The Supreme Court unanimously held on March 20, 2007, that an unsecured lender could recover contractbased legal fees “incurred in [post-bankruptcy] litigation” on “issues of bankruptcy law.” Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., __ U.S. __ (March 20, 2007). Op., at 1, 3. In doing so, the court vacated a summary ruling by the Ninth Circuit last year. 167 Fed. Appx. 593 (9th Cir. 2006) (held, “attorney fees… not recoverable in bankruptcy for litigating issues ‘peculiar to federal bankruptcy law.’“), citing In re Fobian, 951 F.2d 1149, 1153 (9th Cir. 1991) (held, when “litigating issues involving 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.”).
Facts. The lender in Travelers incurred legal fees when objecting to a proposed reorganization plan and related matters. 167 Fed. Appx. at 593-94. The lender claimed that the debtor had failed to provide the requisite “adequate information” about the plan, and sought assurance that its rights would not be impaired. Id. Because a resolution of this litigation was “governed entirely by federal bankruptcy law,” the Ninth Circuit affirmed the lower courts’ denial of the lender’s attorney fee claim. Id. The Supreme Court agreed to hear the case and resolve a conflict among the circuits on this narrow issue.
No Statutory Bar to Contract-Based Fees. The Bankruptcy Code does not disallow contract-based claims for legal fees “solely [because] the fees…were incurred litigating issues of bankruptcy law.” Op., at 5. On the contrary, reasoned the court, “we generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed by the Code.” Op., at 9. There was simply no statutory basis for disallowing the lender’s claim here.
Narrow Ruling. The court declined to hear any of the debtor’s other arguments because they had not been raised in the lower courts (e.g., only over-secured lenders are entitled to legal fees; “structure and purpose of the Bankruptcy Code” militate against legal fees for unsecured creditors). On remand to the lower courts, the debtor will be free to make these arguments, for the Supreme Court decided only the narrow issue before it.
1. The court’s decision is consistent with prior rulings in other circuits. In re Shangra-La, Inc. 167 F.3d 843,848-49 (4th Cir. 1999) (“Entitlement to attorneys’ fees … depended on … terms of [contract] and on state law.”); In re United Merchants & Mfrs., Inc. 674 F.2d 134 (2d Cir. 1982) (Act case).
2. The lender in Travelers does not get an administrative priority claim for its legal fees. Instead, the amount of the fees will be added to its non-priority unsecured claim, payable in bankruptcy dollars.
3. The debtor in Travelers will still be able to challenge the reasonableness of the lender’s fees on remand (i.e., were they necessary, reasonable?). See, e.g., Shangra-La, 167 F.3d at 850. Although the debtor still has other unresolved legal objections, noted above, they are apparently makeweight.