Amicus Curiae Brief — Travelers Cas. & Sur. Co. v. PACIFIC GAS

Ko9!

eee em

Uereme Coun, US

i “iLer

NOV 2 0 2006

No. 05-1429 SKE Se THE CLERK |

a ———

IN THE

Supreme Court of the United States

TRAVELERS CASUALTY AND

SuRETY COMPANY OF AMERICA,

Petitioner,

PACIFIC GAS AND ELECTRIC COMPANY,

Respondent,

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

BRIEF FOR AMICUS CURIAE

AMERICAN INSURANCE ASSOCIATION

IN SUPPORT OF PETITIONER

CRAIG GOLDBLATT

{Counsel of Re cord

CAPOLINE RoGUS

WILMER CUTLER PICKERING

HALE AND DORR LLP’

1875 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(P22) 663-6000

———_ ee

TABLE OF CONTENTS

/=—— Page

TABLE OF AUTHOR PETG xcncoxcscseessnsescceencsecsecersesvsssnessacseseh ii

INTEREST OF AMICUS CURITAE.........ccssssscssssssssssseesesssens 12

ET eee CRY MW oasscessecevsiseeenesnssysintcnenstenenenevtensenis 3

STATEMENT OF THE CASE q......2.:.ccscescsscsosssscossosevssvessousesee 4

RII EIIINE ctistsnctepsivinaiicamainisnnestinmninimnuitionneiimemmmasit 5

I. THE ALLOWANCE OF CLAIMS IN

BANKRUPTCY IS GOVERNED BY OTHERWISE

APPLICABLE NONBANKRUPTCY LAW..........cc.csesesseseseeeeee 5

A. Section 502 Of The Bankruptcy Code Ex-

pressly Directs Bankruptcy Courts To

EAE ELIT AL SOT I 5

B. Federal Law Does Not Require A Differ-

I iii chectitccicicsintncltidlitipiimeinianicnietiinivebaiinmtcn 7

C. The Proper Analysis Is Simply Whether

The Disputed Attorneys’ Fees Are Per-

missible Under The Indemnity Agree-

Il. THE CREATION OF A “FEDERAL COMMON

LAW” OF CLAIMS ALLOWANCE WOULD

INVITE FORUM SHOPPING INTO BANKRUPTCY............ 14

CONCLUSION..............0. somvepciiositincsspiinremittitomntisinanmevmtnetens 17

ey

TABLE OF AUTHORITIES

CASES

Page(s)

Alport v. Ritter (In re Alport), 144 F.3d 1163 (8th

I I ice bicatceissciscelbiaieiatalaiia Aedekcseihaeiigtheienpldinbpiaaiedasenastenieas 13

Alyeska Pipeline Service Co. v. Wilderness Society,

EEE AF a a PD cteiivicnsdiinicsenicsiacicttadinaptanithaienioabainaidacitiients 13

American Airlines, Inc. v. Wolens, 513 U.S. 219

Ce iisciceniacdcvecichntncsicaitiaiigbisiicinscntavidianiotick ioenaec ae

American Automobile Manufacturers Ass’ nm V.

Commissioner, Massachusetts Department of

Environmental Protection, 998 F. Supp. 10 (D.

Mass. 1997). aff'd, 208 F.3d 1 (1st Cir. 2000) ...........-0.00 10

Baker & Drake, Inc. v. Public Service Commission

(In re Baker & Drake, Inc.), 35 F.3d 1348 (9th

Bank of New England Corp. v. Branch (In re Bank

of New England Corp.), 364 F.3d 355 (1st Cir.

Building & Construction Trades Council v. Asso-

ciated Contractors & Builders of Massachu-

setts/Rhode Island, Inc., 507 U.S. 218 (1993) ......--sseseesee: 9

Butner v. United States, 440 US. 48 (1979)......... 5, 6, 7, 14, 16

Century Indemnity Co. v. Congoleum Corp. (In re

Congoleum Corp.), 426 F.3d 675 (3d Cir. 2005)............. 16

Cipollone v. Liggett Group, Inc., 505 U.S. 504 (1992)............. 8

Davidson vy. Davidson (In re Davidson), 947 F.2d

1294 (Sth Cir. 1991) ...........cccscecsecees oie Oe

Davis v. Davis (In re Davis), 170 F.3d 475 (5th Cir.

1999) , ne)

Duvall v. Bristol-Myers Squibb Co., 65 F.3d 392

(4th Cir. 1995), vacated on other grounds,

aD Sree Be cet htcitineinttiinenstiiapeineniiipiiininenencies 10

Fleischmann Distilling Corp. v. Maier Brewing

ig A Fe cdicititdedacindhcicusiiinnnitiitianitiniaiatentiainsivinis 12

Fobian v. Western Farm Credit Bank (In re Fo-

bian), 951 F.2d 1149 (9th Cir. 1991)... eeeeee 4, 7,13

Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824) ..........scscessssssees 9

iii

Grogan v. Garner, 498 U.S. 279 (1991) .....ccccccescscescsceseseecereneees 6

Hall v. Cola, 418 US. 1 CRGTB) cescscrsecesavssssesscizcesossoceseccnesosesociss 13

