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Originally published in Reed Smith’s Commercial Restructuring & Bankruptcy Alert, December 2006
The U.S. Supreme Court has agreed to hear a case in which the U.S. Court of Appeals for the Ninth Circuit upheld the denial of attorney fees to a creditor in bankruptcy proceedings, despite the existence of an agreement between the parties under which the debtor had agreed to pay litigation costs.
In a brief to the Supreme Court, Travelers Casualty and Surety Company states that circumstances under which creditors can recover attorney fees "is important and recurring."
"The conflict among the courts of appeals is longstanding, widespread, entrenched, and unlikely to resolve itself absent intervention by this court," Travelers stated.
The dispute at issue arose between Travelers and the Pacific Gas and Electric Company (PG&E), which filed for bankruptcy in April 2001. Travelers had provided PG&E with a $100 million bond to cover PG&E’s workers’ compensation obligations. Under the bond contract, PG&E agreed to pay Travelers’ attorneys’ fees from any litigation resulting from the agreement.
Travelers filed a claim in bankruptcy court over the bond, and PG&E sued Travelers. Travelers then sought recovery from PG&E of its attorney fees, but PG&E declined to pay, citing the rule that debtors aren’t obligated to pay attorney fees for federal bankruptcy proceedings.
The bankruptcy and district courts agreed with PG&E.
In Travelers Casualty and Surety Co. v. Pacific Gas and Elec. Co., No. 04-156-5 (9th Cir. 2006), the Ninth Circuit issued a three-page decision, designated as "not for publication," addressing Travelers’ attempt to recover fees for objections to PG&E’s proposed reorganization plans and related proceedings.
Travelers objected to the reorganization plan, claiming the debtor failed to provide the required "adequate information" about the reorganization plan, as required under the Bankruptcy Code, 11 U.S.C. § 1125. Specifically, Travelers sought assurance that its subrogation rights would be unimpaired.
The Ninth Circuit noted that "nothing in the federal bankruptcy proceeding required Travelers to satisfy any of the obligations assured by, or make any payment with respect to, any of its surety bonds or indemnity agreement with the debtor." Moreover, the court stated, "Travelers did not prevail on any claim it asserted in the bankruptcy proceeding."
Prevailing parties in bankruptcy proceedings may be entitled to attorney fees "‘in accordance with applicable state law if state law governs the substantive issues raised in the proceedings,’" the Ninth Circuit stated, citing Ford v. Baroff (In re Baroff), 105 F.3d 439, 441 (9th Cir. 1997).
"However, attorney fees are not recoverable in bankruptcy for litigation issues ‘peculiar to federal bankruptcy law,’" the court added, citing Ford.
In Travelers, the Ninth Circuit concluded that the resolution of the proceedings was governed entirely by federal bankruptcy law, and that therefore Travelers’ claim for attorney fees had been correctly denied.
"Indeed, 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 court concluded.
This article is presented for informational purposes only and is not intended to constitute legal advice.