312-263-2200

Courts have disagreed on the issue of whether an unsecured creditor can recover fees incurred post-petition.  Compare, In re SNTL Corp., 380 B.R. 204 (9th Cir. BAP 2007) (unsecured creditor was entitled to include contract based attorney’s fees incurred post-petition in its prepetition claim) and In re Elec. Mach. Enter., Inc., 371 B.R. 549 (Bankr. N.D.Fla. 2007) (disallowing unsecured creditors post petition attorneys fees).

The Electric Machinery case held that unsecured creditors cannot recover post-petition attorney’s fees for four primary reasons.  First, the court focused on the plain language of Section 506(b) of the Bankruptcy Code and applied the legal maximum of expressio unius est exclusio alterius.  The language of Section 506(b) provides that “[t]o the extent that an allowed secured claim [is oversecured] there shall be allowed to the holder of such claim, interest . . . and any reasonable fees, costs and charges.”  The court interpreted this language as establishing a congressional intent to create an exception to the general rule that claims are to be determined as of the petition date, exclusive of post-petition interest, attorneys’ fees, and other charges. Id. at 551.  Specifically, use of the words “to the extent” a claim is oversecured, and “there shall be allowed” interest and fees, mandated the conclusion that in all other circumstances, post-petition interest, attorneys’ fees, and charges shall not be allowed.  In other words, if Congress intended for unsecured creditors to receive post-petition attorneys’ fees, then it would have done so explicitly by authorizing unsecured creditors to collect fees under Section 506(b). Id.

Second, the court found that the Supreme Court in United Savings Ass’n v. Timbers, 484 U.S. 365 (1988) concluded that because Section 506(b) permitted post-petition interest to be paid only out of an equity cushion, an undersecured creditor who had no equity cushion fell within the general rule of disallowing post-petition interest.  That rationale applied equally to the disallowance of post petition attorneys’ fees and costs to unsecured creditors. Id.  Third, Section 502(b) of the Bankruptcy Code provides that “if an objection to claim is filed, the court shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount.”  Therefore, the time for determining the amount of a claim is “as it existed as of the time of the filing of the case, without inclusion of post-petition interest, attorneys’ fees or costs unless the claim is oversecured where such amounts would be allowed under Section 506(b). Id.

Finally, Electric Machinery considered the equitable considerations and policy of providing equality of distribution among similarly situated creditors according to the priorities set out in the Code.  “To find otherwise would permit certain types of unsecured creditors, typically holders of contract claims under agreements with attorneys’ fee provisions, to recover their fees while other unsecured creditors (tort claimants and trade creditors) would not be able to recover fees as part of their unsecured claims.” Id. at 552.  The court then concluded as follows:

Furthermore, the Court is particularly mindful of the practical impact a contrary ruling would have on the administration of a bankruptcy case.  There would be no finality to the claims process as bankruptcy courts would constantly have to revisit the issue of the amount of claims to include ever-accruing attorneys’ fees.  The “cash registers” would ring on a daily basis, as attorneys for unsecured creditors that were active in the case would continually be filing new claims or seeking to reconsider previously allowed claims in order to add post-petition attorneys’ fees and costs.  Essentially, there could be no finality to the claims resolution process if the ever-accruing fees and costs attendant to the representation of unsecured creditors were allowed as part of an unsecured claim.

Id. at 553. See also, Adams v. Zimmerman, 73 F.3d 1164, 1177 (1st Cir. 1996); and In re Waterman, 248 B.R. 567 (8th Cir. BAP 2000).

In re Hitch, 2009 WL 1542791 (Bankr. C.D.Ill. May 29, 2009), followed Electric Machinery.  In this Chapter 13 case, the debtors financed a vehicle through Prairieland Federal Credit Union (“PFCU”).  PFCU filed a secured proof of claim in the amount of $16,062.10.  The debtors’ confirmed Chapter 13 plan provided that the debtors would make their regular monthly post-petition payments directly to PFCU.  The debtors then fell in arrears, PFCU filed a motion to modify the stay to repossess the vehicle, which motion was granted, and the car was subsequently sold for $11,520.08.  PFCU then filed an unsecured proof of claim for the deficiency of $13,635.97, plus a repossession charge of $275.00, a consignor fee of $375.00 and a selling fee of $375.00.  The issue was whether PFCU was entitled to these post-petition fees.

