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September 21, 2009

9th Circuit Rules that Section 506(b) Preempts State Law on Attorneys Fees

Countrywide Home Loans v. Hoopai (In re Hoopai), ---- F. 3d ----, 2009 WL ------------- (9th Cir. Sept. 2009)

Issue:   Is an oversecured creditor’s right to fees under Section 506(b) limited by state law?  Does an oversecured creditor have the right to fees under 506(b) incurred after a chapter 13 plan is confirmed? 

Holding:   No on either.  506(b) pre-empts state law but the right under 506(b) ends on confirmation.  

Appeal from the BAP

Judge Richard Paez
Prior to filing her chapter 13, the debtor sold her home for $300,000 but did not complete the sale.  Also prior to the filing, Countrywide conducted a foreclosure action selling the same home to a third party for $159,000.  “However, Countrywide did not record the affidavit of sale as required by Hawaii Revised Statutes section 667-5 to conclude the sale.”  The debtor filed chapter 13 three days after the foreclosure but before the affidavit of sale was recorded.  The debtor moved to complete her sale, and Countrywide moved for relief.  The bankruptcy court denied the MFR, granted the debtor’s motion and confirmed the plan.  Both sides appealed and the district court affirmed both decisions.  The debtor’s sale was ultimately completed but Countrywide wanted $85,000 in attorneys fees as an oversecured creditor under 506(b).  The debtor filed a declaratory relief action re the fees and requested fees herself under Hawaiian law as the prevailing party.  The bankruptcy judge ruled that Countrywide was the prevailing party and that the requested fees were reasonable. 

The BAP reversed saying that Countrywide was not the prevailing party and remanded to reconsider the rulings on that basis.  Countrywide appealed saying that even if it was not the prevailing party as required to get fees under Hawaiian law, it was entitled to the fees under 506(b) since 506(b) preempts state law. 

The Court of Appeals reversed both and remanded.  It said that both the court and the BAP incorrectly assumed that there was no right to fees unless Hawaiian law permitted the fees.  “[O]ur case law has firmly established that § 506(b) entitles oversecured creditors to enforce contractual attorneys’ fees provisions and preempts state law on attorneys’ fees.”  “Countrywide’s entitlement to attorneys’ fees under § 506(b) is not limited by state law.”

 

The Court of Appeals then looked at the “temporal scope” of the fees.  The issue was whether Countrywide has a right to fees for its efforts after confirmation of the plan.  Countrywide argued that it had the right to fees at least until the plan’s “effective date,” that is, when the sale was completed a year later.  The 9th Circuit ruled that the right to fees under 506(b) ends when the plan is confirmed “because a confirmed plan establishes the scope of all claims against the debtor.”  “[A] contrary result would be inconsistent with the purpose of section 506(b), which allows oversecured creditors to include post-petition interest and certain fees as part of the secured claim they will receive upon confirmation of the plan.”  Also, “because § 1325(a) provides secured creditors with a different right to interest from the ‘effective date of the plan’ through payment, §506(b) would seem to conflict with § 1325(a) if both were to apply during the same time period.”  It ruled that here the confirmation date and the effective date were the same (as would be the case almost always it comments).  Therefore, to receive post-confirmation fees, Countrywide must proceed under state law.  The Court of Appeals ruled that the debtor was the prevailing party and that Countrywide therefore did not have the right to post-confirmation fees.  Because the debtor was the prevailing party, she may have the right to her fees and remanded the whole thing back to the bankruptcy court.   

September 21, 2009 | Permalink

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