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Business Bankruptcy Issues Recent Developments

A Fly In The Ointment: Sale Of Property May Cut Off Landlord’s Section 502(b)(6) Lease Rejection Claim For Future Rent

Here’s a scenario frequently seen in Chapter 11 cases. A tenant files bankruptcy and rejects a commercial real estate lease. The landlord files an unsecured lease rejection claim seeking to recover the lost future rent under the rejected lease. The claim amount is capped by Bankruptcy Code Section 502(b)(6) but may still be one of the larger unsecured claims in the case. Now let’s add a small, but relatively common, twist. Sometime later, but before distributions are made on the claim, the landlord sells the real estate that the debtor had occupied under the rejected lease.

The FLYi Chapter 11 Case. That, complete with the twist, was the situation in the In re FLYi, Inc. Chapter 11 case pending in the Delaware Bankruptcy Court. After the landlord sold the property, the liquidation trust established under the debtor’s Chapter 11 plan of reorganization objected to the landlord’s claim, arguing that after the sale of the property the debtor had no further obligations under the lease. Virginia law applied because the property was located in Dulles, Virginia. As described by the Bankruptcy Court, the landlord had three options under Virginia law:

[D]o nothing and sue for the rent remaining under the Lease; reenter the Premises for the sole purpose of re-letting it without terminating the Lease; or re-enter the Premises and exercise full dominion over the premises thereby terminating the Lease and eliminating FLYi’s obligation to pay any future rent.

The landlord argued that this interpretation of the law was wrong but asserted that provisions in the lease protected the landlord’s claim anyway. The Bankruptcy Court rejected those arguments and held that the landlord’s sale of the property terminated both the lease and the landlord’s right to future rent after the date of the sale. A copy of the Bankruptcy Court’s decision is available here.

Be sure to read the Delaware Business Bankruptcy Report’s interesting discussion for more details on the decision, including the arguments advanced and the Bankruptcy Court’s treatment of them.

What Does This Mean For Landlords? A landlord contemplating a sale of the real property will have to consider what impact that sale might have on its lease rejection claim.

  • In states like Virginia where, according to the Bankruptcy Court in the FLYi case, termination of a lease cuts off a landlord’s claim for future rent, landlords will have to be prepared to lose all or a portion of a lease rejection claim if they sell the real property. 
  • The outcome may be different in other states. Section 1951.2 of the California Civil Code, for example, expressly permits a landlord, upon termination of a lease, to recover the present value of the difference between the unpaid future rent under the lease and the amount of rent that could reasonably be avoided through mitigation efforts. This may permit a landlord to sell the property and still retain a lease rejection claim.
  • When state law allows it, landlords may seek to include provisions in a lease to preserve contractually the right to a post-sale lease damages claim.

What Does This Mean For Bankruptcy Estates? Debtors, liquidation trusts, and other estate representatives may have an incentive to determine whether the landlord still owns the property. In states where a post-rejection sale of the property operates to cut off the landlord’s future rent claim, this fact could provide a new ground for an objection to the landlord’s Section 502(b)(6) claim.

Conclusion. Time will tell how frequently this scenario will play out in future cases, but landlords should expect to see the "did you sell the property" question asked more often going forward.

Business Bankruptcy Issues Recent Developments

New Article Tackles Whether Unsecured Creditors Should Be Able To Recover Post-Petition Attorney’s Fees, The Question Left Open By The Travelers Decision

When 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 (available here) in March 2007, it left for another day the question of whether unsecured creditors could recover, as part of their unsecured claims, post-petition attorney’s fees incurred during the course of the bankruptcy case.

Early Decisions Take Different Views. Since the Travelers decision, two bankruptcy courts have issued decisions but have come to different conclusions on that question. 

  • In May 2007, in the In re Qmect, Inc. decision (available here), the U.S. Bankruptcy Court for the Northern District of California held that unsecured creditors could recover post-petition attorney’s fees. For more on that decision, see this earlier post on the case and its analysis. 
  • In July 2007, in the In re Electric Machinery Enterprises, Inc. case (available here), the U.S. Bankruptcy Court for the Middle District of Florida came to the opposite conclusion, following a majority of courts that had addressed this issue unrestrained by the Ninth Circuit’s Fobian decision. See this previous post for more on the Florida decision.

