Another Circuit Allows an Unsecured Claim for Contractual Attorneys’ Fees

The circuit courts are consistently allowing unsecured claims for post-petition attorneys’ fees when the creditor is entitled by contract to recover the costs of collection.

In an opinion on February 8, the Fourth Circuit joined the Second, Seventh and Ninth Circuits. Before the Supreme Court’s pivotal decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007), the First and Eleventh Circuits had reached the same conclusion.

Although the circuit courts agree, some lower courts have the opposite opinion.

The case at bar involved a secured creditor with collateral worth about $1.7 million. The loan agreement allowed the lender to recover the costs of collection, including attorneys’ fees. The chapter 11 plan gave the creditor an allowed, secured claim for $1.7 million, an amount covering principal, interest, and some of the lender’s post-petition attorneys’ fees.

The plan permitted the lender to file an unsecured claim for additional post-petition attorneys’ fees. Upheld in district court, the bankruptcy court disallowed the lender’s unsecured claim for post-petition attorneys’ fees.

The lender appealed and won a reversal in an opinion written by Fourth Circuit Judge Pamela Harris.

The lender relied largely on Travelers, where the Supreme Court overturned a rule developed in lower courts disallowing attorneys’ fees for litigating issues peculiar to bankruptcy law. In a statement being followed in other contexts, the high court said that “claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.” Id. at 452.

Judge Harris said that bankruptcy and district courts “long have wrestled with this question, disagreeing as to whether creditors may assert unsecured claims for post-petition fees based on pre-petition contracts.” She said that Travelers requires a determination of whether the Bankruptcy Code “expressly disallows” the claim.

Turning to the statute, Section 502(b) requires the court to “determine the amount of such claim . . . as of the date of the filing of the petition.” The subsection goes on to list nine specific categories of otherwise valid claims that are disallowed, such as unmatured interest.

Judge Harris framed the question as whether the lender had a claim for post-petition counsel fees as of the filing date. Permitted under the loan agreement, the claim, she said, was “contingent on a future, post-petition event.” She went on to say that the term “claim” is defined broadly in Section 101(5)(A) to include a “right to payment” that is “contingent.”

Because the claim was valid under state law and did not fall into any of the nine categories of disallowed claims, Judge Harris concluded that the claim was allowable because she “found nothing in Section 502(b) that expressly disallows unsecured claims for post-petition attorneys’ fees.”

Judge Harris saw additional support in Section 502(c), which calls on the court to estimate claims that are contingent.

The debtor based an alternative argument on Section 506(b), allowing a secured claim for attorneys’ fees only to the extent there is value in the collateral. The debtor interpreted the section to mean that undersecured claims for attorneys’ fees are not allowed.

Judge Harris rejected the argument, saying that “Section 506(b) never mentions, let alone expressly disallows, unsecured claims for post-petition attorneys’ fees.” She found a second problem with the argument: “Section 506(b) has nothing to do with the allowance or disallowance of claims.” (N.B.: The subsection does say that a claim for attorneys’ fees “shall be allowed” under specified circumstances. However, the subsection may only be referring to the creditor’s secured claim, not an unsecured claim.)

Judge Harris also declined to disallow the claim for “policy considerations.” In that regard, the debtor had argued that allowance of unsecured claims for post-petition attorneys’ fees would dilute the recovery by other unsecured creditors.

Judge Harris said the Bankruptcy Code itself already answered the question of whether the claim is allowable. She said the court “must defer to Congress’ chosen policy” because the debtor’s fairness argument “has no basis in the text of the relevant Code provisions.”

The same issue is on appeal to the Third Circuit in Tribune Media Co. v. Wilmington Trust Co. (In re Tribune Media Co.), 18-3793 (3d Cir.). In Tribune, the district court reversed the bankruptcy court by allowing an unsecured claim for post-petition counsel fees. To read ABI’s discussion of the district court opinion, click here.