In a key decision in the Northern District of Georgia, Judge Hagenau has ruled that a secured creditor is only entitled to a secured claim, pursuant to § 506(b), to the extent of its actual and reasonable fees rather than contractual and statutory fees after a foreclosure sale where the property has not been abandoned.  Most Promissory Notes and Security Deeds call for contractual attorneys fees and expenses upon default.  The contractual and statutory attorneys fees are up to 15% of the loan amount and may or may not be close to the actual fees incurred by the lender. 

In Trauner v. State Bank and Trust Company (In re Solid Rock Development Corp., Inc.), Ch. 7 Case No. 10-72777, Adv. Proc. No. 12-5238, 481 B.R. 221, 2012 Bankr. LEXIS 4845 (September 27, 2012) (click here for .pdf),  SB&T received relief from the automatic stay to foreclose on the Debtor’s real property.  The Order lifting the stay stated the following:

The automatic stay of 11 U.S.C. § 362 of the Bankruptcy Code is modified to
allow SB&T to exercise its rights and remedies under applicable law, including
foreclosure of its security interest in the Property, promptly accounting to the
Trustee for any proceeds received in excess of the lawful claim of SB&T

SB&T conducted a foreclosure sale and credit bid the outstanding balance of its debt, $2,025,182.00.  The bid amount included $262,386.87 in statutory attorney’s fees.  The Chapter 7 Trustee sought turnover of the amount of attorneys fees "charged" by  SB&T over and above its "reasonable fees." 

The Trustee argues this case is governed by the Eleventh Circuit decision in [Welzel v. Advocate Realty Invs. (In re Welzel), 275 F.3d 1308 (11th Cir. 2001).] , where the court held that, notwithstanding the provisions of the contract or the provisions of O.C.G.A. § 13-1-11, the creditor was limited under Section 506(b) to the recovery of reasonable attorney’s fees. 275 F.3d at 1315. The Trustee therefore argues that SB&T could not recover statutory attorney’s fees through its foreclosure sale. The Trustee argues further that the credit bid by SB&T of the statutory fees constitutes a cash bid in excess of the allowable claim of SB&T, and SB&T must therefore pay to the Trustee the amount of the credit bid in excess of the allowable claim.

SB&T, conversely, argued that once the stay was lifted the Bankruptcy Court no longer had jurisdiction to determine whether there were excess proceeds to be paid to the Trustee, and it can collect the entire amount of statutory fees allowed by state law. 

The Judge held that the Bankruptcy Court had continued jurisdiction over the issues, including surplus funds received at the foreclosure sale, and that SB&T’s secured claim was limited to "reasonable" fees pursuant to § 506(b).


Since both the real property and the surplus remain property of the estate, Section 506(b) continues to govern the amount of SB&T’s secured claim…


 The Court noted that its opinion addressed only the allowability if the secured claim.

The Trustee argues that Welzel and Section 506(b) preempt state law regarding attorney’s fees. The Court believes the Trustee overstates the case. The only portion of bankruptcy law  that “preempts” state law is the allowability of the statutory fees to an oversecured creditor as part of its secured claim in the bankruptcy case. The preemption is not as to attorney’s fees in general, or as to the recoverability of those fees from parties other than the Debtor. Nevertheless, the Trustee is correct that Welzel holds Section 506(b) limits the amount of attorney’s fees that are part of a secured claim.

The Court holds that the Welzel analysis applies in determining whether a surplus exists after foreclosure vis a vis a bankruptcy estate as long as the surplus remains property of the estate. It is important to note here that the property was never abandoned, either by notice or by operation of the closing of the case. Moreover, the stay relief order specifically reserved the right of the Trustee to the surplus and therefore the estate’s interest in the surplus. Consequently, the Bankruptcy Code continues to apply in determining the extent of that surplus.

Furthermore, this holding is consistent with the way secured lenders are treated throughout the bankruptcy case. There is no doubt under Welzel and Section 506(b) that SB&T’s secured claim would be limited to the amount of actual, reasonable attorney’s fees if the Trustee had sold the Property. Moreover, there is no doubt that, if the sale were held under 11 U.S.C. § 363 and SB&T chose to credit bid, the amount of the credit bid would be limited to actual, reasonable attorney’s fees. 11 U.S.C. § 363(k). There is, therefore, no reason to treat the determination of the surplus claim, which is also property of the estate, any differently. 

 The Court did not grant judgment for the Trustee, as factual issues remained.  This included whether SB&T actually received a windfall after its credit bid (if the property was worth less than the bid amount) and the "reasonable" fees of SB&T. 

The Trustee has made his prima facie case that the value of the Property equals the amount credit bid. The burden now shifts to SB&T to show that the value is less than the amount bid in. Still, the Trustee has the ultimate burden of establishing by a preponderance of the evidence his right to a refund.

We may or may not find out the answers to those questions, as the Trustee has appealed the Order. The Trustee contends in his Motion for Leave to Appeal (click here for .pdf) that the Court was in error in holding that SB&T did not necessarily reflect the extent to which SB&T recovered fees in excess of the reasonable fees allowed by § 506(b).  The Trustee believes that under well-settled state law, SB&T should be deemed to have received the entire amount of its credit bid, and thus liable to turn over the excess fees (whatever they may be) to the Trustee.  It will be interesting to see how this appeal proceeds. Theoretically, should the Trustee prevail, not only could SB&T get a property worth less than the loan balance it could also be liable to the Trustee for a significant amount of money ($200,000 or so, the Trustee contends).

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here