Hillsborough County, Florida v. Automated Medi-

cal Laboratories, Inc., 471 U.S. 707 (1985)............... eee

In re Chicago, Milwaukee, Saint Paul & Pacific

Railroad Co., 791 F.2d 524 (7th Cir. 1986)........0.000+. 6,14

Johnson v. Righetti (In re Johnson), 756 F.2d 738

Rs IE iiciclinsibiiciinnicitgedhiiniinscniiiblinitiatinstantiisaitbisigitdliinaesine 5

Lorillard Tobacco Co. v. Reilly, 533 U.S. 525 (2001).............. 8

Martin v. Bank of Germantown (In re Martin), -

Be fis Lb Re. ANUS RENE mm 13

Medtronic, Inc. v. Lohr, 518 U.S. 470 (1996)...............ccc00000- 8,9

New York State Conference of Blwe Cross & Blue

Shield Plans v. Travelers Insurance Co.,

ae ls I dctindesisschicnsesaniaisinenbsighnetimnnditeciidnatiiiddonenttiniasiioces 9

NMSBPCSLDHB, LP v. Integrated Telecom Ex-

press, Inc. (In re Integrated Telecom Express,

Inc.), 384 F.3d 108 (3d Cit, 2004) ..........sessssseecesesseecereenees 15

Pacific Gas & Electric Co. v. California, 350 F.3d

932 (9th Cir. 2003), cert. denied, 543 U.S. 956

SIP e aD winaicnincdiciebieienietpapcetivcnieisnnvciicicitlecietiiiansshasibninihadtbinindiatipieid 8

Raleigh v. Illinois Department of Revenue, 530

ia ee Gada hvasipuiciciassthcdoiansbpsttipineabsinlionlanipdesietisresanitediniuieniocies 6

Sears, Roebuck & Co. v. O’Brien, 178 F.3d 962 (8th

I, TID citinitchcecicschsuipesesisintietsbiinnlncsaiagaiiilactetpaidineiieivauiciailinas 8

Sprietsma v. Mercury Marine, 537 U.S. 51 (2002) ........... 9,11

Sturges v. Crowninshield, 17 U.S. 122 (1819)............ccccereesees 16

Summit Valley Industries, Inc. v. Local 112,

United Brotherhood of Carpenters & Joiners of

America, 456 U.S. 717 (1982) ...........c...ccccccsccocsccsccescsceoeees 12

Three Sisters Partners LLC v. Harden (In re

Shangra-La, Inc.), 167 F.3d 843 (4th Cir. 1999)............ 14

TranSouth Financial Corp. v. Johnson, 931 F.2d

TE SE DEUS ree ee 13

CONSTITUTIONAL AND STATUTORY PROVISIONS

eR See Se eee ae 7

Be ee richest sitiadihcaetiniatetciasigunitapetibibiahdiniesseaptadntdiadinad 4,11

BS AR re iessictiencercsipeneevsinnesistinnsticintenicovinnbsouinitihitanesatt 10

iv

he Ree MI iiccnciticinisiebiliiscinteitinestataticscshentpinetadsnataniibitiintiiiae 11

i ea ici iiiaisichath issih. ccesiahnetnttniepahniiihasdinsceaniniibatintisiails 11

ie as OP scikciceeteiikenpsiiubichepintsshcanstasshscirghcndiinisibcnadbipilaactideapes 1

ae en Oe cbaidinnitobecieshiecindiidaltipipainnieniinbsiidstiiactitoisiinisin passim

ice MPI a cidiktsshstuhasnieslinhinsictsabddenieibiestitehdimsestinbenonmninnacanatis 11

BE Fae icine Ninth aeiaidihaihets icacinnthsetincicinephidinieieboatotel 11

OTHER AUTHORITIES

Baird, Douglas G., The Elements of Bankruptcy

REARS Se er AO mY et NON 16

4 Collier on Bankruptcy (15th ed. 2003)

Se alitticiciaicinenttisinsinndnaiiseisitiebsinstpttaenipteadsitivitnbitinabitieaieninnticedeede 6

aD saictincsidiinhbaselianikceneieiohliiaeidehcahnsneiiiebanioaliceien 13

Plevin, Mark D., et al., Pre-Packaged Asbestos

Bankruptcies: A Flawed Solution, 44 S. Tex. L.

ess Te ID aibbictasthahlasinibitcecticaiitsaeeniiiicvieceinniaipenisiaidibimenianse 16

IN THE

Supreme Court of the United Stat

TRAVELERS CASUALTY AND

SURETY COMPANY OF AMERICA,

Petitioner,

=

ts)

Vv.

PACIFIC GAS AND ELECTRIC COMPANY,

Respondent.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Amicus curiae American Insurance Association (AIA)

respectfully submits this brief in support of petitioner.’

When a debtor seeks bankruptcy protection, the various

creditors to whom the debtor owes money may file “proofs of

claim” in which they seek a determination of the amount of

their claim. 11 U.S.C. § 501(a). Any “party in interest,”

meaning the debtor, another creditor, or any other entity

with a stake in the bankruptcy (such as an insurer that may

ultimately be asked to satisfy the claim), may file an objec-

tion to the “allowance” of that claim. Jd. § 502(b). If the

claim is objected to, the bankruptcy court is required to de-

termine the amount of the allowed claim. Once a claim is al-

lowed, the creditor receives its distribution from the bank-

ruptcy estate, on a pro rata basis, according either to the

statutory priority scheme, or the terms of a confirmed plan

of reorganization, based on the amount of that allowed claim.

