Amicus Curiae Brief — Travelers Cas. & Sur. Co. v. PACIFIC GAS
Supreme Court brief2007
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oop OF THE CLERK;
2 UF ete M = CO UAT, XS S.
IN THE |
Supreme Court of the United States
sos
TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA,
Petitioner,
—v.—
PACIFIC GAS AND ELECTRIC COMPANY,
Respondent.
ON WRIT OF CERTIORARI TO THE UNITED STATES
COURT OF APPEALS FOR THE NINTH CIRCUIT
BRIEF IN SUPPORT OF RESPONDENT FOR
AMICI CURIAE PROFESSORS RICHARD AARON,
JAGDEEP S. BHANDARI, SUSAN BLOCK-LIEB,
RALPH BRUBAKER, ERWIN CHEMERINSKY,
S. ELIZABETH GIBSON, KENNETH N. KLEE,
ROBERT M. LAWLESS, NANCY B. RAPOPORT
AND ETTIE WARD
ROBERT M. ZINMAN
Professor of Law
ST. JOHN’S UNIVERSITY
SCHOOL OF LAW
8000 Utopia Parkway
Jamaica, New York 11439
(718) 990-6646/(914) 631-3515
Counsel of Recc d
December 22, 2006 for Amici Curiae
TABLE OF CONTENTS
Page
Ae Cd PIII wiiitestinscichaiccseccncicenscdovdatanokiiniionn iil
INTEREST OF AMICT CURIAE ..s:.000.000.-ccsasarehesesceoreseccessees ]
SUMMARY OF ARGUMENT .......0........cccccccesceeessceseeseeeeees 2
FN i ESOS aE ESSAI SOONER SRO AT IET 6
I. Bankruptcy Code § 502(b) Should Be Construed
Narrowly In Light Of Long-Standing Precedent
Of This Court, and The Structure and Goals Of
re I GI soins siete tisigiinsaachinihetntinnsditntionend 6
A. In Light of Other Bankruptcy Code Provisions,
§ 502(b) Should Be Narrowly Construed Not To
Allow Unsecured Creditors’ Claims For
Postpetition Legal Services of No Benefit to The
tbh ibecechialail clathrate 6
B. Timbers of Inwbod Supports Disallowance of
Contractual Postpetition Fee Claims For
IIT ENR) IOSD SCD 7
C. Under Randolph v. Scruggs and Other Cases,
Unsecured Creditors Should Be Allowed Claims
For Postpetition Legal Fees Only If The Attorney’s
Services Were Beneficial To The Estate. .................. 9
D. The Bankruptcy Courts Have Exclusive
_ Jurisdiction Over Legal Fees In Bankruptcy
Cases; Such Fees Are Not A Matter For
Pe RN ioe ecnstcinidiiesanasepenicih 13
il
E. Section 502(b) Should Be Narrowly Construed
In View of The Bankruptcy Code’s Distinction
F. Interpretation of § 502(b) In Light of the
Principle of Equality of Distribution For
ai iaiciah hlinincchsaictincncaiticlaim andanbiatsicitlctstinedihiimnddbeane 16
II. Congress Could Not Have Intended To Allow
Unsecured Creditors’ Contract Claims For
Postpetition Legal Fees In Light of The Severe
Adverse Consequences Such Allowance Would
Have On The Administration of Chapter 11 and
CI Iai GN ciciccsesaiinetemancicapepiplshainhninnpintndldediidetbendiads 18
A. Allowing Such Claims Would Cause
Unwarranted Escalation of Monitoring
Activities By Individual Creditors and
Mounting Expense for the Estate................0.....0000 18
B. Allowing Postpetition Legal Fees to Unsecured
Creditors Will Overly Complicate Chapter 11
ID iccdesiapciccanensistchiessn lncadidieibandadncnsidutisensiiticnubalrnnipioiads 21
C. Unsecured Creditors’ Legal Fee Claims Should
Not Be Allowed Because of the Serious
Consequences Allowance Would Have on
Chapter 13 Debtors and Their Unsecured |
ik dekssiccdsbiciiianiccnedibiaideintiecaioiislatiaebabniedasniains 24
ei iicciccnciiiciliccbbctunstaiedaltgasidgulsteeapsitadigalicibliapaiiniii 29
il
TABLE OF AUTHORITIES
~- FEDERAL CASES
In re 5900 Associate, Inc., 468 F.3d 326 (6"" Cir. 2006) ......14
Alport v. Ritter (In re Alport), 144 F.3d 1163
OP a a Ey 17
In re Alumni Hotel Corp., 203 B.R. 624
(Roamer. EDD. NEGGR. 199G). .2ccscssccccesessssesincsosesseyscsnceonenseses 12
Boeing Co. v. Van Gemert, 444 U.S. 472 (1980)............006. 10
Boese v. King, 108 U.S. 379 (1883).........ccccseccsseseeesseesseneens 16
Matter of Brints Cotton Marketing, Inc., 737 F.2d 1338
Pe a a 15
In re Brown, 346 B.R. 868 (Bankr. N.D. Fla. 2006)............. 26
Prown v. Gerdes, 321 U.S. 178 (1944).........cccccccescesesseeseeeees 14
Burlingham v. Crouse, 228 U.S. 459 (1913) .............0- cvveeed]
Clarke v. Rogers, 228 U.S. 534 (1913) ......cccccccccesseeseeeesseeees 16
In re Combustion Engineering, Inc., 391 F.3d 190
es ties ricibcipsanch sndtsadhcchinencsiditeicdipthidintiobsdelicenapuliods 20
Matter of Consolidated Bancshares, Inc., 785 F.2d 1249
a a 11
Davidson v. Davidson (In re Davidson), 947 F.2d 1294
Pr, Se a ee ee 17
IV
Dewsnup v. Timm, 502 U.S. 410 (1992) .0.....cccceeeseeeeees wovense hE
Dunbar v. Dunbar, 190 U.S. 340 (1903) ....c:cesesseseeseeee ee
In re Ezell, 338 BR. 330 (Bankr. E.D. Tenn. 2006)............. 26
In re Fleming, 339 B.R. 716 (Bankr. E.d. Mo. 2006)........... 26
In re Fobian, 951 F.2d 1149 (9" Cir. 1991) ..ccccesceccsseesessesseee 2-
In re Friedman, 232 F.3d 151 (2d Cir. 1956)... cece 1]
In re Fuger, 347 B.R. 94 (Bankr. D. Utah 2006).................. 27
In re Fuller, 346 B.R. 472 (Bankr. S.D. Ill. 2006) ............... 27
In re Granite Partners, L.P., 213 B.R. 440
IE. SEs BPD cases cehine ai stsiccenssiintescvenintininniiciuielite 12
Guerin v. Weil, Gotshal & Manges, 205 F.2d 302
Sats, Sea icialidanslosis sictipbbieninipssdlieensanesapmeiigtesloletnonniiesiie’ 11
In re Gulf Hills Development Corp., 60 B.R. 366
GFA: PI: SI Pia cesicinseccevntnsnncicepncctisclonpesateseinen secant 14
Hensley v. Eckerhart, 461 U.S.424 (1983) ..0.......::cccccsseeeeeeee 23
In re Inslaw, 106 B.R. 331 (Bankr. D.C. 1989).................... 14
Internal Importation Fund Trustees v. Greenough,
De A EF GRRE D cccetsiesestinsstcemionipnesitinicnsenidibatinensuintets 10
In re Johnson, 337 B.R. 269 (Bankr. M.D.N.C. 2006)......... 26
Jordan vy. Southeast National Bank, 927 F.2d 221
ie WON i i ea 17
v
In re Kisselberth, 273 F.3d 714 (6 Cir. 2001).......:0:ssess0ee 14
Lebron v. Mechem Financial, Inc., 27 F.3d 937
(3d Cir. 1994)....0000.....: Reali scesiilicastaceaibicaiadinisesiiighlbtesiiteisshlil 12
Leiman v. Gutman, 336 U.S. 1 (1949) 0... ccceeeeeeeeeeeee es 13, 14
In re Lister, 846 F.2d 55 (10" Cir. 1988) ......c.cccccsceseeseesesses 11
