Ashely M. Chan, United States Bankruptcy Judge.
The Debtor in this proceeding purchased a condominium unit fourteen years ago and, for the past eight years, failed to consistently and timely pay monthly condominium assessments and related charges required under the condominium's governing documents. By his own admission, the Debtor also filed patently unconfirmable plans and made material misstatements regarding the Debtor's delinquency to the condominium association in this bankruptcy proceeding. In order to protect its lien on the condominium unit, the condominium association was forced to take various legal actions against the Debtor.
The Debtor now objects, inter alia, to the condominium's pre- and post-petition late charges and the majority of its pre- and post-petition attorneys' fees and costs. As discussed below, the Court ultimately has concluded that the condominium association was not permitted under its governing documents to impose late charges against the Debtor, but did have a claim for the majority of its pre- and post-petition attorneys' fees and costs, although the Court has limited the amount of allowed reasonable post-petition attorneys' fees and costs to the equity in the Unit as required under § 506(b).
On May 29, 2002, the Debtor purchased Unit 17 of Williamsburg Commons ("Unit"), a condominium located at 533 Williamsburg Way in King of Prussia, Pennsylvania. Hr'g on Obj. to Claim No. 6 ("Hr'g on Obj."), Claimant's Ex. 1B ("Deed"), at 1, Nov. 17, 2015. As the owner of a Williamsburg Commons unit, the Debtor belongs to the Unit Owners Association, which is known as the Williamsburg Commons Condominium Association ("WCCA"), a Pennsylvania non-profit corporation. Hr'g on Obj., Claimant's Ex. 1 ("Declaration"), § 2.2.a. The Debtor is therefore subject to the Uniform Condominium Act, 68 Pa. Stat. and Cons. Stat. Ann. §§ 3101-414 (West 2016) ("UCA"), the Declaration of Condominium for Williamsburg Commons ("Declaration"), and the Bylaws of Williamsburg Commons Condominium Association ("Bylaws").
On or about June 2, 2003, the Debtor executed a note and mortgage against the Unit in favor of Irwin Mortgage Corp. ("Irwin") in the amount of $193,450 ("First Mortgage"). Mot. of CitiMortgage, Inc. for Relief ("CitiMortgage Mot.") Ex. B, ECF No. 95. On December 12, 2011, Irwin assigned the First Mortgage to CitiMortgage, Inc. ("CitiMortgage"). Id.
The Debtor executed a second note and mortgage against the Unit in favor of Wachovia Bank, N.A. ("Wachovia"), in the amount of $92,516 ("Second Mortgage") on July 28, 2005. Debtor's Second Suppl. Mem. Supp. Objs. to Claims ("Debtor's Second Suppl. Mem.") Ex. B, ECF No. 109. Wells Fargo Bank, N.A. ("Wells Fargo"), later became the successor by merger with Wachovia to the Second Mortgage. WCCA's Second Suppl. Mem. Opp'n Objs. ("WCCA's Second Suppl. Mem.") Ex. A, ECF No. 113.
In March 2008, the Debtor allegedly stopped regularly paying monthly and special assessments that he owed to WCCA as required by the Declaration.
At some point thereafter, foreclosure proceedings were initiated against the Unit in connection with the Second Mortgage and a sheriffs sale was ultimately scheduled. Hr'g on Obj. Claimant's Ex. 4. WCCA, through its outside general counsel, Gilbert E. Toll ("Mr. Toll"), began monitoring the foreclosure proceedings and the sheriffs sale, which was continued on multiple occasions. Id.
Before the sheriffs sale was conducted, the Debtor and his wife, Cynthia Milbourne, jointly filed a Chapter 13 Voluntary Petition, ECF No. 1, Bankr. No. 10-31122-bif, on December 29, 2010. William C. Miller was appointed as the Chapter 13 Trustee ("Trustee") in that case ("2010 Bankruptcy"). On January 25, 2011, Wells Fargo filed a proof of claim, which it later amended twice, for the loan secured by the Second Mortgage. Claim 7-1, Claims Register, Bankr No. 10-31122-bif. WCCA also filed a proof of claim for the delinquent
On July 14, 2011, Wells Fargo filed a Motion for Relief from Automatic Stay Under § 362(a) ("Wells Fargo Motion"), ECF No. 61, Bankr. No. 10-31122-bif, to, inter alia, resume the foreclosure proceedings on the Second Mortgage and the sheriff's sale of the Debtor's Unit. Wells Fargo alleged in the motion that the Debtor owed post-petition arrears of $3,316.81 under the Second Mortgage and, as a result, failed to adequately protect Wells Fargo's interest in the Unit. Wells Fargo Mot. ¶¶ 6, 8. Wells Fargo and the Debtor subsequently filed a Settlement Stipulation, ECF No. 83, Bankr. No. 10-31122-bif, on September 21, 2011.
On November 4, 2011, Glenn A. Manochi ("Mr. Manochi") entered his appearance in the 2010 Bankruptcy and filed Objections to Debtors' Second Amended Chapter 13 Plan, ECF No. 95, Bankr No. 10-31122-bif, on behalf of WCCA.
Also on November 4, 2011, Mr. Manochi filed a motion on behalf of WCCA to join
In either April or May 2012, WCCA, through Mr. Toll, filed a complaint against the Debtor to collect the delinquent assessments that the Debtor owed to WCCA. Hr'g on Obj. Claimant's Ex. 4. Shortly thereafter, WCCA filed a motion for default judgment against the Debtor. Id. Although WCCA and the Debtor agreed to a payment plan on July 23, 2012, the Debtor apparently fell out of compliance with the plan by October 16, 2012. Id.
