Security Mortgage Co. v. Powers - 278 U.S. 149 (1928)
U.S. Supreme Court
Security Mortgage Co. v. Powers, 278 U.S. 149 (1928)
Security Mortgage Co. v. Powers
Argued October 12, 1928
Decided December 10, 1928
278 U.S. 149
1. When it is asserted that real property, or its proceeds, in a bankrupt estate is subject to a lien for attorney's fees arising from a loan contract secured by the land and made before the bankruptcy proceedings were begun, the contract is to be construed and the validity of the lien determined by the bankruptcy court, in accordance with the law of the state where the contract was made and the land is situated; but whether the liability is enforceable in the circumstances may raise federal questions peculiar to the law of bankruptcy. P. 278 U. S. 153.
2. Petitioner held promissory notes secured by land in Georgia. The land was acquired from the debtor by one who assumed and agreed to pay the debt and later was adjudicated a bankrupt. The notes provided for 10% attorney's fees "if collected by law or through an attorney at law." After the adjudication, there was a default in the payment of interest; petitioner notified the original debtor of its election to declare the principal due, and took against the original debtor only, without joining the bankrupt or the trustee, the steps prescribed by § 4252 of the Georgia Code, which provides that obligations to pay attorney's fees upon any note in addition to interest "are void" unless the debtor fails to pay the debt on or before the return day of the court to which suit is brought for collection of the same, and which requires the holder to serve notice on the debtor of his intention to sue and of the term of court. The suit having resulted in a judgment against the original debtor for
principal, interest, and attorney's fees, and declaring these amounts a special lien on the property, and the property having in the meantime been sold in the bankruptcy court and bought in by the petitioner, the question arose whether credit for the attorney's fees should be allowed the petitioner out of the proceeds of the sale, which remained subject to the lien.
(1) Enforcement of the lien for the attorney's fees was not precluded by § 63 of the Bankruptcy Act upon the ground that the liability remained contingent until after the bankruptcy adjudication. The lien was not contingent, and property subject to a perfected lien securing a liability still contingent at the time of bankruptcy is not discharged from the lien by the adjudication. P. 278 U. S. 155.
(2) The contingent obligation to pay attorney's fees having been part of the original loan transaction, and the consideration for the lien having been the loan -- a " present consideration " -- and not the attorney's services, allowance of the attorney's fees was not excluded by § 67d of the Bankruptcy Act. P. 278 U. S. 156.
(3) Section 4252 of the Georgia Code does not mean that a contract to pay attorney's fees shall be void until validated thereunder; it merely adds a statutory condition to the contract. P. 278 U. S. 156.
(4) If the petitioner in this case, which knew that the bankrupt had assumed and become primarily liable for the debt, failed to notify the trustee of its election to declare the debt due or of the suit under § 4252, Georgia Code, or if its sole purpose in bringing that suit, knowing the defendant, the original debtor, to be insolvent, was to increase by the amount of the attorney's fees the claim payable in bankruptcy under the lien -- it is not entitled to credit for the attorney's fees. Pp. 278 U. S. 157-158.
3. Where the grounds upon which the circuit court of appeals had affirmed a judgment were found by this Court to be untenable, but there were other reasons requiring the same results if facts, not included in the stipulated record, were found to exist, the case was reversed and remanded to the district court with directions for further proceedings. P. 278 U. S. 159.
21 F.2d 965 reversed.
Certiorari, 276 U.S. 610, to a judgment of the circuit court of appeals which affirmed a judgment of the district court, in bankruptcy, disallowing a claim for attorney's fees.