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October 6, 2007

What Do We Do with Travelers?

In Travelers Casualty & Surety Co v. Pacific Gas & Electric, --- U.S. ---, 127 S. Ct. 1199 (2007), the Supreme Court overruled the long established rule, certainly in the 9th Circuit, that unsecured creditors cannot get attorneys fees pursuant to a contractual right to fees when the fees are incurred in litigating bankruptcy issues.

There is an excellent new article on Travelers in Jennifer M. Taylor and Christopher J. Mertens, Travelers and the Implications on the Allowability of Unsecured Creditors Claims for Post-Petition Attorneys' Fees Against the Bankruptcy Estate, 81 Am. Bankr. L.J. Vol. 2, 2007. 

The article points out that attorneys' fees issues arise in two different situations.  First, when the claim is asserted against the estate as was the case in Travelers, and second, when the award is requested against a litigant other than the estate.  The article contains an excellent analysis of allowance of attorneys fees issues pre-Fobian. 

I'm not sure that Travelers did that much other than re-institute the debate over allowance of fees.  Surprisingly PG&E, the appellant, conceded that Fobian was wrongly decided even though the validity of that case was specifically cited by the Supreme Court as the reason for the grant of cert.  So the unanimous ruling is not surprising.  Alito did confirm the general rule that non-bankruptcy law should prevail in bankruptcy proceedings unless the bankruptcy code says otherwise.  The code doesn't limit under non-bankruptcy law unless that result is required by Section 506(b) which Travelers specifically avoided as it was not argued in the lower courts.      

It seems to me that post-petition fees cannot be awarded against the estate based on Section 502 which states that a claim is fixed as of the petition date.  Also it seems clear that Section 506(b) which describes oversecured creditors are entitled to fees presumably excludes everyone else.  But why cannot a credit card company seek fees in a 523(a) dischargeability action or GMAC in a relief from stay action if the matter is covered by the language of the contract?  I understand that typically the contract clause says something like, if we start fighting over this contract, the winner gets fees.  A non-dischargeability action is not "fighting over the contract," I'll grant you that.  But what if the clause says, "fighting about the discharge in a bankruptcy case," or, "trying to get relief from stay in bankruptcy court." 

Take a look at three recent cases which discuss Travelers. 

In re QMECT, INC., --- B.R. ----, 2007 WL 1463846, (Bkrtcy, N.D. CAL, Tchaikovsky, May, 2007)
Issue:   May the bankruptcy court “allow” attorneys fees for postpetition bankruptcy litigation to be added to the creditor’s prepetition claim?             

Holding:   Yes.   

Busch v. Hancock (In re Busch), 369 B.R. 614,  (10th Cir. BAP, June, 2007(Utah))
Issue:   Did the bankruptcy court err when it awarded attorneys fees to a litigant in bankruptcy court based on a state law permitting attorneys fees in any action to enforce alimony?         

Holding:   No, to the extent the litigation was in bankruptcy court.

In re Electric Machinery Enterprises, Inc.,  --- B.R. ----, 2007 WL 2031445, (Bkrtcy.M.D.Fla. 2007)
Issue:   Can an unsecured creditor be allowed attorneys fees for post-petition bankruptcy litigation?            

Holding:   No.    

October 6, 2007 in Current Affairs | Permalink


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