' No counsel for a party authored this brief in whole or in part, and

no person or entity other than the named amicus curiae, its members, and

its counsel made any monetary contribution toward the preparation or

submission of this brief. Blanket consent for the filing of amicus briefs has

been lodged with the Clerk of the Court by both parties.

2

This case presents a straightforward question: whether

a bankruptcy court, in deciding whether (and in what

amount) to “allow” a claim, is required, absent contrary di-

rection from the Bankruptcy Code, to make this decision by

reference to applicable nonbankruptcy law—typically state

law—or whether a background principle of “bankruptcy pol-

icy” may authorize the court to adopt a different rule of deci-

sion in determining whether to allow a claim in bankruptcy.

AIA, as amicus curiae, submits that, as the statutory

language and the decisions of this Court have long provided,

questions of claims allowance are to be determined according

to the applicable principles of nonbankruptcy law. To hold

otherwise, as the Ninth Circuit did below, risks inviting fo-

rum shopping. If a valid state law claim could be disallowed

in bankruptcy, a debtor might have an incentive to seek

bankruptcy protection to gain a litigation advantage over a

plaintiff in litigation. By contrast, if bankruptcy law could

provide a more generous scheme of claims allowance than

otherwise applicable nonbankruptcy law, creditors who are

unhappy with the substantive law that would otherwise

govern their claims would have an incentive to precipitate a

bankruptcy filing, with the intention of winning a friendlier

forum for deciding the validity and amount of the debt alleg-

edly uwed to them. These incentives may be particularly

powerful in cases, such as several pending mass-tort bank-

ruptcies, in which the debtor’s business assets are nearly (or

entirely) depleted before the bankruptcy filing, but substan-

tial insurance assets remain available to satisfy creditors’

claims.

In order to discourage such misuse of the bankruptcy

process, this Court should adhere to the well-established

principle that, absent a specific provision of the Bankruptcy

Code that requires a different result, questions of claims al-

lowance shall be determined according to otherwise applica-

ble principles of nonbankruptcy law.

INTEREST OF AMICUS CURIAE

AIA is the foremost national trade association réepre-

senting major property and casualty insurers writing busi-

3

ness across the country and globally. AIA advocates sound

and progressive public policies on behalf of its members in

legislative and regulatory forums at the state and federal

levels and files amicus briefs in cases before federal and

state courts on issues of importance to the insurance indus-

try and the insurance marketplace.

Many AIA members issue or have issued insurance

policies covering the liability risks of their policyholders.

Accordingly, when policyholders seek bankruptcy protec-

tion, one consequence of which is that the policyholder’s li-

ability (such as its tort liability) may be determined not in

the state court system, but rather according to mechanisms

established in bankruptcy court, AIA’s members are “par-

ties in interest” with a tremendous stake in this bankruptcy

process. Indeed, in recent years, some number of bank-

ruptcy cases have been filed in which a principal purpose of

the bankruptcy case is to replace a regime of otherwise ap-

plicable law that might weed out invalid or fraudulent tort

claims, with one that would more liberally provide for the

“allowance” of such claims without the scrutiny that might

be brought to bear in the tort system. Following the “allow-

ance” of such claims, the claimants would then seek to obli-

gate the insurers to pay this contrived and artificially in-

flated liability.

As such, AIA and its members have a strong interest in

seeing to it that this Court adhere to the established princi-

ple that claims allowance shall be determined according to

otherwise governing principles of nonbankruptcy law, and

thus reduce the incentive for forum shopping claimants to

precipitate a bankruptcy filing.

‘ STATUTORY PROVISIONS

11 U.S.C. § 502(b) provides, in pertinent part:

(Tjhe court, after notice and a hearing, shall deter-

mine the amount of [a creditor’s] claim in lawful

currency of the United States as of the date of the

filing of the petition, and shall allow such claim in

such amount, except to the extent that ... such

+

claim is unenforceable against the debtor . . . under

any agreement or applicable law ... .

11 U.S.C. § 101(5)(A) provides that the term “claim”

means a “right to payment, whether or not such right is re-

duced to judgment, liquidated, unliquidated, fixed, contin-

gent, matured, unmatured, disputed, undisputed, legal, equi-

table, secured, or unsecured[.}”

STATEMENT OF THE CASE

Prior to Pacific Gas and Electric Company’s (PG&E) fil-

ing for bankruptcy protection, Travelers Casualty and

Surety Company of America (Travelers) had issued surety

bonds on PG&E’s behalf to various third parties. In connec-

tion with the issuance of those surety bonds, PG&E exe-

cuted a series of indemnity agreements in favor of Travelers

(Indemnity Agreements), under which PG&E is obligated to

reimburse Travelers for any attorneys’ fees that it incurs in

connection with Travelers’ efforts to enforce or protect its

rights incident to the surety bonds. PG&E filed a bank-

ruptcy petition under chapter 11 of title 11 of the United

States Code, and Travelers filed an amended proof of claim

that asserted its right to recover its attorneys’ fees, includ-

ing fees for work done in connection with the bankruptcy

case itself.

