In re McCormick, 894 F.3d 953 (8th Cir. 2018)
In re McCormick, 894 F.3d 953 (8th Cir. 2018): The US Court of Appeals for the Eighth Circuit holds that attorney’s fees owed to an oversecured lender arose under the parties’ agreements, even though the borrowers’ obligations resulted in nonconsensual judgment liens that did not include an award of fees. This decision, if adopted in other Circuits, such as the US Court of Appeals for the Ninth Circuit (our Circuit for bankruptcy courts and US district Courts in California) increases the ability of oversecured creditors, to add attorneys fees to those creditors claims in bankruptcy cases. An oversecured creditor is a creditor which has a lien on collateral (real or personal property) of the bankruptcy debtor, and for which the value of that collateral, that the creditor could get by executing
FACTS: A secured lender entered into a series of agreements with a group of borrowers; all of the agreements contained provisions stating that the lender would be entitled to collect its attorney’s fees in the event of default.
After a default, the parties entered into a workout agreement, under which the lender agreed to forbear. The borrowers executed confessions of judgment totaling more than $3 million, to be filed if they defaulted on their workout obligations. When they did so, the lender filed the confessions of judgment, resulting in judgment liens.
The borrowers soon filed a Chapter 11 petition. After a complex (but irrelevant) procedural history, the lender sought and obtained an award of attorney’s fees under 11 U.S.C.A. §506(b), on the ground that it was oversecured and that the governing agreements contained fee clauses.
REASONING: On appeal, the borrowers argued that the agreement for fees was superseded by the entry of the judgments and that the lender was oversecured by operation of its nonconsensual judgment liens, rather than by virtue of the parties’ contractual agreements. The court rejected that argument:
We disagree with any notion that the judgment liens are somehow not part of [the lender’s] secured claim. The judgment liens came about because of the Workout Agreement wherein [the lender] agreed to forebear on various other (secured) loan defaults in return for the [borrowers’] executing confessions of judgments and providing additional collateral to [the lender]. [The lender] filed the confessions of judgments in North Dakota state court, resulting in the judgment liens. Attorney fee provisions were not allowed to be included in these judgment liens by operation of a North Dakota state statute . . . , but these judgment liens did not simply come out of left field. They were always part of the secured claim between [the parties] and came into being because [the lender] attempted to work with the debtors to collect on its secured debt, presumably to avoid what now seems was inevitable-bankruptcy proceedings.