TRAVELERS CASUALTY v. PACIFIC GAS AND ELECTRIC CO.
Prior to declaring bankruptcy, Pacific Gas & Electric company (PG & E) purchased surety bonds from Travelers Casualty and Surety Company of America (Travelers). These bonds obliged Travelers to settle debts PG & E couldn't repay. When PG & E went bankrupt, Travelers hired attorneys to protect its interests. State law mandated that PG & E cover all attorney fees incurred by Travelers during state bankruptcy proceedings. The litigation later moved to federal court. PG & E refused to pay for Travelers's expenditures in federal court, claiming responsibility only for fees incurred during state proceedings.
The Bankruptcy Court denied Travelers's request for reimbursement because the precedents of the U.S. Court of Appeals for the Ninth Circuit held that only federal laws could ensure payment for federal litigation. PG & E was only under contractual and legal obligation to pay for state-court attorney fees. The District Court and the Ninth Circuit denied Travelers's claim on the same grounds. Travelers appealed to the Supreme Court, citing inconsistent rulings among the Circuit Courts of Appeals.
Can a litigant in a bankruptcy case involving federal bankruptcy law collect attorneys' fees that are granted by a contract or a state law?
Legal provision: Bankruptcy Code, Bankruptcy Act or Rules, or Bankruptcy Reform Act of 1978
Yes. Justice Samuel Alito issued the unanimous opinion, which found that the Bankruptcy Code did not expressly waive the contractual obligation to reimburse attorney fees even if incurred in federal litigation. Because the Bankruptcy Code "says nothing about unsecured claims for contractual attorney's fees incurred while litigating issues of bankruptcy law," the Court could "presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed." Since none of the nine exemptions waiving contractual obligation to reimburse attorney fees set forth in 11 U.S.C. Section 502(b) applied to Travelers, nothing undermined the debtor's contractual or state-law obligation to pay.
Argument of G. Eric Brunstad, Jr.
Chief Justice Roberts: We'll hear argument next in 05-1429, Travelers Casualty and Surety Company versus Pacific Gas and Electric Company.
Mr. Brunstad: Mr. Chief Justice, and may it please the Court:
The Ninth Circuit's Fobian rule creates an unwarranted Federal common law rule that exists outside the structure of the Bankruptcy Code.
The Bankruptcy Code has a distinct structure.
For example, if a debtor has a right to an attorneys' fees valid under State law, after the petition date, the date the debtor files for bankruptcy, that right passes to the bankruptcy estate.
If a creditor has a State law right to attorneys' fees, after the petition date, that right becomes a claim in bankruptcy.
The Ninth Circuit's Fobian rule intercepts those rights even before we get to what the Bankruptcy Code provides or does to them and basically says, if you're litigating Federal issues, you simply cannot have a right to attorneys' fees unless the Federal law authorizes that right, in this case, contractual rights, or alternatively rights available under State statute.
That, we submit, is an impermissible creation of a Federal common law rule.
There is no basis for it under this Court's preemption precedents.
There's no conflict between Federal policy and State policy which would justify the creation of the rule, and accordingly, it is unwarranted.
Justice Kennedy: Can you tell me... this is just basic bankruptcy.
I should know, but I looked it up and couldn't find it.
A standard promissory note which provides for attorneys' fees, the holder of the note is the creditor, the maker of the note is the bankrupt... the maker of the note goes bankrupt.
The holder of the note gets his attorney and says: File a claim in bankruptcy.
And the attorney sends him a bill.
Is the attorneys' fees, the attorney fee for filing the bankruptcy claim, recoverable as part of the claim?
Mr. Brunstad: It depends, Justice Kennedy.
It depends on what their contractual right provides.
Here we have a contractual--
Justice Kennedy: It's the standard, it's the standard attorneys' fee provision, all attorneys' fees in connection with collection of this note and enforcement of the terms of this note.
Mr. Brunstad: --Then, yes, Justice Kennedy, I would say it probably would be covered.
It probably would be covered and the analysis--
Justice Kennedy: Is there something where I can look that up in Collier?
Are there millions of cases?
I mean, this seems to me fairly rudimentary.
Mr. Brunstad: --Yes, Justice Kennedy.
In our reply brief, we do cite to Collier, where we talk about exactly that scenario and it is described.
And it basically works like this.
A claim under the Bankruptcy Code is defined under Section 1015.
The claim includes any right to payment whether it's contingent or fixed, matured, unmatured, et cetera.
Any right to payment, literally any right to payment, when the debtor files for bankruptcy, that becomes a claim.
If the right--
Justice Kennedy: No, no.
But in my case, it's a post-petition action.
Mr. Brunstad: --Yes, Justice Kennedy.
The key concept... and this is explained clearly in Collier... is where does the right come from?
If it arises out of a pre-petition contract, then the right is pre-petition in nature, even though the fees are incurred post-petition.
Think of a guarantee.
Think of if PG&E had guaranteed its parent's debt for the $100 million, let's say.
Justice Stevens: Could you just back up just for a second?
Supposing at the time of the bankruptcy that the services have not been performed.
It's post-petition conduct by the lawyer.
Mr. Brunstad: Right.
Chief Justice Roberts: Now, in that case, are you saying that routinely the lawyer recovers fees in the bankruptcy case even if the debtor, the debtor was insolvent?
And we're assuming insolvency in the hypothetical, although it may not fit this case.
Mr. Brunstad: Exactly, yes, Justice Stevens, if in fact, though, the creditor bothers to assert the claim for fees in the bankruptcy case.
In most cases, creditors don't, because it's not worth the effort of asserting the claim for fees subsequently.
In cases such as this, where you have a solvent debtor who can pay all claims in full, there's no reason why they should be able to get out of their contractual obligations in bankruptcy.
Justice Stevens: Well, why wouldn't it be worth... I know here.
But why wouldn't it be worth the effort, instead of getting $90 on the note, to get 95?
Mr. Brunstad: Well, because there's a transaction cost in actually filing the additional claim setting forth the amount that you've incurred.
In most cases, Justice Stevens, creditors don't even hire attorneys to pursue or file a claim in bankruptcy.
In most Chapter 7 cases, for example, they are no-asset cases.
Justice Stevens: Are you telling me just based on your experience that in Justice Kennedy's hypothetical, normally, no fees are recovered?
Mr. Brunstad: Normally, there's no distribution on unsecured claims in most bankruptcy cases.
So why bother?
Justice Stevens: But assuming in those cases where there's some distribution, is it correct, as I'm assuming your answer to Justice Kennedy's question, that the normal practice is you don't bother because there is not enough involved?
Mr. Brunstad: Typically, Justice Stevens, that is correct.
But in cases such as this, where the attorneys' fees are substantial, the debtor is solvent, and there are substantial--
Justice Kennedy: Just in the hypothetical, I would think that in many cases, there's going to be some payout for the promissory note, and the holder of the note tells his attorneys: Make sure I get that claim in bankruptcy.
The attorney files a claim.
And every attorney that files a claim for a promissory note which is entitled to a fee from the bankruptcy court for filing in the bankruptcy court.
Mr. Brunstad: --For the work done in performing, filing the proof of claim, that's correct.
And even though, Justice Kennedy, the attorney's conduct was after the debtor filed for bankruptcy, the right to payment arises out of the pre-petition contract.
Again, think of the guarantee hypothetical.
There you had the--
Justice Stevens: The pre-petition contract, but not out of pre-petition conduct.
Mr. Brunstad: --That's correct, Justice Stevens.
But just think about the pre-petition tort claim, where there has been exposure to asbestos products pre-petition, but the injury arises post-petition.
