Fourth Circuit Bolsters Claims for Postpetition Attorney's Fees Incurred by Unsecured or Undersecured Creditors

In SummitBridge Nat’l Invs. III, LLC v. Faison, 915 F.3d 288 (4th Cir. 2019), the U.S. Court of Appeals for the Fourth Circuit ruled that an unsecured or undersecured creditor may include postpetition attorney’s fees and costs as part of its allowed claim in a bankruptcy case.

Unsecured Creditors and Postpetition Attorney’s Fees and Costs

In Travelers Cas. & Sur. Co. of Am. v. Pac. 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 incurred in 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 "categorically disallows unsecured claims for contractual attorney’s fees" because the issue was not raised in the lower courts. Section 506(b) provides that the secured claim of an oversecured creditor shall include "interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose." In Travelers, 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 or undersecured creditor (in either instance, referred to hereinafter as 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 lower 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 had become the majority position among lower courts:

(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 Tex. 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. Thus, because section 506(b) provides for the allowance of postpetition fees and interest, only the claims of oversecured creditors for postpetition attorney’s fees should be allowed.

(iii) Section 502(b) of the Bankruptcy Code "requires a court to determine the amount of a claim as of the date the petition was filed." According to the Global Indus. court, "It is axiomatic that, as of the petition date, postpetition attorney’s fees have not been incurred[,]" and therefore, "unsecured prepetition claims cannot include postpetition attorney’s fees."

(iv) It would be "inequitable to allow certain unsecured creditors to recover postpetition attorney’s fees at the expense of similarly situated claimants." Allowing one group of unsecured creditors to recover more than their prepetition debt "unfairly discriminates against the others because it reduces the pool of assets available to all unsecured creditors pro rata."

Post-Travelers, some courts have adopted this approach in disallowing postpetition attorney’s fees as part of an unsecured claim. See, e.g., In re Old Colony, LLC, 476 B.R. 1 (D. Mass. 2012); In re Seda France, Inc., 2011 BL 191775 (Bankr. W.D. Tex. July 22, 2011); In re Elec. Mach. Enters., Inc., 371 B.R. 549 (Bankr. M.D. Fl. 2007). Others, including the Ninth Circuit, have ruled to the contrary, reasoning that this approach is inconsistent with the Bankruptcy Code’s broad definition of "claim" and incorrectly conflates the allowance functions of section 502(b) and section 506(b). See, e.g., SNTL Corp., 571 F.3d at 843–45; In re Holden, 491 B.R. 728 (Bankr. E.D.N.C. 2013); see also Ogle v. Fidelity & Deposit Co. of Md., 586 F.3d 143, 148 (2d Cir. 2009) ("section 506(b) does not implicate unsecured claims for post-petition attorney’s fees, and it therefore interposes no bar to recovery").

In In re Tribune Media Co., 2015 WL 7307305 (Bankr. D. Del. Nov. 19, 2015), rev’d, 2018 WL 6167504 (D. Del. Nov. 26, 2018), the indenture trustee for certain unsecured notes filed a claim for more than $30 million in postpetition fees and expenses. After the debtor objected to the claim, a mediator appointed by the bankruptcy court to resolve the dispute recommended that the fee claim be disallowed.

The bankruptcy court adopted the mediator’s recommendation and disallowed the fee claim. Noting that the Third Circuit has not decided the issue, the court found the reasoning of Global Indus. to be persuasive and concluded that "the plain language of § 502(b) and § 506(b), when read together, indicate[s] that postpetition interest, attorney’s fees and costs are recoverable only by oversecured creditors."

According to the Tribune court, denying postpetition attorney’s fees to unsecured creditors does not leave those claimants without recourse. It explained that unsecured creditors may seek payment of postpetition fees and expenses under sections 503(b)(3)(D) and 503(b)(4), which allow an administrative expense claim for actual, necessary expenses, and reasonable compensation for professional services, on the part of creditors (and certain other parties) that provide a "substantial contribution" to the bankruptcy estate.

The Tribune ruling was reversed by the district court in late 2018, and the issue is now on appeal before the Third Circuit. See Tribune Media Co. v. Wilmington Trust Co. (In re Tribune Media Co.), No. 18-3793 (3d Cir.). Noting that it "[did] not have anything new to add to this debate," the district court reasoned it could not conclude that section 506(b) "expressly" disallows the claims at issue. The court agreed with the position adopted by every court of appeals faced with the question, ruling that "Section 506(b) does not limit the allowability of unsecured claims for contractual post-petition attorneys’ fees under Section 502."