The bankruptcy court disallowed Travelers’ claim in its

entirety on the ground that it was bound by the Ninth Cir-

cuit’s decision in Fobian v. Western Farm Credit Bank (In

re Fobian), 951 F.2d 1149 (9th Cir. 1991), which held that

claims for attorneys’ fees shall be disallowed where the is-

sues litigated are matters of bankruptcy law.

Instead of addressing whether Travelers’ claim was un-

enforceable under “any agreement or applicable law,” 11

U.S.C. § 502(b)(1), the lower courts relied on generalized pol-

icy justifications to support their rulings. The court of ap-

peals decision below states only that “[tJhe resolution of all

of these proceedings was governed entirely by federal bank-

ruptcy law” and that “attorney fees are not recoverable in

bankruptcy for litigation issues peculiar to federal bank-

ruptcy law.” Pet. App. 3a. (internal quotations omitted).

5

Insofar as a court may reach that result as a function of

its construction of the terms of the parties’ contract, such an

outcome may well be correct as a matter of federal bank-

ruptcy law. But neither the statutory language nor this

Court’s decisions provide any warrant for the creation, as

the Ninth Circuit appears to have done, of a substantive rule

of bankruptcy law under which attorneys’ fees for litigating

bankruptcy issues are subject to per se disallowance, inde-

pendent of state contract law and ‘ee terms of the pareeg

agreement.

ARGUMENT

I THE ALLOWANCE OF CLAIMS IN BANKRUPTCY Is GOVERNED

By OTHERWISE APPLICABLE NONBANKRUPTCY LAW

A. Section 502 Of The Bankruptcy Code Expressly Di-

rects Bankruptcy Courts To Nonbankruptcy Law

Whether a claim is allowable or not is a matter of fed-

eral bankruptcy law under section 502 of title 11 of the

United States Code. 11 U.S.C. § 502. This provision, how-

ever, directs the bankruptcy court to look to the underlying

substantive nonbankruptcy law in order to determine

whether the claim is valid, and thus “allowable” in bank- —

ruptcy. Specifically, section 502(b)(1) provides that a court

shall allow a claim except to the extent that “such claim is

unenforceable against the debtor ... under any agreement

or applicable law[.J” 11 U.S.C. § 502(b)(1). “Thus, in proof of

claim litigation under 11 U.S.C. § 502(b)(1), the validity of

the claim is determined under state law.” Johnson v.

Righetti (In re Johnson), 756 F.2d 738, 741 (9th Cir. 1985).

That principle is a familiar one in this- Court’s bank-

ruptcy jurisprudence. In Butner v. United States, 440 U.S.

48 (1979), for example, this Court noted that while there are

a number of specific ways in which the Bankruptcy Code al-

ters parties’ rights under state law, Congress had “generally

left the determination of property rights in the assets of a

bankrupt’s estate to state law.” Jd. at 54.

Butner thus dictates that “in the absence of specific

statutory provisions to the contrary, property interests

should not be analyzed differently as a result of a party’s in-

6

volvement in a bankruptcy case,” and consequently ~“bank-

ruptcy courts should only modify the usual state-law com-

pendium of rights and remedies if and to the extent that

such modifications are specifically authorized or directed by

the Bankruptcy Code.” Bank of New England Corp. v.

branch (In re Bank of New England Corp.), 364 F.3d 355,

363 (1st Cir. 2004).

The federal bankruptcy laws were of course created

against the backdrop of nonbankruptcy laws, including state

laws regarding property rights. See In re Chicago, Milwau-

kee, St. Paul & Pac. R.R. Co., 791 F.2d 524, 532 (7th Cir.

1986) (“Bankruptcy law provides a federal machinery for

enforcing creditors’ rights but the rights themselves are

created by state law.”); 4 Collier on Bankruptcy 4 502.03

(15th ed. 2003) (“The validity and legality of claims is gener-

-ally determined by applicable non-bankruptcy law.”). This

Court was clear on that point in Butner: “Property interests

are created and defined by state law. Unless some federal

interest requires a different result, there is no reason why

such interests should be analyzed differently simply because

an interested party is involved in a bankruptcy proceeding.”

440 U.S. at 55; see also Raleigh v. Illinois Dep’t of Revenue,

530 U.S. 15, 19 (2000).

This case can and should be decided on that one princi-

ple. The resolution of the specific issue presented in this

case—whether Travelers may recover attorneys’ fees pur-

suant to the Indemnity Agreements where it has litigated

federal bankruptcy issues—turns simply on the question

whether such fees would be recoverable as a matter of non-

bankruptcy law, here, basic principles of state contract law.

As this Court has consistently and repeatedly observed,

“what claims of creditors are valid and subsisting obliga-

tions . . . is to be determined by reference to state law.” Ra-

leigh, 530 U.S. at 24 (quoting Vanston Bondholders Protec-

tive Comm. v. Green, 329 U.S. 156, 161 (1946)); see also

Grogan v. Garner, 498 U.S. 279, 283 (1991) (“The validity of a

creditor’s claim is determined by rules of state law.”).

The bankruptcy scheme takes property rights as it finds

them, altering such rights only where Congress has ex-

7

pressly demanded such change in order to accomplish the

policies of the Bankruptcy Code.’