Subsequently, CitiMortgage and Wells Fargo separately maintained foreclosure proceedings on their respective mortgages on the Debtor's Unit. Mr. Toll monitored each of the foreclosure proceedings on behalf of WCCA. Id. On January 3, 2013, the Debtor finally satisfied the Second Mortgage. WCCA's Second Suppl. Mem. Ex. A. As evidence thereof, Wells Fargo recorded a Satisfaction of Mortgage in the Recorder of Deeds Office in Montgomery County. Id.
On August 8, 2014 ("Petition Date"), the Debtor filed a Chapter 13 Voluntary Petition, ECF No. 1, and commenced this bankruptcy case. William C. Miller was again appointed as the Chapter 13 Trustee. David A. Scholl entered his appearance on behalf of the Debtor on September 9, 2014, and filed a Chapter 13 Plan of the Debtor ("Chapter 13 Plan"), ECF No. 19, on September 16, 2014.
Mr. Manochi entered his appearance on behalf of WCCA on October 24, 2014, and filed a proof of claim against the Debtor for $16,112.05 ("Proof of Claim") on November 26, 2014. Claim 6-1, Claims Register. WCCA's Proof of Claim reflected WCCA's pre-petition claims described above which included: $7,389.00 of monthly assessments, $950.00 of special assessments, $380.00 of late fees, $35.64 of other fees, and $7,357.41 of attorneys' fees and costs billed by Mr. Toll and Mr. Manochi. Hr'g on Obj. Claimant's Ex. 4.
On January 8, 2015, Mr. Manochi filed objections to the Debtor's Chapter 13 Plan on behalf of WCCA. Objs. to Debtor's Chapter 13 Plan ("Objs. to Plan"), ECF No. 37. Among the listed objections were, inter alia, the plan's failure to: pay the pre- and post-petition arrears owed to WCCA; prioritize the payment of the most recent six months of fees and assessments over the payment of the First Mortgage pursuant to UCA § 3315(b)(2)(i); prioritize the payment of all other months' fees and assessments over the payment of all liens and encumbrances other than first mortgages and liens for governmental assessments pursuant to § 3315(b)(2)(ii); and provide liens of corresponding priority on the Debtor's Unit to WCCA.
On February 6, 2015, the Debtor filed a complaint against WCCA under Bankruptcy
Also on February 6, 2015, the Debtor filed an Amended Chapter 13 Plan ("Amended Plan"), ECF No. 39. The Debtor, however, allegedly had not paid any post-petition assessments or fees that he owed to WCCA. Mot. for Payment of Post-Petition Fees ("Mot. for Payment") ¶ 8, ECF No. 44. Mr. Manochi therefore filed a motion on behalf of WCCA to, inter alia, compel "the immediate payment" by the Debtor of all such post-petition fees and assessments "prior to the confirmation of the Debtor's plan," on March 12, 2015. Id. ¶ 10. He argued that such assessments and fees were "administrative expenses" under Bankruptcy Code § 503(b), which the Debtor was required to pay pre-confirmation under § 1326(b)(1). Id. ¶¶ 5-6. On March 20, 2015, Mr. Manochi filed objections to the Amended Plan on behalf of WCCA that also alleged, inter alia, that the Debtor had not paid any post-petition assessments or fees. Objs. to Debtor's Am. Plan ¶ 6, ECF No. 46.
On March 24, 2015, the Debtor filed an answer to WCCA's motion and indicated that he was "ready, willing, and able" to pay the delinquent post-petition assessments and fees "and thereafter make regular payments." Answer to Mot. for Payment of Post-Petition Fees ¶ 3, ECF No. 47. The Debtor then filed a Second Amended Chapter 13 Plan, ECF No. 48, on March 27, 2015. Although WCCA withdrew its motion on May 7, 2015, Mr. Manochi filed objections to the Second Amended Plan on its behalf on May 13, 2015, in which it again alleged that, inter alia, the Debtor had not paid any post-petition assessments or fees. Objs. to Debtor's Second Am. Plan ¶ 6, ECF No. 59.
The Debtor filed a Third Amended Chapter 13 Plan ("Third Amended Plan"), ECF No. 60, on May 17, 2015, and Mr. Manochi filed Objections to Debtor's Third Amended Plan, ECF No. 64, on August 4, 2015, on behalf of WCCA. The Debtor
In each of the Debtor's first five Chapter 13 plans, the Debtor maintained that if he successfully avoided the liens that allegedly secured WCCA's pre-petition claims against the Unit in the Adversary Proceeding, then the claims would be discharged as unsecured. E.g., Fourth Am. Plan ¶ 3.D. However, WCCA submitted an expert appraisal report on July 24, 2015 ("Appraisal"), which valued the Debtor's Unit at $263,000 as of the Petition Date.
On August 18, 2015, seemingly in response to the Appraisal, the Debtor filed the instant Objections to Proof of Claim ("Objections"), ECF No. 71, in which he argued that the amounts claimed by WCCA were "grossly inflated by unreasonable late charges and ... exorbitant and unnecessary legal fees." Objs. ¶ 5. The Debtor asserted that, as a result, he only owed the pre- and post-petition monthly assessment arrears to WCCA, which amounted to $7,356 and $820, respectively. Id. ¶¶ 3-4.
The Debtor also filed a Fifth Amended Chapter 13 Plan ("Fifth Amended Plan"), ECF No. 73, on August 22, 2015, and a Sixth Amended Chapter 13 Plan ("Sixth Amended Plan"), ECF No. 80, on October 3, 2015. In each, the Debtor acknowledged that the Adversary Proceeding was going to be dismissed in light of the Appraisal. Fifth Am. Plan ¶ 3.D; Sixth Am. Plan ¶ 3.D. Mr. Manochi filed objections to the Fifth Amended Plan and Sixth Amended Plan on behalf of WCCA on September 22, 2015, and November 10, 2015, respectively.