New Article Sides With Majority View. A new article to be published in the Winter 2007 issue of the American Bankruptcy Institute Law Review, gives context for these differing views and argues that the majority position is the correct one. The article, entitled "Interpreting Bankruptcy Code Sections 502 and 506: Post-Petition Attorneys’ Fees in a Post-Travelers World," was written by Professor Mark S. Scarberry, Professor of Law at the Pepperdine University School of Law. Professor Scarberry is the current Robert M. Zinman Scholar in Residence at the American Bankruptcy Institute. A copy of the article is available for download from the Social Science Research Network website by following this link.

A Textual Argument. The centerpiece of the article is Professor Scarberry’s interesting analysis of the interplay between Sections 502(b) and 506 of the Bankruptcy Code and the textual argument he advances to support the majority view.

  • A key building block of this argument is his conclusion that the language in Section 502(b), which provides that a claim is to be allowed in an amount "as of the date of the filing of the petition," precludes inclusion of post-petition amounts as part of the Section 502(b) claim allowance. 
  • He then argues that Section 506(b)’s function is to add post-petition interest and "reasonable fees, costs, and charges" to this Section 502(b) allowed amount but only for secured claims (determined under Section 506(a)) and only when the value of a secured creditor’s collateral exceeds the allowed amount of the claim, determined under Section 506(a).
  • He contends that Section 506(b)’s use of the phrase "there shall be allowed" demonstrates that its purpose is to allow amounts not otherwise allowable under Section 502(b).

The Debate Continues. Professor Scarberry’s article is an excellent resource for those seeking to understand the history and background of this issue. It also provides debtors, creditors committees, and their attorneys with arguments to oppose an unsecured creditor’s attempt to recover post-petition attorney’s fees. The issue, however, remains far from settled in the courts. 

  • The majority view, now bolstered by the arguments in Professor Scarberry’s article, will probably prevail in many cases.
  • Still, the In re Qmect decision shows that at least some courts may allow these fees.

Until this issue is resolved by the Supreme Court, or at least by more Courts of Appeals, unsecured creditors with a contractual or nonbankruptcy statutory right to attorney’s fees may try their luck and seek allowance of post-petition attorney’s fees in bankruptcy cases as part of their unsecured claims.

Business Bankruptcy Issues Recent Developments The Financially Troubled Company

The Bull Rips A Hole In The Matador’s Cape: New Ninth Circuit Decision Limits Reach Of Section 502(b)(6)’s Landlord Cap

A commercial real estate lease often represents the largest single liability of many debtors. For retailers, which typically have scores or even hundreds of store leases, the liability involved is orders of magnitude larger. It’s fair to say that the management of lease obligations can be of enormous consequence to debtors, landlords, and other creditors in Chapter 11 bankruptcy cases.

Rejected Leases And The Capped Claim. As explained in an earlier post on how commercial real estate leases are treated in bankruptcy, one of a debtor’s options in a Chapter 11 case is to reject uneconomic or otherwise burdensome leases, terminating the debtor’s obligation to pay rent and turning the landlord’s claim for termination of the lease into a prepetition claim. Section 502(b)(6) of the Bankruptcy Code goes further and caps the landlord’s prepetition rejection claim at an amount equal to the greater of (1) one year’s rent or (2) fifteen percent of the remaining lease term, up to a maximum of three years’ worth of rent. The starting date for calculating the claim is the earlier of the date when the bankruptcy petition was filed or when the landlord recovered possession of, or the tenant surrendered, the premises. A landlord with six years left on a rejected lease, for example, would have its claim capped at one year’s worth of rent.

