Creditor's Claim For Attorney Fees Not Entitled To Secured Status

The "American rule" is a well-defined legal principle applied by courts throughout the United States that holds each party to a dispute responsible for paying its own attorney fees. This principle is, however, subject to a number of exceptions that effectively allow a prevailing party to recover its own attorney fees from a losing party. For example, federal and state statutes increasingly authorize a prevailing party to recover costs from its adversary in certain types of actions. Likewise, contracting parties often incorporate "fee shifting" terms that provide for recovery of litigation costs by one party in the event of litigation on the contract. In other circumstances, a court exercising its own discretion may award a prevailing party its attorney fees as part of the judgment.

For a judgment creditor whose judgment includes an award for prospective attorney fees, the bankruptcy of the judgment debtor will create numerous obstacles to execution. In particular, while the judgment creditor will normally have an allowed claim against the judgment debtor's bankruptcy estate for the principal portion of its judgment award pursuant to Section 502 of the Bankruptcy Code, it is not clear whether such a claim can properly include attorney fees and costs incurred post-petition. Similarly, even if the judgment creditor's claim is fully secured, it is unlikely that the portion of the claim attributable to post-petition attorney fees will be entitled to secured status pursuant to Section 506(b). Instead, the balance attributable to post-petition attorney fees will likely be considered an unsecured claim.

These issues were recently presented to the bankruptcy court in In re Rubin Family Irrevocable Stock Trust, 516 B.R. 221 (Bankr. E.D.N.Y. 2014). There, the court considered whether an oversecured creditor can assert a claim for post-petition attorney fees and costs in a Chapter 11 case, where the creditor's right to such fees and costs is derived from an enforceable and final prepetition judgment against the debtor. The court concluded that the creditor could assert a secured claim only for the principal amount of the judgment, together with interest and fees, with the balance attributable to post-petition attorney fees being an unsecured claim.

Rubin involved a judgment entered by the U.S. District Court for the District of Utah in favor of ACE Investors LLC against the debtor almost three years before the debtor's bankruptcy filing. The judgment...