Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co.
The Court ruled that a lower-court rule blocking creditors from recovering contract-based attorney's fees whenever the underlying dispute involved bankruptcy-law issues has no basis in the Bankruptcy Code.
Because the Code generally honors valid contract rights unless it says otherwise, an insurance company that guaranteed a utility's workers'-compensation payments can now pursue its claim for attorney's fees that a lower court had rejected under that now-discredited rule.
How it got here: The Bankruptcy Court rejected Travelers' fee claim under a Ninth Circuit rule; the District Court and Ninth Circuit affirmed, and the Supreme Court took the case to resolve a circuit split.
The Case in Depth
What happened
Pacific Gas & Electric (PG&E) filed for bankruptcy after issuing a surety bond arrangement with Travelers to guarantee workers'-compensation payments to injured employees. Travelers had indemnity agreements entitling it to attorney's fees if it had to protect its rights. After disputes over how PG&E's reorganization plan treated Travelers, the two sides settled, but PG&E later objected when Travelers sought to collect the attorney's fees it incurred during the bankruptcy litigation.
The question before the Court
Can bankruptcy law block a creditor from collecting attorney's fees promised in a contract just because the fees were spent arguing over bankruptcy-law issues?
Why it matters
Creditors in bankruptcy cases who have contracts promising them attorney's fees can now seek those fees even when the fight was over bankruptcy-specific issues, not just ordinary contract disputes. This removes a Ninth Circuit-created barrier that had made it harder for creditors like sureties and lenders to recover litigation costs during a company's bankruptcy.
What changes now
The case goes back to the lower courts, which must now decide Travelers' fee claim without relying on the discredited Fobian rule. The Court left open whether some other bankruptcy-law principle might still block the claim, and it did not resolve PG&E's separate argument about oversecured versus unsecured creditors, since that issue was not properly raised below.
What this does not decide
The Court did not decide whether Travelers is actually entitled to the fees, whether the fees were reasonable or authorized by the contract, or whether a different provision of the Bankruptcy Code might independently bar unsecured creditors from recovering such fees, since PG&E raised that argument too late.
How the Court got there
The legal reasoning, step by step
- The Court began with the American Rule, which says each side normally pays its own attorney's fees unless a statute or an enforceable contract says otherwise; a valid contract allocating fees can override that default rule.
- Under the Bankruptcy Code, a creditor's claim must be allowed unless it fits one of nine listed exceptions in Section 502(b); the Court found none of the exceptions applied to Travelers' fee claim except possibly the one covering claims 'unenforceable' under outside law.
- The Court explained that this 'unenforceable' exception simply imports whatever defenses would apply to the claim outside of bankruptcy, meaning bankruptcy courts generally must look to state contract law to decide whether a fee claim is valid.
- The Ninth Circuit's Fobian rule, which barred fee awards whenever the underlying litigation involved issues unique to federal bankruptcy law rather than ordinary contract enforcement, had no textual grounding in the Bankruptcy Code; the cases it relied on had actually failed under state law, not because of any bankruptcy-specific bar.
- Because Congress has shown it knows how to expressly exclude certain categories of fees when it wants to (as it did for fees owed to a debtor's own attorney), and did not do so here, the Court concluded that the Code does not categorically disallow fees earned litigating bankruptcy issues.
- The Court declined to reach PG&E's separate argument that a different provision governing oversecured creditors implicitly forbids all unsecured creditors from ever recovering contractual fees, because PG&E had not raised that argument in the lower courts.
Doctrinal impact
Cases affected by this decision
Overrules Fobian (951 F. 2d 1149)
The Ninth Circuit's rule barring fee awards for bankruptcy-specific litigation is rejected as unsupported by the Bankruptcy Code.