Opinion
Case No. 2:06cv26.
December 7, 2007
OPINION AND ORDER
Plaintiff-Appellant Chase Manhattan Mortgage Corporation ("Chase" or "Creditor") appeals an Order by the United States Bankruptcy Court for the Southern District of Ohio ("Bankruptcy Court"), dated December 9, 2005 (Doc. 1, Ex. 19). The Bankruptcy Court, in its December 9, 2005 Order, ruled in favor of the Defendants-Appellees, Paul Allen Tudor and Phyllis Jean Tudor (collectively, "Tudors" or "Debtors"), sustaining the Tudors' objection to the allowance of attorneys' fees in Chase's arrearage claim, but overruling the Tudors' objection to the allowance of costs. Chase appeals the portion of the Bankruptcy Court's Order sustaining the Tudors' objection to the allowance of attorneys' fees (Doc. 6). For the reasons that follow, the Bankruptcy Court's decision is AFFIRMED.
I. ISSUES ON APPEAL
Plaintiff-Appellant Chase, in its brief in support of appeal, unnecessarily lists four separate "issues presented" for this Court to determine. (Brief of Plaintiff-Appellant at 2-3). The issues listed by Chase are more appropriately condensed into the following two issues raised by this appeal: (1) Did the Bankruptcy Court err in applying Ohio common law to find that the recovery of attorneys' fees is not an allowable component of an arrearage claim in a Chapter 13 case?; and (2) Did the Bankruptcy Court err in finding that the Mortgage's reinstatement provision was not triggered when the Tudors elected to cure their defaults under the Note and Mortgage pursuant to 11 U.S.C. § 1322(b)(5)?
II. JURISDICTION AND STANDARD OF REVIEW
This Court has jurisdiction to hear this appeal by virtue of 28 U.S.C. § 158(a)(1).
This Court, acting as an appellate court, is bound by the Bankruptcy Court's findings of fact unless the findings are clearly erroneous. See Federal Rules of Bankruptcy Procedure, Rule 8013. The clearly erroneous standard as explained by the Supreme Court is as follows: "a finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395 (1948); United States v. Ayen, 997 F.2d 1150, 1152 (6th Cir. 1993).
This Court reviews the Bankruptcy Court's conclusions of law de novo. In Re Caldwell, 851 F.2d 852, 857 (6th Cir. 1988). De novo review requires the "appellate court [to determine] the law independently of the trial court's determination." In re Ravenswood Apartments, Ltd., 338 B.R. 307, 310 (B.A.P. 6th Cir. 2006) ( quoting Treinish v. Norwest Bank Minn., N.A. ( In re Periandri), 266 B.R. 651, 653 (B.A.P. 6th Cir. 2001)). Essentially, the reviewing court decides the issue as if it had not been heard before. In re Marketing Creative Solutions, Inc., 338 B.R. 300, 302 (B.A.P. 6th Cir. 2006).
Equitable determinations are within the sound discretion of the bankruptcy judge and will not be disturbed absent abuse of discretion. In Re M.J. Waterman Assoc., Inc., 227 F.3d 604, 607 (6th Cir. 2000). A bankruptcy court is considered to have abused its discretion when a reviewing court is "left with the definite and firm conviction that the [bankruptcy] court committed a clear error of judgment in the conclusion it reached upon a weighing of the relvant factors." United States v. Haywood, 280 F.3d 715, 720 (6th Cir. 2002).
III. FACTUAL AND PROCEDURAL BACKGROUND
The following facts are not disputed and are taken in part from the Parties' Joint Stipulations of Facts. (Doc. 1, Ex. 9).
On March 15, 2002, the Tudors borrowed $100,000 from Chase to finance their purchase of a single-family residence located in Pataskala, Ohio. The loan is evidenced by a promissory note ("Note"), executed and delivered on March 12, 2002. To secure their payment obligations under the Note, the Tudors executed a mortgage/security agreement ("Mortgage"), granting a lien on their home.
On November 24, 2003, Chase filed a foreclosure action against the Tudors in Licking County Common Pleas Court, alleging that they had defaulted on their payments under the Note and Mortgage. In conjunction with the judicial foreclosure proceeding, Chase expended $350.00 for its preliminary title work, $100.00 for its title update, and $950.00 in attorneys' fees. See Proof of Claim (Doc. 1, Ex. 19).
