Attorneys' Fees Preserved In Bankruptcy Cases

The Fobian rule emerged from the Ninth Circuit's decision, Fobian v. W. Farm Credit Bank (In re Fobian), 951 F.2d 1149, 1153 (9th Cir. 1991). There, a secured creditor objected to the debtors' Chapter 12 plan because it provided no payment on the unsecured portion of the creditor's claim, in violation of Bankruptcy Code ' 1225(b). The bankruptcy court confirmed the plan, but the Bankruptcy Appellate Panel ('BAP') reversed, and the debtors appealed to the Ninth Circuit. On appeal, the creditor requested its attorneys' fees under the promissory note and deed of trust underlying its claim. The Ninth Circuit affirmed the BAP, but denied the attorneys' fees from the litigation in the bankruptcy court. 951 F.2d at 1153. The circuit court recognized that the creditor's attorneys' fees were recoverable under the underlying contracts, but the confirmation dispute in the bankruptcy court involved only the 'proper application of' Bankruptcy Code provisions and was not 'a traditional 'action on the contract.” Id. The court held 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.' Id.

Grove v. Fulwiler

The Fobian court cited three prior Ninth Circuit decisions for its holding. In the first case, Grove v. Fulwiler (In re Fulwiler), 624 F.2d 908 (9th Cir. 1980) (per curiam), a creditor lost a non-dischargeability suit that it brought against the debtor. An Oregon statute provided that the prevailing party in an action to enforce a contract can enforce an attorneys' fees provision in the contract, even if the provision's terms only allow the other party to enforce it. Under that statute and the parties' agreement, the debtor moved to amend the judgment to include an award of costs and attorneys' fees. The bankruptcy court denied the motion, and the district court affirmed.

Before the Ninth Circuit, the parties focused on whether the non-dischargeability action sounded in contract or in tort, because the Oregon statute only applied in a contract action. The circuit court concluded that the action was neither, but instead was 'a new federal ' action not based on, nor identical to, any state cause of action.' Id. at 910 (quoting In re Huff, 1 B.R. 354 (D. Utah 1979) (quotation marks omitted). The court reasoned that 'the award of attorney's fees in a bankruptcy proceeding should rest upon a firmer foundation than the semantical characterization of a particular proceeding.' Id. The court ruled that attorneys' fees were not recoverable. Id.

Collingwood Grain, Inc. v. Coast Trading Co., Inc.

In Fobian's second authority, Collingwood Grain, Inc. v. Coast Trading Co., Inc. (In re Coast Trading Co., Inc.), 744 F.2d 686 (9th Cir. 1984), the Ninth Circuit concluded that the same Oregon statute did not apply to an action to rescind or cancel, rather than enforce, a contract. Citing Fulwiler, the court reasoned that 'the question of the applicability of the bankruptcy laws to particular contracts is not a question of contract enforceability but rather involves a unique, separate area of federal law.' Id.

Johnson v. Righetti

In Fobian's third authority, Johnson v. Righetti (In re Johnson), 756 F.2d 738 (9th Cir. 1985), the bankruptcy court awarded the debtor its attorneys' fees under a reciprocity statute like the one in Fulwiler after a creditor moved unsuccessfully for relief from the stay. On appeal, the Ninth Circuit observed that relief from the stay is governed by federal law, not state law, and '[t]he validity of the ' contract underlying the claim is not litigated.' Id. Accordingly, the Ninth Circuit reversed the fees award because the state statute only covered actions to enforce a contract. Id.

In each case, the fee request was based on a statute that was inapplicable. Thus, the Ninth Circuit could have decided each case based solely on there being no right to attorneys' fees under applicable non-bankruptcy law. The court went further, however, and developed a new doctrine that attorneys' fees incurred litigating issues of federal bankruptcy law were not recoverable, irrespective of applicable non-bankruptcy law.

Other Courts' Responses to The Fobian Rule

Several courts followed Fobian, including the Second Circuit and the District of Delaware. See In re Sokolowski, 205 F.3d 535 (2d Cir. 2000); Agassi v. Planet Hollywood Int'l, Inc., 269 B.R. 543, 553 (D. Del. 2001); In re Child World, Inc., 161 B.R. 349, 354 (Bankr. S.D.N.Y. 1993); In re Best Prod. Co., Inc., 148 B.R. 413 (Bankr. S.D.N.Y. 1992).

