# Amicus Curiae Brief — Travelers Cas. & Sur. Co. v. PACIFIC GAS > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0254%3A12 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 2007 - **Citation:** 549 U.S. 443 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0254%3A12. Public record. Not legal advice.