Delaware Judge Allows Unsecured Claim for Contractual Attorneys’ Fees

If attorneys’ fees are disallowed on undersecured claims, it follows, does it not, that contractual claims for post-petition attorneys’ fees are also disallowed on unsecured claims?

Answer: No, it does not follow.

Reversing the bankruptcy court, District Judge Richard G. Andrews of Delaware interpreted Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007), to mean that an unsecured claim for post-petition attorneys’ fees must be allowed if the contract makes the debtor liable.

Almost ancient history by now, the dispute arose in the reorganization of Tribune Media Co., which began with a chapter 11 filing in late 2008 and concluded on confirmation in 2012.

The indenture for unsecured, subordinated bonds called for Tribune to reimburse the indenture trustee for expenses and attorneys’ fees incurred in collecting the debt. The claim by the indenture trustee included a claim for about $30 million in post-petition attorneys’ fees. Were it allowed, the claim for attorneys’ fees would receive a partial distribution under Tribune’s plan.

The debtor objected to the claim. Bankruptcy Judge Kevin J. Carey disallowed the unsecured claims for attorneys’ fees in an opinion on Nov. 19, 2015. To read Judge Carey’s decision, click here.

Judge Carey adopted the conclusion of what he said were “some [lower] courts” in the Third Circuit that have held that post-petition attorneys’ fees are not recoverable as part of an unsecured claim. Employing the expressio unis maxim, he noted that Section 506(b) expressly allows attorneys’ fees for oversecured creditors, while no provision in the Bankruptcy Code allows fees for unsecured creditors. He also cited Section 502(b), which fixes the amount of claims as of the petition date.

Saying that the courts have “long been divided,” Judge Carey rejected the indenture trustee’s reliance on Travelers. He said the justices had overruled the so-called Fobian rule from the Third Circuit, which disallowed attorneys’ fees for litigating issues peculiar to bankruptcy law. He quoted the Travelers opinion where it said the high court was offering no opinion on whether the claim could have been disallowed on other grounds.

Reversing in a three-page opinion on November 26, Judge Andrews said that three circuit courts after Travelers “have allowed unsecured claims for contractual attorneys’ fees that accrued post-filing of the bankruptcy petition.” He added that two circuits had reached the same conclusion before Travelers.

Judge Andrews conceded that at least six decisions in 2016 and 2017 agreed with Judge Carey and disallowed contractual claims for post-petition attorneys’ fees. However, Judge Andrews appeared to follow the statement in Travelers that “claims enforceable under applicable state law will be allowed in bankruptcy law unless they are expressly disallowed.” Id. at 452.

Not able to contribute “anything new . . . to this debate,” Judge Andrews said, “I cannot conclude that Section 506(b) ‘expressly’ disallowed the claims at issue here. Thus, I agree with the position adopted by every court of appeals faced with this question; Section 506(b) does not limit the allowability of unsecured claims for contractual post-petition attorneys’ fees under Section 502.”