Unsecured Creditors May Claim Post-Petition Attorneys' Fees

Author:Mr Brian Trust and Rick Hyman
Profession:Mayer Brown
 
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Originally published November 24, 2009

Keywords: unsecured creditors, post-petition fees, court of appeals, Ogle, Fidelity, Bankruptcy Code, unsecured claim, post-petition attorneys' fees, prepetition contract, Travelers, bankruptcy law,  

In a decision that will be of great interest to the creditor community, the US Court of Appeals for the Second Circuit held, on November 5, 2009, that the Bankruptcy Code does not bar an unsecured claim for post-petition attorneys' fees that was authorized under a valid prepetition contract. The case, Ogle v. Fidelity & Deposit Company of Maryland,1 extends and clarifies the US Supreme Court's March 2007 decision in the Travelers case,2 which opened the door for such a ruling.

In Travelers, the Supreme Court swept away the "Fobian rule," so named for a 1991 Ninth Circuit decision which held that in litigation involving issues of bankruptcy law, attorneys' fees will not generally be awarded. The Supreme Court found no statutory basis for the Fobian rule in the Bankruptcy Code and did away with it, summarily, holding that the Bankruptcy Code does not disallow contract-based claims for attorneys' fees based solely on the fact that the fees were incurred litigating bankruptcy law issues. In the words of the opinion: "[a] contract allocating attorneys' fees that is enforceable under [state] law is allowable in bankruptcy except where the Bankruptcy Code provides otherwise."

Ogle takes Travelers one important step further, holding that an unsecured creditor is entitled to an allowed claim for post-petition attorneys' fees that were authorized by a prepetition contract, even though the incurrence of such fees was contingent on post-petition events and the amount thereof, necessarily, unliquidated. Of course, as an "allowed" unsecured claim that is deemed to have arisen prepetition, the claim will, as a general matter, ultimately receive the same treatment as all other general unsecured claims in the case.

Here are the central facts in Ogle.

Fidelity & Deposit Company of Maryland (Fidelity) issued a number of surety bonds for the benefit of Agway, Inc., to a number of Agway insurers. In connection with the surety bonds, Agway entered into unsecured reimbursement agreements with Fidelity pursuant to which Agway agreed, among other things, to indemnify Fidelity for attorneys' fees that Fidelity might incur to enforce the reimbursement agreements against Agway.

Agway subsequently commenced a chapter 11 bankruptcy proceeding. Up...

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