Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co.
Headline: Court rejects Ninth Circuit rule blocking contract-based attorney-fee claims in bankruptcy, allowing creditors to pursue contract-authorized fees even when those fees arose in litigation over bankruptcy issues and remanding the case.
Holding: Federal bankruptcy law does not categorically bar contract-based attorney’s fee claims merely because the fees were incurred litigating bankruptcy issues, so the Ninth Circuit’s disallowance of Travelers’ claim was erroneous.
- Allows creditors to seek contract-authorized attorney fees incurred in bankruptcy litigation.
- Invalidates the Ninth Circuit’s Fobian rule that barred such fee claims.
- Sends the case back to lower courts for merits-based review of fee enforceability.
Summary
Background
PG&E, a utility company, filed for Chapter 11 bankruptcy. Travelers had issued a $100 million surety bond guaranteeing PG&E’s payment of state workers’ compensation benefits and had indemnity agreements that required PG&E to reimburse Travelers for attorney’s fees. Travelers filed a claim in the bankruptcy to protect those contractual rights. The parties negotiated plan language, but a later change by PG&E led to litigation that they resolved by a court-approved stipulation allowing Travelers to assert attorney-fee claims as a general unsecured claim. The Bankruptcy Court, the District Court, and the Ninth Circuit all rejected Travelers’ amended fee claim under a Ninth Circuit rule that bars fees when litigation involves issues “peculiar to federal bankruptcy law.”
Reasoning
The Court addressed whether federal bankruptcy law itself bars contract-based attorney-fee claims when the fees were incurred litigating bankruptcy law. The Court held it does not. It explained that §502 requires courts to allow claims unless a specific Code exception applies, and §502(b)(1) disallows only claims that are unenforceable under applicable nonbankruptcy law. The Court emphasized that most claims arise from underlying state law unless the Code clearly provides otherwise, found no textual support for the Ninth Circuit’s categorical rule, and rejected that rule. The Court also declined to consider new statutory arguments raised for the first time on appeal, including a broad reading of §506(b).
Real world impact
Creditors with contracts that allocate attorney’s fees can press those claims in bankruptcy courts even when the fees arose from bankruptcy litigation, unless a specific Code provision or applicable nonbankruptcy law bars recovery. The Ninth Circuit’s Fobian rule is no longer available as a blanket defense. Because the Supreme Court did not decide all statutory or contract-based defenses, lower courts must reconsider Travelers’ claim on the merits and determine whether the fees are enforceable and reasonable under applicable law.
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