It's still a pre-petition claim.
Justice Souter: Okay, but you're one step ahead of that here, because here there hasn't been any, in effect, any exposure.
Here there isn't any certain default on the note.
So far as we know, here, there may never be any default on the workers comp obligation.
So that your contingency is a much more remote contingency.
Why should that, why should this case fall into the same category as the promissory note?
Mr. Brunstad: Justice Souter, it's different in this sense.
This is an indemnity, all-loss indemnity provision.
The surety is not supposed to incur any loss, any cost whatsoever, for supplying these surety bonds to PG&E.
Justice Souter: And so far as we know, it won't.
Mr. Brunstad: But it has, because when PG&E filed for bankruptcy--
Justice Souter: Well, it has, but that depends on a totally circular argument.
The minute it filed for bankruptcy, although there had been no default on the comp obligation, your client started incurring attorneys' fees, and it was not incurring attorneys' fees based on any default by the, by the debtor.
Mr. Brunstad: --Justice Souter, you can visualize bankruptcy itself as being a default.
When the debtor files for bankruptcy, you must come to the bankruptcy court to present your rights--
Justice Souter: You can call bankruptcy a default, but that's not what I mean, and you know that's not what I mean.
I'm talking about a default on the workers comp obligation.
Mr. Brunstad: --Yes, sir.
Justice Souter: There has been no default on the workers comp obligation, and because they intend to keep on running this business, there is reason to suppose that there will not be.
Mr. Brunstad: Well, by analogy, Justice Souter, in the LTV case, the same posture at the beginning of the case.
We don't know what's going to happen in the future.
You must file your claim at the beginning of the case.
Justice Souter: Yes, and maybe you don't have a claim at the beginning of the case.
I mean, that's what we're getting at.
We can understand the claim when the note... when you've got a promissory note and you're out of money.
The claim is inevitable.
In this case, there is no inevitable claim.
Mr. Brunstad: --But that's precisely the point of why claim is defined so broadly to include contingent claims.
Justice Souter: But if it is defined as broadly as this, we're in a situation exactly like this.
There has been no default on the obligation, and prior to getting to this Court, $167,000 has been racked up in legal fees that accomplishes absolutely nothing.
Mr. Brunstad: Absolutely false, Justice Souter.
In bankruptcy, if you do not present your rights, if the rights of the workers themselves are not properly treated, they are lost.
Under Section 1141, they are extinguished.
Justice Souter: All right, in this case, $167,000 has been spent to come to the conclusion, as I understand it.
That if the time comes to assert a right of indemnification, you can assert a right of indemnification and we can oppose it.
If we are going to construe the bankruptcy law to provide a law like this, then maybe there is something wrong in the, in the construction of the bankruptcy law.
Mr. Brunstad: No, Justice Souter, because if you look at what Section 1141 of the Bankruptcy Code does, it provides that a plan of reorganization binds all parties.
If you're not provided for adequately in the plan under Section 1141(d), your rights are extinguished forever.
You must come to the bankruptcy court; you must be sure that the rights are properly characterized.
Justice Ginsburg: But that's not what this bankruptcy court thought about the claim.
This bankruptcy court said some rather critical things.
Mr. Brunstad: Yes, Justice Ginsburg, but I think we need to distinguish two different things.
There was the work that was performed in preserving the rights of the injured employees, to make sure they were properly classified, that their rights were rendered unimpaired.
If that hadn't been in the plan, then their rights would have been extinguished under Section 1141.
Then there was the claim that the surety provides for having had to have done all of that work.
Justice Ginsburg: And I don't... there was never a time that the plan said we are not going to pay our workers' compensation.
Mr. Brunstad: The problem, Justice Ginsburg, is that the plan said nothing at all.
And when the plan says nothing at all, the default rule in bankruptcy is that rights are extinguished; they are discharged under Section 1141(d).
It must be in the plan in order to be invalid after the confirmation of the plan.
We had to assure those rights were properly treated in the plan, because if they weren't, they would have been discharged under the general... general discharge provision.
That is why one must come to the bankruptcy court, one must file a proof of claim, one must enforce your rights in bankruptcy; if you don't, you lose them.
That's why the surety here stepped forward, said it has subrogation rights; the workers have rights.
And the bankruptcy court agreed with Travelers.
It directed the debtor to put that language in the plan.
Justice Ginsburg: I thought there was a section of the code that preserved subrogation rights.
Mr. Brunstad: --That's Section 509, Justice Ginsburg.
Justice Ginsburg: Yes.
Mr. Brunstad: But that's not what I was speaking of just momentarily.
The rights of the injured employees, the workers, when they filed for... when PG&E filed for bankruptcy, the injured workers had claims.
They were going to receive periodic benefit payments off into the future.
If PG&E had not properly provided for those claims in the bankruptcy case in their plan, those claims would have been extinguished.
As a result, though, Travelers would not have been off the hook on its surety bond, Travelers would have had to have stepped forward and make the payments if PG&E did not.
But if Travelers hadn't come to the bankruptcy court and said, these are our rights, these need to be preserved, its recourse against PG&E would have extinguished as well.
If one does not come to the bankruptcy court and assert one's rights, one loses them.
And of course, creditors when they do have to assert their rights, incur attorneys' fees for doing so.
And here we had a pre-petition contract that said, whatever loss we incur, including attorneys' fees, we have a right to recover, a right to payment.
That becomes the claim.
Justice Souter: Let's assume, let's assume that one of the recipients of comp payments had come forward and said: I object to the plan, I have a claim for comp payments and I object to the plan because it doesn't provide for them.
And the... the court said, you're, you're right.
The plan is going to include provision for comp payments and it had been so amended, and it was then... the plan was then amended.
Would you, under those circumstances, have had any... would Travelers, under those circumstances, have had any reason to assert a claim?
Mr. Brunstad: We would not have done that work.
No, Justice Souter, because the injured worker him or herself would have done it.
Justice Souter: No, I know it.
But would you have had any other claim that you would have asserted, had that been done?
Mr. Brunstad: Well, with respect to the, the treatment of the workers under the plan, no.
With respect to--
Justice Souter: With respect to any interest of Travelers?
Mr. Brunstad: --Yes, Justice Souter.
Justice Souter: If that had been done, would Travelers have asserted a claim?
Mr. Brunstad: Yes, Justice Souter.
Justice Souter: What?
Mr. Brunstad: We would have said, in our proof of claim, as we did: If we must make payment in the future, we are entitled to two things.
One, we are entitled to reimbursement from PG&E for any amount that we must spend in the future whenever that might occur.
Two, if we have to pay any of the employees, we are subrogated.
We stand in the shoes of the employees and may assert those rights.
The subrogation right would have been fully protected, though, Justice Souter, because of the treatment of the workers in the plan rendering them unimpaired.
We would have left simply... with simply saying we have these reimbursement rights which we would have in case we have to make payment.
Now, in the LTV case, which we cite in our papers, at the beginning of the LTV case, the surety who has had $40 million in surety bonds was in a position, very much the same as in this case, when PG&E filed.
PG&E got an order authorizing it to continue to pay but not requiring it to pay.
That can only be done in the plan of reorganization.
LTV started paying the workers' comp benefits, but then defaulted and stopped, long after the bankruptcy case had commenced, but far short of when it concluded.
The surety had to step up to the plate and make the payments.
If the surety had not filed a proof of claim at the beginning of the case, the surety would have lost its recourse against the debtor, LTV, even though it subsequently, far later, had to make payment.