The court started its analysis by noting that in order to determine whether a claim is an allowable claim, the court was required to first look to Section 502(a), which provides: “A claim or interest, proof of which is filed under section 501 of this title is deemed allowed, unless a party in interest . . . objects.”  In the event an objection to a claim is filed, Section 502(b) provides that the court “shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition” and that the claim shall be allowed in the amount determined “except to the extent” that the claim implicates any of the nine exceptions enumerated in Section 502(b).  Because none of those exceptions were relevant, the court noted that the unsecured deficiency claim of PFCU should be allowed with the amount of the claim being the only issue for the court to determine.

Hitch stated that to determine the amount of the claim and, specifically, to determine whether the amount may include the claimed costs, the court stated that it needed to consider Section 506 and stated:

Under the plain language of §506(b), a secured creditor can recover post-petition interest, fees, costs, and charges provided by contract or state law only to the extent that its collateral is worth more than the claim.  Section 506(b)’s silence with respect to unsecured and under-secured creditors points to the conclusion that these creditors are not entitled to post-petition fees and costs.  Courts that have disallowed post-petition fees and costs have invoked the legal maxim “expressio unius est exclusio alterius”, i.e., the expression of one thing is the exclusion of another, to support their conclusion that §506(b) does not allow post-petition fees and costs to unsecured and under-secured creditors.

Id. at *3.  The court noted that Section 506(b) provides an exception for over-secured creditors to the general rule that claims are to be determined as of the petition date, exclusive of post-petition fees and costs.  It noted that if Congress had intended for unsecured and under-secured creditors to receive post-petition fees and costs, then it could have easily done so.  Because it did not do so, the plain language of Section 506(b) demonstrated Congressional intent to disallow post-petition fees and costs for all creditors whose claims are not over-secured. Id. at *3.  Hitch also noted that certain equitable considerations dictated this outcome:

Equitable considerations and policy reasons also dictate disallowing post-petition fees and costs to unsecured creditors.  One of the primary goals of bankruptcy law is to provide for the equitable distribution of a debtor’s assets among its creditors.  Similarly situation creditors should be treated equally.  To allow the enforcement of a contractual provision which would permit certain unsecured creditors but not others to charge the bankruptcy estate for post-petition costs would violate the basic bankruptcy principle of equitable distribution.

Id. at *6; See also, In re Olde Prairie Block Owner LLC, 460 B.R. 201, 206 (Bankr. N.D.Ill. 2011) (“An undersecured creditor is not entitled to recover its attorneys’ fees.  It is generally recognized that unsecured and undersecured creditors are not entitled to recover post-petition attorneys’ fees and similar costs.”)

The court in SNTL was not persuaded by the Electric Machinery rationale.  Here, the court noted that Section 506(b) defines what is a secured claim and does not limit unsecured claims.  Therefore, §506(b) is irrelevant in determining whether an unsecured claim should be allowed.  Rather, the court must look to Section 502 of the Bankruptcy Code to determine allowability. Id. at 220.  The court further noted that the parties’ execution of a prepetition agreement containing an attorney’s fee provision gives rise to a contingent unliquidated attorney fee claim.  Citing to In re New Power Co., 315 B.R. 496, 508 (Bankr. N.D.Ga. 2004), the court noted “so long as the right to collect the fees existed pre-petition the fact that the fees were actually incurred during the post petition period is not relevant to the determination of whether the creditor has an allowable pre-petition claim for the fees.”  SNTL noted that this approach is consistent with the Ninth Circuit’s “fair contemplation test” for determining when a claim accrues.  Under this test, post-petition fees can be fairly contemplated when the parties have provided for them in their contracts and thus are contingent claims as of the petition date.  They cannot be disallowed merely because they are contingent.