Local Loan Co. v. Hunt, 292 U.S. 234 (1934) .00.... eee 27
Martin v. Bank of Germantown (In re Martin),
761 F.2d 1163 (6™ Cir. 1985) .....cccccccscescssssesesceseeseseeeeees 17
In re Meza, 467 F.3d 874 (5™ Cir. 2006) ........sececesseseseeeseeees 27
Midlantic National Bank v. New Jersey Department of
Environmental Protection, 474 U.S. 949 (1986)............ ll
Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970) ........... 10
New Haven Inclusion Cases, 399 U.S. 392 (1970)............... 13
Inve Nova Real Estate Investment Trust, 23 B.R. 62
Cee: DD, Vt BOD nas cicissicas cnnnicdeivinendatcrcenher OR 22
Official Committee of Cybergenics, 330 F.3d 548
(3d Cir. aes) bss aSehithosponncnenhiehal RTECS. ESE Mees IRE OE 12
In re Omigas Group, Inc., 16 F.3d 1443
Oe sia 3
Pepper v. Litton, 308 U.S. 295 (1939) .........eccecceeeeeteeeeeeeeeeees 18
Randolph v. Scruggs, 190 U.S. 533 (1903).......cccccceees 2, 9,10
vi
Ruckelshaus v. Sierra Club, 463 U.S. 680 (1983) .......... 20, 21
In re Sakowitz, Inc., 110 B.R. 268
NG Bc Ls SII cncencéciotnnnndibcnrescchondtioscnisenmtinsends 15,19
Saper v. John Viviane & Sons, Inc., 258 F.2d 826
ERE EERE REA SOD Bee UP Y Te Pie 11
Matter of Saphire Steamship Lines, Inc., 509 F.2d 1242
ERS ECCS Rae aw kerk are emo 11
Sexton v. Dreyfus, 219 U.S. 339 (1911)... ceeeeeeeeee 14, 15, 16
In re Sokolowski, 205 F.3d 532 (2d Cir. 2000).........0.0.0..00... 10
In re Solar Manufacturing Corp., 206 F.2d 780
I Sieh A cet ciniacetihii dep hiendelanbiipsniibinedsenndiabicenionhion 11
In re Southern Pacific Funding Corp., 268 F.3d 712
i cstulenaniglibaashis 13
Tennessee Student Assistance Corp. v. Hood,
541 U.S. 440 (2
Transouth Finance Corp. of Fla. v. Johnson ,
931 F.2d 1505 (11 Cir. 1991) o.ccecccecsccsseessesssesseesesneenes 17
In re Triangle Laboratories, Inc., 663 F.2d 463
Fe io encccnernsscsoresencensccsasepstconerpepepeccenivsyeioctoosecats 13
Union Bank v. Wolas, 502 U.S. 151 (1991)......0....ccccceeecceee 16
In re United Merchants & Manufacturers, Inc.,
FP ee BO Oe, BI icsicindetpcctenscnccorsccicscvetwincnsenet 10
United Savings Association of Texas v.Timbers of Inwood
Forest Associate, Lid., 484 U.S. 365 (1988)........... 7, 8,17 -
vi
Vizcaino v. Microsoft Corp., 290 F.3d 1043 (9th Cir.),
cert demied 537 U.S. 1018 (2002) ...........:.escssceeceseeseeeeeees 10
In re Wilson, 274 B.R. 4 (Bankr. D.C. 2001) ...... cece 25
Worthen Bank & Trust Co. v. Morris (In re Morris),
CG Re, CI iiss issn 17
Young v. Higbee, 324 U.S. 204 (1945) ..00...cccccecceeeccesceneeeeees 16
FEDERAL STATUTES
ee ae ED POI veicsiccieibecgunnisenssidbinstnianielininctcctenitadbaitacenica 2
8. RO SRN SS ea a or: 22
Bankruptcy Code § 101(10).............cecccccccscsseccsccosecsceccsesceece 15
Bankruptcy Code § 103(a).............:scsssesserecsesesesesscesenseosenes 24
Bankruptcy Code § 301(5) iliceiliipliiihibsatistinenspipinisbeinsabbinaeaabiiaseiD 15
Bankruptcy Code § 303(h)....cccocceceee0s0-. sd es i a cae 15
Bammteepeay Cain § SOG) oaecncerncnseccecsccccssocessoseconsseconisssnsnnwid 6
NIE TE 2D ccsisnisersndcotiiicentiniesieedsehbesinistinnibdiidaaanial 6
EINE TIO escpicttrtciiccinshicbsisesteeniciclghenmninigang titi 6
NN NID SF SII ncinicininencncitnioninnnstiienishaimsucdeeinciabatiio 20
Bankruptcy Code § 362(d)(1) ..............cccccsceseecesceeceecensereeees 7,8
One ERNIE UF GIA nc) scicstivssterisssnctipaiddiiseduinsnieiediaebaceia 6
Bankruptcy Code § 363(b)......cccccscecececcccssesesesssssesessseesecesssen 20
Bankruptcy Code § 364 .............sscsssecsesesneseesensees aE Se 20
TI ici ccniscccsusiscincsiaseccsnncininlbebianiantnatiiaauiilds 20
Bankruptcy Code § 502(b)...0........0...:cccceececceseeeceseseceeee passim
IE I IED sescntcisniccniscnspsininsspctiniondapntmeisiici 5, 22
Bankruptcy Code § 503(b)...............ccccsceseeeseeseeeceeceeceees passim
Bankruptcy Code § 503(b)(3)(D) and (4)..........0.000.000.. passim
Bamticraptcy Code $ SOG q.....ccccceccsscccescerscsecccvasesseeeeeeses passim
Bankruptcy Code § 506(b).................:c-sceeceeceseeereeeeeseeee passim
I CRD BSI ccc ssstisttscicntninanscdasnnsvilacpetsallils 17
Membrane y Cala © SII) incase sccccsecesicccacnsncoconsnincsessosaseens 6
hedeisies |) SOT ER EE Re A MeL AI ‘epee
IIIS AE D vinh css dnnictrichnicicatllbcheicrnsslisiciinainied duc 20
I AE OIG iia nicteensensisststesndintntinsemiencdiectnlemsilionil 20
SN TI TD CI i iiiceiinseitisidniteinsinsinininictiinineniiiesiten 20
Bankruptcy Code § 1123(a)(4) .............cccccecescescececeseeeeeeeeeces 16
I CAR BET ais cinssscccerincesccsscndecininieipiiacitcest 20, 23
SN RAD 1 OOP nd ncssienencictstoniccsscontabibadniieniesiiiioninis 20
Bankruptcy Code § 1322(d)..............sccscccssseseeeeecseesceerecereeeece 25
IEC AEE eRe 26
iX
Bankruptcy Code § 1325(a)(5)(B) seccsscsecessosescsessesensee
Bankruptcy Code § 1325(a)(9) ..............-.cceccceeeseeeeeceeeeerees
Bankruptcy Code § 1325(b)(1)(B)................cccccccceseceeseeeees
Bankruptcy Code § 1325()(2) .0........cccccccseseeeseeeeeeeeeeeeees
Bankruptcy Code § 1326(C)............sscccsscsssesesecesessesseneceees
pd SRP SERRE, TRC EE CEO
CONGRESSIONAL HISTORY
S. Rep. 95-989, 95th Cong., 2d Sess. 40 (1978)...............
OTHER AUTHORITY
Liore Z. Alroy and J. Michael Mayerfeld, Contracted-
For Post-Petition Attorneys' Fees and Collection
Costs; United Merchants Revisited, 1992 Colum.
Is Sc Rs A, TD wcteicciecciantonpnenicblindienctiaibiotanios
Kenneth N. Klee and K. John Shaffer, Creditors’
Committees Under Chapter 11 of the Bankruptcy
Code, 44 S. Carolina L. Rev. 995, 997 (1993)............
Keith M. Lundin, Chapter 13 Bankruptcy § 518.1
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.
INTEREST OF AMICI CURIAE'
The Amici Curiae are law professors who have
devoted their careers to the study and teaching of bankruptcy
law.” They respectfully submit this pro bono brief in support
of Respondent.
