IN RE GLOBE STORE ACQUISITION CO., INC. (Bankr.M.D.Pa. 2000)

JOHN THOMAS, Bankruptcy Judge

On December 7, 1998, I entered an Order confirming the Debtor's First Amended Plan of Reorganization. Pursuant to that Plan at paragraphs VIII and XIII, the Debtor was authorized to file objections to claims filed against the estate. On July 14, 1994, PNC Bank N.A. (hereinafter PNC or Bank) filed a Proof of Claim asserting a secured claim in the amount of $15,000.00. Thereafter, PNC filed an Amended Proof of Claim asserting a secured claim in the amount of $57,000.00 plus an undetermined amount for future costs in the defense of certain litigation with the City of Scranton and any undetermined liability of PNC to the City of Scranton for which the Debtor would be liable over to PNC. On March 8, 1999, the Debtor filed a First Omnibus Objection to Claims.

The objection, which contains several objection codes, placed PNC's claim into classification C with a general objection reading as follows:

The claimant filed a proof of claim in an amount which exceeds the amount reflected in the Debtor's books and records as being owed to such claimant and such claimant asserts administrative, priority or secured status for the claim, or a portion of the claim, to which the claimant is not entitled; therefore, the claim must be reduced and reclassified as a general unsecured claim.

Pursuant to a Revolving Credit and Term Loan Agreement, PNC loaned the Debtor $5,000,000.00 and, subject to a borrowing formula, extended the Debtor a line of credit in the amount of $1,500,000.00. These obligations were secured by a first priority perfected security interest in all the Debtor's accounts, inventory, equipment, chattel paper, instruments, and general intangibles, and the proceeds of all of the foregoing. Shortly after the case was filed, and following a liquidation of the Debtor's inventory, the Debtor's pre-petition obligations to PNC were paid in full.

In the meantime, the City of Scranton initiated litigation against PNC in the Court of Common Pleas of Lackawanna County to recover damages incurred by the City in connection with a loan the City made to the Debtor through its Office of Economic and Community Development (the Scranton litigation). The Scranton litigation sought the imposition of a constructive trust against the Bank and alleged PNC fraudulently misrepresented the money obtained from the City would be used by the Debtor for working capital and inventory when it was actually used to pay down the Debtor's obligation to PNC pursuant to the terms of the loan agreement between the Debtor and PNC. The loan, which was to be secured by certain of the Debtor's assets, was not perfected until just prior to the bankruptcy filing and was later reduced to an unsecured obligation as a result of the settlement of a preference action against the City.

The Amended Proof of Claim requests reimbursement of the fees and expenses of PNC associated with the Scranton litigation and other post-petition collection activities such as its participation in a Rule 2004 examination. The request for $57,000.00 contained in the Amended Proof of Claim was supplemented at the time of hearing. PNC seeks reimbursement for post-petition related fees and costs in the amount of $26,674.74 and fees and costs associated with the Scranton litigation consisting of actual fees of $50,900.53 and estimated future fees and costs associated with a possible appeal of $30,000.00. The total request is for $107,575.27.

The Debtor made the following arguments at the hearing on the objections and in its brief in support of the objections. The fees requested by PNC are not authorized by the terms of the loan documents. Under the Bankruptcy Code, fees will be allowed a secured creditor only if they are allowed under § 506(b), are provided for under the agreement, and are permissible under state law. In the Debtor's brief filed subsequent to the hearing, it raised the lack of evidentiary support for that portion of the proof of claim requesting fees and costs associated with the future appeal of the Scranton litigation. The Debtor further argues the Scranton litigation and certain of the petition-related activities such as the 2004 examination are not covered by the indemnification provisions which are ambiguous at best and should be construed strictly against the party attempting to enforce the clause in its own favor. Further, PNC was not sued because it entered into a loan agreement with the Debtor. In short, there is nothing in the loan agreement that contemplates indemnification for either PNC's participation in this bankruptcy or the Scranton litigation.

