Judge Keith Lundin dropped a comment on a three-week old post about the pending Supreme Court case involving Travelers’ attorneys fees in the PG&E bankruptcy. Professor Stephen Lubben from Seton Hall kindly sent along some thoughts on the case. Judge Lundin makes an important point that really deserves more attention. The case may not belong at the Supreme Court at all, meaning the Court might dismiss the case as having improvidently granted certiorari. (For nonlegal types the Supreme Court is said to "grant certiorari" when it agrees to a hear a case.)
In the case, Travelers seeks to recover attorneys’ fees it incurred to litigate its proof of claim in PG&E’s bankruptcy. Travelers reasoned that it incurred these fees in establishing its rights under a surety agreement where PG&E had agreed to indemnify Travelers for attorneys fees it had incurred. The Ninth Circuit ruled that Travelers could not recover fees for litigating on federal bankruptcy issues.
Judge Lundin noted that the certiorari petition argued that the lower courts had split on the allowance of postpetition attorney fees to an unsecured creditor. This split in the lower courts would be the reason the Supreme Court would have taken the case. Judge Lundin then continues:
In fact, I don’t believe there
is any circuit court opinion in recorded history that allows [attorneys] fees
to an unsecured creditor except with respect to a nondischargeable
debt, and then not with respect to allowance or distribution from the
estate. Why did the Supremes take cert in this case is the better
quesiton. Was it because they were mislead by the cert petition into
believing there is a (nonexistent) circuit split; or are they going to
make some gigantic new federal common law on the subject of allowance
of post-petition fees to unsecured creditors?
Judge Randall Haines has made a similar point in an article that will be forthcoming in the Norton Bankruptcy Law Advisor. Might the Supremes be persuaded to reconsider whether to decide this case on its merits?
Comments
2 responses to “Improvident Travelers”
With all due respect, there is indeed support for the argument that unsecured creditors can recover contractually agreed attorneys fees, especially in a case (such as PG&E) where unsecured creditors receive a full (100%) recovery.
See Gadsden and Yamasaki, Recovery of Attorneys Fees as an Unsecured Claim, 114 Banking L.J. 594 (1997) and In re United Merchants & Manufacturers, Inc., 674 F.2d 134, 137 (2nd Cir.1982).
I think the reference to the fees as being “postpetition” is the source of some confusion here. This isn’t a case involving a creditor that is alleged to be oversecured, seeking to be paid during the bankruptcy for postpetition fees incurred (or postpetition interest on the claim). While the fees were incurred postpetition, the right to recover those fees arose under a prepetition agreement, and are part of a prepetition claim. (The fact that it is 100% plan renders that question of little practical importance, though.) There is in fact a split on the question whether, when a contract says that fees are available, the creditor’s right to an allowed claim for those fees is a question of state/contract law (which is the right answer), or instead (as CA9 held here, following old and wrong circuit precedent) federal bankruptcy law necessarily requires that a claim for fees incurred in litigating “bankruptcy matters” must be disallowed, regardless of what state/contract law would otherwise provide.