In Brief: Split Continues Over Unsecured Creditors’ Right to Postpetition Attorney’s Fees

In Brief: Split Continues Over Unsecured Creditors’ Right to Postpetition Attorney’s Fees

In Travelers Cas. & Sur. Co. of America v. Pacific Gas and Elec. Co., 549 U.S. 443 (2007), the U.S. Supreme Court rejected the Ninth Circuit’s long-standing Fobian rule disallowing claims against a bankruptcy estate for attorney’s fees arising from litigating issues that are “peculiar to federal bankruptcy law,” rather than basic contract enforcement. In so ruling, the Court recognized the presumption that “claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.”

However, the Court did not address whether section 506(b) of the Bankruptcy Code, which expressly states that the secured claim of an oversecured creditor includes any fees, costs, or other charges provided for under its security agreement or applicable state law, “categorically disallows unsecured claims for contractual attorney’s fees” because the issue was not raised in the lower courts. The Court wrote that “we express no opinion with regard to whether, following the demise of the Fobian rule, other principles of bankruptcy law might provide an independent basis for disallowing . . . [a] claim for attorney’s fees.”

Courts have long been divided—both before and after Travelers—over the issue of whether an unsecured creditor can include postpetition attorney’s fees and costs as part of its allowed claim in a bankruptcy case. See SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826 (9th Cir. 2009) (discussing split and listing cases). The majority of courts to date have concluded that the answer to this question is no.

For example, in Global Indus. Tech. Serv. Co. v. Tangelwood Inv., Inc. (In re Global Indus. Tech., Inc.), 327 B.R. 230 (Bankr. W.D. Pa. 2005), the bankruptcy court, in ruling that an unsecured creditor may not include postpetition attorney’s fees in its claim, recognized four arguments in support of what has become the majority position:

(i) Although section 506(b) expressly provides for the allowance of postpetition attorney’s fees for oversecured creditors, neither section 506(b) nor any other provision of the Bankruptcy Code provides for the allowance of such fees for unsecured creditors. Therefore, unsecured creditors “have no clear entitlement to postpetition attorney’s fees.”

(ii) In United Sav. Ass’n of Texas v. Timbers of Inwood Forest Assoc., 484 U.S. 365 (1988), the Supreme Court held that section 506(b) permits only oversecured creditors to recover postpetition interest on their claims. Thus, “[b]ecause § 506(b) provides for the allowance of postpetition fees and interest, courts apply this reasoning to restrict allowance of postpetition fees only to oversecured creditors.”

(iii) Section 502(b) of the Bankruptcy Code “requires a court to determine the amount of a claim as of the date the petition was filed.” According to the Global Indus. court, “It is axiomatic that, as of the petition date, postpetition attorney’s fees have not been incurred[,]” and therefore, “unsecured prepetition claims cannot include postpetition attorney’s fees.” Section 506(b) then allows the addition of “postpetition interest and fees to the extent a creditor is oversecured.”

(iv) It would be “inequitable to allow certain unsecured creditors to recover postpetition attorney’s fees at the expense of similarly situated claimants.” Allowing one group of unsecured creditors to recover more than their prepetition debt “unfairly discriminates against the others because it reduces the pool of assets available to all unsecured creditors pro rata.”

Post-Travelers, some courts have adhered to this approach in disallowing postpetition attorney’s fees as part of an unsecured claim. See, e.g., In re Old Colony, LLC, 476 B.R. 1 (D. Mass. 2012); In re Seda France, Inc., 2011 BL 191775 (Bankr. W.D. Tex. July 22, 2011); In re Elec. Mach. Enters., Inc., 371 B.R. 549 (Bankr. M.D. Fl. 2007). Others, including the Ninth Circuit, have ruled to the contrary, reasoning that this approach is inconsistent with the Bankruptcy Code’s broad definition of “claim” and incorrectly conflates the allowance functions of section 502(b) and section 506(b). See SNTL Corp., 571 F.3d at 843–45; In re Holden, 491 B.R. 728 (Bankr. E.D.N.C. 2013); see also Ogle v. Fidelity & Deposit Co. of Md., 586 F.3d 143, 148 (2d Cir. 2009) (“section 506(b) does not implicate unsecured claims for post-petition attorney’s fees, and it therefore interposes no bar to recovery”).

Recently, the bankruptcy court in In re Tribune Media Co., 2015 BL 381838 (Bankr. D. Del. Nov. 19, 2015), weighed in on this issue. The chapter 11 plan confirmed for Tribune Media Company (“TMC”) provided that Wilmington Trust Company, as indenture trustee for certain unsecured notes, could assert a general unsecured claim against TMC’s estate for fees and expenses arising under the indenture.

In the indenture, TMC agreed to reimburse WTC “for all reasonable expenses, disbursements and advances incurred or made by [WTC] in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel).” Other provisions of the indenture: (i) obligated TMC, in the event of a default, to pay amounts “to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursement and advances of [WTC], its agents and counsel”; and (ii) authorized WTC to file a proof of claim in any TMC bankruptcy case for such costs and expenses of collection.

WTC filed a claim for more than $30 million in postpetition fees and expenses. After TMC objected to the claim, a mediator appointed by the bankruptcy court to resolve the dispute recommended that the fee claim be disallowed.

U.S. bankruptcy judge Kevin J. Carey adopted the mediator’s recommendation and disallowed the fee claim. Initially, Judge Carey explained that the Third Circuit has not decided this issue. However, he found the reasoning of Global Indus. to be persuasive, concluding that “the plain language of § 502(b) and § 506(b), when read together, indicate[s] that postpetition interest, attorney’s fees and costs are recoverable only by oversecured creditors.”

According to Judge Carey, denying postpetition attorney’s fees to unsecured creditors does not leave these claimants without recourse. He explained that unsecured creditors may seek payment of postpetition fees and expenses under sections 503(b)(3)(D) and 503(b)(4), which allow an administrative expense claim for actual, necessary expenses, and reasonable compensation for professional services, on the part of creditors (and certain other parties) that provide a “substantial contribution” to the bankruptcy estate.

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