The Amici are deeply interested in this case because
of the severe adverse impact the allowance of postpetition
legal fees to unsecured creditors in a bankruptcy case could
have on the sound and economical administration of the case.
They file this brief to offer to the Court what assistance they
can as it considers and decides whether to allow an unsecured
creditor, based on a contract clause it obtained from the
debtor before the bankruptcy filing, to charge the debtor
estate for the iegal fees it incurs for its attorney to monitor
and appear in proceedings in the debtor’s bankruptcy case for
the sole benefit of such creditor.
' Pursuant to Rule 37 of the Rules of this Court, the Amici file this brief
with the written consent of both parties, which are on file with the Clerk.
No counsel for a party authored this brief in whole or in part. No person
or entity including the Amici or their counsel made a monetary
contribution for the preparation or submission of this bref.
> The Amici are Richard Aaron, Professor of Law, S. J. Quinney College
of Law, University of Utah; Jagdeep S. Bhandari, Professor of Law,
Florida Coastal School of Law; Susan Block-Lieb, Professor of Law,
Fordham Law School; Ralph Brubaker, Professor of Law and Mildred
Van Voorhis Jones Faculty Scholar, University of Illinois College of
Law; Erwin Chemerinsky, Alston & Bird Professor of Law and Political
Science, Duke University; S. Elizabeth Gibson, Burton Craige Professor
of Law, University of North Carolina at Chapel Hill; Kenneth N. Klee,
Professor of Law, University of California at Los Angeles School of Law;
Robert M. Lawless, Gordon & Silver, Ltd. Professor of Law, William S.
Boyd School of Law, University of Nevada, Las Vegas; Nancy B.
Rapoport, Professor of Law, University of Houston Law Center; and Ettie
Ward, Professor of Law, St. John’s University School of Law.
2
In the Amici’s view, an unsecured creditor who has
provided no benefit to the estate should not be permitted to
shift its postpetition legal fees to all of the other creditors
who enjoyed no benefit from the legal services such creditor
chose to obtain for its own purposes. This brief argues that, in
the absence of benefit to the estate, the allowance of such
fees would be at odds with long-standing precedent of this
Court and the fundamental bankruptcy goal of equality for
creditors, and impair the sound administration of chapter 11
and chapter 13 cases.
SUMMARY OF ARGUMENT
The Amici seek an affirmance of the order of the
Court of Appeals for the Ninth Circuit disallowing
Petitioner’s claim for the legal fees it incurred for monitoring
and appearing in various proceedings in the Respondent’s
case for reorganization under chapter 11 of the Bankruptcy
Code.’ But the Amici urge disallowance on a different basis
than the one employed by that court. In this case, the Ninth
Circuit applied its decision in Jn re Fobian, 951 F.2d 1149
~(9" Cir. 1991), which disallowed an unsecured creditor’s
claim for postpetition legal fees because its fees were
incurred for litigating purely bankruptcy law issues. The
Amici contend, however, that none of the postpctition legal
fees incurred by an unsecured creditor should be allowed in
the absence of a substantial benefit to the estate as a result of
such legal services.
The Amici note a long-standing holding of this Court
that an unsecured creditor’s postpetition legal fees are
allowed only for services that provide a benefit to the estate.
Randolph v. Scruggs, 190 U.S. 533, 539 (1903) (per Holmes,
* The Bankruptcy Code is codified in 11 U.S.C §101 et seq., and is
referred to herein as the Bankrptcy Code.
3
J.) (a claimant’s pre-bankruptcy contract claim for
postpetition legal services will be allowed only if they were
“beneficial to the estate.”).-The Amici accordingly argue that
§ 502(b)* should be narrowly construed not to allow an
unsecured creditor’s claim for legal services that did not
benefit the debtor estate.
This is a case in which one unsecured creditor seeks
to gain more on its claim in the bankruptcy than the other
unsecured creditors by collecting its own postpetition legal
fees from the debtor estate.” The charging of an unsecured
creditor’s legal fees to the estate, which received no benefit
from the legal services, would, however, be at odds with the
bankruptcy principle of equality for creditors. The allowance
of such fees to an unsecured creditor who obtained a fee-
shifting contract clause would prefer such claimant over
other unsecured creditors, particularly those who become
creditors involuntarily, such as tort creditors, the United
States as the holder of various non-priority tax claims, and
state and local tax creditors, who were never in a position to
seek fee-shifting contracts. In addition, many trade creditors
and others do not have the negotiating power to obtain such
* Citations in this form are to sections of the Bankruptcy Code.
* As stated in /n re Omigas Group, Inc., 16 F.3d 1443, 1445 (6" Cir.
1994), analogizing to the film, Annie Hall (United Artists Entertainment
1977):
Understandably, creditors of bankrupt debtors often feel like
restaurant patrons who not only hate the food, but think the
portions are too small. [fn 1]. To press the analogy, they also
don’t like having to wait in line for a table, possibly being seated
only to find out that the kitchen has just closed. The bankruptcy
court is a little like a soup kitchen, ladling out whatever is
available in ratable portions to those standing in line;
nevertheless, scarcity begets innovation in the hungry creditor’s
quest to get a little more than the next fellow. This case involves
just such an effort.
4
clauses, so that an unsecured creditor who obtained such a
clause would be preferred over many other types of creditors
as well.
The bankruptcy system would be overwhelmed with
claims by unsecured creditors for legal fees if they are
allowed to charge the estate for the tees of their attorneys to
monitor all of the proceedings in the bankruptcy case, and to
pursue unnecessary protections for their claims in
proceedings in the case. The announcement of such a rule
would be a wake-up call to creditors alerting them to write or
revise their contract forms so as to shift to the estate all legal
fees they may incur for services that relate in any way to a
subsequent bankruptcy case of the other party. Such a rule
could generate a multitude of legal fee claims by unsecured
creditors in many bankruptcy cases, which would be
duplicative of the legal fees borne by the estate for the
services of the attorney for the statutorily designated official
creditors’ committee, which performs its statutory duties and
functions on behalf of the entire creditor body.
Moreover, a ruling that allows postpetition legal fees
for services to an unsecured creditor that did not benefit the
estate would cause severe adverse consequences in chapter
11 and chapter 13 cases. In light of the consequences of such
a rule, as set forth herein, Congress could not have intended
to obscure the allowance of such legal fee claims within the
general language of § 502(b).
First, if the Court announces such a rule, it will alert
all creditors to write broad fee shifting clauses, and the level
- of participation by unsecured creditors’ attorneys will
increase because the estate will bear the freight. Unsecured
creditors’ attorneys will monitor all proceedings in chapter
11 cases even though many, if not most, of them do not
directly affect the particular nghts of their creditor clients.
5
—
—_—
Second, allowing postpetition legal fees to an
unsecured creditor will overly complicate chapter 11 cases.
At the beginning of a chapter 11 case, the creditor would not
know what legal services it will seek or the extent thereof.
That will only become known in stages as the chapter 11 case
progresses. Nevertheless, at the outset of a case, as in the
present one, the creditor will file a “contingent” proof of
claim in a particular amount, based solely on a guess. In due
course, it will be necessary to quantify the claim, either by
estimation pursuant to § 502(c), or by an adjudication in a
litigated proceeding. Neither process, however is satisfactory.
An estimation proceeding is a process leading to an educated
guess by the bankruptcy court, which may turn out to be way
off the mark, and the litigated approach may require more
than one adjudication to determine the amount of the
creditor’s claim. This will consume the time of the court and
the parties, and escalate the burden on the estate for fees,
while reducing the “pot” available for the other unsecured
creditors.
Third, the allowance of postpetition legal fee claims
of unsecured creditors would have a significant adverse
effect both on chapter 13 debtors and their unsecured
creditors. This is of great concern because of the hundreds of
thousands of chapter 13 cases filed each year. These adverse
effects have come into sharp focus because of amendments to
the Bankruptcy Code governing chapter 7 and chapter 13
adopted by Congress in 2005. The vast majority of workers
use their own automobiles to get to and from their jobs.