On December 15, 2003, the Tudors responded by filing a voluntary petition in the Bankruptcy Court for relief under Chapter 13 of the Bankruptcy Code, proposing to cure the alleged default. The parties agree that Chase is an oversecured creditor; i.e., the value of the home securing Chase's claim exceeds the Tudors' outstanding mortgage debt. The Tudors' filing of bankruptcy stayed the judicial foreclosure proceeding under the automatic stay provisions of 11 U.S.C. § 362. In conjunction with the initial filing of Tudors' Chapter 13 petition, Chase expended $125.00 in attorneys' fees. See Proof of Claim (Doc. 1, Ex. 18).
This case was filed prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") on April 20, 2005 and prior to the October 17, 2005 effective date of BAPCPA. The amendments to the Bankruptcy Code made by BAPCPA are not applicable to this case. Therefore, all references and citations to, or quotations of specific Code provisions, shall refer to the Code (or particular sections of the Code) prior to its amendment by BAPCPA.
On February 18, 2004, the Bankruptcy Court confirmed the Tudors' Chapter 13 plan. (Doc. 1, Ex. 4). Pursuant to the Tudors' proposed plan of reorganization, the Tudors' elected to cure their defaults under the Note and Mortgage pursuant to 11 U.S.C. § 1322(b)(5). See Chapter 13 Plan (Doc. 1, Ex. 2).
Chase, to protect its rights under the Note and Mortgage, filed a proof of claim, and on April 12, 2004, filed an amended proof of claim, which is the proof of claim at issue. Chase's proof of claim consisted of a principal balance of $98,736.98 and an arrearage of $9,230.35 ("Arrearage Claim"). Chase's Arrearage Claim included attorneys' fees totaling $1,075.00 ("Fees") and costs totaling $826.02 ("Costs"). On April 26, 2004, the Tudors objected to the inclusion of the Fees and Costs. (Doc. 1, Ex. 5). The Tudors did not dispute that the Fees and Costs were incurred and expended, nor did they contest the reasonableness, truth and accuracy of the alleged Fees and Costs. Instead, the Tudors argued that Chase may not recover the Fees and Costs under Ohio law. See id. Thus, the limited issue before the Bankruptcy Court was whether the Fees and Costs were allowable components of Chase's Arrearage Claim.
On June 22, 2004, the Bankruptcy Court heard the objection, and further oral argument followed on October 28, 2004. By Order entered December 9, 2005, the Bankruptcy Court sustained the Tudors' objection to the inclusion of the Fees and overruled the Tudors' objection to the allowance of the Costs. (Doc. 1, Ex. 19). The Bankruptcy Court, in its Memorandum Opinion, relied on Ohio common law to find that the Fees were not an allowable component of Chase's Arrearage Claim. (Doc. 1, Ex. 18). In addition, the Bankruptcy Court held that the fundamental differences between a contractual mortgage reinstatement and the statutory cure right afforded by § 1322(b)(5) of the Bankruptcy Code compelled rejection of Chase's argument that the Mortgage's reinstatement provision provided a basis for Chase to recover the Fees. Id.
On January 11, 2006, Chase initiated the instant case by its Notice of Appeal. (Doc. 1).
IV. DISCUSSION
Section 1322(b)(5) of the Bankruptcy Code allows a Chapter 13 debtor to cure defaults on long-term debts as part of the Chapter 13 plan. 11 U.S.C. § 1322(b)(5). The Tudors invoked this statutory option as part of their Chapter 13 plan. Under Section 1322(e), "the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law." 11 U.S.C. § 1322(e). "The amount of . . . cure is determined by looking at two sources: (1) the existing agreement between the parties; and (2) applicable nonbankruptcy law. . . ." In re Lake, 245 B.R. 282, 285 (Bankr. N.D. Ohio 2000).
