One of the great things about running a blog is that hear more from all of your far-flung friends. Stephen Lubben at Seton Hall wrote me with the following: "When the Boston Red Sox failed to make the playoffs, my life lost most of its meaning. I turn to your blog postings daily for the insight that can only come from someone wise enough to follow the St. Louis Cardinals. What have you to say about the news that the Supreme Court agreed to hear the Ninth Circuit decision in the PG&E bankruptcy about Travelers’ attorneys fees?" Well, I don’t have the original e-mail anymore, but I remember it something like that. And, OK, some of that was only implicit in Stephen’s e-mail.

OK, actually, none of that was implicit in the e-mail. In reality, I asked Stephen if he had any thoughts on the case with the hope that he would allow me to post them here. He wrote back with the following:

As you know, the Supreme Court recently agreed to hear is Travelers Casualty & Surety Co. of America v. Pacific Gas and Electric Co., No. 05-1429. PG&E filed a chapter 11 petition in San Francisco after it got caught in a squeeze created by California’s partially deregulated energy market. It later turned out that some of the gyrations in the State’s energy market were likely caused by Enron’s market manipulations – but that is the subject of another bankruptcy case.

In this case the Ninth Circuit, in an slight (and unpublished) opinion, held that contract provisions that provided for PG&E to pay Travelers’ legal expenses in connection with a surety agreement did not cover claims based on federal issues, such as Travelers proof of claim litigation and its objections to the debtor’s disclosure statement. The Ninth Circuit concluded that “if unimpaired, non-prevailing creditors were authorized to obtain an attorney fee award in bankruptcy for inquiring about the status of unimpaired inchoate and contingent claims, the system would likely be overwhelmed by fee applications, with no funds available for disbursement to impaired creditors or debtor reorganization.”

This is a rather odd bit of the opinion, because it suggests that the merits of Travelers’ underlying argument in the bankruptcy court were somehow relevant to the fee analysis, despite the court’s initial statement that the key issue was whether federal rights were at issue in the litigation. To be sure, there are some indications that Travelers seriously over-lawyered the PG&E bankruptcy case, but one would have thought that this issue would go to the reasonableness of the requested fees, rather than the right to assert a claim for the fees in the first instance. If the Ninth Circuit’s point is merely that if this kind of claim is allowed, the total size of the unsecured claims will grow, so what?  The court can’t really believe that it should facilitate reorganization by deciding to disallow entire classes of claims, based on its own sense of the worthiness of the claimants, can it?

Yes it can.