The Debtor also relies on equity to support its objection. It asserts that under 11 U.S.C. § 552, I can determine the equities of the case warrant the treatment of PNC's attorney fees and costs as unsecured. The Debtor lists several reasons why I should find PNC's claim unsecured on page 13 of its brief. Notably, no supporting case law was cited in support of this position.

Predictably, PNC's position is the flip side of the same coin. PNC draws our attention to the same indemnification language of the agreement. Where the Debtor sees ambiguity, PNC sees clear language delineating tasks and responsibilities of the parties.

PNC argues that the requirements of § 506 were met entitling PNC to payment of all its fees and costs because the Debtor still had over $1,000,000.00 in funds after the sale of the Debtor's assets and payment of the outstanding obligations under the agreement Moreover, not only is PNC an oversecured creditor but the fees were clearly contemplated by the agreement. More specifically, the fees relating to the bankruptcy case were incurred in connection with the enforcement of and in the exercise of PNC's rights under the agreement and in respect to an action instituted against PNC with respect to entering into the agreement. Otherwise, the Scranton litigation is an action contemplated by the indemnification agreement which entitles PNC fees and costs for its involvement in any legal suit, including preparation of a defense as a consequence, direct or indirect, of PNC's entering into the agreement.

At the hearing, the parties agreed there was really no dispute about the nature and extent of PNC's security interest or the reasonableness of fees. Rather, the issue centered on whether the services requested fell within the general indemnification provisions of the loan agreement.

DISCUSSION

My analysis starts with § 506(b).

§ 506. Determination of secured status

(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.

The Supreme Court wrote that the "[r]ecovery of fees, costs and charges . . . is allowed only if [such fees] are reasonable and provided for in the agreement under which the claim arose." United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 1030, 103 L.Ed.2d 290 (1989). To recover fees and costs in this case, PNC must establish: (1) that it is oversecured in excess of the fees requested; (2) that the fees requested are reasonable; and (3) that the agreement giving rise to the claim provides for attorney's fees. In re Schriock Const., Inc., 104 F.3d 200 (8th Cir. 1997).

Paragraph 7.21 of the loan agreement reads as follows:

7.21 Indemnification. To the extent permitted by applicable law, Borrower hereby agrees to indemnify and hold harmless Bank (and its directors, officers, employees and agents) from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorneys' fees) whatsoever which Bank may incur (or which may be claimed against Bank by any person or entity whatsoever) by reason of or in connection with (a) the payment or failure to pay under the Notes, (b) any breach by Borrower of any representation, warranty, covenant, term or condition in, or the occurrence of any default under, this Agreement, the Notes or the other Loan Documents, including all reasonable fees or expenses resulting from the settlement or defense of any claims or liabilities arising as a result of any such breach or default, and (c) involvement of Bank (including preparation for a defense) in any legal suit, investigation, proceeding, inquiry or action as a consequence, direct or indirect, of Bank's entering into this Agreement or any of the Loan Documents or any other event or transaction contemplated by any of the foregoing; provided Borrower shall not be required to indemnify Bank (and its directors, officers, employees and agents) for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, such claim, damage, loss, liability, cost or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have been caused by the willful misconduct or gross negligence of Bank. The provisions of this Section shall be and remain effective notwithstanding the cancellation of any of the Notes, the release of any collateral held by the Bank or any other action which the Bank may have taken in reliance upon its receipt of such payment, and Section shall survive the termination of this Agreement and the other Loan Documents, notwithstanding the payment of the Notes, or the release of any collateral securing the Notes. (Emphasis ours)

(PNC Exhibit 1)

The language of the indemnification clause found at paragraph 7.21 is extremely broad. Contrary to the Debtor's position, it is not ambiguous. I find that both the Scranton litigation and PNC's post-bankruptcy activities including the collection of its debt and participation in a 2004 examination, constitute "involvement of Bank (including preparation for a defense) in any legal suit, investigation, proceeding, inquiry or action as a consequence, direct or indirect, of Bank's entering into this Agreement or any of the Loan Documents or any other event or transaction contemplated by any of the foregoing;. . . ." The objection, taken together with the responses and documents submitted at time of hearing, convinces me that all the actions by PNC in this case are, at least, an indirect consequence of the parties entering into the loan agreement.