What’s Covered By The Cap? This ability to cap a landlord’s claim in bankruptcy can be a major benefit to debtor tenants. Ever since a 1995 decision by the Bankruptcy Appellate Panel (BAP) of the Ninth Circuit in In re McSheridan, 184 B.R. 91 (B.A.P. 9th Cir. 1995), debtors have been successful in many cases in capping a variety of claims by landlords. In McSheridan, the BAP held that the cap applied to all damages for the lessee’s nonperformance of the lease, not just to claims based on future rent. Landlords have challenged that analysis but, at least in the Ninth Circuit, have had little success — until this week.

The Ninth Circuit’s El Toro Decision. In an eight-page opinion (available here) issued on October 1, 2007 in the In re El Toro Materials Company, Inc. Chapter 11 case,, the U.S. Court of Appeals for the Ninth Circuit took a very different view of the landlord cap under Section 502(b)(6). In the El Toro case, the debtor was a mining company that leased property from the Saddleback Community Church, paying $28,000 per month in rent. After the lease was rejected, Saddleback brought an adversary proceeding against El Toro for $23 million in damages alleging that El Toro left a million tons of wet clay "goo," mining equipment, and other materials on the property.

  • The bankruptcy court held that Saddleback’s claim, which asserted waste, nuisance, and other tort theories, would not be limited by the Section 502(b)(6) cap. 
  • Following its McSheridan precedent, the BAP reversed and held that any damages would be subject to the cap. 
  • Interestingly, two of the three judges on the BAP panel filed concurring opinions, voicing doubts about the wisdom of the McSheridan case. A copy of the BAP’s unpublished El Toro decision from July 2005 is available here.

Judge Kozinski’s Analysis. On appeal, the Ninth Circuit reversed the BAP’s decision, holding that the cap did not apply to the landlord’s tort claims. Judge Alex Kozinski authored the opinion and analyzed the key issues this way:

The structure of the cap—measured as a fraction of the remaining term—suggests that damages other than those based on a loss of future rental income are not subject to the cap. It makes sense to cap damages for lost rental income based on the amount of expected rent: Landlords may have the ability to mitigate their damages by re-leasing or selling the premises, but will suffer injury in proportion to the value of their lost rent in the meantime. In contrast, collateral damages are likely to bear only a weak correlation to the amount of rent: A tenant may cause a lot of damage to a premises leased cheaply, or cause little damage to premises underlying an expensive leasehold.

One major purpose of bankruptcy law is to allow creditors to receive an aliquot share of the estate to settle their debts. Metering these collateral damages by the amount of the rent would be inconsistent with the goal of providing compensation to each creditor in proportion with what it is owed. Landlords in future cases may have significant claims for both lost rental income and for breach of other provisions of the lease. To limit their recovery for collateral damages only to a portion of their lost rent would leave landlords in a materially worse position than other creditors. In contrast, capping rent claims but allowing uncapped claims for collateral damage to the rented premises will follow congressional intent by preventing a potentially overwhelming claim for lost rent from draining the estate, while putting landlords on equal footing with other creditors for their collateral claims.

The statutory language supports this interpretation. The cap applies to damages “resulting from” the rejection of the lease. 11 U.S.C. § 502(b)(6). Saddleback’s claims for waste, nuisance and trespass do not result from the rejection of the lease—they result from the pile of dirt allegedly left on the property. Rejection of the lease may or may not have triggered Saddleback’s ability to sue for the alleged damages.But the harm to Saddleback’s property existed whether or not the lease was rejected. A simple test reveals whether the damages result from the rejection of the lease: Assuming all other conditions remain constant, would the landlord have the same claim against the tenant if the tenant were to assume the lease rather than rejecting it? Here, Saddleback would still have the same claim it brings today had El Toro accepted the lease and committed to finish its term: The pile of dirt would still be allegedly trespassing on Saddleback’s land and Saddleback still would have the same basis for its theories of nuisance, waste and breach of contract. The million-ton heap of dirt was not put there by the rejection of the lease—it was put there by the actions and inactions of El Toro in preparing to turn over the site.

(Footnotes omitted.)

