In a recent holding that a creditor may collect, on an unsecured basis, post-petition attorneys’ fees under an otherwise enforceable pre-petition contract, the Second Circuit Court of Appeals followed a similar ruling by the Ninth Circuit earlier this year, adding to a conflict among the circuits on this issue.

In Ogle v. Fidelity & Deposit Co. of Maryland, No. 09-0691-bk (2d Cir. Nov. 5, 2009), Fidelity & Deposit Co. entered into several agreements with Agway, Inc. under which Agway agreed to indemnify Fidelity for any amounts paid on behalf of Agway and for any attorneys’ fees incurred by Fidelity to enforce the agreements. Thereafter, Agway filed a Chapter 11 petition and failed to pay creditors covered by Fidelity’s guarantee. Fidelity paid the creditors and incurred legal fees enforcing the indemnity agreement against Agway. Ogle, Agway’s liquidating trustee, conceded that the agreements gave Fidelity a right to the fees, but asserted that the Bankruptcy Code barred recovery by Fidelity since the attorneys’ fees were incurred post-petition. Both the bankruptcy court and the district court concluded that Agway was liable for an unsecured claim that included Fidelity’s post-petition legal fees enforcing the agreements. (Fidelity’s unsecured claim for postpetition attorneys’ fees, of course, would receive payment only at the same rate as other unsecured claims in the case, not as administrative expenses of the bankruptcy.) The liquidating trustee appealed.

The Second Circuit considered a single issue: May an unsecured creditor recover post-petition attorneys’ fees that were authorized by a pre-petition agreement but were contingent on postpetition events? A recent Supreme Court decision, Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007), held that Bankruptcy Code section 502(b) does not preclude an unsecured creditor from recovering, based on a pre-petition contract, postpetition attorneys’ fees related solely to bankruptcy law litigation, but did not address whether post-petition attorneys’ fees were allowable categorically. In Ogle, the Second Circuit concluded that the Bankruptcy Code permits an unsecured claim for post-petition attorneys’ fees authorized by a valid pre-petition contract. The court examined sections 502 and 506 of the code in reaching its conclusion.

Section 502(b).

Section 502 of the Bankruptcy Code requires allowance of a claim unless one of a series of exceptions to allowance applies. The Second Circuit concluded that the focus thus must be on whether any of the exceptions in section 502(b) expressly require disallowance of post-petition attorneys’ fees. Because none of those exceptions explicitly apply to post-petition attorneys’ fees payable under a pre-petition contract, such a claim is allowable unless it is unenforceable against the debtor under an agreement or applicable law. Here, the indemnification agreements at issue were valid under state law. Hence, “an unsecured claim for post-petition fees, authorized by a valid pre-petition contract, is allowable under section 502(b) and is deemed to have arisen pre-petition.”

Section 502(b) also requires a court “to determine the amounts of such claims as of the date of the filing of the petition.” Although none of the attorneys’ fees at issue had been incurred before the petition date, and were impossible to calculate at that time, the court determined that section 502(b) did not bar recovery on an unsecured basis. (By contrast, in an earlier decision the First Circuit concluded that an unsecured creditor may not recover under section 502(b) attorneys’ fees that were “incurred” after the debtor became insolvent.)

Section 506(b).

Ogle also made an argument based on section 506(b) of the code, which allows oversecured creditors to recover interest on a claim and reasonable fees arising from an agreement or statute that is the basis for the claim. Ogle argued that section 506(b), by allowing interest and fees to oversecured creditors, implies that an unsecured claim for attorneys’ fees incurred post-petition must be disallowed. The court noted that neither the language of section 506(b) nor its legislative history resolves the issue of an unsecured creditor’s contract-based claim for attorneys’ fees. Relying on the Supreme Court’s observation “that ‘the Code says nothing about unsecured claims for contractual attorney’s fees incurred while litigating issues of bankruptcy law,’” the court found it decisive that the code also “says nothing about such fees incurred litigating things other than issues of bankruptcy law.” In the absence of explicit guidance, the court declined to read section 506(b) as prohibiting an unsecured claim for post-petition attorneys’ fees arising from a valid, pre-petition contract. (By contrast, the Bankruptcy Appellate Panel of the Eighth Circuit ruled nearly ten years ago that section 506(b) is the only way to recover attorneys’ fees incurred post-petition.)

Ogle made several additional arguments that the Second Circuit found unpersuasive. Among these was the argument that because the code contains a provision (section 502(e)(2)) that permits certain claims seeking reimbursement and contribution that become fixed after the petition date, the absence of a similar exception for attorneys’ fees in the Bankruptcy Code “thereby forecloses an exception for post-petition attorneys’ fees.” The court refused, however, to draw an inference from silence or omission, observing that a court is to “presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.” Similarly, the court rejected the contention that allowing Fidelity’s unsecured claim based on a pre-petition contract would unfairly disadvantage other creditors, such as tort claimants or trade creditors. When sophisticated parties provide by contract for recovery of collection costs on default, the court explained, there is a presumption that the creditor gave value in the terms of the contract for the collection costs provision. A “policy of equitable distribution” may not be used to defeat otherwise valid claims for collection costs by an unsecured creditor.

The Second Circuit’s opinion in Ogle follows by less than a year a decision of the Ninth Circuit that reached the same conclusion, In re SNTL Corp., 571 F.3d 826 (9th Cir. 2009), and an earlier Sixth Circuit decision to the same effect. Although no conflicting authority at the circuit level has emerged since Travelers, other circuits had previously refused to find unsecured claims for post-petition attorneys’ fees allowable based on a pre-petition contract. Adams v. Zimmerman, 73 F.3d 1164 (1st Cir. 1996); Waterman v. Ditto, 248 B.R. 567 (B.A.P. 8th Cir. 2000). SNTL cited two bankruptcy court cases decided after Travelers that reached opposite conclusions on this issue. Ogle and SNTL, the only circuit-level cases since Travelers to address an unsecured creditor’s recovery of post-petition attorneys’ fees arising from a pre-petition contract, make it likely that creditors with claims in jurisdictions that have not yet taken a position on this question will request attorneys’ fees in similar situations—at least until the Supreme Court resolves this split.