Under the amended provisions, for most chapter 13 debtors
to avoid foreclosure of the purchase money lien on their cars
and be able to retain them and enjoy a “fresh start,” they must
pay in cash to the secured party the full amount of the
underlying debt. The allowance of legal fee claims would not
only increase the amount of cash the debtor must come up
with to keep the car, but also reduce pro tanto the amount of
6
the debtor’s “disposable income” that the unsecured creditors
will receive under a chapter 13 plan. Unsecured creditors’
legal fee claims will also reduce the payments to the other
creditors. Moreover, such a rule would require the periodic
recomputation by the chapter 13 trustee of the amount of
each creditor’s distribution because of the ever-increasing
amount of an unsecured creditor’s postpetition legal fees.
Such recomputation would have to be made in each case,
usually monthly, by the standing chapter 13 trustee in the
district, who may be responsible for administering thousands
of chapter 13 cases, and would pose enormous administrative
complications and difficulties in chapter 13 cases.
ARGUMENT
I. BANKRUPTCY CODE § 502(b) SHOULD BE CONSTRUED
NARROWLY IN LIGHT OF LONG-STANDING PRECEDENT
OF THIS COURT, AND THE STRUCTURE AND GOALS OF
THE BANKRUPTCY CODE.
A. In Light of Other Bankruptcy Code Provisions,
§ 502(b) Should Be Narrowly Construed Not To
Allow Unsecured Creditors’ Claims For
Postpetition Legal Services of No Benefit to The
Estate
Section 502(b) should not be construed to allow an
unsecured creditor’s claim for legal fees because to do so
would be contrary to the structure of the Bankruptcy Code,
which has many provisions that explicitly provide for the
allowance of postpetition legal fees in_ specific
circumstances. See, e.g., §§ 303(i), 330, 331, 362(k),
503(b)(3)(D) and (4), 506(b), and 523(d).
Specifically, only two provisions of the Bankruptcy
Code authorize a creditor’s claim for postpetition legal fees,
7
and Petitioner’s claim does not fit within either of them. The
first is §503(b)(4), which, in_ conjunction’ with
§ 503(b)(3)(D), authorizes a bankruptcy court to allow as an
expense of administration of a chapter 11 case the
postpetition legal fees of an attorney for an unsecured
creditor in making a “substantial contribution” in the case.
The second, § 506(b), allows the legal fees of a secured
creditor, but only to the extent that the value of the collateral
exceeds the principal and interest of the claim. Petitioner’s
claim fails to qualify under either of these provisions. In light
of these provisions sharply limiting the recognition of claims
for postpetition legal fees of creditors’ attorneys, § 502(b) -
should be interpreted narrowly.
B. Timbers of Inwood Supports Disallowance of
Contractual Postpetition Fee Claims For
Unsecured Creditors
The Court’s discussion of Bankruptcy Code § 362(d)(1)
and § 506 in United Savings Ass'n of Texas v.Timbers of
Inwood Forest Assoc., Ltd., 484 U.S. 365 (1988), supports
the conclusion that § 502(b) should be construed narrowly.
There, the Petitioner, a secured creditor whose collateral was
worth less than the amount of its claim, argued that it was
entitled to periodic payments for the use value of its
collateral under the “adequate protection” provision of
§ 362(d)(1). The Court first stated that § 362(d)(1) could be
read to support Petitioner’s claim, but rejected that reading
because it was implausible to impute to Congress an intent to
allow such claims under a general provision, rather than
providing for them specifically in § 506(b). As analyzed by
Justice Scalia for a unanimous court:
If the Code had meant to give the undersecured
creditor, who is thus denied interest on his claim,
interest on the value of his collateral, surely
8
[§ 506(b)] is where that disposition would have been
set forth, and not obscured within the “adequate
protection” provision of § 362(d)(1). Instead of the
intricate phraseology set forth above, § 506(b) would
simply have said that the secured creditor is entitled
to interest “on his allowed claim, or on the value of
the property securing his allowed claim, whichever is
lesser.”
Id. at 373 (Italics in original). The Court’s logic in Timbers of
Inwood likewise requires the disallowance of a contract claim
for postpetition legal fees by an unsecured creditor who has
provided no benefit to the estate. If Congress had intended to
allow such claims despite the absence of benefit to the estate,
it would have simply said so in any of the numerous -
provisions of the Bankruptcy Code that do authorize
postpetition legal fees, and not silently “obscured” the
allowance of such claims within the general language of
§ 502(b).
Moreover, the Court pointed out in Timbers of
Inwood that § 506 has the “substantive effect of denying
undersecured creditors postpetition interest on their claims”
by not providing for it. 484 U.S. at 372. Section 506, which
deals with attorneys’ fees, as well as interest, should have
the same substantive effect of disallowing postpetition
attorneys’ fees for undersecured creditors, and by extension
for wholly unsecured creditors as well. See Liore Z. Alroy
and J. Michael Mayerfeld, Contracted-For Post-Petition
Attorneys’ Fees and Collection Costs; United Merchants
Revisited, 1992 Colum. Bus. L. Rev. 309, 321-23 (“Timbers
suggests that attorneys’ fees ought not to be allowed to
anyone save an oversecured creditor with a contract
providing for collection costs”).
9
C. Under Randolph v. Scruggs and Other Cases,
Unsecured Creditors Should Be Allowed Claims
For Postpetition Legal Fecs Only If The Attorney’s
Services Were Beneficial To The Estate.
Long ago, in Randolph v. Scruggs, 190 U.S. 533
(1903), this Court formulated the requirement of “benefit to
the estate” for the allowance of unsecured creditors’ contract
claims for postpetition legal fees. As stated by Justice
Holmes for the Court:
We are not prepared to go further than to allow
compensation for [legal] services which were
beneficial to the estate.
190 U.S. at 539 (Italics added).
Randolph v Scruggs appears to be the only case in
which this Court has ruled on the allowability in bankruptcy
of a claimant’s unsecured contract claim for postpetition
legal fees it incurs during a bankruptcy case. In the Amici's
view, Randolph v. Scruggs is controlling.
In Randolph v. Scruggs, an assignment for the benefit
of creditors made by a debtor pursuant to state law was
superseded by a subsequent involuntary bankruptcy filing.
The pre-bankruptcy assignment contract between the debtor-
assignor and the assignee provided for the payment of fees of
the assignee’s attorneys. Based on the prepetition contract
clause for legal fees, the assignee’s attorneys filed a claim
against the bankruptcy estate for their fees for various
services, including advice to the assignee with respect to his
duties, and in resisting adjudication in bankruptcy of the
debtor-assignor during the bankruptcy case. The Court held
that the attorneys’ contract claim for legal fees, including
such claim for postpetition legal services, could be allowed
10
only if the legal services were beneficial to the bankruptcy
estate, stating: “The services to the voluntary assignee may
be allowed so far as they benefited the estate.” 190 U.S. at
539 (Italics added).
This Court thus held in Randolph v. Scruggs that the
attorneys’ services for resisting such adjudication dunng the
bankruptcy case did not give rise to an allowable claim
because they were of no benefit to the estate. With respect to
the claim based on the attorneys’ advice to the assignee, the
Court ruled that a remand was necessary for factual findings
as to whether such advice was beneficial to the estate.
Petitioner does not pretend that any of the legal services of its
attorneys were beneficial to the estate. Under Randolph v.
Scruggs, its contract claim for postpetition legal fees must be
disallowed.°
The doctrine for charging one party’s legal fees to a
group that benefited from them has its origin in /nternal Imp.
Fund Trustees v. Greenough, 105 U.S. 527, 531-32. 535-36
(1881), and has been applied ever since. See Mills v. Electric
Auto-Lite Co., 396 U.S. 375, 392 (1970); Boeing Co. v. Van
Gemert, 444 U.S. 472, 478 (1980); Vizcaino v. Microsoft
Corp., 290 F.3d 1043, 1051-52 (9" Cir.), cert denied 537
U.S. 1018 (2002).
* Petitioner’s heavy reliance on the dicta of the Second Circuit in /n re
United Merchants & Mfrs., Inc., 774 F.2d 134 (2d Cir.1982), a decision
under the prior Bankruptcy Act offering the court’s interpretation of then
newly-enacted § 506(a) of the Bankruptcy Code, is entirely misplaced.