Although the Debtor twice requested that WCCA agree to proposed stipulations to voluntarily dismiss the Adversary Complaint, WCCA took the position that it would only consent to the dismissal if, "for the purposes of Debtor's bankruptcy proceeding, the parties agree the value of the Debtor's Unit is $263,000." Pl.'s Mot. to Voluntarily Dismiss Proceeding ("Pl.'s Mot. to Dismiss") ¶ 6, ECF No. 15, Bankr. No. 14-16411, Adv. No. 15-00045; Def.'s Resp. ¶ 9. The Debtor refused. Def.'s Resp. ¶ 10.
On October 19 2015, the Debtor filed a motion to voluntarily dismiss the Adversary Complaint, in which he again admitted that "he could not successfully maintain" the Adversary Proceeding in light of the Appraisal. Pl.'s Mot. to Dismiss ¶ 4. On
On November 17, 2015, the Court also held a hearing on the Debtor's Objections. At the hearing, Mr. Manochi presented various exhibits on behalf of WCCA, including pre-petition bills as well as post-petition bills through November 11, 2015, and a statement of the Debtor's account as of November 11, 2015. Through the exhibits, Mr. Manochi sought to substantiate WCCA's Proof of Claim and also the post-petition claims described above, which included $1,085.00 of monthly assessments, $375.00 of late fees, $50.00 of other fees, and $21,134.77 of attorneys' fees and costs billed by Mr. Toll and Mr. Manochi. Hr'g on Obj. Claimant's Ex. 5.
The Debtor filed a Memorandum in Support of Debtor's Objections ("Debtor's Memorandum"), ECF No. 91, on December 6, 2015, and Mr. Manochi filed a Memorandum in Opposition to Debtor's Objections ("WCCA's Memorandum"), ECF No. 92, on December 7, 2015, on behalf of WCCA. The Debtor argued that only the pre-petition monthly assessments and $618.19 of WCCA's pre-petition attorneys' fees and costs — those related to WCCA's state court action against the Debtor — were due and compensable.
The Debtor also alleged that he needed to resolve WCCA's pre-petition security interests in the Unit because it was "the principal impediment" to a loan modification that he was negotiating. Id. at 2. "For this reason," the Debtor had proposed on multiple occasions to pay a "lump sum" to WCCA to resolve its pre-petition claims. Id. WCCA, however, had rejected all such offers and had proposed no counteroffers. Id.
On December 8, 2015, the Court continued the hearing again to February 9, 2015, and ordered the Debtor and WCCA to submit supplemental and responsive briefing on the issues of late fees and attorneys' fees and costs. The Debtor filed a Supplemental
On February 9, 2016, the Court concluded its hearing on the Debtor's Objections. At the hearing, Mr. Manochi presented additional exhibits on behalf of WCCA, including post-petition bills incurred after the first day of the hearing on November 17, 2015, and a statement of the Debtor's account as of February 4, 2016. Through the additional exhibits, Mr. Manochi sought to substantiate the remaining post-petition claims described above, which included $75.00 of late fees and $13,450.73 of attorneys' fees and costs billed by Mr. Toll and Mr. Manochi. Hr'g on Obj. Claimant's Exs. 10-11. "The Debtor opposed any attempt to reopen the record on the Objections at that juncture," but the Court permitted Mr. Manochi to submit the additional exhibits. Debtor's Second Suppl. Mem. 3.
The Court then ordered the Debtor to submit any line item objections to WCCA's claims by March 1, 2016, and WCCA to submit any responses by March 15, 2016. After the final round of supplemental briefing, the Debtor largely maintained his previous positions, but conceded the pre-petition special assessments and other fees to WCCA that he previously denied were due. Id. at 11. The Debtor therefore requested that the Court reduce WCCA's Proof of Claim to the sum of the pre-petition monthly assessments, special assessments, other fees, and attorneys' fees and costs related to WCCA's state court action against the Debtor: $8,993.33.
WCCA, however, maintained that it was due the full amount of its pre-petition Proof of Claim. WCCA's Second Suppl. Mem. 13. WCCA also requested that the Court "set [its] post-petition claim at $35,585.50 as of February 4, 2016."
As explained above, the Debtor has already conceded that the following pre-petition amounts should be allowed: $7,389 in monthly assessments, $950 in special assessments, and $35.64 in other fees. The Debtor also concedes that WCCA is entitled to $618.69 in pre-petition attorneys' fees and costs related to WCCA's state court action against the Debtor, but disputes that WCCA is entitled to the remaining $6,738.72 in pre-petition attorneys' fees and costs, any portion of its post-petition attorneys' fees and costs, interest on its post-petition attorneys' fees and costs, or any of the pre-petition or post-petition late charges. The Debtor's Objections to WCCA's Proof of Claim therefore raise two primary issues: to what extent should the Court allow WCCA's (A) pre-petition claims for late charges and attorneys' fees and costs; and (B) post-petition claims for late charges, attorneys' fees and costs, and interest on such attorneys' fees and costs. The Court will address these issues in turn.
A proof of claim "is deemed allowed, unless a party in interest ... objects." 11 U.S.C. § 502(a). "If properly filed, a proof of claim is prima facie evidence of the validity and amount of the claim, even if an objection is filed." In re Wells, 463 B.R. 320, 326 (Bankr.E.D.Pa. 2011) (emphasis added) (citations omitted) (citing Fed. R. Bankr. P. 3001(f)). A prima facie proof of claim "satisfies the claimant's initial obligation to go forward." In re Allegheny Int'l, Inc., 954 F.2d 167, 173 (3d Cir.1992).