Other courts, however, rejected Fobian, including the Fourth Circuit in Three Sisters Partners, L.L.C. v. Harden (In re Shangri-La, Inc.), 167 F.3d 843, 848 (4th Cir. 1999). There, the debtor's trustee sought to assume a lease. The debtor's landlord had unsuccessfully sought relief from the automatic stay based on prepetition defaults, and it sought its attorneys' fees as part of the cure amount. Id. at 846-47. The bankruptcy court denied the fees under Fobian. Id. at 848. The Fourth Circuit reversed and rejected Fobian. The Fourth Circuit reasoned that the Bankruptcy Code requires the trustee to cure any defaults, including any attorneys' fees, before the lease can be assumed. Id. at 848. 'Thus, bankruptcy law, by ordering that default be cured ' and that pecuniary losses be paid ' sends us back to state contract law for a determination of the ' landlord's rights upon default under the lease.' Id. at 848; see also In re Crown Books Corp., 269 B.R. 12 (Bankr. D. Del. 2001) (following Shangri-La).

The Fourth Circuit, however, did not necessarily allow all of the landlord's postpetition attorneys' fees. The court directed the lower court to consider whether the fees were recoverable under the parties' lease by focusing on 'whether the attorney's action was taken primarily to collect sums due under the lease or to enforce an obligation of the lessee.' In re Shangri-La, Inc., 167 F.3d at 848. The court ruled that the lease would not allow fees for actions 'undertaken for another purpose.' Id. See In re Crown Books Corp., 269 B.R. at 18 (allowing attorneys' fees incurred 'to enforce the [lessor's] rights under the lease,' but not 'to contest the Debtor's rights under the Bankruptcy Code'); cf. Official Comm. of Unsecured Creditors v. Dow Corning Corp. (In re Dow Corning Corp.), 456 F.3d 668, 686 (6th Cir. 2006) (rejecting Fobian and stating that 'an unsecured creditor may recover those costs to which it has a state-law-based right ' regardless of the nature of the federal proceedings').

Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co.

In Travelers, the Supreme Court addressed Fobian in connection with the Chapter 11 case of Pacific Gas and Electric Company ('PG&E'). Travelers Casualty & Surety Company of America ('Travelers') had issued a prepetition surety bond to guarantee certain of PG&E's obligations. PG&E agreed to indemnify Travelers for any loss it might suffer in connection with the bonds, including attorneys' fees incurred pursuing, protecting or litigating Travelers' rights under the bonds. PG&E did not default on the obligations, but Travelers filed a protective proof of claim in case PG&E defaulted later.

PG&E and Travelers later litigated over plan provisions covering the indemnities and the fees provisions. They resolved the litigation with amendments to the plan provisions and a stipulation for Travelers to 'assert its claim for attorneys' fees under the [i]ndemnity [a]greements,' subject to PG&E's right to object to the claim. Travelers amended its proof of claim to cover its attorneys' fees for the plan litigation. PG&E objected to the amended claim and argued that Fobian required disallowing Travelers's for attorneys' fees because they were incurred litigating issues of federal bankruptcy law. The bankruptcy court disallowed the fees under Fobian, and the district court and Ninth Circuit both affirmed.

The Supreme Court granted certiorari to resolve the split between the Fourth and Ninth Circuits. 127 S. Ct. at 1203. In a unanimous decision, the Court abrogated Fobian, reasoning that, '[i]n Fobian, the court did not identify any provision of the Bankruptcy Code as providing support for [its] new rule. Instead, the court cited three of its own prior decisions, [Johnson, Coast Trading and Fulwiler].' Id. at 1205 (citations and footnote omitted). The Court observed that the Ninth Circuit never identified any federal basis for disallowing attorney's fees incurred litigating issues of federal bankruptcy law, and in each of the cases cited in Fobian, the claim for attorneys' fees failed as a matter of state law. Id. 'The absence of textual support is fatal for the Fobian rule.' Id.

