FRANCIS G. CONRAD, Bankruptcy Judge.
This matter is before us on remand from the District Court and Debtor's modification of its Chapter 12 reorganization plan. We confirm Debtor's plan as modified.
BACKGROUND
Debtor and spouse operated a 138 acre dairy farm in Bridport and Cornwall, Vermont for several years. In 1988, Debtor encountered financial and marital difficulties (now divorced), and undertook to reorganize the dairy farm as a sheep farm. On August 12, 1988, Debtor commenced a Chapter 12 bankruptcy proceeding, 11 U.S.C. § 1201, et seq.
In 1986, Congress enacted Chapter 12 of the Bankruptcy Code, entitled "Adjustment of Debts of a Family Farmer with Regular Annual Income." Bankruptcy Judges, United States Trustees and Family Farmer Bankruptcy Act of 1986, Pub.L. No. 99-554, § 255, 100 Stat. 3105-3114 (codified as amended in various sections of 11 U.S.C. and 28 USC). Unless extended by Congress, the Family Farmer Bankruptcy Act of 1986 has a sunset date of October 1, 1993.
Bank has a first mortgage on Debtor's real and personal property for $84,600.
Debtor's initial Chapter 12 plan, 11 U.S.C. § 1222, proposed a 100% payment to allowed unsecured creditors, payable in monthly installments over a five year period. Debtor's plan also proposed a full present value payment to senior secured creditors. The present value payment would be made either through installments or by the surrender of collateral up to the value of the secured debt. Debtor's second and third real property mortgagees would, in turn, move up to first and second positions, respectively, and be paid in full.
Unhappy with Debtor's proposed treatment under the plan, Bank objected and, after a contested evidentiary confirmation hearing, we ruled from the bench that Debtor must surrender 118 acres in full satisfaction of Bank's secured claim. Debtor would retain the remainder of 20 acres subject to the respectively advanced second and third mortgagees.
Bank appealed our ruling on five grounds:
1. Debtor was not a "family farmer" under
11 U.S.C. § 101(17);
2. We erred by holding
11 U.S.C. § 1225(a)(5)(C) authorized Debtor to surrender less than all of the collateral without allowing Bank to retain a lien on the unsurrendered portion;
3. Our valuations of the Bridport and Cornwall properties were clearly erroneous;
4. Bank, as an over-secured creditor, is entitled to attorney fees by agreement and
11 U.S.C. § 506(b); and,
5. Bank is entitled to recover appraisal costs as an administrative expense under
11 U.S.C. § 503(b)(1)(A).
On appeal to the District Court, Chief Judge Billings reversed in part, affirmed in part, and remanded. First Brandon National Bank v. Kerwin-White, 109 B.R. 626 (D.Vt. 1990). Chief Judge Billings held:
1. Bank waived its objection to Debtor's eligibility as a "family farmer" because they "neglected to raise it before the bankruptcy court."
Id.,
109 BR at 629;
2. Debtor must either surrender all of its collateral to Bank under
11 U.S.C. § 1225(a)(5)(C) or, alternatively in a "cram-down" under
11 U.S.C. § 1225(a)(5)(B), surrender a portion of Bank's collateral up to the value of its debt and allow Bank to retain a lien on the unsurrendered portion of its collateral because Bank is an over-secured non-consenting creditor;
3. In
dicta,
affirmed our valuation on the Bridport property as not clearly erroneous because it was supported by evidence. Reversed the Cornwall valuation because it could not "discern [our] basis for its conclusion" to average comparables;
4. In
dicta,
affirmed our determination Bank was not entitled to attorney fees because their agreements provide for such fees only in the event of foreclosure and "cannot be interpreted as authorizing attorney fees in bankruptcy proceedings."
Id.,
109 BR at 633; and,
5. Affirmed our denial of Bank's request for its cost of appraisal under
11 U.S.C. § 503(b)(1)(A) because Bank failed to meet its burden that such costs "were necessary to preserve its own interest in the estate."