McSheridan Holding Overruled. The Ninth Circuit opinion noted the two concurrences from the BAP decision questioning McSheridan and suggested that the BAP consider adopting an en banc procedure to reconsider such doubtful precedents. Given the Ninth Circuit’s holding, it will come as no surprise that the Court of Appeals also explicitly overruled McSheridan:

To the extent that McSheridan holds section 502(b)(6) to be a limit on tort claims other than those based on lost rent, rent-like payments or other damages directly arising from a tenant’s failure to complete a lease term, it is overruled.

The Ninth Circuit noted that McSheridan also holds that "damages flowing from the failure of a party that has rejected a lease to perform future routine repairs or pay utility bills are capped," but declined to address — or overrule — that holding.

Post-El Toro Ramifications.  At least in the Ninth Circuit, with McSheridan overruled landlords will work hard to characterize their damage claims as arising from tort theories or otherwise not being based on "lost rent, rent-like payments or other damages directly arising from a tenant’s failure to complete the lease term." At the negotiation stage, when the market permits landlords may demand larger security deposits and letters of credit on the view that the Section 502(b)(6) cap no longer limits every type of damage recoverable against such security. They may also structure leases to separate claims for items such as clean-up costs, hazardous waste removal, property damage, and even tenant improvement repayments from rent claims, in an attempt to bolster the argument that these claims fall outside of the cap.

Conclusion. Like a bull charging a matador, the El Toro decision has ripped a hole in the Section 502(b)(6) cape previously used to turn away cap-busting landlord claims. Time will tell just how significant the decision turns out to be, but at first blush it seems that debtors and non-landlord creditors may be the ones who end up seeing red. 

Business Bankruptcy Issues Recent Developments

Florida Bankruptcy Court Considers The Supreme Court’s Travelers Decision And Refuses To Allow Post-Petition Attorney’s Fees To An Unsecured Creditor

In March 2007, the U.S. Supreme Court overruled the so-called Fobian rule in the Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. decision. (Click here for a copy of the decision.) That rule, named for the decision by the United States Court of Appeals for the Ninth Circuit in a case called In re Fobian, 951 F.2d 1149 (9th Cir. 1991), had barred unsecured creditors from recovering as part of their unsecured claim attorney’s fees incurred post-petition litigating bankruptcy issues. 

The Open Question. As discussed in an earlier post, although the Supreme Court dispatched the Fobian rule, in Travelers it did not decide whether an unsecured creditor could actually recover its attorney’s fees. Among other issues, it left for another day the issue of whether Section 506(b) of the Bankruptcy Code, which expressly allows attorney’s fees to oversecured creditors, precludes recovery of post-petition attorney’s fees as part of an unsecured claim.

A New Decision From Florida. Jordan Bublick has an interesting post on his Miami Florida Bankruptcy Law blog about a July 6, 2007 decision in the In re Electric Machinery Enterprises, Inc. Chapter 11 case. In the decision, the court held that an unsecured creditor is not permitted to add post-petition attorney’s fees and costs to its unsecured claim. A copy of the decision, by Judge Michael G. Williamson of the the U.S. Bankruptcy Court for the Middle District of Florida, is available here. As Jordan points out, the Florida bankruptcy court held that the pre-Travelers majority rule denying unsecured creditors post-petition attorney’s fees was still good law. Among the reasons the court cited:

  • Section 506(b)’s language permits only oversecured creditors to receive interest and fees, and this effectively excludes recovery by unsecured creditors.
  • The reasoning of the Supreme Court’s decision in United Savings Ass’n v. Timbers, 484 U.S. 365 (1988), that post-petition interest can only be paid to secured creditors with the benefit of an equity cushion, applies to attorney’s fees as well.
  • Section 502(b) requires the amount of a claim to be determined "as of the date of the filing of the petition," before post-petition fees have accrued.
  • Allowing fees to contract creditors would be inequitable because tort and many trade creditors, who lack the ability to recover attorney’s fees, would have their relative recovery diminished.