In the instant case, the parties agree that the underlying agreements, the Note and Mortgage, are governed by Ohio law. The Mortgage indisputably authorizes Chase to recover its attorneys' fees in the event of default. See Mortgage, §§ 9, 14, and 22. A fourth attorney fee provision in the Mortgage requires the payment of Chase's "expenses incurred in enforcing the [Mortgage], including . . . reasonable attorneys' fees," if the Tudors exercise their contractual right to reinstate the Mortgage after default ("Reinstatement Provision"). Thus, the only matters in dispute between the parties are (1) whether Ohio law permits enforcement of the Mortgage's attorney fee provisions; and (2) whether the Reinstatement Provision provides a basis for Chase to collect its Fees.
The Bankruptcy Court concluded that Ohio common law does not permit enforcement of the Mortgage's attorney fee provisions, and consequently, the Fees are not a proper component of Chase's arrearage claim. (Memorandum Opinion at 24-40). In reaching this conclusion, Judge Hoffman relied on Miller v. Kyle, 85 Ohio St. 186 (1911), and courts interpreting Miller, that "have consistently held that attorney fee provisions in debt instruments are void as against public policy." (Memorandum Opinion at 26). After thoroughly examining the exceptions to Miller, the Bankruptcy Court concluded that the recognized exceptions were inapplicable, specifically rejecting Chase's contention that the reinstatement exception provided a basis for collecting its Fees. (Memorandum Opinion at 24-40). Finally, the Bankruptcy Court rejected Chase's assertion that the doctrine of equitable estoppel requires the allowance of the Fees, describing such an argument as "border[ing] on the frivolous." (Memorandum Opinion 12, 43-46).
On Appeal, Chase argues that the Bankruptcy Court erroneously interpreted and applied Ohio common law. (Brief of Plaintiff-Appellant at 2, 7). More specifically, Chase argues that Miller "has no application to the case at bar." (Brief of Plaintiff-Appellant at 8). Instead, Chase claims that "no Ohio case has addressed the issue," and this Court must therefore consider the "cases decided in the analogous context of a mortgage reinstatement and . . . the underlying principles driving the development of Ohio's public policy relating to the enforceability of attorney-fee provisions in contracts." (Brief of Plaintiff-Appellant at 9).
The Court will examine each of Chase's arguments in turn.A. Burden of Proof
Once a debtor makes a colorable challenge to a proof of claim, the burden of going forward shifts to the creditor, and the creditor bears the ultimate burden of persuasion. In re Morton, 298 B.R. 301, 307 (B.A.P. 6th Cir. 2003).
Here, the Tudors have made a valid challenge to the Arrearage Claim based upon their assertion that Ohio common law bars recovery of the Fees, thus shifting the burden of going forward to Chase. For the reasons set forth below, this Court, like the Bankruptcy Court, finds that Chase has not met its ultimate burden of persuasion with respect to the Fees.
B. Applicable Nonbankruptcy Law
Chase has challenged the Bankruptcy Court's interpretation of Ohio common law, and specifically the applicability of Miller. Therefore, as suggested by Chase, this Court will first review Ohio common law and the articulated purposes driving Ohio's public policy relating to the enforceability of attorney fee provisions in debt instruments. (See Brief of Plaintiff-Appellant at 8-9).
1. Ohio Common Law
In analyzing questions of state law, this Court "must apply state law in accordance with the controlling decision of the highest court of the state." Meridian Mut. Ins. Co. v. Kellman, 197 F.3d 1178, 1181 (6th Cir. 1999).
In 1841, the Ohio Supreme Court first ruled that contractual stipulations for the payment of attorney fees "are against the public policy of the country, and ought not to be enforced in courts of justice." State v. Taylor, 10 Ohio 378, 381 (1841). Taylor involved a contract stipulation requiring the "borrower should pay the expenses of collection." Id. at 381. The Taylor court explained that such stipulations, if permitted, would create a "means of legalized extortion." Id. Similarly, in 1893, the Ohio Supreme Court examined a mortgage provision allowing the mortgagee to recover attorney fees in a foreclosure decree in the event of a default. Leavans v. Ohio National Bank, 50 Ohio St. 591, 591 (1893). The Leavans court found the provision to be unenforceable, holding that "a stipulation in a mortgage to the effect that, in case an action should be brought to foreclose it, a reasonable attorney fee, to be fixed by the court . . . should be included in the decree . . . is against public policy and void." Id. at paragraph one of the syllabus. In Miller, the Ohio Supreme Court reaffirmed the Taylor and Leavans courts proclaiming, "It is the settled law of this state that stipulations incorporated in promissory notes for the payment of attorney fees, if the principal and interest be not paid at maturity, are contrary to public policy and void." 85 Ohio St. at 186, paragraph one of the syllabus. The Miller court identified the rationale behind the rule: "enforcement of such contracts would result in evasions of the usury laws" and "the obvious tendency of such contracts to encourage suit." Id. at 192-193.