If a party in interest objects to a proof of claim, the Court "shall determine the amount of such claim ... as of the date of the filing of the petition, and shall allow such claim in such amount," subject to several exceptions. 11 U.S.C. § 502(b). Upon the filing of an objection to a properly filed proof of claim, "[t]he burden of going forward then shifts [from the claimant] to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim." Allegheny Int'l, 954 F.2d at 173. "[I]f such objection to a claim is made, the court ... shall allow such claim ... except to the extent that ... (1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law." 11 U.S.C. § 502(b); see also Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) (quoting Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000)) (stating that a proof of claim shall be allowed only to the extent that a claimant is entitled to such claim based upon "the underlying substantive law creating the debtor's obligation"). Furthermore, with regard to any objection to a proof of claim, "any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy." Travelers, 549 U.S. at 450, 127 S.Ct. 1199 (citing 4 Collier on Bankruptcy
Here, WCCA properly filed its Proof of Claim under § 501 and it is prima facie evidence of the claims therein. Upon the filing of the Debtor's Objections, the burden of proof shifted to the Debtor to produce evidence sufficient to negate the prima facie validity of the Proof of Claim. The Debtor will satisfy his burden of proof to the extent that he can demonstrate that WCCA's pre-petition claims for late charges and attorneys' fees and costs are unenforceable under an agreement between himself and WCCA or under applicable state law. If the Debtor successfully refutes WCCA's prima facie claims, then WCCA must prove the validity of its claim by a preponderance of the evidence. Mindful of these shifting burdens of proof, the Court must now determine the extent to which the Proof of Claim will be allowed.
WCCA attached a Financial Transaction sheet dated as of October 23, 2014 ("Sheet"), to its Proof of Claim which sets forth, inter alia, a list of the pre-petition late charges charged to the Debtor from October 17, 2006, to October 14, 2014. Claim 6-1, Claims Register. Thus, WCCA set forth a prima facie claim for such pre-petition late charges in the total amount of $380.
The Debtor objects to the pre-petition late charges because (a) he is under "no contractual obligation" to pay the late charges; (b) the late charges are so excessive as to "constitute[] an unenforceable penalty clause"; and (c) the late charges are the product of a procedurally unconscionable adhesion contract. Debtor's Mem. 4-5 (quoting In re Jordan, 91 B.R. 673, 680 (Bankr.E.D.Pa.1988)); Debtor's Reply Mem. 2-3. For the reasons explained below, the Court will sustain the Debtor's Objections to the pre-petition late charges because WCCA failed to prove that the Debtor was contractually obligated to pay late charges to WCCA. In addition, by WCCA's own admission, the Court concludes that the late charges sought to be imposed by WCCA against the Debtor constitute unenforceable penalties.
At the outset, the Debtor denies that he is contractually obligated to pay the pre-petition late charges because, pursuant to In re Jordan, 91 B.R. 673 (Bankr. E.D.Pa.1988), WCCA must have "express" and "unambiguous[]" contractual authorization to collect the late charges. Debtor's Suppl. Mem. 3 (quoting Jordan, 91 B.R. at 678).
In response, WCCA argues that "the imposition of late charges by the Association is a matter of statute and not contract" because it is authorized to impose such fees pursuant to UCA §§ 3302(a)(11) and 3315(a). WCCA's Suppl. Mem. 2-3. Under the former, WCCA may, "[s]ubject to the provisions of the declaration ... (11) Impose charges for late payment of assessments." UCA § 3302(a). Under the latter, "[u]nless the declaration otherwise provides, fees, charges, late charges, fines and interest charged pursuant to section 3302(a)(10), (11) and (12) ... are enforceable as assessments under this section." Id. § 3315(a).
The language of §§ 3302(a)(11) and 3315(a) unambiguously
With regard to WCCA's Declaration, the Debtor argues that "there is no provision in any contract ... between the parties providing for late charges." Debtor's Mem. 5. WCCA argues that a monthly late charge of $10 was automatically assessed to any member of WCCA whose account became delinquent in excess of $20.01 pursuant to the Board's Administrative Resolution # 1 on March 17, 1997 ("Resolution"). WCCA's Second Suppl. Mem. 11-12; Hr'g on Obj. Claimant's Ex. 1A. In addition, WCCA argues that it subsequently increased the late charge to $25 when the monthly condominium assessment increased to $195, as evidenced in the minutes of an October 16, 2013, WCCA Board meeting. WCCA's Second Suppl. Mem. 11-12; Hr'g on Obj. Claimant's Ex. 4.
There is no provision in either WCCA's Declaration and Bylaws which explicitly permits the imposition of late charges. The burden of proof therefore shifts to WCCA to demonstrate that it is permitted to impose late charges under the Declaration or related governing documents.
The only reference to late charges in the Declaration is found in § 13.2 which states that "[a]ny fees, charges, late charges, fines and interest which may be levied by the Executive Board pursuant to 3302(a)(10), (11) and (12) of the [UCA], shall be subordinate to the lien of a Permitted Mortgage on a Unit." Declaration § 13.2. This section, alone, however, is insufficient to support WCCA's imposition of late charges against the Debtor since it fails to set forth that a late charge will actually be imposed or the terms of such late charge; it merely contemplates that, to the extent a late charge is imposed, it will be subordinate to the liens of permitted mortgagees.
The only provisions in the Declaration which could remotely support the imposition of late charges are §§ 13.5 and 14.1(b). Section 13.5 provides that "a special assessment may be levied against the Unit Owner ... for violations of the terms and provisions of this Declaration or the Rules and Regulations promulgated by the Executive Board from time to time." Id. § 13.5. Thus, under a generous reading of this provision, it is possible that WCCA could have levied a special assessment against the Debtor in the form of a late charge for failure to timely pay his monthly condominium assessment. However, no evidence was presented that WCCA levied a special assessment against the Debtor in order to impose late charges.
Id. § 14.1(b).
Although it is possible that WCCA's Board may have adopted the Resolution in order to impose a monthly late charge of $10 against delinquent members pursuant to this provision, WCCA has not provided this Court with any evidence that the Resolution was served on the Debtor, as required by § 14.1(b) of the Declaration. In the absence of such notice, it is clear that the Debtor could not possibly be bound by the Resolution. In addition, the Court finds that the imposition of increased late charges of $25 is also insufficient since the Board apparently did not even adopt a resolution in connection with such late charges and, again, WCCA failed to produce any evidence that the Debtor was notified of any resolution adopting increased late charges.