Judge Williamson called out another reason for his decision:

Furthermore, the Court is particularly mindful of the practical impact a contrary ruling would have on the administration of a bankruptcy case. There would be no finality to the claims process as bankruptcy courts would constantly have to revisit the issue of the amount of claims to include ever-accruing attorneys’ fees. The ‘cash registers’ would ring on a daily basis, as attorneys for unsecured creditors that were active in the case would continually be filing new claims or seeking to reconsider previously allowed claims in order to add post-petition attorneys’ fees and costs. Essentially, there could be no finality to the claims resolution process if the ever-accruing fees and costs attendant to the representation of unsecured creditors were allowed as part of an unsecured claim.

An Earlier California Bankruptcy Court Decision. Interestingly, the Florida bankruptcy court did not cite to the In re Qmect, Inc. decision, issued by the U.S. Bankruptcy Court for the Northern District of California in May 2007 and discussed in this earlier post. In that decision, the California bankruptcy court took the opposite view. It held that an unsecured creditor could recover, as part of its unsecured claim, post-petition attorney’s fees if its contract with the debtor provided for recovery of such fees. Adopting a different view of the bankruptcy policies at issue, that court held:

The strongest rationale for implying a prohibition on the inclusion of post-petition attorneys’ fees in a unsecured creditor’s pre-petition claim is that, unless the debtor is solvent, the unsecured creditor’s augmented claim will diminish the dividend to other unsecured creditors. However, a similar effect flows from allowing secured creditors to include their post-petition attorneys’ fees in their secured claims. While equality of distribution is one of the basic tenets of bankruptcy law, another important policy in bankruptcy is the preservation of nonbankruptcy legal rights except to the extent necessary to facilitate the purpose of the bankruptcy proceeding. Absent a clear provision of the Bankruptcy Code modifying a creditor’s nonbankruptcy legal rights, the Court concludes that those rights should be deemed to be left intact.

More Decisions To Follow. Bankruptcy courts are now beginning to address whether unsecured creditors can recover post-petition attorney’s fees in the wake of the Travelers decision. These two early decisions have reached completely different conclusions. More decisions will undoubtedly follow as creditors with attorney’s fees provisions in their contracts seek to include post-petition fees in their unsecured claims. With the issue far from settled, be sure to stay tuned.

Business Bankruptcy Issues Recent Developments

California Bankruptcy Court Answers Open Question From Supreme Court’s Travelers Decision: Can Post-Petition Attorney’s Fees Be Added To Unsecured Claims?

In March, the U.S. Supreme Court overruled the so-called Fobian rule in the Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. decision. (Click here for a copy of the decision.) That rule, named for decision by the United States Court of Appeals for the Ninth Circuit in a case called In re Fobian, 951 F.2d 1149 (9th Cir. 1991), had barred unsecured creditors from recovering as part of their unsecured claim attorney’s fees incurred post-petition litigating bankruptcy issues.

The Open Question. As discussed in a post on the Travelers decision, although the Supreme Court dispatched the Fobian rule, it did not decide whether an unsecured creditor could actually recover its attorney’s fees. Left unresolved, among other issues, was whether Section 506(b) of the Bankruptcy Code, which expressly allows attorney’s fees to oversecured creditors, precludes recovery of post-petition attorney’s fees as part of an unsecured claim.

The Question Gets Asked Post-Travelers. In the In re Qmect, Inc. Chapter 11 cases pending in the U.S. Bankruptcy Court for the Northern District of California, an unsecured creditor sought allowance of post-petition attorney’s fees, incurred litigating bankruptcy issues, as part of its unsecured claim against debtors who were individual guarantors of its debt owed by the corporation. The creditor had prevailed in an adversary proceeding on its guaranty (an appeal is pending) and sought post-petition attorney’s fees as part of its judgment.

After first denying the creditor’s request without prejudice last November, the Bankruptcy Court asked for supplemental briefing on the issue after the Travelers decision was decided. In the debtors’ supplemental brief, they argued that Section 506(b) of the Bankruptcy Code implicitly provides for the disallowance of post-petition attorney’s fees as part of unsecured claims (as opposed to secured claims). In the creditor’s supplemental brief, it argued that all of the other circuits that have addressed the issue agree that such fees are recoverable and that there is nothing in Section 502(b) or Section 506(b) that prohibits their recovery. Both the debtors and the creditor filed reply briefs as well, further arguing their contentions.