Whether the entire amount of the requested fees and costs will be allowed is another question. The total amount requested is $107,575.27. I will allow a portion of the amount requested.

The Debtors ask that I disallow $500.00 of the claim as it relates to the preparation of a security agreement of Broadway Theater and $1,384.00 relating to PNC's administration of the Debtor's 401(k) plan. Neither amount falls within the purview of the loan agreement and PNC did not address this part of the objection in either its brief or reply brief or at the hearing. I will disallow those charges.

Of more significance is that portion of the claim in the amount of $30,000.00 representing an estimate of future fees and costs in the Scranton litigation. On page 5 footnote 2 of the memorandum in support of its objection, the Debtor, addressing the future costs and fees argued, inter alia, that these fees and costs should be denied due to the total lack of evidentiary support for such speculative claims. The burden of going forward with refuting the prima facie validity of the claim is on the objector (Debtor). In re Allegheny International, Inc., 954 F.2d 167 (3rd Cir. 1992). I find the Debtor has presented me enough to shift the burden of proving the validity of the claim to PNC. With the burden shifting to PNC, it must prove the validity of its claim by a preponderance of the evidence. Id. at 174. While the Debtor's objection to the claim is generally unsustainable, I cannot find any support in the record by way of testimony, documentation, or argument of counsel, which convinces me to grant such an unsupported and speculative request on behalf of PNC for future fees and costs and I will deny that portion of PNC's Proof of Claim.

The Debtor also requests I find the claim to be unsecured under the provisions of 11 U.S.C. § 552(b).

§ 552. Postpetition effect of security interest

(b)(1) Except as provided in sections 363, 506(c), 522, 544, 545, 547, and 548 of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired beforethe commencement of the case and to proceeds, product, offspring, or profits of such property, then such security interest extends to such proceeds, product, offspring, or profits acquired by the estate after the commencement of the case to the extent provided by such security agreement and by applicable nonbankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise. (Emphasis ours)

The Debtor set forth what it calls seven equitable factors which I should consider to treat PNC's otherwise secured claim as unsecured under § 552(b). The Debtor principally relies on the public policy argument. The Debtor argues that "allowing a creditor to be reimbursed in full for fees associated with objecting to and complying with a creditors' (sic) committee's 2004 Examination would have a chilling effect on such examinations, discouraging debtors and others from properly discharging their statutory and fiduciary duties." See Debtor's Brief at page 13.

The agreement providing for the payment of these fees was entered into at arms length between two sophisticated parties. Each is getting the benefit of their bargain with neither side arguing that they did not understand its terms. Both parties have recognized the validity of indemnification agreements and I am not persuaded to ignore the terms of a legally binding contract between the parties because there may otherwise be an increased distribution to unsecured creditors. Further, none of the other reasons cited by the Debtor compel me to order PNC's claim be treated as unsecured. Finally, the Debtor's brief did not provide any case law to support its position. In short, I deny the request to treat PNC's debt as unsecured.

An Order will follow.

ORDER

For those reasons indicated in the Opinion filed this date, I grant, in part, and deny, in part, Debtor's Objection to the Claim of PNC Bank N.A. I deny those portions of the claim requesting fees for preparation of a security agreement for Broadway Theater, PNC's administration of the Debtor's 401(k) plan, and all future fees and costs associated with a possible appeal of the Scranton litigation. I grant the remaining fees and costs of the claim in the amount of $75,691.27 and allow same as secured.