The Court's disallowance of WCCA's pre-petition late charges is further buttressed by this Court's determination that the late charges constitute unenforceable penalties, which WCCA admitted. In opposing the late charges, the Debtor argued that they "are so excessive" that they cannot constitute liquidated damages and instead must be disallowed as "unenforceable penalt[ies]." Debtor's Suppl. Mem. 4. In response, WCCA argued that it "must provide penalties which require unit owners to timely pay assessments" because, otherwise, "unit owners will have no incentive to timely pay their assessments." WCCA's Suppl. Mem. 4.
This issue turns on whether the late charges constitute permissible liquidated damages or unenforceable penalties under Pennsylvania law. Liquidated damages are "the sum a party to a contract agrees to pay if he breaks some promise, and which, having been arrived at by a good faith effort to estimate in advance the actual damage that will probably ensue from the breach, is legally recoverable ... if the breach occurs." Pantuso Motors, Inc. v. CoreStates Bank, 568 Pa. 601, 798 A.2d 1277, 1282 (2002) (quoting In re Plywood Co. of Pa., 425 F.2d 151, 154 (3d Cir.1970)). In contrast, a penalty provision is not designed "as a pre-estimate of probable actual damages, but as a punishment, the threat of which is designed to prevent the breach." Id. (quoting Westmount Country Club v. Kameny, 82 N.J.Super. 200, 197 A.2d 379, 382 (N.J.Super.Ct.App.Div.1964)). "If the amount of damages assessed is subsequently adjudged unreasonable in the light of either anticipated or actual harm, the contractual provision will be voided as a penalty." Finkle v. Gulf & W. Mfg. Co., 744 F.2d 1015, 1021 (3d Cir.1984) (quoting Unit Vending
In determining whether the late charges are reasonable liquidated damages assessments or unenforceable penalties, WCCA has failed to provide any evidence that they represent a good faith estimate of the administrative expense that it would incur if an owner was delinquent. Rather, WCCA admits that the late charges are "penalties" imposed in order to deter owners from not timely paying their assessments. WCCA's Suppl. Mem. 4. By its own description, therefore, each late charge is "a punishment, the threat of which is designed to prevent the breach," and thus, by definition, an unenforceable penalty. Pantuso Motors, 798 A.2d at 1282.
Based upon the foregoing, the Court will not allow WCCA's pre-petition late charges against the Debtor. Neither the Declaration nor Bylaws permit the imposition of late charges and such charges constitute unreasonable penalties. Accordingly, the Court will sustain the Debtor's Objections with regard to the pre-petition late charges.
WCCA sets forth a prima facie claim for pre-petition attorneys' fees and costs in the amount of $7,357.41, as evidenced in the Sheet attached to WCCA's Proof of Claim. Claim 6-1, Claims Register. As explained above, the Debtor has already conceded $618.69 of such fees and costs incurred in WCCA's state court action against him. However, the Debtor objects to the remaining $6,738.72 of such fees and costs incurred largely to monitor the foreclosure proceedings on the Second Mortgage, and the sheriffs sale scheduled thereafter, prior to the 2010 Bankruptcy; to monitor the 2010 Bankruptcy; to prepare and file a proof of claim, objection to confirmation, and joinder motion therein; to appear at the confirmation/dismissal hearing therein; to monitor the subsequent foreclosure proceedings and both mortgages on the Debtor's Unit; and to collect unpaid assessments from the Debtor.
The Debtor objects to the foregoing because (a) WCCA did not incur the fees and costs as a prevailing party in an action against the Debtor; and (b) the fees and costs are unreasonable. Debtor's Second Suppl. Mem. 5-10. For the reasons explained below, the Court will deny in part and grant in part the Debtor's Objections as to the pre-petition attorneys' fees and costs.
The Debtor cites three provisions in the Declaration and Bylaws, which "address the circumstances under which WCCA is entitled to recover reimbursement of its attorneys fees and costs." Debtor's Second Suppl. Mem. 4-5. First, he cites Declaration § 13.12, titled "Remedies," which states, in pertinent part:
Declaration § 14.1(c)(ii) (emphasis added). The Debtor argues this provision imposes the same limits as § 13.12 and adds "the requirement that the party entitled to be reimbursed must be `prevailing.'" Debtor's Second Suppl. Mem. 5.
In addition, he cites Bylaws § 10.1.2, also titled "Costs and Attorney's Fees," which states: "In any proceedings arising out of any alleged default by an Owner, the prevailing party shall be entitled to recover the costs of such proceeding and such reasonable attorney's fees as may be determined by the court." Bylaws § 10.1.2. He argues that § 10.1.2 adds a final requirement: "that the entitlement to reimbursement be `determined' by a court." Debtor's Second Suppl. Mem. 5.
The Debtor alleges that the foregoing provisions "were drafted solely by WCCA" and therefore "must be construed strictly against [it]." Id. at 7. The Debtor argues that the provisions should restrict recoverable attorneys' fees and costs "to those determined by a trial court to be due to WCCA [for] services performed in connection with actions and proceedings initiated by WCCA in which it has been judicially determined to have been the prevailing party." Id. at 6; see also id. at 7 (stating that "WCCA was empowered to draft these documents more broadly and expressly include the services for which it seeks fee-reversal ... and chose not to do so"). The Debtor therefore requests that the Court disallow the remaining pre-petition attorneys' fees and costs because WCCA was never "determined by any court to be entitled to costs and attorneys fees as a prevailing party in any action brought against the Debtor." Id. at 6.