California Bankruptcy Court Gives An Answer. On May 17, 2007, in perhaps the first post-Travelers decision to rule on the issue, Judge Leslie Tchaikovsky held that an unsecured creditor was entitled to include post-petition attorney’s fees incurred litigating bankruptcy-related issues in its unsecured claim, where the parties’ underlying contract provided for recovery of attorney’s fees. In its Memorandum of Decision re Motion for Post-Petition Attorneys’ Fees, the Bankruptcy Court held that (1) the creditor’s post-petition attorney’s fees qualify as a "claim" under Section 101(5) of the Bankruptcy Code, and (2) none of the exceptions in Section 502(b) of the Bankruptcy Code apply to require disallowance of the fees as part of the claim.

The Court’s Analysis. In elaborating on the second holding, the Bankruptcy Court explained as follows:

The only category [of Section 502(b)’s exceptions] that arguably supports the disallowance of an unsecured claim for post-petition attorneys’ fees is 11 U.S.C. § 502(b)(1): i.e., that ‘such claim is unenforceable against property of the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured….’ 11 U.S.C. § 502(b)(1). The debtor contends that this category applies to post-petition attorneys’ fees because 11 U.S.C. § 506(b) renders the claim for post-petition attorneys’ fees unenforceable against the debtor and property of the debtor. Section 502(b)(1) refers to ‘applicable law,’ not ‘applicable nonbankruptcy law.’ Thus, Section 506(b) qualifies as ‘applicable law.’ Section 506(b) provides as follows:

(b) To the extent that an allowed secured claim is secured by property, the value of which is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and reasonable fees, costs or charges provided for under which such claim arose.

Thus, according to the debtor, by providing that a secured claim shall be allowed reasonable fees to the extent the claim is secured by property, the Bankruptcy Code is implicitly saying that fees are not available to an unsecured creditor. The Court finds this reading of 11 U.S.C. §§ 502(b) and 506(b) too strained to be persuasive. First, 11 U.S.C. § 506 is entitled ‘Determination of Secured Status.’ A statute so entitled would not be a logical place to provide for the disallowance of an element of an unsecured claim. If Congress, in enacting the Bankruptcy Code, had wanted to disallow claims for post-petition attorneys’ fees, the logical place for it to have done so was surely in 11 U.S.C. § 502(b). Moreover, 11 U.S.C. § 506(b) does not distinguish between pre-petition and post-petition attorneys’ fees. Thus, if 11 U.S.C. § 506(b) is read as an additional ground for objecting to claims, arguably, an unsecured creditor would be prohibited from including its pre-petition attorneys’ fees in its claim as well as its postpetition fees.

(Footnotes omitted.) After being unable to find any Court of Appeals decision decided under the Bankruptcy Code directly addressing the issue, the Bankruptcy Court then examined the policy argument underlying the debtors’ objection:

The strongest rationale for implying a prohibition on the inclusion of post-petition attorneys’ fees in a unsecured creditor’s pre-petition claim is that, unless the debtor is solvent, the unsecured creditor’s augmented claim will diminish the dividend to other unsecured creditors. However, a similar effect flows from allowing secured creditors to include their post-petition attorneys’ fees in their secured claims. While equality of distribution is one of the basic tenets of bankruptcy law, another important policy in bankruptcy is the preservation of nonbankruptcy legal rights except to the extent necessary to facilitate the purpose of the bankruptcy proceeding. Absent a clear provision of the Bankruptcy Code modifying a creditor’s nonbankruptcy legal rights, the Court concludes that those rights should be deemed to be left intact.

Now What? If the Bankruptcy Court’s decision is followed by other courts, the main question left open in Travelers will have been answered. However, this decision raises some additional issues:

  • 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?