Not only is that opinion dicta because § 506 was inapplicable, but also it
is unlikely that the Second Circuit would currently hold that contract
claims for such postpetition services may be allowed. See /n re
Sokolowski, 205 F.3d 532, 535 (2d Cir. 2000) (disallowing a claim for
attorneys’ fees).
1]
The principle established by Randolph v. Scruggs has
been adhered to by the courts. See Saper v. John Viviane &
Sons, Inc., 258 F.2d 826, 828 (2d Cir. 1958) (“[A]s a general
rule no compensation or reimbursement can be had unless a
tangible benefit has been conferred on the estate to the
advantage of the creditors as a whole.”); /n re Friedman, 232
F.3d 151 (2d Cir. 1956); In re Solar Mfg. Corp., 206 F.2d
780, 781 (3d Cir. 1953) (the work of attorneys for creditors
“must be at the expense of their clients unless it is in some
manner beneficial to the estate”); Guerin v. Weil, Gotshal &
Manges, 205 F.2d 302, 304 (2d Cir.1953) (In the absence of
benefit to the estate, “the bankruptcy court lacks power to
grant, and the policy of the [Bankruptcy] Act is against,
compensation not expressly provided for by the Act.”);
Matter of Saphire Steamship Lines, Inc., 509 F.2d 1242, 1245
(2d Cir.1975); Matter of Consol. Bancshares, Inc., 785 F.2d
1249, 1253 (Sth Cir. 1986) (“[A] creditor’s attorney must
ordinarily look to its own client for payment, unless the
creditor's attorney ... conferred a_ significant and
demonstrable benefit to the debtor’s estate and the
creditors.”) (Italics in onginal); Jn re Lister, 846 F.2d 55, 57
(10" Cir. 1988).
If Congress had intended, when enacting § 502(b) and
§ 506, to overturn Randolph v. Scruggs or the subsequent
cases conditioning the allowance of an unsecured creditor’s
postpetition fee claim on benefit to the estate, it would have
said so explicitly in either of those provisions or in their
legislative history. See Dewsnup v. Timm, 502 U.S. 410, 419
(1992) (“When Congress amends the bankruptcy laws, it
does not write on a clean slate [and] this Court has been
reluctant to accept arguments that would interpret the Code
... to effect a major change in pre-Code practice that is not at
least the subject of some discussion in the legislative
history.”). See also, Midlantic Nat'l Bank v. New Jersey
Dep't of Environmental Protection, 474 U.S. 949, 501 (1986)
12
(“[Ijf Congress intends for legislation to change the
interpretation of a judicially created concept, it makes that
intent specific.”).
The doctrine of Randolph v. Scruggs requiring benefit
to the estate has been carried into the Bankruptcy Code in
§ 503(b)3)(D) and (4), which allows legal fees to the
attorney for an unsecured creditor who has made a
“substantial contribution” in a chapter 11 case. Petitioner
ignores this Code provision in its argument that Congress
meant for postpetition legal fees to be payable whenever
provided for by a contract clause. But the long-standing rule
of Randolph v. Scruggs, which is carried into § 503(b)(3)(D)
and (4), eviscerates Petitioner’s argument. Something more is
required of an unsecured creditor for it to grasp a
disproportionate share of the bankruptcy estate — it must
substantially contribute to that estate to recover its attorney’s
fees. See Lebron v. Mechem Financial, Inc. 27 F.3d 937, 944
(3d Cir. 1994) (“[T]he purpose of § 503(b)(3)(D) is to
encourage activities that will benefit the estate as a
whole....”). See also Official Committee of Cybergenics, 330
F.3d 548, 564 (3d Cir. 2003) (§ 503(b)(3)D) and (4)
continues the benefit policy of § 64(a)(1) of the former
Bankruptcy Act allowing a creditor to recover expense
incurred “which actually benefits the estate.” ). In addition,
the courts have developed a stringent standard for the
allowance of fee claims of attorneys for unsecured creditors
pursuant to § 503(b)(3)(D) and (4). As stated in Lebron, 27
F.3d at 944, the applicable test for determining whether there
has been a “substantial contribution” is whether the efforts of
the applicant resulted in “an actual and demonstrable benefit
to the debtor’s estate [and] the creditors.” Accord: Jn re
Granite Partners, L.P., 213 B.R. 440, 446 (Bankr. S.D.N.Y.
1997); In re Alumni Hotel Corp., 203 B.R. 624, 632 (Bankr.
E.D. Mich. 1996). In the present case, Petitioner does not
13
make any pretense that its attorneys’ services provided any
benefit whatever to the estate or the creditors.’
D. The Bankruptcy Courts Have Exclusive
Jurisdiction Over Legal Fees In Bankruptcy
Cases; Such Fees Are Not A Matter For Private
Agreements
A fundamental principle of the bankruptcy law is that
the bankruptcy courts have exclusive jurisdiction over the
property of the debtor estate from the moment that the
debtor’s bankruptcy case has been commenced. See New
Haven Inclusion Cases, 399 U.S. 392, 420-21 (1970). Such
exclusive jurisdiction of the bankruptcy courts was carried
into the 1978 bankruptcy jurisdictional legislation as 28
U.S.C. § 1334(e). See Tennessee Student Assistance Corp. v.
Hood, 541 U.S. 440, 447 (2004) (relying on 28 U.S.C.
§ 1334(e)).
Among the matters central to bankruptcy that are
within the exclusive jurisdiction of the bankruptcy courts is
the conduct of litigation in those courts and the determination
of issues regarding legal fees incurred in connection
therewith. See Leiman v. Gutman, 336 U.S. 1, 9 (1949)
(“...[T]he determination of [legal fee] allowances has been
made an integral part of the process of confirmation which is
” To the extent that a contract clause triggers an obligation for
postpetition legal fees because of a bankruptcy filing, it <s in the nature of
an ipso facto provision and should be held unenforceable for that reason
as well. See §§ 365(e)(1) and 541(c)1)(B); in re Southern Pacific
Funding Corp., 268 F.3d 712, 716 (9" Cir. 2001) (ipso facto provisions
are intended “to protect the debtor from enforcement of unfavorab.-
insolvency-triggered clauses”); Jn re Triangle Lab., Inc., 663 F.2d 463,
465 (3d Cir. 1981) (Congress outlawed ipso facto clauses under the
Bankruptcy Code to protect and maximize the estate, indicating a strong
policy against such provisions).
4
exclusively entrusted to the bankruptcy court....”); Brown v.
Gerdes, 321 U.S. 178, 188 (1944) (the bankruptcy court has
“exclusive authority” to determine bankruptcy fees payable
out of the estate). Significantly, the Court has refused to
enforce “private arrangements” fixing bankruptcy fees that
were not even payable out of the estate. See Leiman v.
Gutman, 336 U:S. at 4, 8. Accord: Jn re Kisselberth, 273 F.3d
714, 718-19 (6" Cir. 2001); Jn re Inslaw, 106 B.R. 331, 333
(Bankr. D.C. 1989) (“In a bankruptcy case fees are not a
matter for private agreement.”); Jn re 5900 Assoc., Inc., 468
F.3d 326, 329 (6 Cir. 2006) (The debtor and an attorney
“cannot, simply by entering into a state law contract, abridge
the cour’ s duty to monitor such fees.”); Jn re Gulf Hills Dev.
Corp., 6v B.R. 366, 369 (S.D. Miss. 1985). See also, S. Rep.
95-989, 95" Cong., 2d Sess. 40 (1978) (“In a bankruptcy case
fees are not a matter for private agreement.”).
E. Section 502(b) Should Be Narrowly Construed In
View of The Bankruptcy Code’s Distinction
Between the Prepetition and Postpetition Periods
The Bankruptcy Code distinguishes between the
prebankruptcy and the postbankruptcy periods:
For more than a century and a half the theory
of the English bankruptcy system has been that
everything stops at a certain date. Interest was not
computed beyond the date of the commission. ...[T]he
rule was laid down not because of the words of the
statute, but as a fundamental principle. We take our
bankruptcy system from England, and we naturally
assume that the fundamental principles upon which it
was administered were adopted by us when we copied
the system....