Id.,
109 BR at 633.
Debtor appealed to the Second Circuit Chief Judge Billings' holding that a Chapter 12 plan could not provide for a surrender of less than all of the collateral in satisfaction of an oversecured creditor's claim without also providing a lien on the unsurrendered collateral. Debtor also appealed the District Court's reversal of our valuation on the Cornwall property. Bank cross-appealed. After some procedural discussions at the Circuit level about finality, Bank and Debtor withdrew their respective appeals without prejudice, and returned the case to this Court.
See, Bowers v. Connecticut National Bank, 847 F.2d 1019, 1023 (2d Cir. 1988) (Courts of Appeals lack jurisdiction over appeals from orders of District Courts remanding to Bankruptcy Courts for significant further proceedings). Debtor claims it "has expressly reserved the right of subsequent appeal to the Court of Appeals on both these issues." Presumably, Bank has done likewise. See also, Consumer News and Business Channel Partnership v. Dow Jones/Group W Television Co. (In re Financial News Network, Inc.), 931 F.2d 217, 220 (2d Cir. 1991).
Upon return to us, Debtor filed its "Motion to Modify Plan of Reorganization" on April 19, 1990. Debtor added the following language to paragraph 6.4 of the plan: "claimant [Bank] shall retain its lien on the remaining property as security for any deficiency." Id., p. 1 (emphasis in original).
On June 6, 1990, we held a telephonic status conference where we overruled Bank's contention that a new plan of reorganization and de novo hearing were needed. We ruled, inter alia, a plan modification would suffice and scheduled a hearing on the modification only.
We also ruled the evidentiary record was adequate for purposes of revisiting our Cornwall property valuation. On June 21, 1990, we issued a Memorandum of Decision and Order on the valuation wherein we revised downward our original per acre valuation from $2,700 to $2,100. We denied Bank's Motion to Reconsider our valuation ruling on July 12, 1990. Bank filed a notice of an appeal on August 1, 1990. We stayed the effect of our valuation ruling until the issuance of the instant Decision to allow all issues to be resolved in one appeal.
On August 20, 1990, we heard all pending motions, including Debtor's "Motion to Modify Plan of Reorganization," Chapter 12 Trustee's request for a ruling on distribution of funds received under the plan, and Bank's Motion to Dismiss Debtor's Chapter 12 case. A post-hearing briefing schedule was fixed, after which we took all remaining issues under advisement.
At the hearing we ordered Trustee to withhold any payments made under the plan pending further direction from the Court.
Bank's Motion to Dismiss was withdrawn.
CLAIMS OF THE PARTIES
Debtor and Bank briefed the following claims:
1. Bank argues Debtor must either surrender all of Bank's collateral under § 1225(a)(5)(C), or Bank must retain its lien on the unsurrendered portion
pending sale of the surrendered property under § 1225(a)(5)(B). Debtor counters that a Chapter 12 debtor may satisfy an oversecured creditor by transferring collateral up to the full value of the creditor's allowed claim without the additional requirement that creditor must also retain a lien on the unsurrendered property.
(Debtor's
view is known in Chapter 12 jargon as "eat dirt.").
2. Bank argues District Court's reversal and remand requires a new confirmation hearing on a newly presented plan with newly presented evidence. Debtor counters its proposed plan modification complies with the District Court's requirement that Bank retain a lien on the unsurrendered property as security for any deficiency.
3. Bank challenges Debtor's eligibility as a "family farmer" under § 101(17). Debtor says Bank waived its right to contest Debtor's eligibility.
4. Bank argues our valuation finding on the Cornwall property is clearly erroneous while Debtor says our original valuation of the Cornwall property was correct.
5. Bank says the potential deficiency that is secured by the proposed lien on the unsurrendered collateral must also include interest, late fees, all costs of sale, and interim tax and insurance expenses that may result from a sale of the surrendered property. Debtor counters Bank failed to challenge the $86,500.00 allowed amount of its claim (except for adding attorneys' fees and appraisal costs that were denied by the District Court) and has therefore waived entitlement of these additions to its allowed claim.
