May Unsecured Creditors Recover Attorney’s Fees In Bankruptcy:
Supreme Court Weighs In

In an important case involving creditors with huge bankruptcy claims against Pacific Gas & Electric, the United States Supreme Court ruled last month that lower courts incorrectly denied recovery of attorney’s fees to creditors. Justice Alito, writing for a unanimous Court, repudiated the Ninth Circuit Court of Appeals’ rule that creditors cannot claim attorney’s fees, even if contract-based, if the issues litigated were based on the bankruptcy filing. The Court found that the rule used by the lower court to justify denial of attorney’s fees is not found in the Bankruptcy Code itself, and could not be relied upon to deny the fee requests.

Although the Supreme Court was clear about its observations regarding these disputes in the Pacific Gas & Electric Chapter 11 bankruptcy case, the Court left the door open for further debate about entitlement to attorney’s fees. The Court declined to consider a related question raised by one of the parties about a section of the Bankruptcy Code dealing with secured creditor claims. Section 506(a) of the Bankruptcy Code restricts claims of several creditors for attorney’s fees unless the value of the collateral exceeds the claimed debt, perhaps implying that all unsecured creditors are prohibited from including attorney’s fees in their claims. Because the argument first appeared during the appeal to the Supreme Court, the Court said it could not be considered.

Until the question not resolved in this recent Supreme Court case is answered, there still is an argument for disallowance of claims for attorney’s fees asserted by unsecured creditors involved in bankruptcy cases. Creditors should consider including attorney’s fees in Proofs of Claim filed in bankruptcy cases, and should amend Proofs of Claim as necessary to include continuing fees. Whether the claims will be allowed will depend upon the courts’ views of the law, until the issue not addressed in the Pacific Gas & Electric case is determined by appellate courts.

Henry A. Efroymson is partner in Ice Miller's bankruptcy and debtor/creditor disputes practice group. Henry Concentrates his practice in loan workout, creditor/debtor disputes and bankruptcy. Henry can be reached directly at (317) 236-2397 or henry.efroymson@icemiller.com.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.