Justice Ginsburg: Correct me if I'm wrong--
Mr. Brunstad: That's how bankruptcy works.
Justice Ginsburg: --In... in this case, I thought that if a contingency claim for indemnification is not allowed, but if it becomes fixed at some time, then the claim can be made and is not lost.
Mr. Brunstad: No, Justice Ginsburg.
There is a bar date set in the beginning of Chapter 11 cases.
You must file your claim by the bar date or you'll be forever barred, even if your liability becomes fixed later.
Justice Ginsburg: I'm talking about 502(e)(1).
Mr. Brunstad: Yes, Justice Ginsburg, if your reimbursement claim is contingent, it will be disallowed, subject to reconsideration under Section 502(j).
And that's what the parties stipulated to in this case in our stipulation.
We filed our proof of claim, then PG&E objected to our proof of claim, but Justice Ginsburg, PG&E did a lot more than just object to our contingent reimbursement rights.
They mischaracterized our subrogation rights as claims; they sought to disallow our subrogation claims; and they sought to subordinate our claims.
Plus in addition, they sought to disallow the claims of the injured workers.
So we had to respond to the litigation that was commenced.
We had to defend our rights, and we were successful.
The workers' claims were ultimately left unimpaired in the bankruptcy as they should have been.
PG&E was fully responsible for paying the workers' claims.
Justice Ginsburg: In any case, this has nothing to do with the, Fobian, so-called Fobian issue, whether the Ninth Circuit drew the bright line.
Mr. Brunstad: Correct, Justice Ginsburg.
The Fobian rule, we submit, is an impermissible creation of Federal common law.
It's not justified by any concept of preemption; there is no conflict with bankruptcy policy--
Justice Kennedy: Are they--
Justice Breyer: Question--
Justice Kennedy: --Let me just ask you about the Fobian, and I know Justice Breyer has a question.
Let's assume that you're correct in that the fees are allowable.
Can the bankruptcy court make the determination of the reasonableness of the fees?
Mr. Brunstad: --It depends, Justice Kennedy.
If State law, if it's an unsecured claim under Section 501(b)(1)--
Justice Kennedy: In this case.
Mr. Brunstad: --In this case, that would be a determination under State law.
Every State, Your Honor, has a reasonableness requirement.
Justice Kennedy: So... so if the bankruptcy judge isn't sure of what the amount is, he looks to State law to determine the amount?
Mr. Brunstad: Yes, Justice Kennedy.
Under Section 501(b)(1)--
Justice Kennedy: But the bankruptcy court does determine reasonableness.
Mr. Brunstad: --If State law provides for it, and all States do.
The bankruptcy court adopts the State reasonableness standard for unsecured claims under Section 502(b)(1).
Yes, Justice Breyer?
Justice Breyer: --I'm sort of back where Justice Kennedy started on this.
Forget... I'd like to forget your case, because your case seems to me to be a case where parties argue reasonably about whether the contract itself covers this kind of fee.
And maybe it doesn't, if it's very unreasonable, et cetera.
But let's take a very straightforward case.
It's an obvious contract to collect a debt, or maybe a mortgage, and in the debt or the mortgage agreement, it says, attorneys' fees will be paid for collection.
It clearly covers bankruptcy, too, by its language.
And now there must be many instances or some, anyway, where the security is inadequate.
Mr. Brunstad: The security--
Justice Breyer: And there must be other instances in which there wasn't any security.
And if I read Collier as you pointed to, that seems to say, in such cases, very simple, the creditor has the status of an unsecured creditor in respect to those attorneys' fees.
Mr. Brunstad: --And in--
Justice Breyer: Overage in the secured case, and the whole claim in the unsecured case.
So get in the queue and you can collect your pro-rata share.
Mr. Brunstad: --Absolutely, Justice Breyer.
Justice Breyer: My question is, I have 19 professors on the other side coming to tell me that that's never happened.
They can't even find an instance.
So it isn't as if, it isn't as if you haven't found an instance, it is that they are prepared to say it never happened.
And then there may be one exception or two or something like that.
And I can't, that... I'm now totally puzzled.
Because if it's so clear as you say, and I follow your logic, and I followed Collier, why?
After all, there are bankrupt people who do have some assets.
Mr. Brunstad: Justice Breyer it happens all the time.
In our brief, we cite to many, many cases in which attorneys' fees are allowed as unsecured claims.
It's actually been happening for over 100 years, it happened in the Bankruptcy Act of 1998.
Justice Kennedy: No, no.
But... but we are talking about attorneys' fees for services performed in the bankruptcy proceeding?
Mr. Brunstad: Correct, Your Honor.
Justice Kennedy: The cost of filing the claim, the cost of talking to the bankruptcy judge, et cetera.
Mr. Brunstad: Correct, Your Honor.
And in a key case we cited, the Second Circuit's decision, United Manufacturers and Merchants, where they didn't even hire an attorney until after the bankruptcy case was filed, the attorney performed services, filing a proof of claim, protecting the equitable rights, and the Second Circuit clearly held that those attorneys' fees were properly part of the unsecured claim, but it couldn't be any clearer.
And the Second Circuit--
Justice Stevens: But what I don't... there is a body of law on the other side of that issue, too, isn't there?
Mr. Brunstad: --There is, Justice Stevens, but those are lower court decisions.
Justice Stevens: Yes.
The Second Circuit is a lower court.
Mr. Brunstad: Well, compared to this Court, certainly, Justice Stevens.
Justice Stevens: That's exactly right.
There are no cases from this Court speaking to this precise issue, are there?
On which there is a disagreement among the lower courts?
Mr. Brunstad: Justice Stevens, I think it's important to say that the alternative rule that PG&E asked for is one that every court of appeals to have addressed has rejected.
What they are saying is, oh, you can't get your attorneys' fees based on a construction of the Bankruptcy Code.
No court of appeals has accepted it.
There are some lower bankruptcy court decisions that have accepted it, but that is routinely overturned on appeal.
The issue of whether you get your attorneys' fees as part of an unsecured claim, Cohen versus De La Cruz, in that case this Court had to construe whether the term debt, which means under the Bankruptcy Code the same thing as a claim, is defined as liability on a claim, there the Court, this Court concluded that that debt included attorneys' fees, the treble damages, the whole nine yards.
Justice Breyer: You would have thought that the one group of people who ought to know this thoroughly, or at least have a view are the bankruptcy bar.
Mr. Brunstad: Well--
Justice Breyer: And, and yet there are no briefs from them; there are not... there is no article that I could find in Bankruptcy Journal.
Chief Justice Roberts: Well, there may be no briefs from them because it isn't the question on which we granted cert, is it?
Mr. Brunstad: --Chief Justice Roberts, that's correct.
And our view is that the Court should deal only with the Fobian rule.
And the alternative argument which Respondent presented was never argued below, was not decided below, was not presented in the opposition to certiorari.
It's been rejected by every single court of appeals--
Justice Ginsburg: But it would be proper to remand for the Ninth Circuit to consider those other arguments?
Mr. Brunstad: --Yes, Justice Ginsburg.
And that's exactly what this Court should do.
It should remand their statutory interpretation argument to the Court of Appeals to consider, for the lower courts to consider.
This Court deserves more than just a 20-page reply brief in response to 80 pages of briefing by the other side on an issue that was never raised below, not presented in the opposition to certiorari.
Remand would be the proper thing to do with respect to their claim.
I do believe that is true, Justice Ginsburg.
Justice Ginsburg: On both their statutory interpretation and the contract?
Mr. Brunstad: The contract, reasonableness, all of those issues.