B. Federal Law Does Not Reauire A Different Result

The Ninth Circuit offered no justification for its ruling ©

other than reliance on its decision in Fobian, which itself

provided scant reasoning for its categorical holding that, as a

matter of bankruptcy law, attorneys’ fees will not be

awarded for litigated issues involving federal bankruptcy

law. Fobian, 951 F.2d at 1153. The only support provided in

the Fobian decision is a series of earlier Ninth Circuit opin-

ions refusing to award attorneys’ fees in bankruptcy. See id.

(“(T]he question of the applicability of the bankruptcy laws

to particular contracts is not a question of the enforceability

of a contract but rather involves a unique, separate area of

federal law.” (quoting Collingwood Grain, Inc. v. Coast

Trading Co. (In re Coast Trading Co.), 744 F.2d 686, 693

(9th Cir 1984))). The effect of the court’s holding below is

the substitution of federal law for state law with respect to

determining the validity of a creditor’s property rights, a

result this Court has held should not occur “{ujniess some

federal interest requires a different result[{.]” Butner, 440

U.S. at 55. There is no such federal interest here, however,

that might justify that result.

While Congress certainly has the authority to preempt

contrary state law, U.S. Const. art. VI, cl. 2, there is no sug-

gestion here that state law “interfere{s] with, or [is] con-

trary to” the Bankruptcy Code. Hillsborough County, Fla.

v. Automated Med. Labs., Inc., 471 U.S. 707, 712 (1985) (in-

ternal quotations omitted).

? A number of specific provisions of the Bankruptcy Code do provide

that a creditor’s allowed claim will differ from that creditor's claim against

the debtor under state law. See, e.g., 11 U.S.C. § 502(b\(2) (disallowing a

claim for unmatured interest); id. § 502(b)(4) (disallowing claim for ser-

vices of an insider or attorney of the debtor to the extent that the claim

exceeds the reasonable value of the services); id. § 502(b)(6) (disallowing

claims of a landlord for termination of a real property lease, to the extent

the claim exceeds a formula set out in the Bankruptcy Code).

8

State law may be preempted in any of three ways:

“State action may be foreclosed by express language in a

congressional enactment, by implication from the depth and

breadth of a congressional scheme that occupies the legisla-

tive field, or by implication because of a conflict with a con-

gressional enactment.” Lorillard Tobacco Co. v. Reilly, 533

U.S. 525, 541 (2001) (citations omitted). No matter what

kind of preemption is at stake, however, “(t]he purpose of

Congress is the ultimate touchstone of pre-emption analy-

sis.” Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516

(1992) (internal quotations omitted).

To that end, a congressional intent to preempt state law

is not lightly inferred:

[BJecause the States are independent sovereigns in

our federal system, we have long presumed that

Congress does not cavalierly pre-empt state-law

causes of action. in all pre-emption cases, and par-

ticularly in those in which Congress has legislated

in a field which the States have traditionally occu-

pied, we start with the assumption that the historic

police powers of the States were not to be super-

seded by the Federal Act unless that was the clear

and manifest purpose of Congress.

Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996) (internal

quotations omitted); see also Davis v. Davis (In re Davis),

170 F.3d 475, 481 (5th Cir. 1999) (“Deference to our federal-

ism counsels a presumption that areas of law traditionally

reserved to the states, like ... property law, are not to be

disturbed absent the clear and manifest purpose of Con-

gress.” (internal quotations omitted)). The “presumption

against displacing state law ... is just as strong in bank-

ruptcy as in other areas of federal legislative power.” Pa-

cific Gas & Elec. Co. v. California, 350 F.3d 932, 943 (9th

Cir. 2003), cert. denied, 543 U.S. 956 (2004); Davis, 170 }'.3d

at 481; see also Sears, Roebuck & Co. v. O’Brien, 178 F.3d

962, 966-967 (8th Cir. 1999) (federal bankruptcy law did not

preempt Iowa law prohibiting debt collectors from contact-

ing knowingly represented persons; although federal bank-

ruptcy law is “expansive,” Congress has not exclusively

9

regulated relationships between private lawyers and clients,

an area typically within state’s powers).

Where a federal statute does expressly preempt state

law, a court “must in the first instance focus on the plain

wording of the clause[.]” Sprietsma v. Mercury Marine, 537

U.S. 51, 62-63 (2002) (internal quotations omitted). In de-

termining the scope of an express preemption provision, the

court “move[s] on, as need be, to the structure and purpose

of the Act in which [that provision] occurs.” New York State

Conference of Blue Cross & Blue Shield Plans v. Travelers

Ins. Co., 514 U.S. 645, 655 (1995). Where such an express

preemption provision operates “in a field which the States

have traditionally occupied,” it receives a “narrow interpre-

tation.” Medtronic, 518 U.S. at 485 (internal quotations

omitted).

The Bankruptcy Code, of course, contains no provision

expressly preempting state law as to contractual obligations

to pay attorneys’ fees. And this Court has made clear that—

while the ultimate touchstone is congressional intent—

courts should be even more reluctant to assume that Con-

gress intended to interfere with state laws that merely en-

force contractual obligations, as opposed to affirmative state

lawmaking or regulation. See, e.g., Gibbons v. Ogden, 22

U.S. (9 Wheat.) 1, 211 (1824) (“appropriate application of”

Supremacy Clause is to “acts of the State Legislatures ...

enacted in the exercise of [its] powers”); Building & Constr.

