In Brief: Split Continues Over Unsecured Creditors' Right To Postpetition Attorney's Fees

In Travelers Cas. & Sur. Co. of America v. Pacific Gas and Elec. Co., 549 U.S. 443 (2007), the U.S. Supreme Court rejected the Ninth Circuit's long-standing Fobian rule disallowing claims against a bankruptcy estate for attorney's fees arising from litigating issues that are "peculiar to federal bankruptcy law," rather than basic contract enforcement. In so ruling, the Court recognized the presumption that "claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed."

However, the Court did not address whether section 506(b) of the Bankruptcy Code, which expressly states that the secured claim of an oversecured creditor includes any fees, costs, or other charges provided for under its security agreement or applicable state law, "categorically disallows unsecured claims for contractual attorney's fees" because the issue was not raised in the lower courts. The Court wrote that "we express no opinion with regard to whether, following the demise of the Fobian rule, other principles of bankruptcy law might provide an independent basis for disallowing . . . [a] claim for attorney's fees."

Courts have long been divided—both before and after Travelers—over the issue of whether an unsecured creditor can include postpetition attorney's fees and costs as part of its allowed claim in a bankruptcy case. See SNTL Corp. v. Centre Ins. Co. (In re SNTL Corp.), 571 F.3d 826 (9th Cir. 2009) (discussing split and listing cases). The majority of courts to date have concluded that the answer to this question is no.

For example, in Global Indus. Tech. Serv. Co. v. Tangelwood Inv., Inc. (In re Global Indus. Tech., Inc.), 327 B.R. 230 (Bankr. W.D. Pa. 2005), the bankruptcy court, in ruling that an unsecured creditor may not include postpetition attorney's fees in its claim, recognized four arguments in support of what has become the majority position:

(i) Although section 506(b) expressly provides for the allowance of postpetition attorney's fees for oversecured creditors, neither section 506(b) nor any other provision of the Bankruptcy Code provides for the allowance of such fees for unsecured creditors. Therefore, unsecured creditors "have no clear entitlement to postpetition attorney's fees."

(ii) In United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assoc., 484 U.S. 365 (1988), the Supreme Court held that section 506(b) permits only oversecured creditors to recover postpetition interest on their claims...