A creditor wants to know if he should be represented by an attorney, and if the legal costs will be recovered from the borrower in a Chapter 13 case. Believe it or not, we sometimes get questions from creditors asking how they can collect the money owed to them by a person who has filed bankruptcy.
This was the case for a person that held the mortgage on real property owned by a borrower who filed Chapter 13:
I am a secured creditor in a chapter 13 case. My security is a note secured by a deed of trust on a commercial property where the debtor runs his business.
The debtor has been timely in making his monthly interest only payments and assures me that his timely payments will continue. There is a meeting of creditors soon and the deadline for objections to his plan and the confirmation hearing are also approaching.
The note is secured by a Deed of Trust that contains pretty good language saying I can recover my lawyer fees if I’m “required to retain an attorney to enforce” my rights and if I’m the “prevailing party.”
Here are my questions:
● Should I file proof of claim?
● Should I attend the creditors meeting? The confirmation hearing?
● Do I need an attorney to represent me in this matter and to attend any necessary hearings and meetings in order to protect my interests?
● If I hire an attorney, what will my costs be and will I recover my costs?
We are providing the following for information purposes only. It is not intended and should not be taken as legal advice. But we think this information will be useful to our subscribers and others that face bankruptcy either as debtors or creditors:
I certainly do recommend that you hire an experienced bankruptcy attorney. You don’t mention the value of your note, but I assume it is very valuable and likely worth spending some money to make sure that you are protecting it to the extent possible.
Legal fees could be $2,500 for an evaluation of your rights and the basic steps that are necessary to protect your note and deed of trust. Of course, nobody wants to spend money needlessly. It is always possible that you could do absolutely nothing and still come out just fine. In a case like this, legal fees are just an unfortunate cost of doing business, the same as banks face every day. However, they have legal departments and expect to spend money to protect their assets. While you may not have expected such an expense, you have the same risks and exposure that banks have.
By carrying a note (perhaps if you sold the underlying business or property) you have put yourself in the banking business—which means there is “overhead” involved in conducting your “new” banking business. If you want to make sure that you are not stumbling around in the dark and that you are not accidentally doing anything detrimental to your new business, then hire yourself a lawyer.
I don’t know if the fees would be recoverable. You can try, but probably not if the debtor objects. I wonder if a lawyer drafted your note? I suspect a broker or an escrow agent prepared it?
The word “enforce” is very troublesome. I do not like seeing that term in your note. If it had said “protect,” I would be more optimistic that your fees are recoverable. Doing basic legal servicing on your note, such as filing a proof of claim, reviewing the Plan and other documents etc. probably does not qualify as “enforcing” the note. It is really more in the nature of “protecting” your rights in the note (kind of like the difference between watering your lawn as opposed to replanting bad areas in the grass.)
It may well turn out that no legal action needs to be commenced to “enforce” it, particularly if the debtor continues to pay as agreed. Most professional lenders stopped using the term “enforce” back in the 1980s because of this precise reason! They got burned; and then they changed the wording in their legal documents.
Recovery of fees can also hinge on whether your note is fully secured or only partially secured by the value of the property. It is partially secured if the real property is a little “upside down” and fully secured if the property has equity.
ShareBayer, Wishman & Leotta is a full service bankruptcy firm. We have offices in Downtown Los Angeles, West Los Angeles, the San Fernando Valley and Long Beach. Our attorneys are Certified Specialists in consumer and small business bankruptcy and you may reach us at (800) 477-3111.
This is good advice.