6. In the event we approve Debtor's proposed modification, Bank asks that we also require judicial review prior to sale of the surrendered property to assure Bank the sale is "commercially reasonable." Debtor counters there is no Code provision that requires Court supervision over the conduct of a sale of surrendered property.
ISSUES PRESENTED
1. Whether the potential deficiency secured by the proposed lien on the unsurrendered collateral must include interest, late fees, all costs of sale, and interim tax and insurance expenses that may result from the sale of the surrendered property?
2. Whether the Court ought to condition its approval of Debtor's proposed plan modification upon our supervision over Bank's sale of its surrendered collateral to assure the sale is "commercially reasonable?"
DISCUSSION
Does the deficiency secured by the lien on the unsurrendered collateral include interest, late fees, all costs of sale, and interim tax and insurance expenses after we have fixed the value of the over-secured creditor's allowed secured claim? The short answer is no.
Bank sought "reassurance" that it is entitled to a first lien priority on the unsurrendered collateral vis a vis Debtor's second and third real property mortgagees. That is our understanding of Debtor's modification.
We deny Bank's request to these additional costs for three reasons. First, for the same reason the District Court denied Bank's request for attorney fees supra, we cannot allow a request to add late fees, all costs of sale, and interim tax and insurance, i.e., Bank's agreements provide for such items only in the event of foreclosure action and no such action was brought prior to Debtor's bankruptcy filing. See, First Brandon National Bank v. Kerwin-White, supra, 109 B.R. at 633. Second, Bank's request to add interest is untimely and deemed waived because it was made after we fixed the value of Bank's allowed secured claim under §§ 502 and 506. This aspect of our determination was not appealed to the District Court. Third, the District Court's ruling that Bank is entitled to a lien to secure a deficiency encompasses only the shortfall between what Bank realizes from a sale of surrendered property and its allowed secured claim.
Outside of bankruptcy, a consensual over-secured creditor is entitled to receive exactly what it bargained for under its agreements. The same is true inside bankruptcy, i.e., the over-secured creditor gets the value of its allowed secured claim under §§ 502 and 506, and, to the extent the agreements giving rise to its allowed claim expressly provide, reasonable fees, costs or charges. Additionally, the over-secured creditor with an allowed secured claim in bankruptcy is entitled to interest whether or not provided for by its agreements:
(b) To the extent that an allowed secured claim is secured by property the value of which . . . 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.
11 U.S.C. § 506(b).
United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (a non-consensual creditor is entitled to receive post-petition interest on allowed over-secured claim under § 506(b). Consensual over-secured creditors with allowed claims are entitled to post-petition interest, reasonable fees, costs, and charges under § 506(b) to the extent provided for in their agreements).
Ron Pair and § 506(b) instruct us to treat "interest on such claim[s]" separately from "reasonable fees, costs, and charges," i.e., an over-secured creditor with an allowed secured claim is entitled to interest as a matter of law, whereas "reasonable fees, costs, or charges" must arise by an agreement. 11 U.S.C. § 506(b); United States v. Ron Pair Enterprises, Inc., supra. Thus, we meet Bank's request for interest separately from its request for late fees, all costs of sale, and interim tax and insurance expenses.
We first address Bank's request for late fees, all costs of sale, and interim tax and insurance expenses. In the proceeding sub judice, the operative agreements are the parties' promissory note-security agreements and the mortgage deed. The front side of the note form incorporated the Mortgage Deed:
I give you a security interest in the property described below. The rights I am giving you in this property and the obligations this agreement secures are defined on the reverse side of this form. . . .
The reverse side of the note form states:
DEFAULT AND REMEDIES — I will be in default on this agreement if any event specified in the `Default' paragraph of the note occurs. If I am in default on this agreement or on any secured obligation, you have all of the remedies provided in the note or other obligation and all of the remedies provided below
and by law. You may:
(b) take immediate possession of the property and sell, lease or dispose of it, as provided by law. You may apply the proceeds of disposition to your expenses (including costs of repossession, attorneys' fees (if permitted), repairs (if necessary) and costs of sale) and then to payment of the secured obligations.