Further, the court stated that the Supreme Court decision in Timbers was irrelevant.  In Timbers, the Supreme Court concluded that Section 506(b) permitted post-petition interest to be paid only out of the equity cushion, meaning that an unsecured creditor who had no equity cushion fell within the general rule disallowing post-petition interest.  However, this holding is consistent with Section 502(b)(2) of the Bankruptcy Code, which specifically disallows claims of unmatured interest.  SNTL stated that “inasmuch as Section 502(b) does not contain a similar prohibition against attorney’s fees, the comparison between the current issue and that presented in Timbers is not persuasive.” Id. at 222.

In Ogle v. Fidelity & Deposit Co. of Maryland, 586 F.3d 143 (2nd Cir. 2009), the court also found that attorney’s fees are allowable.  Here, the court noted that under Section 502(b), a “court, after notice and a hearing, shall determine the amount of [a] claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount.”  In conjunction with the above, it noted that under Section 101(5)(A), a claim is a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”  A “contingent” claim under the Code refers to “obligations that will become due upon the happening of a future event that was within the actual or presumed contemplation of the parties at the time the original relationship between the parties was created.”  Id. at 146, citing to and quoting In re Manville Forest Prods. Corp., 209 F.3d 125, 128-29 (2nd Cir.2000).  Applying these definitions to the attorney fee clause at issue, the court stated that under contract law, “a right to payment based on a written indemnification contract arises at the time the indemnification agreement is executed. Id.

In this case, the creditor possessed a contingent right to post-petition attorneys’ fees, which arose pre-petition.  The dollar amount of the creditor’s contingent right was not a sum certain on the day the bankruptcy petition was filed.  However, the court read the Supreme Court decision in Travelers Cas. & Sur. Co. of Am. V. PG&E, 549 U.S. 443 (2007) to mean that this was not important. Id.  The court stated that Travelers provided that “an otherwise enforceable contract allocating attorney’s fees (i.e., one that is enforceable under substantive, nonbankruptcy law) is allowable in bankruptcy except where the Bankruptcy Code provides otherwise.” Id. at 448.  Travelers went on to explain that because no exceptions to Section 502(b) applied that Travelers’ claim for post-petition fees “must be allowed under §502(b) unless unenforceable within the meaning of §502(b)(1).” Id. at 449-50.  Section 502(b)(1) in turn bars any claim that 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.”

From the above, Travelers concluded that “any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy. Id. at 450.  In other words, unless a claim is unenforceable under state law or one of exceptions to Sections 502(b)(2)-(9) applies, courts must “presume” that the claim “will be allowed in bankruptcy unless [it is] expressly disallowed.” Id. at 452.  In Ogle, the court concluded that it was decisive that the Code says nothing about unsecured claims for contractual attorney’s fees incurred while litigating issues of bankruptcy law. Id. at 148.  It then concluded as follows, quoting from United Merchs. & Mfrs., Inc. v. equitable Life Assurance Soc’y of the U.S., 674 F.2d 134, 137 (2nd Cir.2007):

When equally sophisticated parties negotiate a loan agreement that provides for recovery of collection costs upon default, courts should presume, absent a clear showing to the contrary, that the creditor gave value, in the form of a contract term favorable to the debtor or otherwise, in exchange for the collection costs provision.  Such a creditor should recover more in the division of the debtor’s estate because it gave more to the debtor at the time it made the loan.  Rather than providing an undeserved bonus for one creditor at the expense of others, allowing a claim under a collection costs provision merely effectuates the bargained-for terms of the loan contract.

In re Castillo, 488 B.R. 441 (Bankr. C.D.Cal. 2013) found that an undersecured creditor was entitled to post-petition attorney’s fees.  The court relied upon the Supreme Court’s decision in Travelers where the court held that an unsecured creditor’s claim for post-petition attorney’s fees could not be disallowed merely because the fees had been incurred in litigating issues that were peculiar to federal bankruptcy law.  According to the Supreme Court, even if a party in interest objects to a creditor’s proof of claim, “[T]he court shall allow the claim except to the extent that the claim implicates any of the nine exceptions enumerated in §502(b).”  548 U.S. at 449.

