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Supreme Court Decision Update - Travelers Casualty and Surety Co. of America v. Pacific Gas and Electric Co.

empty.jpgToday’s sole Supreme decision comes in Travelers Casualty and Surety Co. of America v. Pacific Gas and Electric Co. (PDF of the opinion). In a unanimous opinion, the Court says that nothing in federal bankruptcy law prevents an unsecured creditor from getting attorney’s fees pursuant to a contract between the creditor and the debtor.

QuizLaw Analysis: Oh, yes, we’re talking bankruptcy and contract law, folks. It doesn’t get any better than this. And by the by, this is yet another case that comes from the Ninth Circuit and where the Ninth finds itself reversed. Maybe we should just get rid of the Ninth Circuit entirely and have cases go right to the Supremes. Save everyone some time and money, you know? ‘Cause this is just getting kind of ridiculous.

…bankruptcy? Really? Yup. Sorry.

Ok, who went broke? Back in 2001, Pacific Gas and Electric Company (who we’ll call PG&E) filed for Chapter 11 bankruptcy. Travelers Casualty & Surety Company (let’s call them Travelers) had previously issued a $100 million surety bond on behalf of PG&E to guarantee PG&E’s continued payment of state workers’ comp benefits. At that time, PG&E and Travelers entered into several agreement which included provisions that PG&E would have to cover any loss Travelers suffered in connection with these bonds, and that would include any attorney’s fees which Travelers might have to spend in litigating anything related to the bonds.

Anyway, when PG&E filed for bankruptcy Travelers filed a claim as an unsecured creditor so that it would be protected if PG&E ended up defaulting on its workers’ comp benefits. When PG&E put a reorganization plan together, it included a statement to protect Travelers’ rights, per a negotiation between them both. But Travelers said that PG&E changed the agreed language in a way that offered it less protection, and a lawsuit followed. They resolved their dispute and in the subsequent agreement they both agreed that Travelers could, as an unsecured creditor, seek any attorneys’ fees pursuant to its original agreements.

Travelers then tried to get attorney’s fees for the money it spent in all this bankruptcy mess, and PG&E tried to fight it. The Bankruptcy Court took PG&E’s side, and denied Travelers’ claim for fees, so Travelers went to the District Court. The District Court affirmed as well, as did the Ninth Circuit.

How come Travelers got dinged? The District Court and the Ninth Circuit both relied on a 1991 opinion from the Ninth Circuit, In re Fobian. In Fobian, the Ninth said that “where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party.” And since there wasn’t any apparent bad faith or harassment by PG&E, Travelers couldn’t get its fees, since those fees came from a bankruptcy matter rather than a dispute over the original contracts.

So what’s Alito have to say about it? Again, since this is the Ninth Circuit, it should come as no surprise that his unanimous opinion says the Ninth got things wrong yet again. He begins by acknowledging that in general, the winner in a lawsuit isn’t entitled to attorneys’ fees. However, this default rule can be trumped by a statute or a contract between the parties. Now, as far as bankruptcy law goes, fees pursuant to a contract are allowed unless the Bankruptcy Code specifically says otherwise. So the question here is “whether the Bankruptcy Code disallows contract-based claims for attorney’s fees based solely on the fact that the fees at issue were incurred litigating issues of bankruptcy laws.”

And what’s the Bankruptcy Code have to say about attorney’s fees? Well in general, it says that all claims under a certain provision (section 501, which is what Travelers was filing its claim under) are allowed unless one of nine explicit exceptions applies. Those exceptions come from section 502(b) of the Bankruptcy Code.

What are the nine exceptions? Well, a claim can be disallowed where:

1. The claim is unenforceable because of an agreement or relevant law.
2. The claim is for an interest that hasn’t matured yet (i.e., the creditor is too early).
3. The claim is for a property tax that’s for more than the value of the related property.
4. The claim “is for services of an insider or attorney of the debtor” and is in excess of the reasonable value of those services.
5. The claim is for alimony or child support obligations which aren’t mature yet (i.e., not due).
6. The claim is for damages that came from the termination of a lease.
7. The claim is for damages that came from the termination of a lease or employment contract.
8. The claim “results from a reduction, due to late payment, in the amount of…credit available to the debtor in connection with an employment tax on wages, salaries, or commissions earned from the debtor.”
9. The claim was filed in an untimely fashion.

And none of these exceptions apply to Travelers’ claim? Nope. The only one Alito says even has a shot is the first one, that a claim is “unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” Alito says this means that “any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy.” Alito says that this is a basic principle that is consistent with the language of the Bankruptcy Code, as well as settled law. The word “claim” is well understood to mean any payment right recognized by state law, so unless federal law trumps state law, “there is no reason why such interests should be analyzed differently simply because an interest party is involved in a bankruptcy proceeding.”

When the Ninth told Travelers to get lost, it didn’t determine that Travelers’ claim was unenforceable under bankruptcy law. In fact, it acknowledged that some winning parties in a bankruptcy action are entitled to fees. Instead, it relied on the Fobian rule, which was “a rule of that court’s own creation.” And that rule, says Alito, is bunk.

There’s no support for such a rule in the Bankruptcy Code and, in fact, the Fobian court didn’t point to the Bankruptcy Code for any such support. And so it boils down to this: “The absence of textual support is fatal for the Fobian rule.” In fact, remember exception 4 from above? That said that attorneys’ fees in excess of reasonable value for the service were to be excluded. Well that “suggests that, in [the absence of such excess], a claim for such fees would be allowed in bankruptcy to the extent enforceable under state law.”

Now if Congress wants a rule like the Fobian rule, it can certainly amend the Bankruptcy Code. But it hasn’t done so, and this isn’t up to the Ninth Circuit to do on its own. And that’s that.

Ok, but I’m following along in the opinion, and there’s still another two-and-a-half pages. What’s dat? Well PG&E tried to argue that another section of the Bankruptcy Code, not these nine exceptions, is what disallows Travelers’ claim. Section 506(b) says:

To the extent that an allowed secured claim is secured by property the value of which…is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.

PG&E tried to argue that this allows attorney’s fees for claims that are oversecured, but not for claims that are unsecured (which is what Travelers’ claim is). Trouble is, PG&E didn’t make this argument in the lower courts, and the Supremes only granted cert on the Fobian rule issue, so Alito says “tough titties.”