In Ogle v. Fidelity & Deposit Co. of Maryland, 586 F.3d 143 (2d Cir. 2009), the Second Circuit has now become the second circuit court of appeals to recently conclude that general unsecured creditors may include postpetition attorneys’ fees as part of their claim when attorneys’ fees are permitted by contract or applicable state law.11

In Ogle, Fidelity had issued surety bonds to various third parties. Agway, the debtor, made an agreement to indemnify Fidelity for the payments made under the bonds as well as any legal fees incurred to enforce the agreements. After filing chapter 11, Agway defaulted on its indemnity payments to Fidelity. Fidelity subsequently incurred attorneys’ fees attempting to enforce its rights under the indemnity agreement and, in turn, sought to recover those attorneys’ fees as part of its unsecured claim.

At issue in Ogle was whether Bankruptcy Code sections 502(b) or 506(b) or policy concerns bar an unsecured creditor’s ability to recover postpetition attorneys’ fees.

Postpetition Attorneys’ Fees Are Simply Contingent, Unliquidated Amounts as of the Petition Date and Not Barred by Bankruptcy Code Section 502(b)

Bankruptcy Code section 502(b) provides that the “court, after notice and a hearing, shall determine the amount of [a] claim . . . as of the date of filing the petition.” (emphasis added). The trustee argued that the “as of the date of filing” language of section 502(b) barred postpetition fees because postpetition fees were contingent and unliquidated as of the petition date. The Second Circuit expressly rejected this argument, however, concluding that a contingent right to fees arose when the agreement was executed, not when the fees were incurred. That is, even though the attorneys’ fees arose out of postpetition events, the contingent right to recover such fees arose prepetition. Moreover, the fact that the postpetition attorneys’ fees were unliquidated as of the petition date was not a bar to recovery because the Bankruptcy Code’s definition of “claim” expressly extends to unliquidated amounts.12

Bankruptcy Code Section 506(b) – Which Expressly Applies to Oversecured Creditors – Does Not Create a Negative Inference Barring Unsecured Creditors From Recovering Postpetition Attorneys’ Fees

The trustee alternatively argued that since Bankruptcy Code section 506(b) only expressly permits oversecured creditors to recover fees, the requisite negative inference is that unsecured creditors may not collect fees. The Second Circuit, however, refused to assume that Congress intended to exclude unsecured creditors from collecting reasonable fees through negative inference, noting that neither section 506(b) nor the Bankruptcy Code’s legislative history mentions the status of unsecured creditors collecting fees.

Allowing Unsecured Claims for Postpetition Attorneys’ Fees Does Not Unfairly Disadvantage Other Creditors

Finally, the Second Circuit rejected the trustee’s policy argument that allowing unsecured claims for contractual postpetition attorneys’ fees would unfairly disadvantage other creditors, such as tort claimants and trade creditors, whose distributions would be correspondingly reduced. The Second Circuit concluded that creditors who had contractual rights to recover attorneys’ fees most likely received such rights in exchange for giving value, in the form of a contract term favorable to the debtor or otherwise, and such creditors should not be denied the benefit of their bargain.

Potential Effects of the Ogle and SNTL Ruling

Debtors should expect Ogle and SNTL to embolden individual unsecured creditors to become more litigious in cases where a significant distribution to unsecured creditors is expected. And while fee requests under Ogle and SNTL will, of course, remain subject to the bankruptcy court’s review for reasonableness, debtors will incur additional associated costs. On the other side of the coin, Ogle and SNTL suggest vendors and suppliers should insist on including a contractual right to attorneys’ fees and costs in their customer contracts. Moreover, all unsecured creditors are incentivized to research whether a contractual or statutory basis exists for including postpetition attorneys’ fees as part of their claim.