In response, WCCA argues that, in addition to the attorneys' fees and costs described by the Debtor, it is also entitled to the amounts set forth in Declaration § 13.8, titled "Interest and Charges," which states, in pertinent part:
Declaration § 13.8 (emphasis added). WCCA argues that § 13.8 "plainly sets forth Debtor's obligation to pay the Association's expenses to protect its lien" and that the remaining pre-petition attorneys' fees and costs may be allowed thereunder. WCCA's Second Suppl. Mem. 6.
The Court concludes that WCCA correctly interprets § 13.8. As explained above, WCCA has liens on the Debtor's Unit for the delinquent assessments pursuant
If WCCA's remaining pre-petition fees and costs are reasonable, they will be allowed as part of its Proof of Claim. Whether pre-petition attorneys' fees and costs are reasonable is determined according to applicable nonbankruptcy law. See Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007) (citing Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000)) (stating that bankruptcy courts should "consult state law in determining the validity of most claims" under § 501(b)(1)). The Pennsylvania Supreme Court has instructed that the following factors apply:
In re LaRocca's Tr. Estate, 431 Pa. 542,246 A.2d 337, 339 (1968).
The Debtor's only line item objections to the pre-petition fees and costs were set forth in his first memorandum. Therein, he asserted that Mr. Manochi committed a mathematical error when he calculated the fees and costs listed in Invoice 2989. Although the Debtor asserted that the error inflated the pre-petition fees and costs by $60.50, Mr. Manochi conceded that the error inflated the fees and costs by $78.00. Debtor's Suppl. Mem. Ex. A; Debtor's Mem. 7. The Debtor asserted that Mr. Manochi committed additional
In addition, the Court's calculations revealed an error not asserted by the Debtor with respect to Invoice 3203. As reflected in the Sheet, the portion of that invoice that was charged to the Debtor on August 6, 2012, was in the amount of $869.64. However, as reflected in the pre-petition bills, that portion of the invoice was billed to WCCA in the amount of $526.50, which is $343.14 less than the amount charged to the Debtor. Hr'g on Obj. Claimant's Ex. 4. The Court will therefore reduce WCCA's Proof of Claim by an additional $343.14.
As stated above, the Court ordered the Debtor to submit additional line item objections following the conclusion of the hearing on his Objections. Although the Debtor purported to comply with the Court's order, he asserted only general objections to WCCA's attorneys' fees and costs, not line item objections. Moreover, his objections were confined to a single paragraph in which he concluded that "[a] further line-by-line analysis could be undertaken, but only with considerable time-expenditures, which should be unnecessary because the entire sum of amounts allowed to WCCA are likely to be ultimately classified as unsecured and hence payable in very small part, or disallowed entirely." Debtor's Second Suppl. Mem. 9-10. Accordingly, the Debtor asserted only two further objections to the remaining pre-petition fees and costs.
First, the Debtor denied that "most of Mr. Toll's services for monitoring the foreclosure action brought by the Debtor's first mortgagee ... were necessary." Id. at 9. As explained above, CitiMortgage holds the First Mortgage on the Debtor's Unit and maintained foreclosure proceedings thereupon after the Debtor's 2010 Bankruptcy. If CitiMortgage had obtained a foreclosure judgment and conducted a sheriffs sale, then WCCA would have risked the complete divestment of its liens for unpaid assessments due more than six months before the sale. UCA § 3315(b)(2). Therefore, these services were reasonably incurred to protect WCCA's liens under Declaration § 13.8.
Second, the Debtor denied that "Mr. Manochi's services for monitoring the Debtor's first bankruptcy were necessary." Debtor's Second Suppl. Mem. 9. As explained above, the 2010 Bankruptcy commenced on December 29, 2010. Therein, WCCA filed a proof of claim for delinquent assessments; objections to confirmation to compel priority payment of pre- and post-petition arrears; and a motion to join the Trustee's motion to dismiss the bankruptcy because of the nonpayment of post-petition arrears. Mr. Toll prepared the proof of claim and Mr. Manochi prepared the objections and joinder motion. Such services were reasonably incurred to protect WCCA's liens in the Unit and to ensure that the Debtor did not discharge WCCA's claims in the 2010 Bankruptcy under Declaration §§ 13.12 and 14.1(c)(ii) and Bylaws § 6.1.2.
The Debtor's additional general objections to the remaining pre-petition attorneys' fees and costs therefore did not reveal any unreasonable or unauthorized fees or costs. The Court's line-by-line analysis of the pre-petition bills, however, did discover one unauthorized charge. There is a single entry in Invoice 3203 on January 20, 2012, that does not appear to pertain to services incurred in pursuit of this or related
The sum of the foregoing reductions for mathematical errors and unreasonable or unauthorized charges is $538.14. After subtracting this amount from WCCA's request for prepetition attorneys' fees and costs of $7,357.41, the Court concludes that WCCA holds a total allowed pre-petition claim for attorneys' fees and costs equal to $6,819.27.
This amount is eminently reasonable in light of the fact that it represents less than twenty-eight hours of legal services provided over more than four years to recover the Debtor's delinquent assessments and protect WCCA's liens arising therefrom. Through those services, Mr. Toll and Mr. Manochi monitored multiple foreclosure proceedings, preserved their client's claims in bankruptcy, and managed the collection of the Debtor's account. Moreover, the vast majority of the pre-petition fees and costs were billed by Mr. Toll, whose testimony was particularly credible and whose rate was more than reasonable, especially in light of his vast experience and credentials, which the Debtor did not challenge. Finally, the Debtor could have prevented the incursion of all or most of such fees and costs had he timely paid the delinquent assessments, or cured the delinquencies in a reasonable timeframe, rather than allow them to accumulate over the four years preceding this bankruptcy.
Based upon the foregoing, the Court concludes that WCCA holds an allowed pre-petition secured claim in the amount of $15,193.91, which represents the following allowed pre-petition amounts: $7,389 in monthly assessments, $950 in special assessments, $35.64 in fees, and $6,819.27 in attorneys' fees and costs.
