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On March 20, in Travelers Casualty & Surety v. Pacific Gas & Electric Co., 127 S. Ct. 1199 (2007), a unanimous U.S. Supreme Court reversed a long-standing rule in the 9th U.S. Circuit Court of Appeals that had previously prevented undersecured and unsecured creditors from asserting claims for contractually agreed upon attorney fees against a debtor when such fees were incurred litigating matters of bankruptcy law. This is the second article with respect to the Supreme Court’s Travelers decision. It emphasizes the potential practical application of the decision on the manner in which attorney fee provisions may be better drafted in contracts, leases and other documents in the event of a bankruptcy case. Some background provided in the first article is reiterated herein for clarity. For more detail, see Craig M. Rankin and Anne E. Wells, “Travelers Casualty,” NLJ, May 7, 2007, at 12. In overturning Fobian v. Western Farm Credit Bank (In re Fobian), 951 F.2d 1149 (9th Cir. 1991), the Supreme Court found no express prohibition in the Bankruptcy Code for recovery of attorney fees arising out of the litigation of federal bankruptcy matters. This ruling should be viewed as a wake-up call to all types of creditors � lenders, landlords, equipment lessors and trade creditors � to re-evaluate their credit and lease documents to make sure that they maximize their ability to recover attorney fees incurred in connection with a bankruptcy case. In Fobian, the 9th Circuit had held that even if the parties’ underlying contract provided for the prevailing party to recover attorney fees, “where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party.” 951 F. 2d at 1153. In other words (in those jurisdictions following Fobian), the attorney fees provisions agreed to by the parties were limited by court-created federal bankruptcy law. In Travelers, the lower courts and the 9th Circuit affirmed the denial of certain attorney fees in reliance on Fobian. Travelers appealed, and the Supreme Court agreed to hear the matter due to a split in the circuit courts on this issue. Court found no statutory exceptions applied The Supreme Court’s analysis started from the premise that all supportable claims against a debtor are allowed, unless the claim falls under one of the nine expressly enumerated exceptions set forth in Bankruptcy Code � 502(b). Finding that none of the statutory exceptions applied, the Supreme Court also found that there was no support in the Bankruptcy Code for the distinction in the Fobian rule between litigation of issues peculiar to bankruptcy and litigation of nonbankruptcy issues. With no Bankruptcy Code provisions disallowing contractually based attorney fees claims in matters of bankruptcy law, the court noted that the “absence of such textual support is fatal,” and explicitly struck down the “judicially-made” Fobian rule. The high court’s decision did have its limits. The court did not issue a carte blanche ruling that attorney fees can be recovered in bankruptcy cases. In fact, because PGE failed to present certain other arguments against fee recovery, the court remanded the case without actually deciding whether Travelers could recover the fees. In particular, the court specifically stated that it expressed no opinion “whether . . . other principles of bankruptcy law might provide an independent basis for disallowing Travelers’ claim for attorney’s fees. We conclude only that the Court of Appeals erred in disallowing the claim based on the fact that the fees at issue were incurred litigating issues of bankruptcy law.” 127 S. Ct. at 1207-08. The court declined to consider PGE’s argument that Bankruptcy Code � 506(b) prohibits recovery of such attorney fee claims by “explicit negation” because the issue was not raised in prior proceedings. Section 506(b), which deals with secured claims, specifically allows claims for reasonable attorney fees to the extent a creditor is oversecured. Therefore, there is an argument that by “explicit negation,” purely unsecured claims such as Travelers’ must be categorically disallowed. Although the Supreme Court expressly declined to address the “explicit negation” argument, substantial authority exists that it should fail. For example, two cases, one from several years ago and one more recent, demonstrate (consistent with analysis in Travelers) that � 506(b) is not determinative regarding claims for attorney fees by an unsecured or undersecured creditor. In Welzel v. Advocate Realty Inv. LLC, 275 F.3d 1308 (11th Cir. 2001), the court held that � 502 controls the overall question of whether an oversecured creditor will be entitled to attorney fees � not � 506(b). Therefore, even an oversecured creditor’s claim for attorney fees could be bifurcated into secured and unsecured portions. In that case, based on the prepetition attorney fee agreement, the court awarded an oversecured creditor an unsecured claim for those attorney fees that were “unreasonable” under � 506(b), but allowed other “reasonable” fees as party of its secured claim. The more recent Business Credit v. Gencarelli, 48 Bankr. Ct. Dec. 210 (1st Cir. 2007), reached a similar conclusion relating to allowability of prepayment penalties under � 502, but not � 506(b). Importantly, Travelers has had a tangible impact in the 9th Circuit, as demonstrated in In re Qmect Inc., 368 B.R. 882 (Bankr. N.D. Calif. 