It will be interesting to see how these issues unfold as the impact of this decision, and those of other courts facing this issue, are felt. Stay tuned.

Business Bankruptcy Issues Recent Developments

Proof Of Claim And Other Bankruptcy Forms Revised To Reflect April 1, 2007 Dollar Amount Adjustments

As reported in this post last month, certain dollar amounts in the Bankruptcy Code were increased effective April 1, 2007. The dollar amount changes meant that some of the official bankruptcy forms, most notably the proof of claim form and the voluntary petition, had to be revised as well.

After I put up that post, the Administrative Office of the United States Courts (known in the trade as "the AO") made the revised forms available and released a formal notice of the dollar amount adjustments. Copies of the revised forms — with handy arrows pointing out each place where they were revised — are attached to the notice.

Of course, you’ll need to get the forms in blank to use in bankruptcy cases. If you don’t have special bankruptcy form software, a number of the official bankruptcy forms have been designed to allow you to type in information or select choices from drop-down menus before printing the form. Printing is the only way to go because the form won’t let you save your changes. 

If you follow the links above you’ll be able to access blank copies of the revised forms from the AO’s website. That way, you’ll be sure to have the most up-to-date versions.

Business Bankruptcy Issues

The U.S. Supreme Court Rejects The Fobian Rule Barring Unsecured Creditors From Recovering Attorney’s Fees In Bankruptcy Cases

Attorney’s Fees And Unsecured Claims. For more than 15 years, creditors in the Ninth Circuit who sought to include in unsecured claims amounts for attorney’s fees incurred post-petition litigating bankruptcy issues have had that portion of their claims disallowed. The reason? A decision by the United States Court of Appeals for the Ninth Circuit in a 1991 case called In re Fobian, 951 F.2d 1149 (9th Cir. 1991).  

The Fobian Rule. In In re Fobian, the Ninth Circuit held that even if the parties’ underlying contract provided for the prevailing party to recover attorney’s fees, "where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party." 

The Supreme Court Overrules Fobian. That all changed on Tuesday, March 20, 2007, with the U.S. Supreme Court’s unanimous decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. (click here for the decision). Neither Travelers nor PG&E sought to defend the Fobian rule, and the Supreme Court had little problem disposing of it:

The Fobian rule finds no support in the Bankruptcy Code, either in §502 or elsewhere. In Fobian, the court did not identify any provision of the Bankruptcy Code as providing support for the new rule. See 951 F. 2d, at 1153. Instead, the court cited three of its own prior decisions, In re Johnson, 756 F. 2d 738 (1985); In re Coast Trading Co., 744 F.2d 686 (1984); and In re Fulwiler, 624 F. 2d 908 (1980) (per curium). Significantly, in none of those cases did the court identify any basis for disallowing a contractual claim for attorney’s fees incurred 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. See Johnson, supra, at 741–742; Coast Trading, supra, at 693; Fulwiler, supra, at 910. [footnote omitted]

The absence of textual support is fatal for the Fobian rule. Consistent with our prior statements regarding creditors’ entitlements in bankruptcy, see, e.g., Raleigh, 530 U.S., at 20, we generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed. See 11 U. S. C. §502(b). Neither the court below nor PG&E has offered any reason why the fact that the attorney’s fees in this case were incurred litigating issues of federal bankruptcy law overcomes that presumption.

An Important But Undecided Question. Although the Supreme Court dispatched the Fobian rule, it remanded the case without deciding whether Travelers, an unsecured creditor, could actually recover its attorney’s fees. Instead, the Supreme Court held that the remaining arguments had not been raised below. Still to be resolved is whether Section 506(b) of the Bankruptcy Code, which expressly allows attorney’s fees to oversecured creditors, means that creditors cannot recover attorney’s fees as part of an unsecured claim. For a flavor of the Supreme Court’s reactions to this open issue, you may find the transcript of the oral argument, held in January 2007, interesting .

Thanks to the Supreme Court of the United States Blog and the Georgia Bankruptcy Law Blog for first reporting on the decision.