Business Bankruptcy Issues

On November 5, 2009, the U.S. Court of Appeals for the Second Circuit became the second court of appeals to answer the question left open in the U.S. Supreme Court’s March 2007 decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007): Can unsecured creditors recover post-petition attorney’s fees as part of their unsecured claims? For more on the Travelers decision, follow the link to this earlier post.

The Ninth Circuit’s Earlier SNTL Corp. Decision. In June 2009, the Ninth Circuit, in a per curiam decision in In re SNTL Corp., 571 F.3d 826 (9th Cir. 2009), held that post-petition attorney’s fees were allowable as part of an unsecured prepetition contract claim. The Ninth Circuit adopted the December 2007 opinion of the Ninth Circuit Bankruptcy Appellate Panel, In re SNTL Corp., 380 B.R. 204 (9th Cir. BAP 2007), which is available by following the link in this sentence. You may find this earlier post on the SNTL Corp. case of interest as well.

The Second Circuit’s New Decision. In its November 5, 2009 opinion in Ogle v. Fidelity & Deposit Company of Maryland, the Second Circuit held — as the Ninth Circuit did in the SNTL Corp. case — that an unsecured creditor can include post-petition attorney’s fees authorized under a prepetition contract valid under state law. In Ogle, the Second Circuit extended its holding in United Merchants & Manufacturers, Inc. v. Equitable Life Assurance Society of the United States, 674 F.2d 134 (2d Cir. 1982), a case decided under the Bankruptcy Act, and concluded that United Merchants survived both the statutory revisions made by the Bankruptcy Code and the Supreme Court’s Travelers decision.

In reaching this result, the Second Circuit analyzed the issues presented, in part, as follows:

All of the fees at issue in Travelers were incurred post-petition; so the amount was necessarily unknown when the bankruptcy petition was filed. It follows that if an unsecured claim for post-petition fees was for that reason unrecoverable, the Travelers Court could have disposed of the claim on that simple, available ground alone. Travelers, therefore, proceeds along lines that, reasonably extended, would suggest (notwithstanding the Court’s express disclaimer) that section 502(b)’s requirement–that the court “shall determine the amount of such claim . . . as of the date of the filing of the petition”–does not bar recovery of post-petition attorneys’ fees.

In the present appeal, as in Travelers: The underlying contract is valid as a matter of state substantive law; none of the section 502(b)(2)-(9) exceptions apply; and the Code is silent as to the particular question presented–in Travelers, whether the Code allows “unsecured claims for contractual attorney’s fees incurred while litigating issues of bankruptcy law,” 549 U.S. at 453; and here, whether the Code allows unsecured claims for “fees incurred while litigating issues of” contract law more generally.

Accordingly, we hold that an unsecured claim for post-petition fees, authorized by a valid pre-petition contract, is allowable under section 502(b) and is deemed to have
arisen pre-petition.  Accord SNTL, 571 F.3d at 844 (“[W]e reject the position . . . that section 502(b) precludes such fees.”).
 

The Court then turned to the question of whether Section 506(b) of the Bankruptcy Code expressly disallows the recovery of attorney’s fees as part of an unsecured claim:

As Travelers makes clear, the question is whether the Code disallows post-petition attorneys’ fees, and does so expressly. It was therefore decisive in Travelers that “the Code says nothing about unsecured claims for contractual attorney’s fees incurred while litigating issues of bankruptcy law.” 459 U.S. at 453 (emphasis in original). And while Travelers declined to address section 506(b) (because the parties had not raised the issue below), see id. at 454-56, it is decisive here that the Code says nothing about such fees incurred litigating things other than issues of bankruptcy law. The teaching of Travelers is therefore fully consonant with our decision in United Merchants.

Accordingly, we hold that section 506(b) does not implicate unsecured claims for post-petition attorneys’ fees, and it therefore interposes no bar to recovery.