In 1987, the Ohio Supreme Court decided two cases that qualified, but did not overturn the holding of Miller. See Worth v. Aetna Casualty Surety Co., 32 Ohio St.3d 238 (1987) and Nottingdale Homeowners' Assn., Inc. v. Darby, 33 Ohio St.3d 32 (1987). In Worth, the Ohio Supreme Court unanimously upheld Miller, but found it inapplicable where an attorney fee provision in an indemnification agreement was arrived at "through free and understanding negotiation" and where both parties "were able to protect their respective interests." 32 Ohio St.3d at 243. The Worth Court specifically distinguished negotiated agreements from ordinary debt instruments:
When a stipulation to pay attorney fees is incorporated into an ordinary contract, lease, note or other debt instrument, it is ordinarily included by the creditor or a similar party to whom the debt is owed and is in the sole interest of such party. In the event of a breach or other default on the underlying obligation, the stipulation to pay attorney fees operates as a penalty to the defaulting party and encourages litigation to establish either a breach of the agreement or a default on the obligation. In those circumstances, the promise to pay counsel fees is not arrived at through free and understanding negotiation.
Id. at 242-243.
In Nottingdale, decided a month after Worth, a divided Ohio Supreme Court allowed payment of attorney fees required by provisions in condominium association's declaration and bylaws in the event of a successful collection or foreclosure action against condominium owners. Id. at 33, 39. As in Worth, the court in Nottingdale distinguished Miller: " Miller is factually a far cry from the case now before us which involves a specific contractual provision that was assented to in a non-commercial setting by competent parties with equal bargaining positions and under neither compulsion or duress." Id. at 35.
This Court, like the Bankruptcy Court, interprets Worth and Nottingdale as carving out an exception to Miller where the parties have equal bargaining positions, and the promise to pay attorneys' fees is arrived at through free and understanding negotiation. ( See Memorandum Opinion at 26, 28-29 (citations omitted)). Ohio courts and federal courts sitting in Ohio have reached this same conclusion. In re Petroff, 2001 WL 34041797, at *2-3 (B.A.P. 6th Cir. 2001) ( citing First Capital Corp. v. G J Indus., Inc., 131 Ohio App.3d 106 (Ohio Ct.App. 1999); Telmark, Inc. v. Schierloh, 102 Ohio App.3d 801 (Ohio Ct.App. 1995); Citfed Mortgage Corp. v. Parish, 1997 WL 156616, at *9 (Ohio Ct.App. Apr. 3, 1997); Clarklift of Northwest Ohio, Inc. v. Clark Equip. Co., 869 F.Supp. 533, 536 n. 2 (N.D.Ohio 1994); RB-3 Assocs. v. M.A. Bruder Sons, Inc., 1996 WL 1609231, at *7 (S.D. Ohio Aug. 26, 1996); and In re Lake, 245 B.R. 282, 286 (Bankr. N.D. Ohio 2000). In addition, the Sixth Circuit agrees that Worth and Nottingdale did not alter Miller: "While we agree that the rule of Taylor and Miller has been revisited by the Ohio Supreme Court, we do not agree that the rule has been eviscerated by these subsequent decisions." The Colonel's, Inc. v. Cincinnati Milacron Mktg. Co., 1998 WL 321061, at *4 (6th Cir. 1998) (relying on Miller to hold, "[T]he attorney fees provision in the agreement was not the product of specific free and understanding negotiation. Instead, it was a preprinted clause that appeared in defendant's standard contract forms. Accordingly, the district court did not err when it concluded that the provision is void as against the public policy of Ohio.").
