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When FRBP Rule 3002.1 is Applicable, Secured Creditor’s Post-Petition Attorneys’ Fees Do Not Require a Fee Application: Maine BK Court Reviews: Official Bankruptcy Form 410S2 & Post-Petition Attorneys

Posted By USFN, Monday, November 6, 2017
Updated: Monday, October 23, 2017

November 6, 2017

by Andrew S. Cannella
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

Earlier this year, a Maine bankruptcy court held that post-petition attorneys’ fees incurred by a secured creditor in the context of a bankruptcy proceeding are not within the purview of Federal Rules of Bankruptcy Procedure (FRBP) Rule 2016, and the corresponding Maine Local Bankruptcy Rule 2016-1. The court also held that those attorneys’ fees do not need to be approved by the bankruptcy court in the context of a fee application in order to be recovered from the debtor when FRBP Rule 3002.1 is applicable. See In re Cotsis, Case Number 15-20588 (Bankr. Me. Feb. 24, 2017).

Background — In Cotsis, the debtors filed a Chapter 13 petition on August 20, 2015. Subsequently, the debtors obtained a modification of their loan from the secured creditor, which cured the pre-petition default; the debtors obtained bankruptcy court approval of the loan modification. The secured creditor’s plan objection was resolved by the loan modification, and the debtor confirmed a plan that provided for payment of the modified mortgage directly to the secured creditor.

Later, in compliance with FRBP Rule 3002.1, the loan servicer timely filed a notice of post-petition mortgage fees, expenses, and charges regarding the fees incurred for the plan review and plan objection (Notice) using Official Bankruptcy Form 410S2. The date that the fee was incurred and the total amount of that fee were appropriately set forth on line number 3, “Attorney Fees,” of the Notice. As an attachment to the Notice, two invoices were provided that further itemized and set forth a description of the fees listed in the Notice as “review of plan and notice of appearance ($400)” and for “objection to confirmation ($500).”

The debtors filed an objection on the basis that the Notice did not comply with FRBP Rule 2016 (requiring an application for compensation or reimbursement from the bankruptcy estate) and Maine Local Bankruptcy Rule 2016-1(a)(3) (collectively, Fee Application Rules). The Fee Application Rules require the submission of the professional’s time records and other documentation with the bankruptcy court to support fee applications of professionals retained by the debtor and/or the bankruptcy estate.

Court’s Analysis — In its memorandum of decision, the bankruptcy court determined that the Fee Application Rules are inapplicable to the Notice filed because the fees contained in the Notice are governed by the terms of the agreement between the parties, as set forth in the underlying security interest. Therefore, the servicer’s act of the filing of the Notice required by Rule 3002.1 was not to seek compensation for legal services rendered for the debtors or their bankruptcy estate but merely to explain the scope of the creditor’s post-petition fee claim. Additionally, the bankruptcy court found that Rule 3002.1 provides an adequate procedural mechanism of which debtors may avail themselves to contest the fees, expenses, and/or charges set forth in a notice filed pursuant to Rule 3002.1.

Pursuant to Rule 3002.1(e), a motion can be filed within one year of the filing of a notice and the court shall “determine whether payment of any claimed fee, expense, or charge is required by the underlying agreement and applicable nonbankruptcy law to cure a default or maintain payments in accordance with § 1322(b)(5) of the Code.” In the event that the debtors believe the description of the fees set forth in the Notice is inadequate to support the reasonableness of the fees, the Notice may be challenged in the manner prescribed by Rule 3002.1.

Tate Distinguished — The decision in Cotsis is a very important one for mortgage servicers. It distinguishes the holding in a 2000 North Carolina bankruptcy class action that creditors and their attorneys had to file FRBP Rule 2016 applications in order to seek compensation or reimbursement from the debtor, or his estate, and the failure to do so before charging the debtor could result in sanctions. See In re Tate, 253 B.R. 653 (Bankr. W.D.N.C. 2000). The Tate opinion states that “the Court recognizes that [Bankruptcy Code] § 506(b) and [Bankruptcy] Rule 2016 create rights and duties for creditors in bankruptcy cases. A creditor may be entitled to payment of professional fees under its contract with a debtor, but before those funds will be paid from the bankruptcy estate, the creditor must affirmatively demonstrate their reasonableness to the court after notice. If a creditor elects to ignore the law to obtain such fees, it is well within the Court’s authority under § 105 [the bankruptcy court’s equitable powers] to rectify that error.” Tate, at 668.

Cotsis expressly distinguished Tate and held that creditors only need to comply with Rule 3002.1; timesheets and other supporting documentation are not required.

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