As just discussed, WCCA holds an allowed pre-petition secured claim equal to $15,193.91 ("Secured Claim") under § 502. WCCA has also requested an award for post-petition late charges, interest and attorneys' fees.
11 U.S.C. § 506(b). Section 506(b) therefore "allows oversecured creditors to add reasonable post-petition, pre-confirmation attorney fees, interest, and costs to the amount of their secured claim" to the extent of the value of the underlying collateral.
By the terms of § 506(b), however, the oversecured creditor's ability to add reasonable post-petition attorney fees to its secured claim is capped by the value of such creditor's underlying collateral. To the extent that an oversecured creditor's reasonable post-petition attorney fees exceed the value of its collateral, such excess portion is disallowed in its entirety. See United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 372, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988) (addressing the right to recover post-petition interest under § 506(b) and holding that § 506(b) has the "substantive effect of denying undersecured creditors postpetition interest on their claims — just as it denies over secured creditors postpetition interest to the extent that such interest, when added to the principal amount of the claim, will exceed the value of the collateral").
The Court has determined that the Unit has a value of $263,000.00.
Under § 506(b), post-petition attorney's fees may be allowed "if three elements are satisfied: (1) the claim is an oversecured, allowed secured claim; (2) the fees are reasonable; and (3) the fees are provided for under the agreement between the parties or by statute." In re Gordon-Brown, 340 B.R. 751, 757 (Bankr.E.D.Pa. 2006); accord In re Nunez, 317 B.R. at 668 (stating the same); Collier, supra, ¶ 506.04[3] (stating the same). However, unlike pre-petition fees and costs, whether post-petition fees and costs are reasonable under § 506(b) is determined according to "federal standards." Collier, supra, ¶ 506.04[3][d]; see also In re Ryker, No. 06-1872, 2007 WL 2138590, at *4 (3d Cir. July 27, 2007) (citing In re A & P Diversified Techs. Realty, Inc., 467 F.3d 337, 341 (3d Cir.2006)) (stating that § 506(b) "governs the reasonableness of ... attorneys' fees, irrespective of conflicting state law" and "preempts conflicting state law regarding attorneys' fees")).
Under federal law, the lodestar approach controls whether post-petition attorneys' fees and costs are reasonably incurred. See Gordon-Brown, 340 B.R. at 757. Pursuant to the lodestar approach, the Court will inquire "into the hours spent by the attorneys." Lindy Bros. Builders, Inc. of Phila. v. Am. Radiator & Standard Sanitary Corp., 487 F.2d 161, 167 (3d Cir.1973).
Accordingly, WCCA's post-petition fees and costs will be allowed to the extent that they were reasonably incurred and authorized under the Declaration and the Bylaws. WCCA has incurred post-petition attorneys' fees and costs totaling at least $34,585.50. Hr'g on Obj. Claimant's Exs. 5, 10-11. WCCA incurred such fees and costs largely to prepare and file its Proof of Claim, motion to compel the payment of its post-petition fees and assessments, praecipe to withdraw the same, memorandums in opposition to the Debtor's Objections, and objections to the confirmation of eight of the Debtor's ten Chapter 13 plans in this bankruptcy; to prepare and file an answer, expert appraisal report, and response to the Debtor's voluntary motion to dismiss, in the Adversary Proceeding; and to collect unpaid assessments from the Debtor and respond to his lump sum payment proposals.
Just like with WCCA's pre-petition attorneys' fees and costs, the Debtor argues that these fees and costs are not authorized under the Declaration and Bylaws. However, these arguments fail for the same reasons discussed above — namely, Declaration § 13.8 permits WCCA to incur attorneys' fees and costs to protect its lien against the Unit.
The Debtor also lists several "specific services" that he believes were unreasonably billed to him.
First, the Debtor denies that "the numerous consultations between Mr. Toll and Mr. Manochi" were necessary. Id. at 10. As a general principle, however, the Court finds that it was necessary for Mr. Toll and Mr. Manochi to occasionally consult each other in order to competently represent WCCA. The Court will therefore reduce WCCA's post-petition claims only if, and to the extent that, a line-by-line analysis of its post-petition bills reveals that its attorneys excessively consulted with each other.
Second, the Debtor denies that it was necessary to defend against his Adversary Proceeding if Mr. Manochi knew of, but failed to disclose, Wells Fargo's Second Mortgage on the Debtor's unit. Id. at 9-10.
Third, the Debtor denies that WCCA's opposition to his "attempts to voluntarily dismiss the initial adversary proceeding" was necessary and asserts that WCCA should have executed a "Stipulation of Dismissal." Debtor's Second Suppl. Mem. 10. However, WCCA reasonably devoted "significant time and expense" to prepare its Appraisal of the Debtor's Unit in the Adversary Proceeding. Def.'s Resp. ¶ 13. And the Debtor tacitly endorsed WCCA's Appraisal when he admitted that the primary reason that he moved to dismiss the Adversary Proceeding was his "subsequent review of ... evidence of the value of the residence." Pl.'s Mot. to Dismiss ¶ 4. WCCA did not act unreasonably, therefore, when it incurred time trying to obtain the Debtor's consent to the value of the Unit since WCCA was trying to avoid the "additional time and expense" necessary to re-litigate the Unit's value in the lead bankruptcy case. Def.'s Resp. ¶ 13. Thus, WCCA reasonably opposed dismissal of the Adversary Proceeding in an attempt to secure the full value of its efforts to determine the value of the Unit therein.
Fourth, the Debtor denies that WCCA's "voluminous" objections to the confirmation of the Debtor's Chapter 13 plans were necessary because the plans "could not have been confirmed." Debtor's Second Suppl. Mem. 10. According to the Debtor, confirmation of his Chapter 13 plans would have been denied, even if WCCA did not object, because of "[t]he presence of other, larger creditors of the Debtor whose claims were not totally satisfactorily treated." Debtor's Mem. 1.
