Supreme Court Declares Bankruptcy Does Not Bar Recovery of Attorneys Fees
Last week the United States Supreme Court determined that the bankruptcy of one party to a contract does not prevent the other party from recovering its attorneys fees if the contract provides for their recovery.
In Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co.,[1] the Supreme Court resolved a split between the Courts of Appeals, overturning an earlier decision by the Ninth Circuit Court of Appeals. The Supreme Court held that, if applicable state law authorizes one party to collect its attorneys fees, the bankruptcy laws do not prohibit the enforcement of such contract-based claims.
Generally, the American Rule does not award attorneys fees to the winner of litigation. But the American Rule does not apply where the parties have entered into an enforceable contract allocating attorneys fees. Enforceability of such clauses is usually determined by applicable state law. However, in the Ninth Circuit, the appellate court had adopted a contrary rule, known as the Fobian rule.[2] Under the Fobian rule, where the dispute giving rise to the attorneys fees was basically one interpreting federal bankruptcy law, fees could not be recovered even though the dispute arose out of a contract containing a provision for recovery of attorneys fees. This rule was contrary to the rule applied by the Fourth Circuit Court of Appeals.[3]
In reversing the Ninth Circuit Court, the Supreme Court said that the ability to recover attorneys fees was basically one of state law and “unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceedings.” The Court found that there was nothing in the Bankruptcy Code which supported the Fobian rule so the Travelers case effectively directs bankruptcy courts to simply determine whether applicable state law would permit the recovery of attorneys fees and to apply that same result to disputes in bankruptcy proceedings.
For commercial loans and other business transactions,[4] this means that, generally speaking, contract provisions requiring a debtor in bankruptcy to pay the other party’s attorneys fees will be enforced. However, this does not mean that those fees will be collectable since the ability of a creditor to collect from a debtor will still be dependent upon the availability of funds to pay the creditor. A creditor having a legitimate claim can now include attorneys fees as a portion of the claim but the resultant increase in the amount of the claim will not alter the relative priority, or collectability, of claims.
For further information, please contact
Gerald
Baldwin at gbaldwin@fbtlaw.com or any other member of the FBT Banking Litigation Group.
[1] 549
U.S. ________________; No. 05-1429, Slip. Op. (
Mar. 20, 2007 ).
[2] In re Fobian, 951 F.2d 1149 (9th Cir. 1991).
[3] In re Shangra-La, Inc., 167 F.3d 843 (4th Cir. 1999).
[4] But the result will not likely apply in the context of consumer transactions because the law in many states would not allow the recovery of attorneys fees in consumer cases.
