Monday, September 9, 2013

Bankruptcy Lawyer - US Supreme Court Rules on Issue of Allocation of Attorneys Fees

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.

On March 20, 2007, the US Supreme Court issued its decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., ___ US ___ (2007) which was before the Court on a writ of certiorari from the 9th Circuit Court of Appeals. The issue before the Court was "whether federal bankruptcy law precludes an unsecured creditor from recovering attorney's fees authorized by a prepetition contract and incurred in postpetition litigation." The 9th Circuit Court of Appeals had held that such fees are categorically prohibited to the extent the litigation involves issues of federal bankruptcy law. The US Supreme Court disagreed and vacated the lower Court's decision.

In the bankruptcy case, Traveler's filed a proof of claim that included an amount to recover its attorney's fees incurred in connection with PG&E's bankruptcy proceedings. The Bankruptcy Court agreed with PG&E, that Traveler's was not entitled to recover attorney's fees incurred while litigating issues of bankruptcy law.

On appeal, the District Court agreed with the bankruptcy court relying on In re Fobian, 951 F.2d 1149 (9th Cir. 1991) which held that "where the litigated issues involve 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." The 9th Circuit Court of Appeals affirmed the District Court's ruling.

In its decision, the US Supreme Court explained that under the American Rule, the prevailing litigant is ordinarily not entitled to collect attorney's fees from the loser, unless this rule is overcome by statute or by an enforceable contract allocating attorney's fees. The Court held that an otherwise enforceable contract is allowable in bankruptcy except where the Bankruptcy Code provides otherwise. The Court further held that the Bankruptcy Code does not disallow a contract-based claim for attorney's fees based solely on the fact that the fees in issue were incurred litigating issues of bankruptcy law. The Court stated that the Fobian rule has no support in the Bankruptcy Code either in section 502 (which is the section dealing with the allowance and disallowance of claims) or in any other code section.

The Court expressed no opinion whether following the demise of the Fobian rule, other principles of bankruptcy law may provide an independent basis for disallowing the involved attorney's fees claim. One such argument not addressed by the Court as it was not raised in the Courts below was whether section 506(b) by explicit negation disallows unsecured claims for contractual attorney's fees. In short, the Court's holding was a narrow repudiation of the Fobian rule, leaving open the broader question of whether unsecured creditors can collect post-petition attorney's fees.