2. Application of the Common Law
Chase argues that Miller is inapplicable because the Fees became payable not as a penalty for default, but instead "as a condition of the Debtors' election to cure their defaults over time, as allowed by § 1322(b)(5)." (Brief of Plaintiff-Appellant at 11-12). This argument fails for two reasons. First, it ignores the explicit language of the attorney fee provisions in the Mortgage, §§ 9, 14, and 22. Second, it proceeds from a false assumption — that is, it assumes that the Mortgage's Reinstatement Provision applies when a debtor elects to statutorily cure pursuant to § 1322(b)(5) of the Bankruptcy Code.
Review of the Mortgage's attorney fee provisions, §§ 9, 14, and 22, makes obvious that these provisions, like the provisions at issue in Miller, are default-based, i.e., the Tudors' contractual obligation to pay attorney fees and costs was triggered by their default under the Mortgage. These Default Provisions are set forth in relevant part below:
9. Protection of Lender's Interest in the Property and Rights Under this Security Instrument
If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, (b) there is a legal proceeding that might significantly affect Lender's interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy, probate, for condemnation or forfeiture, for enforcement of a lien which may attain priority over this Security Instrument or to enforce laws or regulations), or (c) Borrower has abandoned the Property, then Lender may do and pay for whatever is reasonable or appropriate to protect Lender's interest in the Property and rights under this Security Instrument, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property. Lender's actions can include, but are not limited to: (a) paying any sums secured by a lien which has priority over this Security Instrument; (b) appearing in court; and (c) paying reasonable attorneys' fees to protect its interest in the Property and/or rights under this Security Instrument, including its secured position in a bankruptcy proceeding. Securing the Property includes, but is not limited to, entering the Property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off. Although Lender may take action under this Section 9, Lender does not have to do so and is not under any duty or obligation to do so. It is agreed that Lender incurs no liability for not taking any or all actions authorized under this Section 9.
Mortgage, § 9 (emphasis added).
14. Loan Charges.
Lender may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting Lender's interest in the Property and rights under this Security Instrument, including, but not limited to, attorneys' fees, property inspection and valuation fees[.] In regard to any other fees, the absence of express authority in this Security Instrument to charge a specific fee to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that are expressly prohibited by this Security Instrument or by Applicable Law[.]
Mortgage, § 14 (emphasis added).
22. Acceleration; Remedies.
Lender shall give notice to Borrower prior to acceleration following Borrower's breach of any covenant or agreement in this Security Instrument (but not prior to acceleration under Section 18 unless Applicable Law provides otherwise). The notice shall specify: (a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument, foreclosure by judicial proceeding and sale of the Property. The notice shall further inform Borrower of the right to reinstate after acceleration and the right to assert in the foreclosure proceeding the non-existence of a default or any other defense of Borrower to acceleration and foreclosure. If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and may foreclose this Security Instrument by judicial proceeding. Lender shall be entitled to collect all expenses incurred in pursuing the remedies provided in this Section 22, including, but not limited to, costs of title evidence.
Mortgage, § 22 (emphasis added).
Conspicuously absent from Chase's briefing is any discussion distinguishing these default-based provisions from the default-based provisions voided on public policy grounds in Miller. Instead, Chase makes conclusory assertions that Miller is not applicable, and, in its Reply brief, attempts to skirt the issue by stating: "The bankruptcy court below found `no question' that the Chase mortgage contract provides for payment of attorneys' fees, invoking Sections 9, 14, 19, and 22 of the Mortgage as the provisions allowing such payment, but concluded that such fees were prohibited by Ohio law." (Reply of Plaintiff-Appellant at 7).