Sexton v. Dreyfus, 219 U.S. 339, 344 (1911) (per Holmes, J).
15
The Bankruptcy Code also structures the date of
commencement of a bankruptcy case as a temporal date for
the determination of claims against the estate and the scope
of property of the estate. See § 502(b), § 503(b) and § 541.
Thus, under § 502(b), the amount of every claim must be
determined “as of the date of the filing of the petition”
commencing the bankruptcy case.
The Bankruptcy Code also divides claims into two
categones depending on whether they arose before or after
the date of the filing of the bankruptcy petition. The claims of
“creditors” are those that arise at the time of or before the
commencement of the bankruptcy case.* Claims arising after
the commencement of the bankruptcy case that provide a
benefit to the estate constitute “administrative expenses” of
the case under § 503(b), and they are accorded priority of
distribution under § 507(a)(2) because they benefit the estate
by enabling the debtor in possession or the trustee to
administer the estate, and to operate the debtor’s business.
The determination and allowance of claims as of the
filing date, with payment as administrative expenses only for
expenditures benefiting the estate during its administration, is
fundamental to the bankruptcy system. See Matter of Brints
Cotton Marketing, Inc., 737 F.2d 1338, 1342 (5" Cir. 1984)
(A creditor cannot “improve his position viz-a-viz other
creditors by action taken by him post-petition,” citing Sexton
v. Dreyfus, 219 U.S. 339 (1911)). See also, Jn re Sakowitz,
Inc., 110 B.R. 268, 271 (Bankr. S.D. Tex. 1989) (disallowing
* Under § 101(10), a “creditor” is defined as an entity whose claim
against the debtor arose at the time of or before the “order for relief” in
the case; and under § 301(b), the commencement of a voluntary
bankruptcy case constitutes an order for relief in the case. In an
involuntary bankruptcy case, if the petition is not dismissed after trial, the
bankruptcy court enters an order for relief pursuant to § 303(h).
16
a claim for postpetition legal fees because “Section 502(b)
speaks in terms of the proof of claim as it existed at the time
of the filing of the case.") (Italics in original).
Legal fees incurred by a creditor after the
commencement of the bankruptcy case are of the same
quality as interest that would otherwise accrue after
bankruptcy, and should be disallowed under the fundamental
principle adopted by this Court in Sexton v. Dreyfus and
followed thereafter by the courts.
F. Interpretation of § 502(b) In Light of the Principle
of Equality of Distribution For Creditors
A prime policy of the bankruptcy law, established
long ago, is “to secure equality among the creditors of a
bankrupt.” Boese v. King, 108 U.S. 379, 385-86 (1883). The
_ Court has continued to apply this policy through the years.
~ See, e.g., Clarke v. Rogers, 228 U.S. 534, 548 (1913); Young
v. Higbee, 324 U.S. 204, 210 (1945); Union Bank v. Wolas,
502 U.S. 151, 161 (1991). This policy was carried into the
Bankruptcy Code by § 1123(a)(4), which requires that a
chapter 11 plan provide “the same treatment for each claim
...of a particular class.”
Indeed, Petitioner recognizes this basic bankruptcy
policy, Pet. Op. Br., p. 45,” but contends that equality is
served by allowing creditors with provisions for attorneys’
fees to increase their claims by adding postpetition fees to
their claims. The cases it cites for this proposition are
inapposite because they concern either a secured creditor, or
an unsecured creditor who obtained a judgment ayainst the
debtor personally on a debt found to be non-dischargeable
* Citations in this form are to pages of Petitioner’s opening brief.
17
pursuant to § 523(a).'° Secured creditors are entitled to look
to their collateral for the payment of their claims in priority to
the unsecured creditors, and their rights to collect interest and
legal fees up to the limit of their collateral value is the
exception that underscores the rule. Only “to the extent” of
that collateral value do secured creditors receive that special
right to collect interest and attorneys’ fees. This principle was
thoroughly analyzed in Timbers of Inwood, 484 U.S. at 373.
With regard to unsecured creditors’ claims, the six decisions
by courts of appeals relied upon by Petitioner, Pet. Op. Br., p.
25,'' are also inapposite. In each of those cases, the judgment
in favor of the creditor was on a debt excepted from the
debtor’s discharge under § 523(a). Significantly, such a
judgment is not granted against the debtor estate, but only
against the debtor personally. The creditor’s legal fees
allowed in each of those cases was thus borne solely by the
debtor personally, not by the debtor estate or the other
creditors.
If the debtor estate is required, predicated on a
contract clause, to bear the legal fees incurred by an
unsecured creditor during the bankruptcy, that creditor would
in actuality be preferred over other unsecured creditors,
particularly those who become unsecured creditors
involuntarily, such as the holders of tort claims for pe:sonal
injuries, or of claims for non-priority federal, state or local
'° See § 523 (a), which sets forth 19 particular types of debts of an
individual debtor that are excepted from such debtor’s discharge in
bankruptcy.
"! Alport v. Ritter (In re Alport), 144 F,3d 1163, 1168 (8 Cir. 1998);
Davidson v. Davidson (In re Davidson), 947 F.2d 1294, 1297-98 (5" Cir.
1991); Transouth Fin. Corp. of Fla. V. Johnson , 931 F.2d 1505, 1507
(11™ Cir. 1991); Jordan v. Southeast Nat'l Bank, 927 F.2d 221, 227 (5™
Cir. 1991); Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163,
1168 (6" Cir. 1985); Worthen Bank & Trust Co. v. Morris (/n re Morris),
602 F.2d 826, 828-29 (8" Cir. 1979).
18
taxes. None of the involuntary unsecured creditors could
have negotiated before bankruptcy for provisions allowing
legal fees they might incur in a subsequent bankrupicy.
Moreover, many trade creditors and suppliers who operate
small businesses lack sufficient bargaining power to obtain
contracts affording them coverage for their legal fees
incurred in a subsequent bankruptcy. If such postpetition fee
claims are allowed, many unsecured creditors would not be
on an equal footing with those who have the prepetition
ability and leverage to obtain fee-shifting clauses. The
principle of the bankruptcy law for equality of treatment for
unsecured creditors thus requires the disallowance of
Petitioner’s claim.
Petitioner calls on equity to support its effort to gain
more than the other general creditors. Pet. Op. Br., p. 49.
Rather, equity calls for the disallowance of Petitioner’s claim
so as to avoid conferring a postpetition benefit on it that other
creditors, whose claims do not-arise under contracts, could
never obtain. See Pepper v. Litton, 308 U.S. 295, 305 (1939)
(“Equitable powers are to be exercised on the allowance of
claims....”).
II. CONGRESS COULD NOT HAVE INTENDED TO ALLOW
UNSECURED CREDITORS’ CONTRACT CLAIMS FOR
POSTPETITION LEGAL FEES IN LIGHT OF THE SEVERE
ADVERSE CONSEQUENCES SUCH ALLOWANCE WOULD
HAVE ON THE ADMINISTRATION OF CHAPTER I1 AND
CHAPTER 13 CASES
A. Allowing Such Claims Would Cause Unwarranted
Escalation of Monitoring Activities By Individual
Creditors and Mounting Expense for the Estate
If the Court were to sustain such legal fee claims, its
decision will alert lenders and others who extend credit to
-
19
focus on the need to include or revise the fee-shifting clauses
in their standard forms of contracts. Such a rule will likely
result in the prevalent use of fee shifting clauses in
prepetition contracts and a vast increase in the number of
such claims, which could overwhelm the administration of
bankruptcy cases. It can be expected that all parties who
extend credit will write clauses broadly providing for
charging all legal fees of every kind they incur in connection
with a later bankruptcy case. It is also likely that such claims
will be routinely filed even in the absence of any dispute over
the unsecured creditor’s underlying substantive claim and
thus no need for legal representation to establish such claim.
As predicted by the court in Jn re Sakowitz, Inc., 110 B.R. at
275, “Each creditor might send an attorney to every hearing
in the case.”