The circuit split, which we presented to the Court, and which I understand certiorari was... well, I'm guessing... certiorari was granted on, it deals with the Fobian rule.
As this common law rule, this sort of construct, that if you're litigating Federal law issues, well, as a matter of general Federal common law, you can't get the attorneys' fees unless it's authorized by Federal law.
And our brief was entirely devoted to that.
You can't justify that rule in our view under preemption principles; there's no conflict; there is no Congress preempting the field in any way; you can't justify this under Atherton as a, as a... something that's necessary because of a conflict with Federal policy.
And also the Fobian rule is inappropriately categorical, in violation of what we submit are these Court's principles in the Nolan case, in the CF and I case.
In those cases, the Court said: It's not for the courts to create these claims processing rules in bankruptcy.
But that exactly is what the Ninth Circuit did here.
If there are no further questions I'd like to reserve the balance of my time for rebuttal.
Justice Stevens: One quick question, if I may.
Would one of the issues open on remand be the construction of the contract?
Is there an issue at State law as to whether Travelers pays for these particular services?
Mr. Brunstad: Yes, Justice Stevens.
That would be appropriate on remand.
I reserve the balance--
of my time.
Chief Justice Roberts: Thank you, Counsel.
Mr. Brunstad: Thank you.
Argument of E. Joshua Rosenkranz
Chief Justice Roberts: Mr. Rosenkranz.
Mr. Rosenkranz: Mr. Chief Justice, and may it please the Court:
Let me begin at the threshold, on whether this Court should consider the statutory construction argument that we've presented.
The issue of statutory--
Justice Ginsburg: And can we be, take one step before that and tell us if you are conceding that the Fobian rule has no basis in the statute and is wrong?
Mr. Rosenkranz: --Your Honor, the Fobian rule reaches the correct conclusion in this case, but Your Honor is correct.
The problem with the Fobian rule is that it doesn't go far enough in presenting, in preventing creditors from requiring other creditors to pay for their attorneys' fees.
Justice Kennedy: Well, if you say it doesn't go far enough then I infer from that you say that it's valid as far as it goes?
Mr. Rosenkranz: It is valid as far as it covers this case but not on the rationale of the Ninth Circuit.
In other words, the Ninth Circuit did begin in the wrong place, which was not to read the statute, Section 502, which is why that is a rational predicate to the issue that Travelers is presenting here.
Chief Justice Roberts: I'm not sure I agree, Counsel, that the Fobian rule is both narrower and broader than the question you try to present.
For example it applies to the claims of a secured creditor for attorneys fees on a secured claim as well.
Mr. Rosenkranz: No, Your Honor--
Chief Justice Roberts: Why... it doesn't?
Mr. Rosenkranz: --No, Mr. Chief Justice.
No court has ever held that the Fobian rule applies to oversecured creditors.
Everyone acknowledges that Section 506(b) applies to oversecured creditors so.
Chief Justice Roberts: So if you're an oversecured creditor with a claim for attorneys' fees arising under solely issues of matters of Federal bankruptcy law, the Fobian rule doesn't prevent that?
Mr. Rosenkranz: No, Your Honor.
Everyone is absolutely clear that Fobian to the extent that it applies--
Chief Justice Roberts: Well, not everyone.
I'm not clear on it.
Mr. Rosenkranz: --I'm sorry, Your Honor.
All the bankruptcy practitioners and courts are clear that to the extent that Fobian applies, it applies only to unsecured creditors.
But again this is a rational predicate to this Court's analysis of Fobian.
How do we know?
Chief Justice Roberts: If it is a rational predicate, we might have expected to hear about it in the opposition to certiorari.
Mr. Rosenkranz: Yes, Your Honor.
I apologize for focusing only on the issue that Travelers was focusing on, which was whether this was, whether the Fobian rule was itself cert-worthy question.
But it is a rational predicate because, as you can see from Travelers' brief, Travelers says no fewer than a dozen times, including in two point headings: Read the code; read the code.
It will tell you that unsecured creditors have an allowable claim for post-petition attorneys' fees, and only if you begin by reading the code can you figure out whether the Fobian common law overlay is correct or not.
So when we say, Your Honors, yes, let's read the code, that's not an ambush and that is not smuggling in.
Chief Justice Roberts: No, it's an ambush and it is smuggling in the sense we don't have a court of appeals decision one way or the other on that question, do we?
Mr. Rosenkranz: Your Honor, we do have court of appeals decisions on this precise question, not in this case because the court of appeals had Fobian and the rule that underlay Fobian for 20 years.
But there are three courts of appeals--
Justice Kennedy: Justice Ginsburg has a question I'm very interested in.
Do you defend the Fobian rule?
Mr. Rosenkranz: --We do not, Your Honor.
The Fobian rule is wrong at least, especially as to the distinction that it draws between State law and Federal litigation.
There's only one answer to the question--
Justice Stevens: Well, why then isn't the proper disposition of this case to send it back to the Ninth Circuit to consider all these other arguments?
Mr. Rosenkranz: --Well, Your Honor, because this issue has been fully ventilated among the lower courts.
Justice Ginsburg: Yes, but we are not a court of first view and you know that very well.
We are a court of review.
So no matter how well it's been aired, we wait to see what the lower courts have said on a question.
We don't take it in the first instance.
Mr. Rosenkranz: Yes, I understand that, Your Honor.
It would have been futile to argue this before the Ninth Circuit.
The Ninth Circuit would have said that--
Justice Ginsburg: I understand that because they have the Fobian rule.
Mr. Rosenkranz: --Yes.
Now, but, Your Honor, let me just add two additional reasons why this Court should consider it now.
The first is this has been fully ventilated in the lower courts.
There is not a single argument in the briefs on either side on which there is not a lower court opinion going one way or another on every argument.
Secondly, there is an enormous amount of affirmative harm that can come from this Court simply saying, let us conclude that the Ninth Circuit was wrong in disallowing these claims on the logic that the Ninth Circuit followed, but we will reserve for a later day an open question of law on what Section 502(b) and 506(b) means.
And the harm comes from the fact that overwhelmingly the lower courts in the last 10 years have concluded that 502(b) and 506(b) mean that unsecured creditors do not have these claims.
If this Court declares that it is now an open question--
Justice Stevens: Let me ask you a question about that.
Your argument depends... you analogize... you would agree, I take it, that if this was an oversecured, secured creditor they'd be entitled to fees?
Mr. Rosenkranz: --Your Honor, we would dispute the contractual interpretation, but yes, Your Honor.
Justice Stevens: But assuming, assuming the contract provides that.
Mr. Rosenkranz: Yes, Your Honor.
Chief Justice Roberts: And if that's true... and the reason for that I suppose is that doesn't impair the rights of the general creditors at all.
Mr. Rosenkranz: That's one logic of the--
Justice Stevens: If that's so, why isn't their argument that, well, your client is solvent, the complete answer to your position?
Mr. Rosenkranz: --Well, Your Honor, because Congress didn't say that.
Congress gave only one answer to the question whether unsecured creditors get their attorneys' fees allowed, that is post-petition attorneys' fees allowed.
It's either yes or no.
There is no on-off switch for solvent or insolvent creditors within the code, which is why Travelers never argued that as a, an objection to the plan of confirmation.
Justice Stevens: They argue it in their reply brief here.
Mr. Rosenkranz: Yes, Your Honor, and that is absolutely incorrect.
If you look at the case that they cite, that case relies on a provision of the code, which is Section 726.
And Section 726 is only about post-petition interest for solvent debtors, not post-petition attorneys' fees.
Justice Breyer: Well, how do you avoid... what about their statement from Collier?
