CREDITOR FAILS TO MEET BURDEN ON MORTGAGE ARREARAGE, FEES

June 4, 2003

By Steven P. Garmisa
Hoey Farina & Downes 
sgarmisa@felahfd.com

Invoking Chapter 13 of the Bankruptcy Code to save a home from foreclosure often provokes fights over the amount of legal fees and expenses that will be considered part of the arrearage on a mortgage.

In a case from the Central District of Illinois, the amount of fees and expenses turned on Illinois law. But Chief U.S. Bankruptcy Judge Thomas L. Perkins was frustrated in efforts to get the creditor to voluntarily provide the information needed to evaluate the reasonableness of the requested fees and expenses. This resulted in an evidentiary hearing where the creditor's attorney, apparently equally frustrated, requested guidance on what evidence the court expected.

Declining to give mid-trial advice to counsel on how to prove his case, Perkins issued an opinion detailing the required evidence. In Re Coates, 2003 WL 1908214 (Bankr. C.D. Ill.) (April 17).

Maria Coates filed a petition pursuant to Chapter 13. Although there was no dispute about the monthly payments she owed under her home mortgage ($3,533), the mortgage also provided for recovery of legal fees and expenses incurred in foreclosure proceedings. Relying on this provision, Litton Loan (the assignee of the mortgagee) claimed it was owed a total of $8,124.

Litton failed to present any evidence in support of its request, arguing the amount of its claim should be presumed correct in the absence of specific objections. At one point during the evidentiary hearing, Litton's exasperated counsel asked the judge what was expected.

Providing an answer in his post-hearing ruling, Perkins explained (with some material omitted):

"Perhaps the most common reason that debtors choose Chapter 13 over Chapter 7 is a desire to save their house from foreclosure. Most often, mortgage lenders will not agree to permit a Chapter 7 debtor who is in default on his mortgage payments to reaffirm unless the mortgage loan is brought current. Lacking the cash to cure the arrearage, such debtors turn to Chapter 13, which permits a pre-petition payment default on a mortgage to be cured in installments through the Chapter 13 plan, while the regular post-petition mortgage payments are paid when due. 11 U.S.C. [sec]1322(b)(5).

"A debtor's obligation to cure the pre-petition mortgage arrearage is enforceable as a condition of confirmation. A plan that fails to provide for a complete cure is not confirmable over the objection of the mortgagee.

"Most of the Chapter 13 cases filed in this district involve the cure of a pre-petition mortgage arrearage. Since only a small percentage of Chapter 13 plans provide for a 100% payout to unsecured creditors, the determination of the allowed amount of the pre-petition mortgage arrearage, in most cases, has a significant effect on unsecured creditors: the higher the amount of the arrearage, the less that unsecured creditors will be paid.

"The Supreme Court has characterized the claim determination process as one of basic importance in the administration of a bankruptcy estate, without which unmeritorious or excessive claims might dilute the participation of the legitimate claimants.

"Since mortgage lenders seldom sit on their rights in the face of nonpayment, it is often the case that a foreclosure action will have been commenced pre-petition. As provided by most standard promissory notes and mortgages, attorney fees and expenses incurred by the lender on account of a default, are collectable from the mortgagor. These fees and expenses become part of the claimed arrearage amount that is so often at issue in Chapter 13 cases. Accordingly, this issue, so frequently litigated, should be addressed systematically."

The amount owed on the Coates mortgage was a question of Illinois law.

"Under Illinois law," Perkins continued, "whether expressly stated in the contract provision or not, a standard of reasonableness will be implied to all requests for reimbursement of attorney fees and expenses assessed by one party to a contract against the other. It is well-settled that the party seeking the fees, whether for himself or on behalf of a client, always bears the burden of proof and of production to present sufficient evidence from which the trial court can render a decision as to their reasonableness.

"The allocation of the burden of proof by Illinois courts is identical to that of federal courts. The party seeking recovery of attorney fees bears the burden of proving the fees are reasonable, both in bankruptcy cases, and non- bankruptcy cases. When an oversecured creditor seeks to charge the bankruptcy estate with its attorney fees, costs and expenses, the creditor bears the burden to prove the reasonableness thereof.

"As in most jurisdictions, Illinois courts rely upon the lodestar method to determine the reasonableness of attorney fees. The party claiming fees must present the court with detailed records specifying the services performed, by whom they were performed, the time expended and the hourly rate charged.

