Second Circuit Rules That Bankruptcy Courts May Award Appellate Legal Fees As Sanction For Contempt

• Published date: 30 September 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Financial Restructuring
• Law Firm: Jones Day
• Author: Mr Mark Douglas and Charles Oellermann

Courts disagree whether a bankruptcy court, in exercising its broad equitable powers, has the authority to award appellate legal fees as a sanction for contempt. The U.S. Court of Appeals for the Second Circuit recently weighed in on this issue as an apparent matter of first impression. In Law Offices of Francis J. Reilly, Esq. v. Selene Finance, L.P. (In re DiBattista), 33 F.4th 698 (2d Cir. 2022), the Second Circuit held that a bankruptcy court erroneously concluded that it did not have the power to award attorney fees incurred on appeal by a debtor seeking to enforce a contempt order for violations of a bankruptcy discharge order.

The American Rule and Fee Shifting in Bankruptcy

The general rule in the United States is that litigants are responsible for their own attorney fees, win or lose. This is referred to as the "American Rule," as distinguished from the "English Rule," whereby the prevailing party ordinarily recovers its own attorney fees from the loser. However, the American Rule is merely the general rule. It can be overridden under certain circumstances, such as by contract or statute'sometimes referred to as a "fee-shifting" statute.

The Bankruptcy Code contains many fee-shifting exceptions to the American Rule, including:

(1) Counsel to a bankruptcy trustee or a chapter 11 debtor-in-possession is compensated by the estate, and if the estate is insolvent, unsecured creditors bear the cost unless secured creditors agree to do so by means of a court-approved collateral "carve out";

(2) The estate is obligated to pay a secured creditor's attorney fees, either pursuant to section 506(b) of the Bankruptcy Code, to the extent the value of the secured creditor's collateral exceeds the face amount of its claim, or in accordance with an order authorizing postpetition financing and providing "adequate protection" to the secured creditor;

(3) Attorneys retained by official committees of unsecured creditors or shareholders are compensated by the estate;

(4) Attorney fees may be imposed as a sanction for violations of the automatic stay under section 362(k);

(5) Court-imposed sanctions under Rule 9011 of the Federal Rules of Bankruptcy Procedure ("Fed. R. Bankr. P.") for misrepresentations to the court may include the imposition of attorney fees;

(6) Creditors and certain other parties who, among other things, file an involuntary petition, make a "substantial contribution" in a chapter 9 or 11 case, recover property transferred or concealed by a debtor...