Bankruptcy & Attorney's Fees
On Tuesday, the SCOTUS unanimously decided that a contract-based claim for attorney's fees is not disallowed under federal bankruptcy law, even where the fees in question were incurred litigating bankruptcy issues in a post-petition setting. Reversing the Ninth Circuit (ed.: now there's a surprise), the Court concluded the view that "such fees are categorically prohibited . . . finds no support in the Bankruptcy Code."
The facts of Travelers Cas. & Surety Co. v. PG&E are relatively straightforward. Travelers had posted a large bond to secure PG&E's payment of workers comp. benefits. In connection with that undertaking, PG&E had executed an indemnity agreement on behalf of Travelers that included an attorney's fees provision. PG&E declared bankruptcy. Travelers filed a bankruptcy claim to protect its interests. As part of the reorganization, PG&E and Travelers negotiated a deal providing Travelers with additional protection and the bankruptcy court approved the deal. Subsequently, Travelers alleged that PG&E had unilaterally altered the language of the agreement. Further litigation followed. In resolution, the parties entered a stipulation, one component of which stated that Travelers "may assert its claim for attorneys fees [incurred in connection with that further litigation] as a general unsecured claim against PG&E." Travelers asserted the claim. PG&E opposed the claim.
Ultimately, the Bankruptcy Court disallowed Travelers' claim. Travelers appealed and the District Court affirmed on the basis that "where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorneys fees will not be awarded absent bad faith or harassment by the losing party." In re Fobian, 951 F.2d 1149 (9th Cir. 1991). The Ninth Circuit also affirmed. The Court granter certiorari to resolve a Circuit split.
In considering the issue, the Court first noted that, in connection with the Bankruptcy Act of 1898, it had held that "[t]he character of [a contractual obligation] to pay attorney's fees presents no obstacle to enforcing it in bankruptcy." Security Mortgage Co. v. Powers, 278 U.S. 149, 154 (1928). The rule, the Court continued, retains its vitality unless the Code provides otherwise. Given the presumed allowance of such claims, the issue for the Court was "whether the Bankruptcy Code disallows contract-based claims for attorney's fees based solely on the fact that the fees at issue were incurred in litigating issue of bankruptcy law."
In concluding that the Bankruptcy Code did not disallow such claims, Justice Alito, writing for the Court, hammered the Ninth:
The Fobian rule finds no support in the Bankruptcy Code, either in [section] 502 or elsewhere. In Fobian, the court did not identify any provision of the Bankruptcy Code as providing support for the new rule. Instead, the court cited three of its own prior decisions. Significantly, in none of those decisions did the court identify any basis for disallowing a contractual claim for attorney's fees incurred in litigating issues of federal bankruptcy law. Nor did the court have occasion to do so; in each of those cases, the claim for attorney's fees failed as a matter of state law. The absence of textual support is fatal for Fobian.
Ouch. Notably, PG&E did not even bother to defend Fobian before the SCOTUS. Instead, PG&E argued that the fees at issue were disallowed by section 506(b). Unfortunately for PG&E, it had not raised the issue below. Although it greeted PG&E's new argument with a slight degree of skepticism, the SCOTUS refused to consider it and "express[ed] no opinion with regard to whether . . . other principles of bankruptcy law might provide an independent basis for disallowing Travelers' claim for attorneys fees."
The good news for creditors here is that, if you have a contract-based right to attorneys fees, those fees may be asserted as a claim in bankruptcy without regard to whether the fees arose in connection with litigation of bankruptcy issues. Although the Third Circuit appears not to have ever weighed in on the issue, bankruptcy courts within the Circuit have cited Fobian approvingly. See, e.g., In re S.S., No. 98-2862(RG) at 8 (D.N.J. (Bankr.) January 9, 2002).