Therefore, based on its interpretation of Travelers, because the terms of the parties’ prepetition agreement permitted the recovery of the fees in question and none of the exceptions enumerated in Section 502(b) prohibited the allowance of a contractual claim for post-petition attorney’s fees, the same should not be disallowed. Id. at 446.  The court noted that Travelers did not resolve the application of Section 506(b), because that question was not raised with the courts below.  However, Castillo followed the holding in SNTL on this issue.  It further noted that even though Section 502 directs the bankruptcy court to determine the amount of a claim “as of the date of the filing of the petition,” this did not mean that attorneys’ fees incurred after the petition date must be disallowed.

To the contrary, the Bankruptcy Code’s broad definition of a “claim” includes any right to payment that existed as of the petition date, even if, as of that date, the right was contingent and/or unliquidated.  “So long as the right to collect the fees existed prepetition, the fact that the fees were actually incurred during the postpetition period is not relevant to the determination of whether the creditor has an allowable pre-petition claim for the fees.”

Id. at 447.  See also, Martin v. Bank of Germantown, 761 F.2d 1163, 1168 (6th Cir.1985); and In re Qmect, Inc., 368 B.R. 882 (Bankr.N.D.Cal.2007).

SummitBridge National Investments III, LLC v. Faison, 915 F.3d 288 (4th Cir.2019), also followed this second line or reasoning.  Here, the court stated that Section 502(b) does not bar a creditor from recovering post-petition attorneys’ fees, so long as two conditions are met: First, the creditor must have had a “claim” for those fees as of the petition date; and second, that claim must not fall within one or more of the nine enumerated exceptions. Id. at 292.  Because the debtor did not dispute that none of the nine exceptions is implicated here, the only question was whether the creditor had a “claim” under the Code for post-petition attorneys’ fees as of the petition date.  The court stated that the fact that the attorneys’ fees at issue arose post-petition was not relevant.

It is true that the right to payment of attorneys’ fees under Faison’s promissory notes was contingent on a future, post-petition event – namely, the notes being placed with an attorney for collection.  But the Code defines “claim” broadly, and expressly includes “right[s] to payment” that are “contingent.” 11 U.S.C. §101(5)(A) (defining “claim” as “a right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured”).  What matters is that the right to those fees arose pre-petition, when Faison signed the promissory notes in question.

The court determined that the Supreme Court decision in Travelers provided important guidance.  There, the Court applied a presumption of broader significance: “[W]e generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.”  548 U.S. at 452.  Because nothing in the Code disallowed claims for post-petition attorneys’ fees that are incurred in connection with federal bankruptcy law issues, the Court concluded, the Ninth Circuit’s rule was unfounded. Id. at 452–54.

SummitBridge also stated that Section 506(b) did not preclude post-petition attorneys’ fees to unsecured creditors.  First, it stated that Travelers made clear that claims enforceable under state law are presumed allowable, and that this presumption may be overcome only by an express disallowance. Id. at 294.  Second, Section 506(b) is completely silent on the point.

Section 506(b) has nothing to do with the allowance or disallowance of claims. That function, as described above, is performed by §502, aptly titled “[a]llowance of claims or interests.” What §506 is concerned with, as its title makes equally clear, is the “secured status” of claims already allowed or presumed allowed. See 11 U.S.C. §506 (“Determination of secured status”).  Section 502, in other words, answers “the threshold question of whether a claim should be allowed or disallowed,” while “§506 deals with the entirely different, more narrow question of whether certain types of claims should be considered secured or unsecured.”

Id.  When Congress intends to disallow a claim for attorneys’ fees, it does so in Section 502, not Section 506. Id. at 295.

 

Matthew T. Gensburg
mgensburg@gcklegal.com