Finally, the Second Circuit rejected arguments that (1) Section 502(b)(2)’s disallowance of unmatured interest bars claims for post-petition attorney’s fees, (2) Section 502(e)(2) regarding claims for reimbursement or contribution implicitly forecloses post-petition attorney’s fees, and (3) as a policy matter it would be unfair to allow contract creditors to recover post-petition attorney’s fees when tort claimants and many trade creditors cannot.

Conclusion. We now have two U.S. Court of Appeals decisions this year holding that, after Travelers, post-petition attorney’s fees are allowable as part of an unsecured claim if otherwise recoverable under a prepetition contract. Particularly given the major bankruptcy cases filed in the Southern District of New York, within the Second Circuit, unsecured creditors may make a point of including post-petition attorney’s fees as part of their claims when their contracts so provide. This decision raises questions as well:

• Will the potential allowance of post-petition attorney’s fees for bankruptcy-related issues impact a debtor’s reorganization prospects?
• What procedures will debtors propose for managing the process as unsecured creditors amend their claims to add attorney’s fees incurred in protecting their rights during the course of a bankruptcy case?
• Will individual unsecured creditors become more active in Chapter 11 cases, particularly in those cases in which a large distribution is likely?
• What standards will bankruptcy courts use to assess the reasonableness of an unsecured creditor’s post-petition attorney’s fees for bankruptcy-related issues?
• Will claims buyers pay more for unsecured claims based on contracts providing for recovery of post-petition attorney’s fees now that bankruptcy-related fees are recoverable?
• Will creditors be more insistent on including attorney’s fees provisions in contracts?

Not every unsecured creditor will have the right to attorney’s fees, and most may not incur significant fees after a bankruptcy is filed. However, those that do now have another important arrow in their quiver when seeking to add those fees to their unsecured claims. It will be interesting to see how these issues play out in the months ahead.

 

On June 23, 2009, the U.S. Court of Appeals for the Ninth Circuit became the first Court of Appeals to answer the question left open in the U.S. Supreme Court’s March 2007 decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. — whether post-petition attorney’s fees can be added to unsecured claims.

• The Ninth Circuit had before it an appeal from the December 2007 decision by the Ninth Circuit Bankruptcy Appellate Panel ("BAP") in the In re SNTL Corp. case, which in turn had been the first appellate decision to address that unresolved question. 
• The decision also addressed the interesting, albeit unrelated, question of whether a guarantor of a debt can become liable if the payment of the debt by the primary obligor later is returned in a preference settlement.

The Travelers Case. Before turning to the SNTL Corp. case itself, let’s look back at the Supreme Court’s decision. In March 2007, the U.S. Supreme Court overruled the Ninth Circuit’s so-called Fobian rule in the Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. decision. However, it did not decide whether unsecured creditors could recover, as part of their unsecured claims, post-petition attorney’s fees incurred during the course of the bankruptcy case. For more on the Travelers decision, follow the link in this sentence.

The SNTL Corp. BAP Decision. In the December 2007 BAP decision, Bankruptcy Judge Dennis Montali, writing for the unanimous BAP panel, held that that "claims for postpetition attorneys’ fees cannot be disallowed simply because the claim of the creditor is unsecured." On the unrelated issue, the BAP held that a guarantor’s liability was revived after a preference settlement.

The Ninth Circuit Rules In The SNTL Corp. Case. On June 23, 2009, the Ninth Circuit decided the appeal, issuing a brief, per curiam decision, stating as follows:

The Bankruptcy Appellate Panel decision is AFFIRMED for the reasons stated in its opinion in this case sub nom. We adopt the BAP opinion, In re SNTL Corp., 380 B.R. 204 (B.A.P. 9th Cir. 2007), as our own and attach it as an appendix to this opinion. See Appendix, infra.

