [T]here is insufficient commonality to maintain a class as to what is an appropriate fee except as to debtors in this district. . . . Charging a flat fee of $225–275 is not inappropriate or unfair. . . . [P]reparing and filing a proof of claim is not a simple task. . . . The act of filing a proof of claim is not always a ministerial act. . . . [An] attorney may properly be used to file a proof of claim if a reasonable fee is charged.”); In re Nash, No. 97-30711, 1997 WL 33421073, at *3 (Bankr. D.N.D. Oct. 17, 1997) (unpublished) (Section 506(b) entitles oversecured mortgage holder to reasonable fees, costs and other charges provided for under its agreement; reasonableness under § 506(b) is controlled by federal law. “Most courts in making an evaluation of reasonableness begin with the ‘lodestar’ method.”); In re Staggie, 255 B.R. 48 (Bankr. D. Idaho 2000) (On debtors’ objection to the attorneys’ fees taken from the proceeds of the sale of property after the petition, oversecured claim holder under § 506(b) is only entitled to reasonable fees; creditor failed to prove that legal expenses of $3,782.43 were justified when the creditor was owed $20,000 on property that sold for $105,000. Because of lumping, billing for nonprofessional tasks and charges for unnecessary services, fee reduced to $1,414.78.).

 

31  See § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges. See, e.g., In re Plant, 288 B.R. 635, 643 (Bankr. D. Mass. 2003) (Bankruptcy Rule 2016 defines the process by which an oversecured claim holder includes fees, costs and expenses in an arrearage claim. Citing Tate v. Mortgage Corp. (In re Tate), 253 B.R. 653 (Bankr. W.D.N.C. 2000), “[t]he fees sought by National City would be paid from the Chapter 13 estate and accordingly, the requirements of FRBP 2016 apply.”); In re Gifford, 256 B.R. 661, 662 n.2 (Bankr. D. Conn. 2000) (In a footnote, “[t]he court now agrees with the reasoning of Tate v. NationsBanc Mortgage Corp. (In re Tate), 253 B.R. 653, 660 (Bankr. W.D.N.C. 2000), and henceforth will disallow oversecured creditors’ attorney’s fees for bankruptcy court services included in a proof of claim. Such fees require an application pursuant to Fed. R. Bankr. P. 2016.”); Tate v. NationsBanc Mortgage Corp. (In re Tate), 253 B.R. 653 (Bankr. W.D.N.C. 2000) (Bankruptcy court sustains class action by Chapter 13 debtors against NationsBanc to recover attorneys’ fees included as “Bankruptcy Fees” in proofs of claim filed by NationsBanc. Oversecured claim holders are entitled to recover fees under § 506(b) under certain circumstances, but Bankruptcy Rule 2016 requires a motion, notice to creditors and court approval, not just inserting the fee into a proof of claim. NationsBanc’s failure to comply with Rule 2016 renders the fee “per se unreasonable.”). But see Powe v. Chrysler Fin. Corp. (In re Powe), 281 B.R. 336, 346 (Bankr. S.D. Ala. 2001) (In class action asserting that Chrysler Financial Corporation failed to disclose attorneys’ fees added to oversecured proofs of claim, disagreeing with Tate v. NationsBanc Mortgage Corp. (In re Tate), 253 B.R. 653 (Bankr. W.D.N.C. 2000): “The Court concludes that either filing an application for fees in compliance with § 503 and Rule 2016 or filing a proof of claim which specifically claims the postpetition fee is sufficient to comply with due process requirements for payment.”).