Accordingly, such a rule will lead to escalating and
often unnecessary legal fees being imposed on _ the estate in
chapter 11 cases at the expense of all of the other creditors,
who, through the estate, are already bearing the fees of the
attorneys for the official creditors’ committee for serving all
of the creditors. See Kenneth N. Klee and K. John Shaffer,
Creditors’ Committees Under Chapter 11 of the Bankruptcy
Code, 44 S. Carolina L. Rev. 995, 997 (1993) (discusses the
role, functions and operation of official creditors’ committees
in chapter 11 cases). The official creditors’ committee
participates in the numerous bankruptcy-specific proceedings
that are conducted during chapter 11 cases, and is
specifically required by § 1102(b)(3) to provide access to
relevant information to all of the creditors, and gives
additional reports and disclosure to the creditors as required
by the bankruptcy court. Yet if Petitioner wins the day in this
case, bankruptcy estates will be burdened with legal fees that
creditors may choose to incur for having their own attorneys
monitor and otherwise participate in these proceedings.
20
Fee-shifting clauses encourage the pursuit of
litigation, Ruckelshaus v. Sierra Club, 463 U.S. 680, 687
(1983). Chapter 11 is intended to provide a framework for the
consensual and cooperative resolution of disputes and the
reorganization of the debtor, a purpose that would be
undermined by a rule allowing recovery of postpetition legal
fees. See In re Combustion Engineering, Inc., 391 F.3d 190,
244 (3d Cir. 2004).
This problem is especially heightened in chapter 11
cases, which are significantly different than conventional
two-party litigation in the federal district courts. A chapter 11
case is not litigation between parties as such, but is a forum
for-the adjudication of numerous bankruptcy-related separate
proceedings that affect all unsecured creditors as a group.’
The effect of the myriad of bankruptcy-related proceedings is
generally the same for all unsecured creditors, rather than
affecting the rights of particular creditors, and is adequately
addressed for unsecured creditors as a group by the attorney
for the official creditors’ committee. However, bankruptcy
attorneys representing creditors in chapter 11 cases tend to
participate in such proceedings even though the interests of
their clients are not challenged or at risk. It is not uncommon
for creditors’ attorneys, as here, to inject themselves into
proceedings for bankruptcy court approval of disclosure
statements pursuant to § 1125 and for confirmation of plans
of reorganization pursuant to § 1129.
'2 Such bankruptcy-specific proceedings affect the unsecured creditors as
a group, and often do not affect the allowance of the individual claims of
the creditors. Proceedings of this type arise under § 362(d) (relief from
the automatic stay), § 363(b) (sale of assets), § 364 (borrowing money),
§ 365 (assumption and rejection of executory contracts), § 1104
(appointment of a trustee), § 1113 (rejection of collective bargaining
agreements), § 1114 (payment of retiree benefits), and § 1121(d)
(changing the debtor’s exclusive period to file a chapter 11 plan).
21
If unsecured creditors are allowed legal fees under
contract clauses, it will be necessary for the bankruptcy
courts to sort out whether and to what extent such legal
services are within the applicable contract clause and to
adjudicate the value of unnecessary and duplicative legal
services of creditors’ attorneys. A rule allowing legal fees of
unsecured creditors incurred for their attorneys’ appearance
at these proceedings would result in a large number of
claims aggregating large amounts against the estate, and
reduce the distributions from the “pot” that would otherwise
be available for all of the unsecured creditors.
Because bankruptcy proceedings are multi-party with
shifting alliances, quite different than standard two-party
lawsuits, bankruptcy courts may be hard-pressed to evaluate
the results achieved by attorneys for unsecured creditors and
determine who was the winner. See Ruckelshaus v. Sierra
Club, 463 U. S. at 684 (after referring to the basic American
rule against fee-shifting, stating: “It is clear that generations
of American judges, lawyers and legislators... would regard it
as quite ‘inappropriate’ to award the ‘looser’ an attorney’s
fee from the ‘prevailing litigant.””).
In light of these consequences, Congress could not
have intended § 502(b) to be a basis for the allowance of
claims by unsecured creditors for postpetition legal fees.
B. Allowing Postpetition Legal Fees to Unsecured
Creditors Will Overly Complicate Chapter 11
Cases
The allowance of postpetition legal fee claims to
unsecured creditors will overly complicate chapter 11 cases,
increase the legal fees the estate must bear, thereby diluting
the “pool” of assets available for all other unsecured
creditors, and delay their administration and conclusion.
22
Unsecured creditor legal fee claimants will, as
Petitioner did here, increasingly file so-called “contingent”
protective claims at the outset of the case. Contingent claims
constitute “claims” under the Bankruptcy Code because they
are within §101(5)’s definition of a “claim.” At the
beginning of a chapter 11 case, when creditors file contingent
claims, an unsecured creditor will not know whether, or the
extent to which, it will thereafter incur legal fees in the case
because it will not know what proceedings will be
commenced in the case and whether its claim will be
challenged. The contingent claim for future legal fees will
thus amount to nothing more than a guess by the unsecured
creditor.
To be an allowed claim entitled to vote on a chapter
11 plan and participate in distributions thereunder, however,
such contingent claim must be estimated pursuant to
§ 502(c), or adjudged to be in a particular amount in a
litigated proceeding. Section 502(c) requires that an
“estimation” proceeding be conducted, at which evidence
may be adduced and in which the bankruptcy court makes an
educated guess as to the ultimate value of the claim. See Jn re
Nova Real Estate Inv. Trust, 23 B.R. 62, 66 (Bankr. D. Va.
1982) (“An estimate necessarily implies no certainty”). Cf.
Dunbar v. Dunbar, 190 U.S. 340, 345 (1903) (There is an
“innate difficulty, if not impossibility, of estimating or
valuing” many contingencies). The estimate is made before
any legal services of the unsecured creditor’s attorney have
been rendered and will ascribe value to various possible
future proceedings that may never be commenced or disputes
involving the unsecured creditor that may never arise. This
makes estimation of future legal services in the chapter 11
context a speculative matter. It is thus not a satisfactory
process for the allowance of an unsecured creditor’s legal fee
claim in a chapter 11 case.
23
On the other hand, the alternative of liquidating the
contingent legal fee claim of the unsecured creditor by an
adjudication is likewise unattractive. Among other things, it
could require the bankruptcy court to conduct several
proceedings at different stages of the chapter 11 case in order
to determine the total amount to which the creditor would be
entitled for its legal fee claim. All of these proceedings would
occur in the face of the Court’s admonition in Hensley v.
Eckerhart, 461 U.S.424, 437 (1983), that “A request for
attorney’s fees should not result in a second major litigation.”
But that is exactly what may happen if unsecured creditors
are allowed postpetition legal fees under contract clauses.
Even if the determination of the amount of an
unsecured creditor’s claim is not made until later in the case,
there may initially be a proceeding by the unsecured creditor
to determine the amount of the claim so as to establish its
voting mghts. The unsecured creditor’s attorney will likely
thereafter continue to render legal services as the chapter 11
case moves forward to other stages of the confirmation
process including among others, proceedings for approval of
disclosure statements under §1125 required for the
solicitation of acceptances of the plan and for its
confirmation. After the creditor’s attorney monitors or
otherwise participates in those proceedings, more litigation
will be required. to determine the amount of the fees to be
allowed for that participation. And even that may not be the
end of the story. If the proposed plan is not accepted by
creditors or is not confirmed for other reasons, still another
proposed plan of reorganization will emerge, only to be
followed by still another round of fee litigation with the
unsecured creditor. All of these proceedings would consume
a substantial amount of time of the bankruptcy court as well
as for the attorneys for the chapter 11 debtor in possession (or
trustee) and for the official creditors’ committee, all at the
expense of the debtor estate.
24
Moreover, a rule allowing unsecured creditors’ claims
for postpetition legal fees may interfere with the formulation
on a timely basis of the terms for reorganization by the debtor
or another potential proponent of a plan of reorganization.
Such terms are formulated in part on the basis of the total
amount of all of the claims against the debtor. Information as
to the universe of claims against the debtor is thus needed by
the debtor and others who seek to pursue reorganization
alternatives. The continuous stream of services by unsecured
creditors’ attorneys throughout the case and the continued
accrual of the fees therefor, however, will stand in the way
of determining on a timely basis the universe of claims
against the debtor.