This statement mischaracterizes the Bankruptcy Court's opinion. In the "Factual and Procedural Background" Section of the Memorandum Opinion, Judge Hoffman noted that "[t]he Mortgage contains four separate provisions that call for the Debtor's payment of Chase's attorney fees and costs upon the occurrence of certain conditions." (Memorandum Opinion at 5) (emphasis added). The Bankruptcy Court further explained that §§ 9, 14, and 22 were "triggered by a default," and that § 19, the Reinstatement Provision, was triggered " if the Tudors exercise their contractual right to reinstate the Mortgage after default." Id. at 7 (emphasis added). Ultimately, the Bankruptcy Court held that the Reinstatement Provision was not triggered due to the fundamental differences between a contractual mortgage reinstatement and the statutory cure right afforded by § 1322(b)(5) of the Bankruptcy Code. Id. at 34-40. Consequently, the Bankruptcy Court did not reach the question of whether or not the Reinstatement Provision was prohibited by Ohio law. See id. at 10-11; See discussion infra at IV.C. Therefore, it is improper to conclude, as Chase has done, that the Bankruptcy Court "found `no question'" that the Reinstatement Provision provides a contractual basis for the Fees.
The Court rejects Plaintiff's bald assertion of the inapplicability of Miller. The policy implications of Miller apply equally here. Further, the Bankruptcy Court concluded correctly that the exception to Miller — developed in Worth and Nottingdale, where the parties have equal bargaining positions, and the promise to pay attorneys' fees is arrived at through free and understanding negotiation — is inapplicable. ( See Memorandum Opinion 31-34).
As Worth acknowledged, "When a stipulation is incorporated into an ordinary contract, lease, note or other debt instrument, it is ordinarily included by the creditor or a similar party to whom the debt is owed and is in the sole interest of such party." 32 Ohio St.3d at 242. "In those circumstances, the promise to pay counsel fees is not arrived at through free understanding and negotiation." Id. at 243. Chase concedes that the Mortgage executed by the Tudors was a standard, pre-printed form contract. "[P]reprinted form documents . . . by definition are not negotiated agreements." Lake, 245 B.R. at 287. The Bankruptcy Court described the Note and Mortgage as follows:
The standard form documents signed by the Debtor contain attorney fee provisions that favor only Chase. Further, its very format, with multiple pages of boilerplate provisions set forth in minuscule print, reinforces the Debtor's contention that Chase would not negotiate the terms of the Mortgage, regardless of who drafted it, a contention that Chase did not refute at the Hearing.
(Memorandum Opinion at 34).
Based upon the foregoing, this Court, like the Bankruptcy Court, concludes that the Mortgage's default-based attorney fee provisions were not the product of free understanding and negotiation between parties of equal bargaining power and similar sophistication. Accordingly, the Court holds that Miller is applicable and operates to void the Mortgage's default-based attorney fee provisions. C. The Mortgage's Reinstatement Provision
This Court's ruling is consistent with other bankruptcy courts applying Ohio law. As the Bankruptcy Court correctly observed, "Relying on Miller, bankruptcy courts applying Ohio law have consistently held that attorney fee provisions in debt instruments are void as against public policy and consequently, not a proper component of a mortgagee's arrearage claim in a Chapter 13 case." (Memorandum Opinion at 26) ( citing In re Petroff, 2001 WL 34041797, at *1 (B.A.P. 6th Cir. 2007); In re Shaffer, 287 B.R. 898, 901-02 (Bankr. S.D. Ohio 2002); In re Landrum, 267 B.R. 577, 582 (Bankr. S.D. Ohio 2001); In re Lake, 245 B.R. 282 (Bankr. N.D. Ohio 2000); In re Foreman, 119 B.R. 584, 588 (Bankr. S.D. Ohio 1990); In re Simons, 119 B.R. 589, 593-94 (Bankr. S.D. Ohio 1990).
Having found that Mortgage, §§ 9, 14 and 22, the default-based provisions, are void under Miller, the Reinstatement Provision, [Mortgage, § 19], is the only provision that could arguably provide a basis for Chase's recovery of attorneys fees. The Mortgage's Reinstatement Provision provides:
19. Borrower's Right to Reinstate After Acceleration.
If Borrower meets certain conditions, Borrower shall have the right to have enforcement of this Security Instrument discontinued at any time prior to the earliest of: (a) five days before sale of the Property pursuant to any power of sale contained in this Security Instrument; (b) such other period as Applicable Law might specify for the termination of Borrower's right to reinstate, or (c) entry of a judgment enforcing this Security Instrument. Those conditions are that Borrower: (a) pays Lender all sums which then would be due under this Security Instrument and the Note as if no acceleration had occurred; (b) cures any default of any other covenants or agreements; (c) pays all expenses incurred in enforcing this Security Instrument, including, but not limited to, reasonable attorneys' fees, property inspection and valuation fees, and other fees incurred for the purpose of protecting Lender's interest in the Property and rights under this Security Instrument; and (d) takes such action as Lender may reasonably require to assure that Lender's interest in the Property and rights under this Security Instrument, and Borrower's obligation to pay the sums secured by this Security Instrument, shall continue unchanged. Lender may require that Borrower pay such reinstatement sums and expenses in one of the following forms, as selected by Lender: (a) cash; (b) money order; (c) certified check, bank check, treasurer's check or cashier's check, provided any such check is drawn upon an institution whose deposits are insured by a federal agency, instrumentality or entity; or (d) Electronic Funds Transfer. Upon reinstatement by Borrower, this Security Instrument and obligations secured hereby shall remain fully effective as if no acceleration had occurred. However, this right to reinstate shall not apply in the case of acceleration under Section 18 [addressing transfer of the Property without Lender's consent].
Mortgage, § 19. (emphasis added).
This provision requires payment of Chase's attorneys' fees only if the Tudors exercise their contractual right to reinstate the Mortgage. It is undisputed, however, that the Tudors did not exercise their contractual right of mortgage reinstatement, but instead elected to cure their defaults pursuant to § 1322(b)(5) of the Bankruptcy Code.
Recognizing this, the Bankruptcy Court held: "[T]he Reinstatement Provision was not triggered here because the Debtor did not actually invoke his contractual right of mortgage reinstatement. Instead, he chose — by filing a Chapter 13 case — the statutory cure mechanism provided by § 1322(b)(5) of the Code. Thus, even if the Reinstatement Provision is enforceable, it is simply not operative here." (Memorandum Opinion at 11). In addition, the Bankruptcy Court rejected Chase's argument that the Tudors should be required to pay Chase's Fees because their election to cure through a Chapter 13 plan is the functional equivalent of a contractual mortgage reinstatement. Id. After providing a thorough analysis, the Bankruptcy Court concluded that the fundamental differences between contractual reinstatement and statutory cure — "most notably, the debtor's ability to cure his mortgage arrearage over time, rather than in a single, lump sum payment as Chase's mortgage contract requires" — compel rejection of Chase's contention that these remedies are one and the same. Id. at 11, 34-40.
Before the Bankruptcy Court, Chase at least put forth the argument that "[t]he filing of a Chapter 13 Bankruptcy, and the subsequent repayment of the arrearage is, in effect a reinstatement of the mortgage loan." Id. at 35 ( quoting Chase Supp. Mem. at 10). On appeal, however, Chase glosses over the issue altogether. As noted earlier, Chase incorrectly states that "[t]he bankruptcy court below found `no question' that the Chase mortgage contract provides for payment of attorneys' fees, invoking Sections 9, 14, 19, and 22 of the Mortgage as the provisions allowing such payment, but concluded that such fees were prohibited by Ohio law." (Reply of Plaintiff-Appellant at 7). Relying on this faulty premise, Chase spends the bulk of its briefing: (1) arguing that the line of cases finding reinstatement provisions in debt instruments enforceable is correct. ( See Brief of Plaintiff-Appellant at 13-17, 25-30; Reply at 2-5); and (2) analogizing contractual reinstatements and Chapter 13 cures to demonstrate that statutory cure, like contractual reinstatement, should not offend Ohio's public policy ( See Brief of Plaintiff-Appellant at 17-25; Reply at 9-11).
Several cases hold that Ohio common law invalidates all attorney fee stipulations in debt instruments — both default based provisions and those that require the payment of attorney fees as a condition of contractual reinstatement. See e.g., Landrum, 267 B.R. at 582-83; Lake, 245 B.R. at 286-87. Other courts have drawn a distinction between default-based attorney fee provisions and contractual stipulations requiring the payment of fees as a condition of mortgage reinstatement, holding that the latter are not contrary to public policy and are enforceable. See Wilborn v. Bank One Corp., 2007 WL 446049, at *8 (Ohio App. 7 Dist. 2007); Davidson v. Weltman, Weinberg Reis, 285 F. Supp. 2d 1093, 1097-1103 (S.D. Ohio 2003) (Rice, J.); Washington Mut. Bank v. Mahaffey, 796 N.E.2d 39, 44-45 (Ohio App. 2 Dist. 2003).