SummitBridge

In SummitBridge, Branch Banking and Trust Company ("BB&T") loaned $2.1 million to the debtor secured by farmland. In the event of default, the loan agreements obligated the debtor to pay "all costs of collection, including but not limited to reasonable attorneys’ fees."

In 2014, the debtor filed for chapter 11 protection in the Eastern District of North Carolina. BB&T filed proof of its secured claims for the outstanding principal and interest due on the loans as of the petition date. BB&T later assigned the loans to SummitBridge National Investments III, LLC ("SBNI"), which began incurring attorney’s fees in defending its claims.

The debtor’s chapter 11 plan treated SBNI’s claims as a single secured claim in the amount of $1,715,000—the value of the farmland securing the loans. That amount was sufficient to cover the outstanding principal, prepetition interest, and some of SBNI’s postpetition interest and attorney’s fees. The plan provided that SBNI could assert an unsecured claim for its remaining postpetition attorney’s fees. However, the debtor objected to SBNI’s unsecured claim for those attorney’s fees, claiming that, even though SBNI was entitled to collect such fees under the loan agreements and applicable state law, the Bankruptcy Code does not provide for the allowance of an unsecured claim for postpetition attorney’s fees or costs. The bankruptcy court ruled in the debtor’s favor and the district court affirmed on appeal. SBNI appealed to the Fourth Circuit.

The Fourth Circuit’s Ruling

The Fourth Circuit addressed three main arguments.

First, the court considered whether SBNI’s unsecured claim for postpetition attorney’s fees should be disallowed because the amount of the fees was not determinable as of the petition date in accordance with section 502(b), which requires the court to "determine the amount of such claim . . . as of the date of the filing of the petition." The Fourth Circuit rejected this argument, reasoning that the Bankruptcy Code’s definition of "claim" is broad, and includes contingent rights to payment. In this case, the court explained, SBNI’s right to the attorney’s fees arose prepetition, when the debtor signed the loan agreements.

Second, the Fourth Circuit evaluated whether section 506(b) disallowed SBNI’s unsecured claim for postpetition attorney’s fees. Relying on Travelers and the express language of section 506(b), the court rejected the debtor’s argument that, because section 506(b) expressly refers only to the allowance of attorney’s fee claims asserted by oversecured creditors, the provision by implication disallows fee claims asserted by unsecured or undersecured creditors. According to the Fourth Circuit, Travelers creates a presumption that claims enforceable under state law are allowable unless the Bankruptcy Code expressly disallows them. In this case, the court concluded, the Bankruptcy Code is "completely silent" with regard to the issue, and thus "cannot rebut the Travelers presumption."

Furthermore, the court explained, section 506(b) does not address allowability in the first instance. Instead, Congress provided nine exceptions to the allowance of claims in section 502(b). Quoting Travelers, the Fourth Circuit wrote that the "absence of an analogous provision excluding" claims for fees, when Congress knew how to draft a provision that expressly disallows a claim for certain attorney’s fees (i.e., section 502(b)(4), which disallows a claim for attorney’s fees for services rendered to a debtor that "exceeds the reasonable value of such services," is "strong evidence" that the Bankruptcy Code does not disallow such claims.

Finally, the Fourth Circuit rejected the policy argument that permitting a secured creditor to assert an unsecured claim for attorneys’ fees as well would further diminish the assets available to other unsecured creditors "who have yet to recover any principal, let alone fees." Rejecting the argument’s premise, the Fourth Circuit hearkened back to the plain language of the Bankruptcy Code. "What matters under § 502 and § 506(b)," the court wrote, "is the status of a given claim, not the status of the creditor asserting it." It further noted that a principal rule in bankruptcy is that secured creditors enjoy the benefit of their secured position, and a policy argument advanced in favor of disallowance "would flip this argument on its head."

The Fourth Circuit accordingly ruled that the Bankruptcy Code does not bar a creditor from asserting an unsecured claim for attorney’s fees incurred postpetition if the fees are provided for in a prepetition contract.

Outlook

In SummitBridge, the Fourth Circuit held that an unsecured or undersecured creditor may include postpetition attorney’s fees and costs as part of its allowed claim in a bankruptcy case. The Third Circuit will have an opportunity to weigh in on this issue in the Tribune case. Nonetheless, many lower courts in the circuits have taken the opposite position.