Trades Council v. Associated Contractors & Builders of

Mass/R.1., Inc., 507 U.S. 218, 227 (1993) (“pre-emption doc-

trines apply only to state regulation”); see also American

Airlines, Inc. v. Wolens, 513 U.S. 219, 228-229 (1995) (Airline

Deregulation Act, which preempts state regulation of air

carrier services, did not preempt state-law breach of con-

tract claims filed by passengers against airline regarding

frequent flier programs; contracts were “privately ordered

obligations” and did not amount to a law, rule, regulation,

10

standard, or other provision having the force and effect of

. law under ADA preemption statute).’

Congress surely expressed no intention in the Bank-

ruptcy Code to re-write contractual obligations to pay attor-

neys’ fees. For example, there is certainly nothing in section

502 of the Bankruptcy Code, the provision governing the

allowance of claims, suggesting that Congress intended to

preempt state law on this issue. To the-contrary, section 502

expressly reflects Congress’s desire to defer to state law in

determining the validity of a claim. A claim shall be allowed

except to the extent that “such claim is unenforceable

against the debtor ... under any agreement or applicable

law[.]” 11 U.S.C. § 502(b)(1). Bankruptcy courts are thus

obligated to examine applicable state law, not substitute an

untethered federal common law, in determining the allow-

ance of claims. |

By contrast, there are several instances in the Bank-

ruptey Code in which Congress did reflect a clear desire to

override the terms of state law and private contracts, and in

each instance it made that intent clear. See 11 U.S.C.

§ 363(l) (governing use, sale, or lease of property) (“notwith-

3 See also Duvall v. Bristol-Myers Squibb Co., 65 F.3d 392, 401 (4th

Cir. 1995) (express warranty claim not preempted by Medical Device

Amendment to Federal Food, Drug, and Cosmetic Act, which preempts

state-imposed requirements on medical devices; to extent warranty claims

based solely on voluntary promises made by warrantor, not duties im-

posed under state law, claims were not requirements imposed under state

law), vacated on other grounds, 518 U.S. 1030 (1996), American Auto.

Mfrs. Ass’n v. Commissioner, Mass. Dep't Envtl. Prot., 998 F. Supp. 10,

21-24 (D. Mass. 1997) (Section 20%a) of the Clean Air Act, which pre-

empted all state “standards” regarding vehicle emissions, did not apply to

private Memoranda of Understanding between state agency and private

automakers, as these were private, voluntary agreements, and were not

“standards” within the section’s preemptive scope; “courts generally re-

strict federal preemption to state laws, statutes, rules, regulations, and

other state provisions having the force and effect of law” and have “made

a clear distinction between state-imposed requirements and voluntary

contractual agreements” (citations omitted)), aff'd, 208 F.3d 1, 7 (ist. Cir.

2000) (“{FJederal preemption is generally confined to formal state laws

and regulations and not applicable to contracts and other voluntary

agreements.”).

we __— = it

standing any provision in a contract, a lease, or applicable

law”); id. § 365(e)(1) (governing executory contracts and un-

expired leases) (“[nJotwithstanding a provision in an execu-

tory contract or unexpiréd lease, or in applicable law”); id.

§ 365(f)(1) (“(nJotwithstanding a provision in an executory

contract or unexpired lease of the debtor,-or in applicable

law”); id. §541(c)(1) (regarding property of the estate)

(“notwithstandifig~any—provision in an agreement, transfer

instrument, or applicable nonbankruptcy law”); id. § 1124(2)

(governing impairment of claims or interests) (“notwith-

standing any contractual provision or applicable law”). And

in the context of claims allowance, the various enumerated

exceptions set forth in section 502(b) of the Bankruptcy

Code expressly describe circumstances in which—

notwithstanding the fact that a party may have a “right of

payment,” id. § 101(5)(A), under state law—that party’s al-

lowed “claim” under the Bankruptcy Code is calculated by a

different means. See, e.g., id. § 502(b)(6) (providing for

statutory caps on landlord claims for damages for the rejec-

tion of a real property lease).

In short, when Congress wished to preempt the terms

of private agreements in the Bankruptcy Code, it has said so

expressly. And it said nothing to suggest it intended to

treat claims for attorneys’ fees any differently from any

other contractual obligation. On this and most other issues

of the “allowance” of claims in bankruptcy, Congress ex-

pressly incorporated state substantive law into a bankruptcy

court’s analysis of the validity of a creditor’s claim.

Nor can there be any suggestion that state law is “im-

pliedly preempted” in this context. Such “conflict preemp-

tion” applies “where it is impossible for a private party to

comply with both state and federal requirements, or where

state law stands as an obstacle to the accomplishment and

execution of the full purposes and objectives of Congress.”

Sprietsma, 537 U.S. at 64-65 (internal quotations omitted).

Here, there is neither an actual conflict between the In-

demnity Agreements and section 502(b) nor do the Indem-

nity Agreements pose an obstacle to achieving Congress’s

full purposes and objectives in enacting section 502(b).

12

Rather, Travelers is seeking only the benefit of the bargain

it negotiated with PG&E prior to PG&E’s bankruptcy filing.

There is no reason at all to believe that Congress intended

the Bankruptcy Code to provide a basis for altering any and

all state laws that are implicated by a bankruptcy filing—

and even less reason to believe that it intended, beyond re-

ducing a creditor’s recovery to its pro rata distribution on

account of its allowed claim, to provide a means for one party

to re-write the parties’ self-imposed contractual obligations.