A Second Look At The BAP’s Decision. Given that the Ninth Circuit affirmed and adopted as its own the BAP opinion in its entirety, further review of the BAP’s analysis is merited. In reaching its decision, the BAP carefully reviewed two earlier decisions by bankruptcy courts that had taken up the open "Travelers" issue, In re Qmect, Inc. (see earlier post on the Qmect decision) and In re Electric Machinery Enterprises, Inc. (see prior post on the Electric Machinery decision), as well as pre-Travelers law, and first explained its analysis of the interplay between Sections 502 and 506(b):

We are not persuaded by the approach of the Electric Machinery court and, like Qmect, we reject the argument that section 506(b) preempts postpetition attorneys’ fees for all except oversecured creditors. While we cannot predict how the Ninth Circuit will decide this issue in Travelers, we do find a clue in Joseph F. Sanson Inv. Co. v. 268 Ltd. (In re 268 Ltd.), 789 F.2d 674, 678 (9th Cir. 1986), where the Ninth Circuit observed that section 506(b) defines secured claims and does not limit unsecured claims:

When read literally, subsection (b) arguably limits the fees available to the oversecured creditor. When read in conjunction with § 506(a), however, it may be understood to define the portion of the fees which shall be afforded secured status. We adopt the latter reading.

268 Ltd., 789 F.2d at 678.

Next, the BAP discussed Section 502(b)(1)’s requirement that the court determine the amount of an unsecured claim as of the petition date:

The Electric Machinery court, like the bankruptcy court here and many of the pre-Travelers majority courts, disallowed the postpetition fees of an unsecured creditor because section 502(b)(1) provides that a bankruptcy court “shall determine the amount of such claim . . . as of the date of the filing of the petition” and the postpetition fees did not exist as of that date. Elec. Mach., 371 B.R. at 551; Pride Cos., 285 B.R. at 373. Because the amount of fees incurred postpetition cannot be determined or calculated as of the petition date, section 502(b) purportedly precludes their allowance. Id. We disagree with this approach, as it is inconsistent with the Bankruptcy Code’s broad definition of “claim,” which — as discussed previously — includes any right to payment, whether or not that right is contingent and unliquidated. See 11 U.S.C. § 101(5)(A); Qmect, 368 B.R. at 884.

The BAP then held that the Supreme Court’s 1988 Timbers decision did not apply:

We believe that Electric Machinery’s reliance on Timbers is misplaced. Timbers provided that an undersecured creditor could not receive postpetition interest on the unsecured portion of its debt. Timbers, 484 U.S. at 380. This holding is consistent with section 502(b)(2), which specifically disallows claims for unmatured interest. Inasmuch as section 502(b) does not contain a similar prohibition against attorneys’ fees, the comparison between the current issue and that presented in Timbers is not persuasive.

Finally, the BAP held that it was unnecessary to reconcile the competing public policy considerations advanced by the Electric Machinery and Qmect decisions:

Because we find that the Bankruptcy Code itself provides the answer to this issue (by not specifically disallowing postpetition fees), we do not attempt to reconcile these policy concerns. In the end, it is the province of Congress to correct statutory dysfunctions and to resolve difficult policy questions embedded in the statute.

For more on this decision, as well as the BAP’s discussion (now adopted by the Ninth Circuit) on the revival of a guarantor’s liability after a preference settlement, this earlier post on the BAP’s In re SNTL Corp. decision may be of interest.

On Remand From The Supreme Court’s Travelers Decision. One interesting side note involves the BAP’s December 2007 comment in the In re SNTL Corp. decision about being unable to predict how the Ninth Circuit would decide this issue in the Travelers case on remand from the U.S. Supreme Court. Months later, in May 2008, the Ninth Circuit issued this brief order in the Travelers case, effectively remanding the case for "consideration of the bankruptcy court in the first instance." The bankruptcy judge to whom the decision was remanded? Bankruptcy Judge Dennis Montali, who wrote the BAP opinion in In re SNTL Corp.

Impact On Unsecured Creditors? As the first ruling by a U.S. Court of Appeals on this open issue, the Ninth Circuit’s decision may lead unsecured creditors to include post-petition attorney’s fees as part of their allowed unsecured claims when their contracts or a statute provides for them outside of bankruptcy. It will be interesting to see whether the decision has a significant impact on how unsecured creditors in the Ninth Circuit and other jurisdictions pursue claims in bankruptcy cases, and how bankruptcy estates react to such claims for post-petition attorney’s fees.