(Underscore in original). The Mortgage Deed provides:
In case this mortgage shall be foreclosed and a decree obtained thereon, there shall be included in such decree a reasonable solicitor's fee, in addition to all taxable costs allowed by law.
As noted supra, the District Court held Bank was not entitled to attorney fees because its agreement "effectively limits the grant of attorneys' fees to acts pertaining to foreclosure, [the agreement] cannot be interpreted as authorizing attorneys' fees in bankruptcy proceedings. . . ." First Brandon National Bank v. Kerwin-White, supra, 109 B.R. at 632-33. Accord, In re Trombley, 31 B.R. 386, 388 (Bkrtcy.D.Vt. 1983) (over-secured creditor is not entitled to attorney fees under § 506(b) because it did not initiate foreclosure action as required under its mortgage note agreement); In re International Coins Currency, Inc., 26 B.R. 256, 259-60 (Bkrtcy.D.Vt. 1982) (attorney fees allowed where required criteria in agreement was met).
The District Court's rationale for its denial of Bank's attorney fees wholly applies to our denial of Bank's request to add late fees, all costs of sale, and interim tax and insurance expenses. Bank's agreements provide for such charges only in the event it initiates a foreclosure action, and no such action was brought here.
Moreover, as noted supra, the District Court's Decision required that Bank receive a lien on its unsurrendered collateral to secure a potential deficiency that may result from Bank's sale of its surrendered collateral. That deficiency is limited to the amount of short-fall between the allowed fixed secured claim and the sale. Thus, the deficiency does not cover the additional items sought by Bank.
Lastly, the District Court's Decision denying Bank's request for attorney fees is further evidence that the District Court did not intend Bank would be permitted to add late fees, all costs of sale, and interim tax and insurance expenses to its fixed allowed claim. As we have just said, the District Court's denial of Bank's attorney fees runs directly to our denial today. To permit Bank's request to add costs in the event there is a deficiency would in effect allow Bank to succeed on an approach that the District Court directly prohibited; if its not in the parties agreement, the creditor does not get it. Bank's request is nothing more than a hollow attempt to get around the limitations set by its agreements, § 506, and the District Court's instructions.
Bank's request for interest is addressed next. In the proceeding sub judice, we had fixed the value of Bank's secured allowed claim at $84,600. Bank did not challenge that fixed amount either before or during its appeal to the District Court. Its right to do so now is considered waived.
The District Court's Decision is not a license for Bank to add items it had failed to anticipate before we fixed its allowed secured claim. As we just observed with respect to our denial of Bank's request to add certain costs, supra, the District Court's Decision instructed that the lien used to secure Bank's deficiency is limited to Bank's potential short-fall between a sale of the surrendered collateral and Bank's allowed secured claim. Moreover, the District Court's Decision instructed that we were to re-value certain collateral, not revisit the fixed amount of Bank's allowed secured claim. Thus, we reject Bank's attempt to resurrect its neglected entitlement to interest under § 506(b), and we reject Bank's overreaching of the District Court's limited instructions on remand. Our holding here renders moot Bank's request for guidance on how the proceeds of its sale would be applied against "accumulated interest, late fees and costs of sale."
The last issue to be decided is whether we ought to condition our approval of Debtor's plan modification upon judicial approval of Bank's sale of its surrendered collateral to assure the sale is "commercially reasonable." We decline Bank's invitation.