The Supreme Court observed that Fobian turns a proper claims allowance analysis on its head, because the Bankruptcy Code requires the court to allow a claim except to the extent that the claim comes under any of nine enumerated exceptions. Id. at 1204. Those exceptions are consistent with the principle that 'creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.' Id. at 1204-05 (quoting Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20 (2000)). Additionally, ”[u]nless some federal interest requires a different result, there is no reason why [property] interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” Id. at 1205 (quoting Butner v. United States, 440 U.S. 48, 55 (1979)).

The Bankruptcy Code expressly disallows claims for attorney's fees for services rendered to a debtor, to the extent the fees 'excee[d] the reasonable value of [the] services.' Id. at 1206 (quoting 11 U.S.C. ' 502(b)(4)). That provision implies that such fees are allowable in bankruptcy to the full extent they are enforceable under state law. Id. Without an analogous provision disallowing the fees covered by Fobian, the Bankruptcy Code does not categorically disallow such fees. Id.

Conclusion

Travelers resolves the circuit split over when attorneys' fees may be recoverable in a bankruptcy case. Parties in bankruptcy cases, particularly in the Ninth and Second Circuits, no longer have to guess at whether their attorneys' fees are recoverable under Fobian. They now need only look to their underlying contract or to nonbankruptcy law, without regard to whether they are litigating federal bankruptcy law issues. Travelers does not, however, create an unbridled entitlement to attorneys' fees but merely removes Fobian's bar to recovering attorneys' fees. Litigants must still demonstrate that they are entitled to their attorneys' fees under applicable contract or nonbankruptcy law.

John H. Bae is a partner and Philip John Nichols is an associate in the Financial Restructuring Department of Cadwalader, Wickersham & Taft LLP in New York. Michele L. Angell, an associate, assisted in the preparation of this article.

Until recently, courts were split over whether parties may recover attorneys' fees for litigation in a bankruptcy case under applicable non-bankruptcy law. Some courts allowed such fees, but the Court of Appeals for the Ninth Circuit and certain other courts followed the so-called 'Fobian rule,' which disallowed postpetition attorneys' fees that were incurred while litigating issues of federal bankruptcy law, irrespective of the party's rights under state law or governing contracts. The Supreme Court in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co. (In re Pacific Gas & Electric Co.), 549 U.S. ____, 127 S. Ct. 1199 (2007) abrogated the Fobian rule and ruled that postpetition attorneys' fees are recoverable to the full extent of applicable non-bankruptcy law.

This article discusses the development of the Fobian rule and other courts' treatment of it. The article also summarizes the Supreme Court's reasoning in abrogating the Fobian rule in Travelers.

The Fobian Rule

The Fobian rule emerged from the Ninth Circuit's decision, Fobian v. W. Farm Credit Bank (In re Fobian), 951 F.2d 1149, 1153 (9th Cir. 1991). There, a secured creditor objected to the debtors' Chapter 12 plan because it provided no payment on the unsecured portion of the creditor's claim, in violation of Bankruptcy Code ' 1225(b). The bankruptcy court confirmed the plan, but the Bankruptcy Appellate Panel ('BAP') reversed, and the debtors appealed to the Ninth Circuit. On appeal, the creditor requested its attorneys' fees under the promissory note and deed of trust underlying its claim. The Ninth Circuit affirmed the BAP, but denied the attorneys' fees from the litigation in the bankruptcy court. 951 F.2d at 1153. The circuit court recognized that the creditor's attorneys' fees were recoverable under the underlying contracts, but the confirmation dispute in the bankruptcy court involved only the 'proper application of' Bankruptcy Code provisions and was not 'a traditional 'action on the contract.” Id. The court held 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.' Id.

Grove v. Fulwiler

The Fobian court cited three prior Ninth Circuit decisions for its holding. In the first case, Grove v. Fulwiler (In re Fulwiler), 624 F.2d 908 (9th Cir. 1980) (per curiam), a creditor lost a non-dischargeability suit that it brought against the debtor. An Oregon statute provided that the prevailing party in an action to enforce a contract can enforce an attorneys' fees provision in the contract, even if the provision's terms only allow the other party to enforce it. Under that statute and the parties' agreement, the debtor moved to amend the judgment to include an award of costs and attorneys' fees. The bankruptcy court denied the motion, and the district court affirmed.

