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Post-Bankruptcy Legal Fees
The United States Court of Appeals for the Second Circuit held on Nov. 5, 2009, that a creditor was entitled to its post-bankruptcy legal fees incurred under a pre-bankruptcy indemnity agreement. Ogle v. Fid. & Deposit Co. of Md., __F.3d __, 2009 U.S. App. LEXIS 24329 (2d Cir. Nov. 5, 2009). Affirming the lower courts and agreeing with a recent Ninth Circuit decision, the Second Circuit explained that the Bankruptcy Code (“Code”) “interposes no bar ' to recovery.” Id. at *12 (citing Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 452 (2007) (“[C]laims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.”).
Relevance
Lenders, financial advisers, accountants, indenture trustees and other professionals who bargain for reimbursement of their legal fees should be reassured by Ogle. Lower courts in the Second Circuit and elsewhere had previously disallowed creditors' professional fees, wrongly holding that: 1) nothing in the Code authorizes the payment of these fees; and that 2) contractual rights to these fees are unenforceable. See, e.g., J.P. Morgan Trust Co., N.A. v. A.P. Green Indus., Inc., No. 06-0885, slip op. at 4 (W.D. Pa. Nov. 5, 2007) (affirmed bankruptcy court's denial of indenture trustee's reimbursement claim for legal fees; “Under the maxim of expressio unius est exclusio alterius (the expression of one is the exclusion of the alternatives), silence as to undersecured claims for attorneys' fees and costs in [Code] ' 506(b) indicates that they are excluded from payment.”; a case the author suceeded in losing, In re Crafts Retail Holding Corp., 378 B.R. 44, 50 (Bankr. E.D.N.Y. 2007) (“[A]bsent statutory authority, [financial adviser's] claimed
contractual rights or asserted principles of equity alone do not constitute cognizable bases for an award of compensation or reimbursement of expenses in bankruptcy cases.”). According to the Second Circuit, the appellate courts have been “closely divided on the” issue of post-bankruptcy fees. Ogle at *7. Compare In re SNTL Corp., 571 F.3d 826, 839-45 (9th Cir. 2009) (allowing unsecured guarantor's reimbursement claim for post-petition attorneys' fees based on pre-petition contract); Martin v. Bank of Germantown, 761 F.2d 1163, 1168 (6th Cir. 1985) (” ' creditors are entitled to recover attorneys' fees in bankruptcy claims if they have a contractual right to them valid under state law ' .”; collection costs and legal fees in lender's note); In re Shangra-La, Inc., 167 F.3d 843, 848-49 (4th Cir. 1999) (“Entitlement to attorneys' fees ' depended on ' terms of [contract] and on state law.”), with Adams v. Zimmerman, 73 F.3d 1164, 1177 (1st Cir. 1996) (disallowing claim for post-insolvency fees against FDIC receiver; non-bankruptcy case), and In re Waterman, 248 B.R. 567, 573 (B.A.P. 8th Cir. 2000) (allowing claim for post-petition fees under Code ' 506(b) only because creditor was oversecured).
Facts
In Ogle, the contractual entitlement to attorneys' fees arose from a series of pre-bankruptcy agreements between Fidelity and Agway. In exchange for Fidelity's providing surety bonds to Agway's insurers, Agway agreed to indemnify Fidelity for any payments made under the bonds plus any legal fees incurred enforcing the agreements. Ogle, 2009 U.S. App. LEXIS 24329, at *4. After filing its Chapter 11 petition, Agway defaulted on its obligations to the insurers. Fidelity complied with its obligation under the bonds, and tendered payment to Agway's insurers. Fidelity's efforts to enforce its indemnity rights against Agway, however, resulted in protracted litigation during which Fidelity incurred costs, including attorneys' fees. Id. The Agway liquidating trustee conceded that Fidelity was entitled to the fees under state contract law, but argued that the Code barred Fidelity's recovery. Id. The Second Circuit considered the following narrow issue: “Under the Bankruptcy Code, is an unsecured creditor entitled to recover post-petition attorneys' fees that were authorized by a pre-petition contract but were contingent on post-petition events?” Id. at *5-*6.
Assertedly Relevant Code Provisions
Code ' 502(b): Right To Payment. The court first rejected the trustee's argument that Code ' 502(b) precluded the legal fees sought by Fidelity. Quoting the Supreme Court in Travelers, the court noted that the Code defines “claim” to be a “right to payment,” which “usually refer[s] to a right to payment recognized under state law.” Id. at *8 (Travelers, 549 U.S. at 451) (internal quotation marks omitted).
Contingent Claims Allowable. That the creditor's claim here was contingent was also unimportant. As the court explained, the Code ' 101(5)(A) includes “contingent” claims in its definition of “claim.” Id. Because applicable state contract law gave the creditor here a right to payment when the indemnification agreement was signed, the creditor “possessed a contingent right to post-petition attorneys' fees,” although “its right arose pre-petition.” Id. at *9. Moreover nothing in Code ' 502(b) precludes an unsecured creditor's “recovery of post-petition attorneys' fees” because the claim was contingent. Id. at *9-*10. Accord, In re SNTL Corp., 571 F3d 826, 838 (9th Cir. 2009) (“Under section 502(b)(1), those contingent claims cannot be disallowed simply because the contingency occurred postpetition ' . Contingent claims are allowed under Section 502(b)”). In the Second Circuit's reading of the Supreme Court's Travelers opinion, it had to “presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.” 2009 U.S. App. LEXIS 24329, at *15.
Inapplicability of Code Exceptions to Allowability
Moreover, none of the exceptions to the allowability of a claim listed in ' 502(b) applied to the claim here. Although ' 502(b)(1) makes any defense to a claim available to a bankruptcy trustee, unless applicable state law or one of the exceptions in ' 502(b) applies, “the claim must be allowed.'” Id. at *9-*10 (quoting Travelers, 549 U.S. at 452).
The court's reasoning is straightforward:
The underlying contract is valid as a matter of state substantive law; none of the ' 502(b)(2)-(9) exceptions apply; and the Code is silent as to the particular question presented ' whether the Code allows unsecured claims for fees incurred while litigating issues of contract law more generally.
Id. at *11-*12 (internal quotation marks omitted).
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