"Once presented with that information, the trial court should consider a variety of other factors, including the skill and standing of the attorneys employed, the nature of the case, the novelty and difficulty of the issues involved, the degree of responsibility required, the usual and customary charge for the same or similar services in the community, and whether there is a reasonable relationship between the fees charged and the litigation."

Perkins started the Coates case by encouraging voluntary disclosure of lodestar data by the creditor because of what he "perceived as a sense of mutual frustration between debtors' attorneys and mortgagees' attorneys.

"Debtors' attorneys are regularly faced with a lack of information as to the attorney fees and costs added to the pre-petition arrearage amount by mortgage holders. Without such information, they have no way of determining whether the claimed fees and costs are reasonable or even if the amounts claimed were computed correctly. This inability to ascertain the correct amount of the arrearage delays confirmation and spawns litigation.

"The mortgagees' attorneys are faced with regular opposition to their arrearage claims, asserted in general terms, e.g., 'the claim is too high.' Without knowing exactly what elements of the claim are disputed, and why, those attorneys are faced with the prospect of an evidentiary hearing without knowing what evidence, including what witnesses, will be needed."

The voluntary disclosure plan didn't work in this case. "Apparently unwilling to disclose its records to the debtor or the court, Litton Loan's attorneys objected to the disclosure procedure.

"Because the procedure was intended to benefit Litton Loan and its attorneys by facilitating resolution of the issue without an evidentiary hearing, the court granted the objection, vacated its disclosure order and scheduled an evidentiary hearing.
"Not satisfied with that procedure either, Litton Loan then filed a motion for a more definite statement, taking the position that the debtor, without any information from Litton Loan, should be required to state a detailed objection, line item by line item, to the arrearage calculation contained in its proof of claim.

"The court denied the motion, in part because of the patent absurdity of Litton Loan's position that the debtor be forced to evaluate the reasonableness of the attorney fees and costs without disclosure by Litton Loan's attorneys of its time records, the terms of its fee agreement, and receipts for expenses incurred."

At the evidentiary hearing, Litton Loan failed to present any evidence. Then, "During the trial, in response to the court's surprise at Litton Loan's lack of evidence, Litton Loan's attorney asked the court for direction as to what evidence was expected. The court advised the attorney that such direction could only be given in the court's decision, not during the course of trial."

Answering counsel's question in his opinion, Perkins explained:
"The starting point is this court's opinion in In re McMullen, 273 B.R. 558 (Bankr. C.D. Ill. 2001), involving the same issue of the reasonableness of attorney fees and costs included by a creditor in a claim for a pre-petition mortgage arrearage. As set forth therein, the following evidence must be made a part of the record in order for the mortgagee to satisfy its burden of production:

"1. The terms of the attorney fee contract between the mortgagee and its attorney. The court must be able to determine how much the mortgagee is actually being charged for the attorney's services and on what basis, e.g., hourly, flat rate, etc.

"2. Time records showing the amount of time expended by each attorney or paralegal, a description of each service performed, and the applicable hourly rate charged, or the customary hourly rate charged by that attorney or paralegal for work performed on an hourly basis.

"3. If a judgment of foreclosure was entered by the state court, a complete file-stamped copy of the judgment must be attached so that the bankruptcy court may take into account any award of fees or costs contained in the judgment.

"4. Copies of invoices or receipts for all expenses incurred. If reimbursement of charges for property inspections or appraisals is sought, some additional evidence demonstrating the necessity for these activities must be submitted. If a commitment for title insurance was purchased, a copy of the commitment and the invoice should be attached.

"Once the information is provided, the debtor's attorney must then advance a specific objection to each separate item in dispute."
In the Coates, case, "had Litton Loan's attorney been prepared to do so, he could have at least met his burden of production with no other witnesses. An attorney may testify as to the fees and costs charged to a client by the attorney or his firm. This would not have relieved the attorney from the necessity of presenting the documentary evidence referred to above. But had he been prepared to do so, the attorney could have presented the documents at the hearing where he was available to be cross-examined by opposing counsel.

"Even if the attorney was not prepared to testify at the hearing, if the documents had been filed, the court would at least have had a basis to make a determination of the reasonableness of fees and costs, and to make an award of fees and costs even in the absence of testimony. That is exactly what this court did in McMullen. But without the necessary documents in the record, the court cannot determine what fees and costs were actually charged to Litton Loan, much less whether they were reasonable.

"Because Litton Loan failed to produce any evidence in support of its claim for attorney fees, costs and other charges, and since the debtor disputed and did not concede any of those items," the creditor's request for payment of these charges was denied.
The amount of arrearages awarded to Litton Loan was limited to the amount of missed monthly mortgage payments.

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