To the contrary, the Bankruptcy Code generally takes

state law as a given, and is construed to alter state law only

in those circumstances in which it expressly so provides.

And “{sjimply making a reorganization more difficult for a

particular debtor ... does not rise to the level of stand{ing]

as an obstacle to the accomplishment of the full purposes and

objectives of Congress.” Baker & Drake, Inc. v. Public

Serv. Comm’n (In re Baker & Drake, Inc.), 35 F.3d 1348,

1354 (9th Cir. 1994) (second alteration in original; internal

quotations omitted). Permitting parties to a contract to file

claims for attorneys’ fees based on the property rights they

possess under state law—just as they would if the very same

arrangement were negotiated and implemented outside of

bankruptcy—would by no means frustrate Congress’s pur-

pose in enacting section 502(¢b) or any other provision of the

Code. To thé contrary, it is fully consistent with the basic

principle that a creditor’s property rights in bankruptcy are

identical to its rights outside bankruptcy.

Indeed, as far as federal policy is concerned, this Court

has long accepted the proposition that even under the pre-

vailing “American Rule,” parties may provide by contract

for a regime of fee-shifting. See generally Fleischmann Dis-

tilling Corp. v. Maier Brewing Co., 386 U.S. 714, 717 (1967)

(attorneys’ fees are not recoverable “in the absence of a

statute or enforceable contract providing therefor”); Sum-

mit Valley Indus., Inc. v. Local 112, United Bhd. of Carpen-

ters and Joiners of Am., 456 U.S. 717, 721 (1982) (“[u]nder

the American Rule it is well established that attorney’s fees

are not ordinarily recoverable in the sence of a statute or

enforceable contract providing therefore” (internal quota-

13

tions omitted)); Hall v. Cole, 412 U.S. 1, 4 (1973) (“the tradi-

tional American Rule ordinarily disfavors the allowance of

attorneys’ fees in the absence of statutory or contractual au-

thorization” (footnote omitted)); Alyeska Pipeline Serv. Co.

v. Wilderness Soc’y, 421 U.S. 240, 257 (1975) (“the general

rule [is] that, absent statute or enforceable contract, liti-

gants pay their own attorneys’ fees”).

C. The Proper Analysis Is Simply Whether The Dis-

puted Attorneys’ Fees Are Permissible Under The

Indemnity Agreements

The court of appeais below relied on its decision in Jn re

Fobian, 951 F.2d 1149, to conclude that “attorney fees are

not recoverable in bankruptcy for litigating issues ‘peculiar

to federal bankruptcy law.” Pet. App. 3a (quoting Fobian,

951 F.2d at 1153). The Ninth Circuit characterized Travel-

ers’ claim as an attempt “to recover fees in bankruptcy for

objections to proposed reorganization plans and related

bankruptcy proceedings,” and thus “(t]he resolution of all of

these proceedings was governed entirely by federal bank-

ruptcy law.” Jd. 2a-3a. That is simply incorrect. The fact

that federal bankruptcy law applied to the underlying pro-

ceedings provides no basis at all for creating a federal com-

mon law—independent of whether state law would enforce a

contractual obligation—regarding the validity of Travelers’

claim for attorneys’ fees.

It is thus unsurprising that other courts, those that ad-

here to the congressional design reflected in the Bankruptcy

Code, have rejected the Ninth Cireuit’s analysis, instead

permitting attorneys’ fees to be part of an allowed claim

where otherwise applicable state law would so provide. See

Alport v. Ritter (In re Alport), 144 F.3d 1163, 1168 (8th Cir.

1998); Davidson v. Davidson (In re Davidson), 947 F.2d

1294, 1298 (5th Cir. 1991); TranSouth Fin. Corp. v. Johnson,

931 F.2d 1505, 1509 (11th Cir. 1991); Martin v. Bank of Ger-

mantown (In re Martin), 761 F.2d 1163, 1168 (6th Cir. 1985);

see also 4 Collier on Bankruptcy { 506.04 (15th ed.) (Fobian

analysis “inverts the proper analysis” because “a claim that

is valid under state law is allowable in bankruptcy unless

14

some provision of the Bankruptcy Code expressly disallows

it”).

The Fourth Circuit has specifically and correctly criti-

cized Ninth Circuit’s analysis on the ground that it substi-

tutes federal law for applicable state law, noting that Fobian

“inappropriately focuses on the presence of issues peculiar to

bankruptcy law, rather than on whether the attorneys’ fees

are properly taken in furtherance of the [contract] and appli-

cable state law.” Three Sisters Partners LLC v. Harden (In

re Shangra-La, Inc.), 167 F.3d 843, 848 (4th Cir. 1999). See-

tion 502(b)(1) instructs the bankruptcy court to determine

whether the claim for attorneys’ fees are enforceable under

“any agreement or applicable law.” 11 U.S.C. § 502(b)(1).

Consequently, the contracts between Travelers and

PG&E—the Indemnity Agreements—must serve as “the

measure of their rights,” Chicago, Milwaukee, 791 F.2d at

529, and not federal common law.

Because the bankruptcy court below incorrectly denied

Travelers’ claim as a matter of federal bankruptcy law, it

never examined the legitimacy of the claim with respect to

the terms of the Indemnity Agreement and applicable state

contract law. Accordingly, this Court should reverse the

Ninth Circuit’s ruling affirming the bankruptcy court’s deci-

sion and remand for such a determination.

