Interpreting Bankruptcy Code Sections 502 and 506: Post-Petition Attorneys' Fees in a Post-Travelers World
Mark S. Scarberry
Pepperdine University School of Law
American Bankruptcy Institute Law Review, Vol. 15, pp. 611-58, 2007
Pepperdine University Legal Studies Research Paper No. 2008/3
Under the Bankruptcy Code, the filing of a bankruptcy petition creates a gulf between the pre-petition and post-petition worlds. The allowable amount of a claim in bankruptcy is determined as of the petition date. Interest stops accruing on claims (other than oversecured claims), as of the petition date; post-petition interest is not an allowable part of an unsecured claim. It would seem that post-petition attorneys' fees similarly would not be an allowable part of an unsecured claim, even if the claim arises under a contract or statute that calls for the creditor's attorneys' fees to be added to the debt.
The right to fees (pre-petition and post-petition) under a contract or statute with respect to a pre-petition debt is itself a pre-petition claim that typically will be discharged, regardless of whether the fees that are allowed in the bankruptcy case include post-petition fees. Because the right is a pre-petition claim, there is an argument (with its genesis in the 1982 United Merchants decision of the Second Circuit applying pre-Code law) that post-petition fees are allowable as pre-petition contingent claims, either in an estimated amount or in an amount established after the fees are incurred. The majority of courts (where the debtor is insolvent) have rejected the Second Circuit's argument and thus held that post-petition fees are not allowable with respect to pre-petition unsecured claims. The article provides an argument from the text of Bankruptcy Code sections 502(b), 506(a), and 506(b) in support of the majority view, a textual argument that the article concludes is determinative.
In its unanimous 2007 Travelers opinion, the Supreme Court refused to decide whether post-petition fees are allowable on unsecured claims, deciding instead only that the Ninth Circuit's Fobian rule - a federal common law rule precluding award or allowance of post-petition fees for litigation of bankruptcy law issues - had no basis in the text of the Bankruptcy Code and could not stand. The article analyzes Travelers, concludes that the Court left open for consideration all grounds other than the Fobian rule for deciding the allowability of post-petition fees, and provides a brief eulogy for the Fobian rule.
The article describes and critiques the conventional arguments for the majority view. It also explains that some courts - including courts of appeals in at least three circuits - have embraced a misunderstanding of section 506(b). They have done so in part to resolve a quandary created by their adoption, in limited circumstances, of the minority view, and in part to allow for a review under federal common law standards of the reasonableness of pre-petition fees incurred by oversecured creditors - a federal common law approach reminiscent of the ill-fated Fobian rule.
The article then argues, as noted above, that the text of sections 502(b), 506(a), and 506(b) - in fact the plain meaning of those sections - precludes allowance of post-petition fees on unsecured claims. Thus the majority view is correct. The article goes on to consider five potential problems with the majority view, concluding that none of them cast serious doubt on its correctness. (1) The majority view does not render section 502(b)(2) superfluous. (2) There is no conflicting plain meaning interpretation of the provisions of the Code dealing with contingent claims. If there were, it would have to yield to the more specific provisions of sections 502(b), 506(a), and 506(b) (and if there were a need for harmonization, the policies of the Code cut in favor of the majority view). (3) Any potential unfairness of denial of post-petition fees in indemnity situations may be substantially mitigated if post-petition "collateral legal expenses" are allowable, a possibility noted below. (4) The apparent unanimity of courts in requiring payment of post-petition fees where the debtor is solvent may not conflict with the textual analysis that is at the base of the majority rule, because specific provisions of the Code may call for payment of post-petition fees where the debtor is solvent, even if the fees are not part of an allowed claim. (5) The majority view does not conflict with pre-Code law as Congress would have understood it at the time of enactment of the Code.
Finally, the article describes issues that require further consideration. First, further analysis is needed to determine whether payment of post-petition fees is required by provisions of the Code where the debtor is solvent; to the extent the answer is "no," the courts will need to be reminded to follow the text of the Code (or perhaps the correctness of the majority view may need to be reconsidered). Second, further analysis is needed of the concept of a contingent claim, and of whether a claim for post-petition fees should be considered to be contingent as the Code uses that term. Third, further consideration is needed of the relationship between section 506(b) and "collateral legal expenses." It is likely that collateral legal expenses - even to the extent they consist of attorneys' fees - are not the kind of fees, costs, or charges referenced in section 506(b). If further analysis confirms that conclusion, then allowance of post-petition collateral legal expenses as contingent claims would not conflict with the text of sections 502(b), 506(a), and 506(b). Fourth, the Fobian rule dealt not just with whether post-petition fees could be included in allowed claims but also with imposition of personal liability for fees incurred in litigating bankruptcy law issues (such as an award of fees against a debtor who unsuccessfully opposes a nondischargeability action brought by a contract creditor whose contract includes a broad attorneys' fee clause). With the Fobian rule abrogated, such fees may be awarded unless another basis is found for precluding an award, such as preemption by the provisions of section 523(d). By granting certiorari in the DeRoche case, vacating the Ninth Circuit's decision, and remanding for further consideration in light of Travelers, the Supreme Court has teed up that issue.
Number of Pages in PDF File: 49
Keywords: Travelers, DeRoche, Fobian, United Merchants, attorneys' fees, fees, bankruptcy, Supreme Court, Ninth Circuit, post-petition, pre-petition, unsecured, secured, oversecured, undersecured, allowed, claim, contingent, debtor, nondischargeability, preemption, collateral legal
JEL Classification: G33, G34, K19, K29, K39
Date posted: October 18, 2007 ; Last revised: January 23, 2008