Mr. Rosenkranz: Your Honor, the statement that Travelers quotes from Collier is about a proposition that we don't dispute, which is whether it is a pre-petition claim.
Justice Breyer: No.
It said... a pre-petition claim, if a creditor incurs the attorneys' fees post-petition, they incur it post-petition, afterwards they file, after the petition they file a claim with the bankruptcy court, in exercising or protecting a pre-petition claim that included a right to recover attorneys' fees.
And they say that's what we have, we had a contract that gave us this right to attorneys' fees.
The fees will be pre-petitioned in nature, constituting a contingent pre-petition obligation that became fixed post-petition when the fees were incurred.
Now, what is your response to that?
Mr. Rosenkranz: Your Honor, my response is I urge you, Justice Breyer, to look back at Colliers, because that is absolutely accurate and it doesn't apply to this case.
Justice Breyer: Because?
Mr. Rosenkranz: Because, Your Honor, that is a statement about whether it is a pre-petition claim, not about whether the claim is allowable or not, which is what we are arguing about.
Justice Breyer: Then you explain that to me?
Mr. Rosenkranz: Yes, Your Honor.
Step one is, is it a claim.
No one disputes that this is a claim.
It is a right to payment.
Step two, is this an allowable claim?
The answer under the code is absolutely not, because the code says there is only one class of creditors that gets their attorneys' fees claims allowed and that is oversecured creditors and so--
Justice Breyer: Well, that's because 506 had to do that in order to tell the bankruptcy courts--
how to deal with secured claims.
Mr. Rosenkranz: --No, Your Honor.
Justice Kennedy: That doesn't... and then you have the negative inference or the exclusio unius argument, whatever, which I think is misplaced in this context.
Mr. Rosenkranz: Your Honor, Congress put 506(b) in the code for one purpose and one purpose only, and that was to allow claims that are not elsewhere allowed, because if it doesn't do that 506(b) serves no purpose at all.
506(b) says nothing at all about whether the claim is secured.
Justice Ginsburg: Why doesn't it serve the purpose of saying that the fees will be covered by the security?
They'll not be just be claims for fees that would stand together with the unsecured creditors, but that the oversecured... the security will cover the interest, will cover the attorneys' fees, and that's the function of 506 whatever--
Mr. Rosenkranz: Your Honor, the answer is 506(b) does not say anything about whether the allowed claim is secured or not.
It is completely silent about that.
Now, if we accept, as we explain in our brief in much more detail, if we accept Travelers' argument that it was an allowed claim in the first instance and it is therefore furthermore an allowed security claim, 506(a) tells you what to do with that.
506(a) tells us that an allowed claim to a secured creditor is a secured claim.
It still leaves Section 506(b) with nothing left to do.
Now, let me just back up and underscore: Any creditor would love to get the other creditors to pay its attorneys' fees.
Tort claimants would love it, trade creditors would love it, local tax collectors would love it.
But Congress said only one category of claimants get to claim their post-petition attorneys' fees.
Justice Breyer: Of course, that is exactly what's puzzling me.
But why haven't they gone out and got?
So why... what you're pointing to so far is that Congress has said a particular class of people get the attorneys' fees out of the security insofar as the security will support it.
It doesn't say a word about what happens to the attorneys' fees after the security is exhausted, nor about anybody else's attorneys' fees, where so provided by contract.
Colliers says they can get it.
Mr. Rosenkranz: Your Honor, Congress said--
Justice Breyer: Same puzzlement.
Mr. Rosenkranz: --Your Honor, Congress has said no such thing.
What Congress says is that an allowed claim is allowed as of the date of the filing of the petition.
That is when you value the claim and you value the claim as of the date of the filing of the petition.
At that point, it is worth zero because no post-petition attorneys' fees have been incurred.
And the fact of the matter is it may well have never occurred to the drafters of the code when--
Justice Breyer: Suppose I sell you a house and I make a promise that I'll fix any leaks in the bathroom.
And lo and behold, before there's a leak the... I'm bankrupt.
And while I'm bankrupt it floods, the bathroom.
Mr. Rosenkranz: --Your Honor, that is a claim.
It is a--
Justice Breyer: It is a contingent claim.
And you're saying this is the same.
Mr. Rosenkranz: --I'm saying... they are saying this is a contingent claim.
If... and it is a very strange sort of a contingency.
It is Travelers saying, we have a claim, it is a contingent claim; the contingency is whether tomorrow morning we're going to pick up the phone and called Weil Gotshal to monitor the bankruptcy proceeding.
But let's assume it is a contingent claim.
It is still a disallowed claim and Congress provided numerous statutory indications that it was.
I already mentioned 506(b) but there are more.
Congress said that attorneys' fees are available only, quote,
"to the extent that a claim is oversecured. "
Now that would be a very--
Chief Justice Roberts: No.
It's quite unlike the situation, for example in Timbers, where had you in 502 a disallowance of post-petition interest.
There is not in 502 a disallowance of attorneys' fees.
Mr. Rosenkranz: --Well, Your Honor, I was just going to get there.
Timbers underscores this proposition.
Timbers focused on the structure of 506 and it began with and it underscored, the only words that it underscored were, "to the extent that".
But let me turn to that.
Justice Kennedy: Well, Timbers cited, as the Chief Justice indicates, the interest section in--
That's all it's about.
I don't... I think Timbers is misleading on this point.
Mr. Rosenkranz: Your Honor, Timbers has the structural argument that focuses on what the purpose of 506(b) is.
But there are more indications.
It would be odd for Congress, for example, to draft this provision 506(b) that purports to put post-petition attorneys' fees on the same footing at post-petition interest if it intended to put them on different footings.
It's an observation this Court made in Ron Pair.
Moreover, Congress was not oblivious to the existence of attorneys' fees post-petition.
There are 15 occasions in the code where Congress spoke to attorneys' fees and if Congress had intended attorneys' fees to be available to this enormous class of unsecured creditors, one would think that it would not have hidden that in the definition of "claim"--
Justice Breyer: Well, are those 15 places... do they involve attorneys' fees as administrative expenses?
Do any of them involve attorneys' fees simply as an unsecured claim for attorneys' fees?
Mr. Rosenkranz: --Your Honor, as to creditors, four of them apply to attorneys' fees as administrative expenses.
It's a very important point because the code says and it adopts this age old rule that if you are going to take money away from some unsecured creditors and give it to attorneys it better be because you're expanding the pot for all of the other creditors.
Justice Breyer: What's the answer to my question?
Is the answer that 11 of them say you can collect attorneys' fees, but only as an unsecured claim against creditors.
Mr. Rosenkranz: Your Honor, for the, for creditors there are only six that apply.
Four of them are the administrative.
Justice Breyer: All right, so six.
Mr. Rosenkranz: Yes.
Justice Breyer: So six are administrative, and then the remaining two say that the creditor can collect it as an unsecured debt?
Mr. Rosenkranz: Yes, Your Honor.
Justice Breyer: Which are those two?
Mr. Rosenkranz: Well, one of them does.
Justice Breyer: Which is that?
Mr. Rosenkranz: That is the provision that Travelers cites... and I apologize it's not in any of the appendices... 502(b)(4).
And 502(b)(4) underscores our point.
502(b)(4) says, and I'm quoting directly from the code:
"A claim is allowed to the... is disallowed to the extent that. "
"(4) if such claim is for services of an insider or attorney and such claim exceeds the reasonable value of such services. "
That is focused on pre-petition activities of the lawyers on behalf of the debtor.