-[J. THE CREATION OF A “FEDERAL COMMON LAW” OF CLAIMS

ALLOWANCE WOULD INVITE FORUM SHOPPING INTO

BANKRUPTCY

As this Court observed in Butner, the “[u]niform treat-

ment of property interests by both state and federal courts

within a State serves to reduce uncertainty, to discourage

forum shopping, and to prevent a party from receiving ‘a

windfall merely by reason of the happenstance of bank-

ruptcy.”” Butner, 440 U.S. at 55 (quoting Lewis v. Manufac-

turers Nat’l Bank, 364 U.S. 603, 609 (1961)).

These goals are critically important, as both common

sense and actual experience demonstrate the very palpable

risk that whenever the question of claims allowance is gov-

erned in bankruptcy by different standards than those that

lu

prevail outside of bankruptcy, there is a risk that litigants

will seek to forum shop into bankruptcy in order to obtain a

litigation advantage, without regard to the underlying pur-

poses of bankruptcy law. In response, the courts have been

required to develop the doctrine of “good faith,” designed to

limit access to the chapter 11 bankruptcy process to those

debtors whose bankruptcy cases serve legitimate reorgani-

zational purposes, and not those who are led into bankruptcy

by a desire to forum shop.

This risk is already present in those few areas where

the Bankruptcy Code expressly provides that the allowance

of claims is to be determined in a manner that differs from

state law. For example, section 502(b)(6) of the Bankruptcy

Code provides that a landlord’s claim for damages for rejec-

tion of a long-term lease of real property is subject to a

statutory cap. In NMSBPCSLDHB, L.P. v. Integrated

Telecom Express, Inc. (In re Integrated Telecom Express,

Inc.), 384 F.3d 108 (3d Cir. 2004), the Third Circuit was thus

required to address the circumstance of a party that filed for

bankruptcy in the absence of any financial distress or legiti-

mate need for bankruptcy protection, but merely in order to

take advantage of this particular provision of the Code.

In response, the Third Circuit held that such a bank-

ruptcy case is not filed in good faith, and thus is subject to

dismissal “for cause” under section 1112(b) of the Bank-

ruptcy Code. 384 F.3d at 129-130. The court held that Inte-

grated Telecom’s petition aimed neither to preserve a going

concern nor to maximize property available to satisfy credi-

tors—the two objectives that chapter 11 of the Bankruptcy

Code seeks to foster. Instead, the Third Circuit observed

Integrated Telecom’s likely motive was simply “to gain a

litigation advantage” against its landlord by invoking the

Code’s cap on landlord damages. Jd. at 124-125.

This risk of forum shopping is particularly acute in the

context of mass-tort bankruptcies, in which companies with

alleged liability for the sale or manufacture of, for example,

asbestos-containing products seek protection in bankruptcy.

In certain of these cases, companies whose non-insurance

assets may be insubstantial or have already been largely de-

16

-_

pleted are led into bankruptcy by the tort claimants, who

hope to create, in bankruptcy, a more lax claims allowance

process that will drive up the company’s “liability,” and thus

create for them a strategic litigation advantage over the

company’s insurers. See generally Century Indem. Co. v.

Congoleum Corp. (In re Congoleum Corp.), 426 F.3d 675 (3d

Cir. 2005); Mark D. Plevin et al., Pre-Packaged Asbestos

Bankruptcies: A Flawed Solution, 44 8. Tex. L. Rev. 883

(2003).

Affirming the decision below would open the door to

precisely this type of gamesmanship. As this Court ob-

served in Butner, no litigant should stand to reap a windfall

“merely by reason of the happenstance of bankruptcy.” 440

U.S. at 55 (internal quotations omitted).

* * &£ *& &

To facilitate the economic rehabilitation of individuals or

troubled businesses, bankruptcy law provides powerful tools

with which a court can alter settled legal expectations.

Debts can be discharged. Leases can be cut short. All this is

possible because federal bankruptcy power, when exercised

-under federal law, trumps the state law foundations on

which the debtor and its creditors ordered their respective

rights. Sturges v. Crowninshield, 17 U.S. 122, 193-194

(1819). The strong medicine bankruptcy law provides thus

comes with a crucial limitation: it can only be exercised

when it would serve a bankruptcy goal that Congress has

identified. That is, “[bJankruptcy law changes nonbank-

ruptcy law only when the purposes of bankruptcy law re-

quire it,” Douglas G. Baird, The Elements of Bankruptcy 5

(4th ed. 2006), and bankruptcy law suspends state law only

where such preemption is express or implied, i.e., “to the

extent of the actual conflict with the system provided by the

Bankruptcy Act.” Butner, 440 U.S. at 54 n.9.

The Ninth Circuit’s decision below breaks with this

critical and long-standing principle, and fundamentally up-

sets the relationship between bankruptcy and nonbank-

ruptcy law.

17

CONCLUSION

For the foregoing reasons, the judgment below should

be reversed.

Respectfully submitted,

CRAIG GOLDBLATT

Counsel of Record

CAROLINE ROGUS

WILMER CUTLER PICKERING

HALE AND DORR LLP

1875 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 663-6000

NOVEMBER 2006