This Court agrees with and adopts the Bankruptcy Court's thorough analysis and conclusion that the Mortgage's Reinstatement Provision is not operative in the instant case. Most significantly, to contractually reinstate the Mortgage, the Tudors would have been required to cure all non-monetary defaults and pay Chase "all sums" necessary to bring the Note and Mortgage current. Mortgage, § 19. Put another way, a lump-sum payment from the Tudors to Chase would have been necessary in order to cure the arrearage and reinstate the loan. By contrast, a Chapter 13 plan may "provide for the curing of any default within a reasonable time" and the plan may provide for payments over a period of up to five years. 11 U.S.C. §§ 1322(b)(5); 1322(d) (emphasis added). In addition, Chase has not provided the Court with any authority equating statutory cures with contractual reinstatements. The few courts addressing this issue have acknowledged differences. See In re Seibel, 82 B.R. 463, 465 (Bankr. S.D. Ohio 1987); Petroff, 2001 WL 34041797, at *3 n. 2; In re Alden, 123 B.R. 563, 568 n. 6 (Bankr. E.D. Mich. 1990); Wells Fargo Bank Minnesota N.A. v. Guarnieri, 308 B.R. 122, 127 (D.Conn. 2004); In re Cureton, 163 B.R. 494, 496 (Bankr. E.D. Mich. 1994); and In re Evans, 336 B.R. 749, 756 (Bankr. S.D. Ohio 2006). For these reasons and the others expounded by the Bankruptcy Court ( See Memorandum Opinion at 34-40), this Court finds that the Mortgage's Reinstatement Provision does not provide a contractual basis for the recovery of the Fees.
Consequently, this Court does not need to decide whether to side with the line of cases invalidating all attorney fee stipulations in debt instruments versus those that find enforceable contractual stipulations requiring the payment of attorneys' fees as a condition of contractual reinstatement. As the Bankruptcy Court explained,
[T]he outcome is the same — Chase's claim for the Fees must be disallowed. Under a broad reading of [ Miller], Chase's claim for recovery of the Fees fails because all of the attorney fee provisions contained in the Mortgage . . . would be deemed void and unenforceable. But even if the Court recognizes the reinstatement exception . . . it does not provide a basis for allowance of the Fees for two reasons. First, . . . the Reinstatement Provision was not triggered because the Debtor did not actually invoke his contractual right of mortgage reinstatement. * * * Second, the Court is unpersuaded by Chase's argument that the Debtor should be required to pay Chase's Fees because his cure of the mortgage arrearage through a Chapter 13 plan is the functional equivalent of a contractual mortgage reinstatement.
(Memorandum Opinion at 11).
In summary, this Court finds (1) that Miller is applicable and operates to void the default-based attorney fee provisions in the Mortgage (§ 9, 14, and 22); and (2) that the Mortgage's Reinstatement Provision (§ 19) does not come into play because it has not been triggered by Tudors' statutory election. In addition, because the issue is not outcome determinative, this Court declines to decide whether or not to follow the line of authority that reads Miller and its progeny broadly, holding that all attorney fee provisions in debt instruments are void, or alternatively, to follow the line of authority which has found attorney fee provisions in reinstatement clauses enforceable.
For the foregoing reasons, the judgment of the Bankruptcy Court is AFFIRMED
V. CONCLUSION
The judgment of the Bankruptcy Court, sustaining Tudor's objection to the allowance of Fees and overruling his objection to the allowance of Costs, is AFFIRMED. Therefore, the Tudors' objection to the allowance of the Fees (as it is defined in this Court's Opinion and Order) is SUSTAINED.
The Clerk shall remove this case from this Court's pending cases list.
The Clerk shall remove Doc. 6 from this Court's pending motions list.
IT IS SO ORDERED.