C. Unsecured Creditors’ Legal Fee Claims Should
Not Be Allowed Because of the Serious
Consequences Allowance Would Have on Chapter
13 Debtors and Their Unsecured Creditors
A rule interpreting § 502(b)’’ to allow postpetition
legal fee claims of unsecured creditors under fee-shifting
clauses would have a serious adverse effect on chapter 13
debtors, and also on all of their unsecured creditors. Such a
rule would also create . unmanageable administrative
difficulties in computing and making the periodic
distributions, usually monthly, of the debtor’s “disposable
income”'* :o the unsecured creditors pursuant to confirmed
chapter 13 plans. § 1325(b)(1)(B). This is because it would
" Under § 103(a), § 502(b) applies in chapter 13 cases as well as chapter
11 cases.
* Section 1325(b\2) defines “disposable income” as all of the current
income monthly income of the debtor (excluding certain support
obligations and payments) less amounts reasonably necessary for support
of the debtor and dependants, and certain charitable contributions and
certain business expenses if the debtor is engaged in a business.
25
be essential to recompute each creditor’s share of such
distributions every time that a creditor’s attorney renders
additional legal services.
The problems caused by the allowance of such claims
would be acute in light of the enormous volume of chapter 13
cases. During the 12 months ended June 30, 2006, there were
313,085 chapter 13 filings'’ and thousands more than that
number of chapter 13 cases are currently being administered.
In light of that high volume, allowing postpetition legal fee
claims would be a nightmare in chapter 13 cases, and
specifically for chapter 13 trustees, who are the ones who
make the payments to the unsecured creditors under the plan
pursuant to § 1326(c), and who may be held personally liable
for errors in making distributions to the creditors. See Jn re
Wilson, 274 B.R. 4 (Bankr. D.C. 2001).
In most districts, a standing chapter 13 trustee is
appointed to administer all of the chapter 13 cases in the
district, § 1302(a), and the single chapter 13 trustee is thus
often responsible for thousands of chapter 13 cases at a time.
If unsecured creditors’ postpetition fee claims were to be
allowed, it would be a virtual impossibility for these chapter
13 trustees to make the periodic recomputations of claims
and distributions to creditors on a timely basis, and it could
be necessary to defer distribution to creditors for five years
until the end of a chapter 13 case, § 1322(d), instead of much
earlier period’ distributions in chapter 13 cases.
Morec.’, the Court should not adopt a rule allowing
postpetition fee claims by unsecured creditors because it
would operate against the interests of both the chapter 13
'S This number was compiled by the Administrative Office of the United
States Courts. See http://www. te sure ue
bankrupt f2table_jun2006.xls.
26
debtor and all of the debtor’s unsecured creditors. First,
chapter 13 debtors often need to retain their automobiles to
get to and from work. Over 77% of workers in America use
their cars for that purpose.,'® and given the dependence on
cars for getting to work, making cars-a vital component of
gaining a “fresh start.” See Keith M. Lundin, Chapter /3
Bankruptcy § 518.1 (3d ed. 2006). In order to retain his or
her car, § 1325(a)(S)(B) requires a chapter 13 debtor to pay
the holder of a purchase money lien securing the vehicle the
full amount of “the underlying debt determined under
nonbankruptcy law” if such debt arose within 910 days
before the bankruptcy filing and the car was acquired for
personal use.'’ See In re Fleming, 339 B.R. 716, 722
(Bankr.E.D. Mo. 2006) (stating that it is irrelevant that the
value of the collateral is less than the underlying debt); Jn re
Johnson, 337 B.R. 269, 272-73 (Bankr. M.D.N.C. 2006); Jn
re Ezell, 338 B.R. 330, 340-41 (Bankr. E.D.Tenn. 2006); Jn
re Brown, 346 B.R. 868, 876 (Bankr. N.D.Fla. 2006). If, as in
many chapter 13 cases, the lienholder’s claim is more than
the value of the car, the debt to such undersecured creditor
would, if such rule is adopted, include unsecured postpetition
legal fees as part of the “underlying debt.” This will make it
more difficult for the debtor to be able to retain the car,
because to do so, the financially embarrassed debtor will
have to come up with even more cash to cover the legal fees
as part of the underlying debt to the vehicular financier, or
loose the car. This could impair the debtor’s “fresh start,”
‘© US. Census Bureau, 2005 American Community Survey,
http://factfinder.census. Gov/servlet/STTable
'’ The so-called “hanging paragraph” of §1325(a), which immediately
follows the first sentence of § 1325(a)(9), makes § 506(a), which reduces
the secured portion of an undersecured claim to the value of the collateral,
inapplicable to the determination of the amount of the“underlying debt”
for the purpose of § 1325(a)(5S) if the debt arose within 910 days before
the bankruptcy filing and the car was acquired for the debtor’s personal
use.
27
which is a main purpose of the bankruptcy law. See
Burlingham v. Crouse, 228 U.S. 459, 473 (1913); Local Loan
Co. v. Hunt, 292 U.S. 234, 244 (1934).
There is another compelling reason for the
disallowance of such claims. The obligation to pay such car
lenders more than their collateral value was enacted in 2005
as part of the Bankruptcy Abuse Prevention and Consumer
Protection Act. That Act significantly amended both chapter
7 governing liquidation proceedings, in which unsecured
creditors rarely receive any distribution from the individual
debtor’s chapter 7 estate, and chapter 13, under which
unsecured creditors are likely to receive periodic distributions
under confirmed plans. Congress’ purpose was to ensure that
unsecured creditors of individual debtors seeking bankruptcy
relief would receive distributions from the debtors’ post-
petition wages. Cf. In re Meza, 467 F.3d 874, 877 (5" Cir.
2006) (Chapter 13 enables individual debtors “to amortize
their debts out of future earnings,” and “permits wage-
earning debtors ‘to reorganize with a repayment plan as an
alternative to seeking a complete discharge of debts through
the chapter 7 bankruptcy liquidation process.’”). To
accomplish that objective, Congress restructured chapter 7 to
require the dismissal of an individual debtor’s chapter 7 case
unless the debtor’s monthly income is less than the statutory
level, which § 707(b)(2) fixes at a relatively low amount.
This makes chapter 7 unavailable to many individual wage
earners, and leaves as their only bankruptcy alternative a —
proceeding under chapter 13, which, to accomplish Congress’
purpose, requires the distribution of all of the debtor's
“disposable income” to his or her unsecured creditors during
the multi-year life of a chapter 13 plan. See Jn re Fuller, 346
B.R. 472, 484 (Bankr. S.D. Ill. 2006); Jn re Fuger, 347 PR.
94, 99 (Bankr. D. Utah 2006).
28
The allowance of postpetition legal fee claims would
result in a significant reduction in the amount of the chapter
13 debtor’s “disposable income” and thus in a dollar for
dollar reduction in the distributions targeted by Congress for
the unsecured creditors in chapter 13 cases. This is because
the allowance of postpetition legal fees to an undersecured
creditor, which must be paid by a chapter 13 debtor to retain
his or her car, would reduce the debtor’s “disposable income”
and thereby reduce the amount distributable to all of the other
unsecured creditors. Moreover, the allowance of
postpetition fee claims of wholly unsecured creditors would
itself increase the aggregate amount of all unsecured claims,
thereby diluting every unsecured creditor’s pro rata share of
all distributions of the debtor’s “disposable income.”
A rule allowing unsecured creditors’ postpetition
legal fee claims would not only be administratively
unmanageable, but also would be harmful to the unsecured
creditors.
29
CONCLUSION
For the foregoing reasons, the order appealed from
disallowing Petitioner’s claim should be affirmed.
Respectfully submitted,
Of Counsel:
Richard Corbi
Daniel J. Morse
December 22, 2006
ROBERT M. ZINMAN
Professor of Law
St. John’s University School of
Law .
8000 Utopia Parkway
Jamaica, New York 11439
(718) 990- 6646, or
(914) 631-3515
Counsel of Record for Amici
Curiae Professors
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