Justice Breyer: That seems to cut the other way because it says it's disallowed insofar as it's unreasonable of course, and therefore it would be allowed insofar as it's reasonable.
Mr. Rosenkranz: Well, yes.
Pre-petition claims for services provided by an attorney before for the petition.
Justice Kennedy: No, attorney for the debtor.
Mr. Rosenkranz: An attorney for the debtor and, Your Honor, the code is clear it's noteworthy.
Justice Breyer: Yes, but I mean you don't have exactly what I was driving to.
I was quite interested that you said there are 11 other provisions that we could look at for support, and I wouldn't think it was support if those consider... concern administrative expenses, which nobody's asking for here, they just want an unsecured claim, or if they concern some other--
Mr. Rosenkranz: Fair enough Your Honor.
Justice Breyer: --irrelevant thing.
Mr. Rosenkranz: Fair enough, Your Honor.
My point is that Congress knew about attorneys' fees and if it wanted this huge class of unsecured creditors to collect their attorneys' fees for post-petition activities, it wouldn't have hidden that in a general definition of claim or in the general statement of allowability.
Chief Justice Roberts: Counsel, your brother in his reply brief said that no court of appeals has endorsed your theory, and I... earlier you told me one had.
Which one in particular?
Mr. Rosenkranz: Your Honor, the First Circuit... there are three courts of appeals that have addressed the question, all in dictum but in very extensive dictum.
So the First Circuit comes out our way in Adams versus Zimmerman.
The Second Circuit comes out also in dictum on Travelers' side in United Merchants.
And then the Sixth Circuit splits the baby in half, or reads the code all the way up to our position as we do, and then takes a detour in another direction.
Chief Justice Roberts: So you really want us to reach out and decide a question that's not presented when there has been no holding of the court of appeals one way or the other on the issue?
Mr. Rosenkranz: Your Honor, we didn't come here asking this Court to address this question.
Travelers put it front and center.
Chief Justice Roberts: If you thought the Fobian rule was wrong, you could have said that.
Mr. Rosenkranz: --Well, Your Honor, it would have made no sense for us to argue that Fobian was wrong when we were trying to defend the judgment below.
But I concede, Your Honor, this Court has discretion to decide whether it's going to address what we believe is an absolute factual predicate, and what Travelers seems... I'm sorry, legal predicate... and what Travelers seems to believe is a legal predicate, which is why we're saying to the Court this case, this issue has been ventilating for 20 years, and a lot of mischief can be--
Justice Breyer: How... can we decide?
But I'm wondering about, maybe you don't want to answer this, but I mean, if we were to say Fobian is wrong, everybody will agree with us.
But we should have to say why it's wrong.
And if we say the reason that it's wrong is because you can't collect attorneys' fees at all, you'll be delighted.
And if we say the reason it's wrong is because you can collect attorneys' fees regardless, they'll be delighted.
And our only other alternative is to not say why it's wrong or... I mean, that's the problem.
Mr. Rosenkranz: --That's exactly--
Chief Justice Roberts: That's an added complication.
There's another case on which the Ninth Circuit's based its decision in your case, DeRoche.
Your proposed solution here doesn't address the issue in DeRoche because there it's the debtor that's seeking attorneys' fees.
Mr. Rosenkranz: --Absolutely, Your Honor.
Chief Justice Roberts: So we still have to decide the Fobian issue.
And your failure to defend it here means that we're going to have to decide in on that inadequate record.
If you have mentioned that in an opposition to certiorari, perhaps we would have granted cert in the DeRoche case and had an argument about the rule that we have to decide.
Mr. Rosenkranz: Your Honor, I appreciate that, and I apologize for not having raised it in the cert petition, cert opposition, we were simply focused on why it is that this little sliver of the Fobian rule was not worth this Court's attention.
But I understand that this Court needs to look forward and try and figure out what exactly the issues are that are presented.
I only add that the statutory question that is presented in DeRoche and in this case are as Your Honor has pointed out, mirror images of each other.
So whatever this Court decides as to the statutory construction question on 502(b), this Court can say it's not resolving Fobian because this is a predicate question.
And this Court can say there may well be circumstances in which a creditor can say, you know what, for State law litigation we have this common law right, and we reserve for a later day the question of whether there is an exception to the statutory rule that we are articulating.
Now I want to underscore that Congress had very important reasons that are built into the code for coming out this way and disallowing unsecured creditors attorneys' fees.
Bear in mind that these sorts of fee shifting provisions are absolutely ubiquitous.
They are in every credit card contract.
They are in every bank loan.
They are in virtually any written contract, and when a contract doesn't provide for it, quite often State law statutes do.
Allowing all of these unsecured creditors to pay their lawyers out of the hides of all of the other unsecured creditors--
Justice Stevens: Yes, but that's not the facts of this case.
Isn't that correct?
Mr. Rosenkranz: --Well, Your Honor--
Justice Stevens: This will not have any adverse, if I understand the facts, any adverse impact whatsoever on any unsecured creditor.
Mr. Rosenkranz: --Your Honor, on the facts of this case if the rule had been otherwise, we don't know whether PG&E would have been solvent at all.
But we are arguing about a rule that is not one rule for Travelers and one rule for everyone else.
We are arguing about a rule for the vast majority of cases.
Justice Stevens: No, but just looking at this case itself, if there is plenty of money there to pay a State law obligation, why shouldn't just ordinary rules of contract law apply?
Mr. Rosenkranz: Well, Your Honor, the answer is, Congress dealt with this issue and decided that no one gets to get in line and get their attorneys' fees, regardless of whether they're solvent or not.
Justice Ginsburg: --You're raising a provision that says just that, it's the absence of a provision for attorneys' fees that you're relying on.
Mr. Rosenkranz: --Well, no, Your Honor.
We've been talking about why the only natural way to read the code is to disallow attorneys' fees, and I'm explaining that if attorneys' fees are generally disallowed to everyone, there's no exception to that rule in the code that says ah, yes, but if there's an insolvent... if there's a solvent debtor, the rule is otherwise.
Justice Ginsburg: Where is the provision that generally disallows attorneys' fees?
Mr. Rosenkranz: I'm sorry.
What I'm saying is 502(b) when you read
"as of the time of the filing of the petition. "
it says... that means, that must mean that it doesn't apply to post-petition attorneys' fees, especially when you look at 502(b) through the lens, as this Court did in Timbers, of the rest of the code.
506(b), all of these other attorneys' fees--
Justice Kennedy: Well, on that point you disagree with the Collier citation at page 9 of the reply brief then?
Mr. Rosenkranz: --Yes, Your Honor, I disagree with Colliers, but I don't think Colliers comes out one way or another on this particular question.
That was the same question that was asked earlier about whether it's a claim, whether it's a pre-petition claim.
Justice Kennedy: Well, it says if the creditor incurs the attorneys' fees post petition in connection with protecting a pre-petition claim--
Mr. Rosenkranz: Yes, Your Honor.
Justice Kennedy: --the fees will be pre-petition.
Mr. Rosenkranz: That was the same--
Justice Kennedy: So you disagree with that?
Mr. Rosenkranz: --I don't disagree with that, Your Honor.
I was referring to another provision of Colliers, not the one that's cited in the reply brief.
That is a correct statement but it has no application here because we are not arguing about whether it's a pre-petition obligation.
Of course it's a pre-petition obligation.
Just like pre-petition interest... excuse me... post-petition interest is a pre-petition obligation we are arguing that the code cancels that obligation because there are very important reasons, such as equality among all unsecured creditors, the--
Justice Breyer: You're saying this particular set of pre-petition obligations.
Collier, I think in context must be saying, you get paid the money.
