In Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Company, the Supreme Court held that federal bankruptcy law does not automatically disallow claims for post-petition attorneys' fees incurred by a prepetition unsecured creditor simply because such fees are incurred in litigating issues arising under the Bankruptcy Code. The Court, however, left open the issue whether such claims may be disallowed on the basis that the attorneys' fees were incurred post-petition. Creditors, distressed debtors, and their professionals have watched post-Travelers cases discussing the open issue closely, as the allowance of claims of prepetition unsecured creditors for post-petition attorneys fees could dramatically affect how an insolvent debtor's limited unencumbered assets are divided up among the debtor's unsecured creditors. When there is not enough pie to go around, each creditor wants its slice to be as large as possible.

Post-Travelers court decisions have split in their determination of the issue left open in Travelers. In the opinion discussed above, after reviewing the reasoning of the post-Travelers courts that have considered the issue, the Ninth Circuit BAP came down squarely on the side of permitting the allowance of claims for post-petition attorneys' fees incurred by unsecured creditors.

In its proofs of claim, Centre asserted a claim for approximately $3 million in attorneys' fees. The trustee objected to the attorneys' fees claim to the extent Centre sought recovery for attorneys' fees incurred post-petition, arguing that a claim of a prepetition unsecured creditor for post-petition attorneys' fees must be disallowed. The bankruptcy court sustained the trustee's objection. Centre appealed this ruling as well.

On appeal, the BAP noted that the issue of whether a prepetition unsecured creditor's claim for post-petition attorneys' fees must be disallowed because the fees were incurred post-petition was currently pending before the Ninth Circuit Court of Appeals on remand in the Travelers case itself. The BAP determined to decide the issue in the case before it without waiting for the Ninth Circuit to rule.

Relying in part on its holding with respect to Centre's guarantee claim — that an allowed prepetition claim properly may include a contingent claim that becomes fixed after the petition date — the BAP held that nothing in the Bankruptcy Code provides for the disallowance of a claim of a prepetition unsecured creditor for post-petition attorneys' fees merely because the fees are incurred post-petition. The BAP reversed the bankruptcy court's order disallowing Centre's claim for post-petition attorneys' fees and remanded the case to the bankruptcy court to determine whether Centre had satisfied the requisites for allowance of that portion of its claims under the relevant contracts and state law.

White & Case will continue to monitor developments in this and other important areas of bankruptcy law and report significant developments as they occur.

Related Article from the January 2008 Insolvency Notes:

Creditor Revives $110 Million Claim Against a Released Guarantor