Before the Ninth Circuit, the parties focused on whether the non-dischargeability action sounded in contract or in tort, because the Oregon statute only applied in a contract action. The circuit court concluded that the action was neither, but instead was 'a new federal ' action not based on, nor identical to, any state cause of action.' Id. at 910 (quoting In re Huff, 1 B.R. 354 (D. Utah 1979) (quotation marks omitted). The court reasoned that 'the award of attorney's fees in a bankruptcy proceeding should rest upon a firmer foundation than the semantical characterization of a particular proceeding.' Id. The court ruled that attorneys' fees were not recoverable. Id.

Collingwood Grain, Inc. v. Coast Trading Co., Inc.

In Fobian's second authority, Collingwood Grain, Inc. v. Coast Trading Co., Inc. (In re Coast Trading Co., Inc.), 744 F.2d 686 (9th Cir. 1984), the Ninth Circuit concluded that the same Oregon statute did not apply to an action to rescind or cancel, rather than enforce, a contract. Citing Fulwiler, the court reasoned that 'the question of the applicability of the bankruptcy laws to particular contracts is not a question of contract enforceability but rather involves a unique, separate area of federal law.' Id.

Johnson v. Righetti

In Fobian's third authority, Johnson v. Righetti (In re Johnson), 756 F.2d 738 (9th Cir. 1985), the bankruptcy court awarded the debtor its attorneys' fees under a reciprocity statute like the one in Fulwiler after a creditor moved unsuccessfully for relief from the stay. On appeal, the Ninth Circuit observed that relief from the stay is governed by federal law, not state law, and '[t]he validity of the ' contract underlying the claim is not litigated.' Id. Accordingly, the Ninth Circuit reversed the fees award because the state statute only covered actions to enforce a contract. Id.

In each case, the fee request was based on a statute that was inapplicable. Thus, the Ninth Circuit could have decided each case based solely on there being no right to attorneys' fees under applicable non-bankruptcy law. The court went further, however, and developed a new doctrine that attorneys' fees incurred litigating issues of federal bankruptcy law were not recoverable, irrespective of applicable non-bankruptcy law.

Other Courts' Responses to The Fobian Rule

Several courts followed Fobian, including the Second Circuit and the District of Delaware. See In re Sokolowski, 205 F.3d 535 (2d Cir. 2000); Agassi v. Planet Hollywood Int'l, Inc. , 269 B.R. 543, 553 (D. Del. 2001); In re Child World, Inc., 161 B.R. 349, 354 (Bankr. S.D.N.Y. 1993); In re Best Prod. Co., Inc., 148 B.R. 413 (Bankr. S.D.N.Y. 1992).

Other courts, however, rejected Fobian, including the Fourth Circuit in Three Sisters Partners, L.L.C. v. Harden (In re Shangri-La, Inc.), 167 F.3d 843, 848 (4th Cir. 1999). There, the debtor's trustee sought to assume a lease. The debtor's landlord had unsuccessfully sought relief from the automatic stay based on prepetition defaults, and it sought its attorneys' fees as part of the cure amount. Id. at 846-47. The bankruptcy court denied the fees under Fobian. Id. at 848. The Fourth Circuit reversed and rejected Fobian. The Fourth Circuit reasoned that the Bankruptcy Code requires the trustee to cure any defaults, including any attorneys' fees, before the lease can be assumed. Id. at 848. 'Thus, bankruptcy law, by ordering that default be cured ' and that pecuniary losses be paid ' sends us back to state contract law for a determination of the ' landlord's rights upon default under the lease.' Id. at 848; see also In re Crown Books Corp., 269 B.R. 12 (Bankr. D. Del. 2001) (following Shangri-La).

The Fourth Circuit, however, did not necessarily allow all of the landlord's postpetition attorneys' fees. The court directed the lower court to consider whether the fees were recoverable under the parties' lease by focusing on 'whether the attorney's action was taken primarily to collect sums due under the lease or to enforce an obligation of the lessee.' In re Shangri-La, Inc., 167 F.3d at 848. The court ruled that the lease would not allow fees for actions 'undertaken for another purpose.' Id. See In re Crown Books Corp., 269 B.R. at 18 (allowing attorneys' fees incurred 'to enforce the [lessor's] rights under the lease,' but not 'to contest the Debtor's rights under the Bankruptcy Code'); cf. Official Comm. of Unsecured Creditors v. Dow Corning Corp. (In re Dow Corning Corp.), 456 F.3d 668, 686 (6th Cir. 2006) (rejecting Fobian and stating that 'an unsecured creditor may recover those costs to which it has a state-law-based right ' regardless of the nature of the federal proceedings').

Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co.

In Travelers, the Supreme Court addressed Fobian in connection with the Chapter 11 case of Pacific Gas and Electric Company ('PG&E'). Travelers Casualty & Surety Company of America ('Travelers') had issued a prepetition surety bond to guarantee certain of PG&E's obligations. PG&E agreed to indemnify Travelers for any loss it might suffer in connection with the bonds, including attorneys' fees incurred pursuing, protecting or litigating Travelers' rights under the bonds. PG&E did not default on the obligations, but Travelers filed a protective proof of claim in case PG&E defaulted later.

PG&E and Travelers later litigated over plan provisions covering the indemnities and the fees provisions. They resolved the litigation with amendments to the plan provisions and a stipulation for Travelers to 'assert its claim for attorneys' fees under the [i]ndemnity [a]greements,' subject to PG&E's right to object to the claim. Travelers amended its proof of claim to cover its attorneys' fees for the plan litigation. PG&E objected to the amended claim and argued that Fobian required disallowing Travelers's for attorneys' fees because they were incurred litigating issues of federal bankruptcy law. The bankruptcy court disallowed the fees under Fobian, and the district court and Ninth Circuit both affirmed.

The Supreme Court granted certiorari to resolve the split between the Fourth and Ninth Circuits. 127 S. Ct. at 1203. In a unanimous decision, the Court abrogated Fobian, reasoning that, '[i]n Fobian, the court did not identify any provision of the Bankruptcy Code as providing support for [its] new rule. Instead, the court cited three of its own prior decisions, [Johnson, Coast Trading and Fulwiler].' Id. at 1205 (citations and footnote omitted). The Court observed that the Ninth Circuit never identified any federal basis for disallowing attorney's fees incurred litigating issues of federal bankruptcy law, and in each of the cases cited in Fobian, the claim for attorneys' fees failed as a matter of state law. Id. 'The absence of textual support is fatal for the Fobian rule.' Id.

The Supreme Court observed that Fobian turns a proper claims allowance analysis on its head, because the Bankruptcy Code requires the court to allow a claim except to the extent that the claim comes under any of nine enumerated exceptions. Id. at 1204. Those exceptions are consistent with the principle that 'creditors' entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code.' Id. at 1204-05 (quoting Raleigh v. Ill. Dep't of Revenue , 530 U.S. 15, 20 (2000)). Additionally, ”[u]nless some federal interest requires a different result, there is no reason why [property] interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.” Id. at 1205 (quoting Butner v. United States , 440 U.S. 48, 55 (1979)).

The Bankruptcy Code expressly disallows claims for attorney's fees for services rendered to a debtor, to the extent the fees 'excee[d] the reasonable value of [the] services.' Id. at 1206 (quoting 11 U.S.C. ' 502(b)(4)). That provision implies that such fees are allowable in bankruptcy to the full extent they are enforceable under state law. Id. Without an analogous provision disallowing the fees covered by Fobian, the Bankruptcy Code does not categorically disallow such fees. Id.

Conclusion

Travelers resolves the circuit split over when attorneys' fees may be recoverable in a bankruptcy case. Parties in bankruptcy cases, particularly in the Ninth and Second Circuits, no longer have to guess at whether their attorneys' fees are recoverable under Fobian. They now need only look to their underlying contract or to nonbankruptcy law, without regard to whether they are litigating federal bankruptcy law issues. Travelers does not, however, create an unbridled entitlement to attorneys' fees but merely removes Fobian's bar to recovering attorneys' fees. Litigants must still demonstrate that they are entitled to their attorneys' fees under applicable contract or nonbankruptcy law.

John H. Bae is a partner and Philip John Nichols is an associate in the Financial Restructuring Department of Cadwalader, Wickersham & Taft LLP in New York. Michele L. Angell, an associate, assisted in the preparation of this article.