Court allows attorney fees recovery in bankruptcy
The Supreme Court ruled on Tuesday that federal bankruptcy law does not forbid the recovery of attorneys’ fees when that right has been recognized by contract. Justice Samuel A. Alito, Jr., wrote the unanimous opinion (download here) in Travelers Casualty & Surety v. Pacific Gas & Electric (05-1429), overturning a Ninth Circuit Court ruling that such recovery is never allowed. This was the only decision of the day on the merits.
The Ninth Circuit, joined by three other Circuit Courts, had ruled that a contract that allows for fee recovery does not overcome a general bar on such fees. By contrast, five other Circuit Courts had ruled that such fees may be recovered if they are allowed under state contract law or by state statute.
PG&E had filed for bankruptcy in April 2001, seeking to reorganize under Chapter 11. For several years before that, Travelers had issued a number of surety bonds on PG&E’s behalf to third parties. Among those was a $100 million bond assuring that PG&E would pay workers’ compensation benefits to its employees. The utility agreed to reimburse Travelers for any attorneys’ fees that it incurred in connection with any effort it made to enforce or protect its rights under the surety bonds.
In the bankruptcy proceeding, the utility gained permission to continue to pay workers’ compensation to injured employees. Along the way, Travelers and PG&E disagreed about Travelers’ rights under the reorganization plan, and Travelers claimed that the utility had changed the language of the plan to diminish Travelers’ protection. Further litigation ensued, but that ultimately was settled.
The two agreed in that stipulation that Travelers could recover its attorneys’ fees in protecting the indemnity agreements. Travelers asserted that right, but PG&E objected, arguing that attorneys’ fees could not be recovered while litigating issues under bankruptcy law. The bankruptcy court, District Court and the Ninth Circuit all agreed with PG&E. The Ninth Circuit, relying on a Circuit decision in 1991, ruled that “attorney fees are not recoverable in bankruptcy for litigating issues peculiar to bankruptcy law.”
On Tuesday, the Court vacated that ruling. Reaching back to a 1928 precedent, Justice Alito’s opinion said that a contractual obligation to pay attorneys’ fees can be enforced in bankruptcy. Such recovery is now allowed under present law, the opinion added, unless expressly barred by a specific provision in the Bankruptcy Code. It found none.
Another week, another unanimous reversal of the Ninth Circuit. This is getting embarrassing.
Comment by Taylor Reynolds — March 20, 2007 @ 10:09 am
The issue whether postpetition attorneys’ fees can be added to prepetition unsecured claims in bankruptcy actually was not reached by the Court. The Ninth Circuit had a rule (the Phobian rule) that allowed such fees to be added to claims (assuming the agreement of the parties provided for fees) but only where the issues that caused the fees to be incurred were not bankruptcy law issues. Both Travelers and PG&E agreed that the Phobian rule lacked support in the Bankruptcy Code. The Court agreed, rejecting the Ninth Circuit’s Phobian rule, and holding that allowance of fees does not depend on whether the issues that caused the fees to be incurred were bankruptcy law issues. But the Court did not decide the next logical question: whether the fees would be allowed. The Court explicitly did not reach the question whether certain provisions of the Bankruptcy Code barred allowance of postpetition fees altogether, with respect to prepetition unsecured claims. (For example, the Code allows postpetition interest for oversecured creditors, to the extent of their oversecurity. PG&E argued that, by implication, postpetition interest was not allowable on unsecured claims.)
There is more that could be said, but that’s probably enough for a comment.
Mark S. Scarberry
Pepperdine Univ. School of Law
Comment by MalibuProf — March 24, 2007 @ 1:04 am