Argument Preview: Travelers v. PG&E on 1/16

The following argument preview was written by Sarah Rispin, an attorney at Akin Gump in Washington, DC.

On Tuesday, January 16, the Court will hear argument in No. 05-1429, Travelers Casualty & Surety Company of America v. Pacific Gas & Electric Company, which presents the question of whether creditors or others seeking to assert a claim against a debtor in federal bankruptcy proceedings can obtain attorneys’ fees for those efforts not as an administrative expense, but rather in a claim in and of itself against the debtor.

Eric Brunstad of Bingham McCutchen is arguing on behalf of petitioner Travelers, and Joshua Rosenkranz of Heller Ehrman is arguing on behalf of respondent PG&E. (By way of full disclosure: Tom Goldstein of Akin, Gump also worked on the Respondents’ brief as advocacy counsel). The American Insurance Association and the Surety & Fidelity Association of America filed amicus briefs on behalf of Travelers. A group of law professors filed an amicus brief on behalf of PG&E.

The case arises out of a surety bond that PG&E took out with Travelers assuring PG&E’s obligation to pay workers’ compensation benefits, as required by California law. The contract for the surety bond included a loosely worded clause that required PG&E to pay attorneys’ fees that Travelers might incur in connection with the enforcement, protection, or litigation of its rights under the contract. PG&E filed for federal bankruptcy protection under Chapter 11 in 2001, staying in operation as debtor-in-possession during the proceedings. Travelers appeared in the bankruptcy court to assert a claim against PG&E for payment in the event that PG&E defaulted on its workers’ compensation claims, and to seek assurance in the Plan of Reorganization that its subrogation rights were being rendered unimpaired. Although its first claim was “disallowed” by the bankruptcy court, Travelers obtained the language it sought in the Plan of Reorganization.

Travelers then filed a second claim against the bankruptcy estate for the attorneys’ fees it incurred appearing in bankruptcy court, arguing that these were pre-petition (not post-petition) claims based on the language of the original contract. (The Bankruptcy Code provides a separate avenue for recovering post-petition attorneys’ fees as “administrative expenses.”) The bankruptcy court also disallowed this claim. It relied on In re Fobian, a Ninth Circuit bankruptcy opinion holding that contractual attorneys’ fees were not recoverable “where the litigated issues involve . . . issues peculiar to federal bankruptcy law.” The basic idea animating that case is one of federal preemption: state law rights should be honored in bankruptcy except where honoring those rights interfered with the federal bankruptcy regime.

Travelers appealed this decision to the Northern District of California, and to the Ninth Circuit, both of which also relied on Fobian to affirm. The Ninth Circuit further added that, “if unimpaired, non-prevailing creditors were authorized to obtain an attorney fee award in bankruptcy for inquiring about the status of unimpaired inchoate and contingent claims, the system would likely be overwhelmed by fee applications, with no funds available for disbursement to impaired creditors or debtor reorganization.” The Supreme Court granted certiorari to determine whether an unsecured creditor could recover, as a claim in bankruptcy, attorneys’ fees granted under a contract governed by state law.

Travelers argues that, as a matter of straightforward application of the Bankruptcy Code, its attorneys’ fees claim should be allowed. Specifically, its right to attorneys’ fees is a valid claim that falls within the broad definition of “claim” set forth in Section 105 of the Bankruptcy Code, and is not disallowed under Section 502 of the Code (Section 502 indicates which claims are allowed and disallowed, i.e. which claims either do or not entitle the creditors who hold them to a proportionate share of the bankruptcy estate). Travelers also argues that the central holding of Fobian is invalid as “untethered” to the Bankruptcy Code.

PG&E argues, in response, that the Court need not affirm Fobian to affirm the Ninth Circuit’s decision in the instant case. Instead, it argues that it is an elementary principle of federal bankruptcy law that unsecured creditors are not entitled to post-petition attorneys’ fees–that is, attorneys’ fees incurred appearing in bankruptcy court after the bankruptcy petition is filed. PG&E cites two primary statutory bases for this argument: First, PG&E points out that Section 502 of the Bankruptcy Code directs the bankruptcy judge to determine bankruptcy claims “as of the date of filing”; because Travelers (and others in a similar position) had incurred no attorneys’ fees enforcing its contract rights as of that date, any “claim” would be nil. Second, PG&E argues that, because Section 506(b) of the Code provides that oversecured creditors can claim contractual fees, expressio unius, unsecured creditors cannot claim such fees in bankruptcy proceedings.

The insurance industry amici agree with Travelers that Fobian has no basis in law and add that allowing the development of such a “federal common law” doctrine against contractual attorneys’ fees in bankruptcy would invite forum shopping into bankruptcy courts. Amicus Surety & Fidelity Association additionally argues that contractual attorneys’ fees provisions should provide the basis of allowable claims in bankruptcy by simple operation of the “American Rule” of responsibility for litigation expenses – namely, that attorneys’ fees are recoverable only pursuant to a statute or enforceable contract that provides for them.

Arguing in support of respondent, the group of law professors urge in their amicus brief that Section 502 of the Code should be construed narrowly to disallow post-petition attorneys’ fees. Such a construction, they explain, follows from both pre-Code case law permitting the reimbursement of post-petition legal fees as administrative expenses only when the attorneys’ services are beneficial to the bankruptcy estate and in light of the goal of the federal bankruptcy regime to maximize the debtor’s estate for disbursement to pre-petition creditors.