I mean, he goes on in the next sentence and says by the way, despite my last sentence, you don't get the money?
Mr. Rosenkranz: --No, Your Honor.
What Colliers is talking about is a completely different question.
He doesn't answer that question one way or another in Colliers.
Justice Breyer: Oh, in other words what he implies, if I ready the whole page I'll see, although he just said what we quoted, the whole page means, by the way, I'm not telling you if you get the money or not?
Mr. Rosenkranz: This was a completely different discussion on a--
Justice Breyer: Sorry, I'll--
Mr. Rosenkranz: --completely different section referring to setoffs.
Justice Breyer: --I think your 506(b) argument, I see your point, I see your point, is there... I mean, and you'd have to say well, 506(b) simply repeats 506(a), as sometimes provisions do, and then it becomes somewhat superfluous, somewhat not.
I got that point.
I also have your point about, well, there are other references.
Now, is there any other point in the code?
Mr. Rosenkranz: Yes, Your Honor.
There is one other point and that is, 502(c) tells the court what it is supposed to do with contingent claims.
It is supposed to either liquidate them or estimate them.
These are... this is a very strange sort of contingency, as I mentioned earlier.
Justice Scalia: That's not in the materials, 502(c)?
Mr. Rosenkranz: 502(c) is, Your Honor.
It's on the very back of the cert petition appendix on page, I believe 28.
And so it says either estimate or liquidate, but always as of the date of the filing of the petition.
Now as of the date of the filing of the petition it would be impossible to estimate without a crystal ball.
Justice Breyer: How do they do it with my leaky bathroom?
Mr. Rosenkranz: Your Honor, what you do is... that is a classic contingency.
What you do is to estimate the likelihood that the bathroom will in fact leak and the cost of those expenses, and you put something into the, into the bankruptcy estate for that purpose.
That would be something that Congress would never have wanted to do with thousands and thousands of unsecured creditors.
Justice Kennedy: I... I am concerned about your point that there are all kinds of attorneys' fees contracts out there and if everybody can get fees for filing the claim post-petition act, we have a huge amount of claims to pay.
Travelers would tell us, though, that a surety is different, that they somehow stand in the shoes of PG&E or something.
Mr. Rosenkranz: Your Honor, I don't understand why a surety is different from any other contract.
All contractual creditors will want their fees.
The reason that they haven't been applying for them is that the overwhelming majority of bankruptcy courts will tell you no, you can't have them, because the overwhelming majority of cases have been saying exactly what I'm saying to you.
502(b) does not allow them, and we can tell that by looking at 506(b).
And there are other reasons that Congress would not have wanted to do that.
It would have burdened the administration of the state... of the estate.
The court would be spending more time administering claims about fees and what does this contract mean, and fees upon fees upon fees, than it would be spending administering the basic bankruptcy estate.
Justice Souter: Well, of course the argument here is that this is something different from the general abuse that you're describing, because the plan didn't make any provision here for, for paying the workers comp obligation at all.
What is your response to that?
Mr. Rosenkranz: Your Honor, my response is that is absolutely wrong.
The first draft of the plan which you can see on page 28 of the appendix says explicitly, and I quote,
"all workers compensation programs are treated as executory contract. "
Treated as executory contracts and deemed assumed by the debtor, and that means that the workers got the most favorable treatment that they could have gotten.
These are not just unsecured claims.
Chief Justice Roberts: Your friend says it's more favorable to say the claims are unimpaired.
Mr. Rosenkranz: Your Honor, that's what they argued.
The bankruptcy court explicitly held otherwise and the Ninth Circuit agreed with the bankruptcy court.
The bankruptcy court said, none of your interventions were reasonably necessary to reach... excuse me... to advance your interests.
Therefore, you are absolutely wrong when you argue to us that you are on the State law side of the Fobian rule.
Now if you ask me, Your Honor, where in the bankruptcy court decision does it say that, I would refer the Court to page 24a of the... of the cert petition appendix, where you see asterisks for a missing paragraph right in the middle of the opinion.
That, and just to orient the Court, we're looking at the first paragraph that says first of all.
Then there's a... there is an asterisk eliminating a paragraph.
Look at page 140a, 141 of the joint appendix where the missing paragraph that Travelers eliminated is filled in, and there the court summarizes a 15-page colloquy with Travelers about why it is completely wrong in claiming that its steps were reasonably necessary.
And on page 141, just to orient the Court again, you see that it begins, second paragraph, first of all.
That's the same paragraph.
The next paragraph refers to Mr. Brunstad's arguments.
"I just simply don't by it. "
"I don't think you can sort of say, you know, we thought there was a thief hiding under the bed so we had to clear out under the bed. "
"I don't think there was a risk there. "
And that was the gist of 15 pages proceeding the joint appendix, where the court methodically demolishes each of the argument Travelers presents here.
Thank you, Your Honor.
Rebuttal of G. Eric Brunstad, Jr.
Chief Justice Roberts: Thank you, counsel.
Mr. Brunstad, you have eight minutes remaining.
Mr. Brunstad: Justice Breyer, in our brief on pages 25 and 26, we cite to a number of cases where the courts allowed attorneys' fees as an unsecured claim, both for pre-petition work done and also post-petition work done where the contractual right was pre-petitioned.
We also cite a bunch of cases around page 44... 43 and 44 of our brief, including an article in the middle of page 44, quote:
"In cases decided under the Bankruptcy Act, the higher courts consistently held that attorneys' fees were allowable even as unsecured claims in bankruptcy. "
I've been a bankruptcy lawyer for over 20 years.
I've been teaching bankruptcy law for 17 years.
It is absolutely not true that courts routinely disallow claims for attorneys' fees as part of unsecured claims.
It's the opposite is true it's routine that they are allowed in practical reality however they are not presented because creditors don't bother to present them because distributions are generally so low in bankruptcy.
On the point about the plan completely protected the rights of the injured workers, nothing could be farther from the truth.
The provision that counsel cites in the plan refers to exec, as executory contracts, workers' compensation benefit programs.
Those are the contractual relationships between PG&E and its administrators, not the claims of the workers themselves.
Tellingly, PG&E never argued in the bankruptcy court that the claims of the workers were fine under the plan.
In fact, they said, we will do what Travelers wants after the bankruptcy court directed... and it's in the transcript... that that was the appropriate thing to do.
In fact, what Travelers insisted is required by Section 1123 of the Bankruptcy Code, claims such as the workers' must be classified, their treatment must be specified.
If they are not they are eliminated.
The reference to executory contracts clearly doesn't apply.
As we explain in our reply brief, the workers' claims were not executory contracts under applicable law.
That section does not apply.
Of course, I think, Chief Justice Roberts, there is a lot more that we would like to say about their alternative arguments than we were able to put in our 20-page reply brief.
The issue that they raised has not been fully ventilated in the lower courts.
In fact, there are many more things we would say about it on remand.
I also think it's important to point out, Justice Stevens, they are a solvent debtor, and under the concept of absolute priority shareholders are not allowed to recover anything unless creditors are paid in full.
What they are trying to do is they're trying to get rid of their contractual obligations in bankruptcy for the benefit of their shareholders.
There's no implication between creditors, creditors' recoveries in this case one versus the other.
In the Dow Corning case which we cite in our reply brief the Sixth Circuit expressly held where you have a solvent debtor you have to pay all of the attorneys' fees.
That is an additional argument we would develop on remand.
But all of their arguments about Section 506 and their interpretation of 502 simply don't matter, because as a solvent debtor they're not entitled to take advantage of that theory even if it were valid.