Bank's use of the phrase "commercially reasonable" in its argument appears to be a term of art borrowed from the disposition of goods under Article 9 of the Uniform Commercial Code. "[E]very aspect of the disposition including the method, manner, time, place and terms must be commercially reasonable." 9A Vt.Stat.Ann. § 9-504(3). Chittenden Trust Company v. Maryanski, 138 Vt. 240, 243-244, 415 A.2d 206 (1980) (Vermont Supreme Court interpreted "commercially reasonable" under § 9-504(3) to place "positive duty" on the secured party to utilize its good faith efforts to maximize the value of the collateral). See, In re Boring, 91 B.R. 791, 795, n. 2 (Bkrtcy.S.D.Ohio 1988), citing, In re American Kitchen Foods, Inc., 2 BCD 715 (Bkrtcy.D.Me. 1976). Our ruling today does not require us to address whether Vermont Law applies a "commercially reasonable" requirement to real estate transactions.
This issue provides us with yet another reason for our disagreement with the District Court's conclusion an over-secured creditor is entitled to a surrender of collateral equal to the amount of its allowed secured claim plus a lien retention on unsurrendered collateral to secure a potential shortfall that may arise from a sale of the surrender of collateral. Our reversed bench ruling required Debtor to surrender Bank's collateral to the extent of Bank's allowed secured claim. The amount of Bank's fixed secured claim, total value of Bank's collateral and total amount of surrendered collateral necessary to satisfy Bank's allowed secured claim were determined by that ruling. If there was a potential deficiency between the value of the collateral that was being surrendered and the fixed amount of Bank's allowed secured claim, it was the parties' obligation to litigate it before our ruling. Instead of the finality that ought to have been accorded to our ruling, the District Court's Decision invites a continuation of the very uncertainties such as the one Bank now seeks to avoid.
Bank concedes there is no requirement in the Bankruptcy Code for prior Court approval of a creditor's sale of collateral after it has been surrendered in satisfaction of the creditor's allowed secured claim. The absence of such a provision is understandable because neither the Debtor nor its estate has any interest left in property once it has been surrendered to the creditor under a plan of reorganization. Indeed, the surrendered collateral is vested in the creditor upon confirmation. 11 U.S.C. § 1227(b).
Bank suggests we should exercise our equitable powers under 11 U.S.C. § 105 and require prior judicial approval of Bank's sale because our involvement may limit potential disputes. The history of the litigation between Bank and Debtor suggests otherwise. Assuming arguendo our participation would have that desired effect, we decline to do so because it is premature. Our participation may be rendered moot if there is no deficiency.
CONCLUSION
We conclude on the six claims briefed by the parties in the order presented to us.
First, although we disagree with our District Court's Decision submitting Bank is entitled to retain a lien on the unsurrendered portion of Debtor's collateral, First Brandon National Bank v. Kerwin-White, supra, 109 B.R. at 630, we are bound by the District Court's Decision under the "Law of the Case" doctrine.
Second, we have already determined the District Court's reversal and remand does not require a new plan of reorganization and de novo hearing because Debtor's proposed plan modification complies with the District Court's lien retention requirement.
Third, the District Court's ruling that Bank had waived its Debtor's eligibility defense, First Brandon National Bank v. Kerwin-White, supra, 109 B.R. at 628-29, is now the "Law of the Case."
Fourth, we have already ruled the evidentiary record was adequate for purposes of revisiting our Cornwall property valuation and issued our Decision. Memorandum of Decision on Valuation, Conrad, B.J., June 21, 1990.
Fifth, we deny Bank's request to add late fees, all costs of sale, and interim tax and insurance expenses because Bank's agreements provide for such charges only in the event of a foreclosure action, and no such action was brought. We deny Bank's request to add interest because it is untimely and deemed waived.
Sixth, we decline to decide whether approval of Debtor's proposed plan modification should be conditioned upon judicial review of Bank's sale of its surrendered collateral because it would not be debtor's property under § 1227(b), and because such a determination would be premature.
Lastly, Bank sought "reassurance" that it is entitled to a first lien priority on the unsurrendered collateral vis a vis Debtor's second and third real property mortgagees. That is our understanding of Debtor's modification.
Debtor, on notice to Bank, is to submit an Order confirming its modified Chapter 12 plan in accordance with this Decision.