 

32  See also discussion of curing default beginning at § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

33  See, e.g., In re Center, 282 B.R. 561, 565–67 (Bankr. D.N.H. 2002) (Oversecured mortgage holder adds attorney fees and costs to its claim as provided in its agreement without regard to state law; reasonableness of fees is determined using lodestar method. “[T]his Court agrees with the majority view and holds that section 506(b) preempts state law with respect to the addition to an allowed secured claim in a bankruptcy proceeding of interest and reasonable fees, costs or charges provided for under the agreement under which such claim arose when the value of the collateral securing the claim exceeds the amount of the claim. . . . [T]he plain language of section 506(b) supports the holding. Section 506(b) makes no reference to state law. . . . Congress intended for section 506(b) to preempt state law with respect to the allowance of attorneys’ fees in oversecured claims in bankruptcy proceedings. . . . ‘It is well established in this circuit that a reasonable [attorneys’] fee will first be computed in accordance with the “lodestar” method.’”); In re Nash, No. 97-30711, 1997 WL 33421073, at *3 (Bankr. D.N.D. Oct. 17, 1997) (unpublished) (Section 506(b) entitles oversecured mortgage holder to reasonable fees, costs and other charges provided for under its agreement; reasonableness under § 506(b) is controlled by federal law “even if contrary state law might dictate a different result. . . . Most courts in making an evaluation of reasonableness begin with the ‘lodestar’ method.”). But see Clark v. Washington Mut. Home Loans (In re Clark), 299 B.R. 694 (Bankr. S.D. Ga. 2003) (Citing Welzel v. Advocate Realty Investment, Inc. (In re Welzel), 275 F.3d 1308 (11th Cir. 2001), once an oversecured mortgage holder is allowed attorney fees under § 506(b), the bankruptcy court must then allow or disallow those fees under § 502(b)(1). Under § 502(b)(1), it is appropriate for the bankruptcy court to determine whether attorney fees are enforceable under state law. Because Washington Mutual did not provide the 10-day payoff period required by Georgia law, its claim for attorney fees is not allowable.).

 

34  287 B.R. 898 (Bankr. S.D. Ohio 2002).

 

35  Accord In re Hatala, 295 B.R. 62 (Bankr. D.N.J. 2003) (When debtor proposes to cure default and maintain payments under § 1322(b)(5), the limitations on recovery of attorney fees under New Jersey court rules apply to limit the recovery of fees as part of an arrearage claim under § 1322(e).). See also § 138.1 [ Late Charges, Attorneys' Fees, Costs and Other Charges ] § 83.6  Late Charges, Attorneys' Fees, Costs and Other Charges.

 

36  See In re Fraser, 184 B.R. 414, 415 (Bankr. D. Conn. 1995) (Oversecured tax claimant is entitled to interest on its claim from the effective date of the plan until paid in full, notwithstanding that part of the tax claim is interest. “[T]he debtor must provide the City with payments equaling the present value of its preconfirmation tax claim. That is accomplished by payments aggregating the face amount of the allowed tax claim, plus interest at the appropriate discount rate over the payment period. The fact that the City’s tax claim includes preconfirmation interest is of no significance.” Debtor argued that Connecticut law did not authorize municipalities to charge taxpayers interest on interest. The court found that interest on interest was required by § 1325(a)(5)(B) with respect to any oversecured claim holder.).

 

37  329 U.S. 156, 67 S. Ct. 237, 91 L. Ed. 162 (1946).

 

38  11 U.S.C. § 1322(e) (emphasis added). See § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994. See, e.g., In re Plant, 288 B.R. 635 (Bankr. D. Mass. 2003) (When plan cures default on a debt incurred after October 22, 1994, arrearages are determined under § 1322(e), not § 506(b).).

 

39  See § 135.1 [ Section 1322(e): Contracts after October 22, 1994 ] § 83.2  Section 1322(e): Contracts after October 22, 1994. See also In re Shaffer, 287 B.R. 898 (Bankr. S.D. Ohio 2002) (Ordinarily, § 506(b) permits an oversecured creditor to recover postpetition attorney fees that are reasonable and contemplated by contract; however, when postpetition attorney fees will become part of an arrearage claim and the debtor proposes to cure default with respect to a contract after October 22, 1994, § 1322(e) controls and the reference to nonbankruptcy law will incorporate the public policy of Ohio that voids the contract provision for attorney fees.).