And we contend that it isn't valid.
The court of appeals have resoundingly rejected it.
The Second Circuit rejected it in United Merchants and Manufacturers.
The Sixth Circuit rejected it in Dow Corning.
The Eleventh Circuit it en banc in the Wellsville case.
All of them considered the 506 argument that they're making and rejected it, and properly so.
Counsel cites to Section 502(b)(4).
That's an important section because that demonstrates that Congress understood that attorneys' fees would be allowable as an unsecured claim under Section 502.
And in Section 502(b)(4) it provided the only exception, the only one where attorneys' fees would not be allowable as an unsecured claim.
It provided expressly attorneys' fees would not be allowable for the attorney for the debtor to the extent the claim for the fees exceeded the reasonable value of the services performed.
Why is that provision there?
Because Congress saw there was a problem.
There was a problem of debtors sending money to their attorneys.
Congress understood that to be a problem and it remedied it.
Congress did not think there was a problem with respect to this historic practice of going on over 100 years of attorneys' fees being allowed as unsecured claims, and so in Section 502 it allows them.
Respondents' argument about Section 506(b) renders Section 502(b)(4) superfluous.
If attorneys' fees were never allowable as part of an unsecured claim except for how 506(b) allows it, then there would not be a need for Section 502(b)(4).
In addition, Respondent overstates the office of Section 506.
506, as this Court explained in Ron Pair, provides, essentially tells us what secured creditors get out of their collateral and in what order... the pre-petition amount and then, if there's any value left, the value of the collateral.
After you pay the pre-petition amount of the claim, you can add attorneys' fees and you can add, post-petition you can add interest.
Their interpretation of Section 506(b) would render Section 502(b)(2) superfluous.
Under their theory, only oversecured creditors get post-petition interest, get interest.
Justice Kennedy: If you prevail, why can't every attorney who represents a creditor who has a credit card or a promissory note providing for attorneys' fees file something in bankruptcy and get attorneys' fees for the filing of the claim?
Mr. Brunstad: That already happens, Justice Kennedy.
In all the circuits that recognize that attorneys' fees are allowed as unsecured claims, that already happens.
And that has not cause any disaster or any problem.
It's been a practice for 100 years.
If Congress had wished to change the practice, it would have when it codified the Bankruptcy Code in 1979.
The fact that it hasn't perceived it to be a problem demonstrates that Congress wanted to leave the practice unchanged.
Now, what happens, though, again, Justice Kennedy, is that creditors don't bother to file claims for those amounts.
And where it matters is in cases where it should matter, like in this case, in the PG&E case, where a solvent debtor is simply trying to get out of its contractual relationships.
And under principles of absolute priority they are not allowed to do that for the benefit of shareholders where creditors are not being paid in full.
And I think it's important to underscore again, Justice Kennedy.
Justice Stevens: It's interesting.
You're of course a teacher too.
The amicus brief by a bunch of professors has a different view of the history than you're describing.
Mr. Brunstad: Justice Stevens, what I take, what I take from their analysis is a hostility towards attorneys' fees being allowed in bankruptcy.
And perhaps maybe as a matter of policy, if we were to start from scratch, well, maybe we shouldn't allow attorneys' fees to be allowed in bankruptcy.
Maybe we shouldn't allow tort claims to be allowed in bankruptcy.
Maybe we shouldn't allow certain kinds of environmental claims to be allowed in bankruptcy.
They don't like the rule, apparently, but their analysis of the history is wrong.
And we cite innumerable cases and law review articles that demonstrate that the practice is as we say that it is.
And policy reasons are no grounds to sort of create these Federal common law rules or these categorical rules of preclusions.
Justice Stevens: Would you say a word about Justice Holmes' opinion in the Scruggs case.
Mr. Brunstad: Yes, Justice Stevens.
The Randolph case was decided in 1903 and the law changed dramatically since then.
For example, in 1903 contingent claims were not provable under the Bankruptcy Act.
That changed in 1938 when contingent claims became provable under the Bankruptcy Act.
Randolph & Randolph versus Scruggs involved the claim of a custodian, a custodian, an assignee, who took control of all the debtor's assets before the bankruptcy filing.
Now under Section 503(b)(3)(E), the Randolph versus Scruggs analysis as it pertains to the claims of the assignee, those are now treated as an administrative expense under Section 503 dealing with administrative expenses.
In Randolph, it's interesting, the fees... Justice Kennedy, the fees incurred in preparing the assignment were allowed as an unsecured claim in the bankruptcy case.
Justice Holmes for the Court said they are allowed.
So in fact Randolph I think refutes their analysis rather than supports it.
Chief Justice Roberts: Thank you, counsel.
The case is submitted.
Argument of Speaker
Mr. Speaker: Justice Alito has the opinion this morning in case 05-1429, Travelers Casualty & Surety versus Pacific Gas & Electric Co.
Argument of Justice Alito
Mr. Alito: Now this case comes to us writ of certiorari to the United States Court of Appeals for the Ninth Circuit.
The question before us is whether a Federal Bankruptcy Law precludes recovery of attorney’s fees authorized by contract based solely on the fact does fees were incurred litigating issues of Bankruptcy Law.
We hope but it does not and therefore vacate and remand.
Respondent Pacific Gas and Electric Company (PG&E) filed for chapter 11 Bankruptcy in April, 2001.
Petitioner Travelers Casualty & Surety Company of America which previously issued a Surety bond to guarantee PG&E’s payment of state workers’ compensation benefits filed the claim in the bankruptcy case.
To protect itself against the possibility of default by PG&E with the Bankruptcy Courts approval PG&E eventually agreed to insert language into its reorganization plan and disclosure statement to protect Travelers in the event of such a default.
Additional litigation over the negotiated language nevertheless ensued and result ultimately resolved by a court-approved stipulation stating among other things that Travelers could assert a general unsecured claim for attorney’s fees incurred during the bankruptcy proceedings as authorized by the party’s original indemnity agreements.
Travelers then field an amended claim seeking attorney’s fees.
PG&E objected to that claim based on the Ninth Circuit’s rule originally announced in that courts decision and in In re Fobian that attorney’s fees may not be awarded in connection with the litigation of issues of Federal Bankruptcy Law.
The bankruptcy court rejected travelers claim based on the Fobian rule and the District Court and the Ninth Circuit affirmed on the same basis.
We granted certiorari to resolve the conflict in the Lower Court on this issue.
Today we conclude that the Fobian rule is unsound.
Under the American rule the prevailing litigant is normally not entitled to collect attorney’s fees from the loser that rule can however be overcome by statute.
It can also be overcome by contract even in bankruptcy proceedings.
So long as the contract is in enforceable under substantive Non-Bankruptcy Law.
A claim for fees based on an otherwise enforceable contract is allowable in bankruptcy except for bankruptcy law provides otherwise.
Section 502(b) of the Bankruptcy Code provides the Bankruptcy Court “shall allow” a creditors’ claim “except to the extent that” the claim implicates any of the nine exceptions enumerated in that Section.
None of those exceptions mandates or even supports the denial of the contract based claim for attorney’s fees based solely on the fact that the issues litigated involved issues of bankruptcy law nor does any other provision of the Bankruptcy Code support such rule.
In concluding otherwise the Court of Appeals relied exclusively on its own precedent most notably Fobian that precedent however finds no support in and affirmatively conflicts with Federal Bankruptcy Law.
PG&E raises several arguments suggesting that Travelers claim might fail even in the absences of Fobian rule.
But because those arguments are not fairly included within the question before us we will not address that.
The court’s opinion is unanimous.