The foregoing argument is absurd. In the event of a unit owner's failure to timely pay assessments, WCCA and the Board are plainly entitled to "each and all of the rights and remedies that may be provided for in the [UCA], the Declaration, the By-Laws or said Rules and Regulations, or that may be available at law or in equity." Declaration § 13.12. WCCA was not obligated, and it would not have been wise for WCCA, to entrust the protection of its rights and remedies to the Debtor's other creditors, the Trustee, or the Court merely to consolidate the objections filed in this bankruptcy:
WCCA's Second Suppl. Mem. 8. Moreover, such entrustment could have possibly exposed its counsel to punishment for violations of the rules of professional conduct.
The Debtor finally argues that WCCA's post-petition fees and costs as a whole are unreasonable for two reasons. According to the Debtor, (1) his "limited financial resources ... should not be exhausted by one creditor" to the detriment of his other creditors; and (2) WCCA's "excessive undertakings... do not exhibit the spirit of economy that might be expected from a creditor actually concerned about saving costs to its members." Debtor's Second Suppl. Mem. 8-9; Debtor's Reply Mem. 3. The Debtor therefore requests that the Court allow no more than 10% of WCCA's post-petition fees and costs. Debtor's Second Suppl. Mem. 9.
In response, WCCA argues that all of the legal actions it has taken during the Debtor's bankruptcy proceeding were necessary to ensure that the Debtor pays WCCA what it is owed. WCCA's Second Suppl. Mem. 9. WCCA alleges that if it had forfeited the amounts it was owed, then other, nondefaulting unit owners would have borne the resulting burden. WCCA's Suppl. Mem. 7-8. Such a result, WCCA concludes, "would not only be unfair to the other unit owners, it would pervert justice." Id. WCCA concludes that it is therefore "entitled to the full amount of its attorneys' fees and costs even if those fees and costs are disproportionate to the non-attorneys' fees assessments [it] seeks." WCCA's Second Suppl. Mem. 9-10 (citing Arches Condo. Ass'n v. Robinson, 131 A.3d 122 (Pa.Commw.Ct.2015); Latch's Lane Owners Ass'n v. Bazargani, No. 2408 C.D. 2009, 2010 WL 9516204 (Pa. Commw.Ct. Apr. 13, 2010); Mountain View Condo. Ass'n v. Bomersbach, 734 A.2d 468 (Pa.Commw.Ct.1999)).
The Court agrees with WCCA. First, although the Debtor has incurred attorneys' fees on account of its legal battle with WCCA in this proceeding, and although the amount that the Debtor may use to pay such fees might otherwise have been available to pay the Debtor's unsecured creditors, WCCA is clearly entitled to take reasonable action in order to enforce its liens to the full extent of its claims. Such advantages enjoyed by secured creditors are inherent in the basic structure of the Bankruptcy Code. See 11 U.S.C. §§ 502-03, 506-07 (setting forth the rules governing secured and unsecured claims).
Second, as WCCA observed, it is not unprecedented to award attorneys' fees and costs to condominium associations in excess of the amounts for which such fees and costs were incurred to recover.
As explained above, the Debtor's objections to WCCA's post-petition claims for attorneys' fees and costs did not reveal any unreasonable or unauthorized charges. Although the Court conducted a line-by-line analysis of WCCA's post-petition bills, the Court discovered only one error not asserted by the Debtor. WCCA claimed $4,602.00 of fees and costs related to services performed by Mr. Manochi from December 2015 to January 2016. Hr'g on Obj. Claimant's Ex. 11. However, the sum of the bills therefor is only $4,542.25. Id. The Court will therefore reduce WCCA's post-petition attorneys' fees and costs by the amount of such error: $59.75.
Based upon the foregoing, WCCA has incurred reasonable post-petition attorneys' fees and costs totaling $34,525.75. As explained above, however, the Court will only allow WCCA's reasonable post-petition attorneys' fees and costs to the extent of the Equity Cushion which is equal to $30,721.74. Thus, the Court will limit the award of WCCA's reasonable post-petition attorneys' fees and costs under § 506(b) to $30,721.74. Finally, WCCA's request for the remainder of its post-petition attorneys' fees and costs and interest on its post-petition attorneys' fees and costs will be disallowed because they exceed the Equity Cushion in the Unit.
For the foregoing reasons, the Debtor's Objections to WCCA's Proof of Claim will be sustained in part and denied in part. The Court concludes that WCCA holds an allowed pre-petition secured claim of $15,193.91 pursuant to § 502 and that WCCA holds an additional secured claim of $30,721.74 as an oversecured creditor pursuant to § 506(b) on account of reasonable post-petition attorneys' fees and costs. The Court concludes therefore that WCCA holds a total allowed secured claim against the Debtor equal to $45,915.65.
An appropriate order follows.
Declaration § 13.12 (emphasis added).
UCA § 3315(b)(2) (emphasis added).
The Debtor also miscalculated the total of WCCA's attorneys' fees and costs that he listed as compensable. The correct total is $618.69. Hr'g on Obj. Claimant's Ex. 4.
The Debtor also argues that, to the extent that WCCA's post-petition attorneys' fees and costs are unauthorized under the parties' agreements, they may be allowed only "in extraordinary situations, such as where legally unjustifiable conduct of a party or counsel for a party is established, or where the debtor requests some extraordinary dispensation." Debtor's Mem. 6-7 (quoting In re Nickleberry, 76 B.R. 413, 424 (Bankr.E.D.Pa.1987)). The Debtor therefore denies that the post-petition fees and costs may be allowed because "[t]here are no such circumstances here on the part of the Debtor or his counsel." Id. However, as the Court will explain below, all of WCCA's post-petition fees and costs were authorized under the Declaration and the Bylaws.