2007). In that case, after an initial hearing on a creditor’s motion for attorney fees, the bankruptcy court took the matter under submission, and requested that the petitioning creditor bifurcate its attorney fee claim in accordance with the Fobian rule, i.e., differentiating between those issues that were and were not peculiar to bankruptcy. After an amended motion and a second hearing, but knowing of the pending appeal to the Supreme Court in Travelers, the bankruptcy court took the matter under submission again. After the Travelers opinion was issued and after additional briefing, the court awarded the creditors post-petition attorney fees in litigation based on a prepetition attorney fee contract provision without the distinction formerly required in Fobian. The foregoing decisions demonstrate that after Travelers, all creditors have a greatly increased chance in obtaining attorney fee awards in bankruptcy cases if their prepetition contracts are properly drafted. The balance of this article will discuss certain “dos” and “don’ts” with respect to attorney fees provisions. Creditors (and their bankruptcy counsel) are commonly frustrated post-bankruptcy filing when a contract or a lease only has a standard “prevailing party” attorney fees clause. This type of clause is extremely limiting, because it is common for a creditor’s counsel to take a number of actions in a bankruptcy case for which there is no prevailing party. Counsel for creditors commonly attend hearings to monitor a bankruptcy case; participate on creditors’ committees; attend statutory meetings of creditors; prepare and file proofs of claim; review myriad notices and pleadings that may or may not affect their client’s claims; and render various other legal services unique to bankruptcy proceedings. In these types of actions, it is difficult, if not impossible, to prove that a creditor is a “prevailing party” that would allow recovery of legal fees. In addition, simply litigating the issue of who is the prevailing party can be costly and time-consuming. Therefore, the standard “prevailing party” provisions should be used only in conjunction with terms that encompass those actions by a creditor that can be reasonably anticipated if the other party files for bankruptcy. In addition, each creditor should review the types of legal services that will likely be needed if the other party to an agreement or lease files a bankruptcy petition. For example, a real property lessor will want to include specific references to motions for relief from stay, and to proceedings relating to assumption or rejection of the lease, disclosure statements and reorganization plans, the sale of assets and post-petition financing, among others. References should also include all related analysis, review of pleadings and documents, negotiations, hearings, conferences with the debtor’s counsel, etc. Can creditors seek fees for avoidance actions? A novel question is whether creditors can draft an enforceable attorney fee clause to cover fees incurred in defending preference and other avoidance actions brought by the debtor or on behalf of the estate under the Bankruptcy Code. To the extent that creditors can add the cost of defending such actions and prosecuting discharge actions to their unsecured claims, essentially forcing the estate to pay its adversary’s legal costs, the price tag for debtors, trustees and others for whose benefit such actions are brought just went up. In such situations, not only will the recovery available to other creditors be reduced, but in many instances the debtor or other party in interest, such as a creditors committee, may be disinclined to bring or defend such actions at all based on a purely economic analysis. Finally, to maximize their enforceability, bankruptcy attorney fee provisions should be sufficiently detailed to be effective in bankruptcy cases. That is, the creditor must establish an appropriate nexus between the fee provision and the actual services rendered for which payment is sought. See, e.g., In re Rodrigues, 370 B.R. 467 (Bankr. D. Mass. 2007). With these ideas in mind, and a carefully drafted attorney fee provision, creditors can maximize their ability to obtain recovery on their claims for attorney fees in light of the foregoing legal authority. Craig M. Rankin and Daniel H. Reiss are partners at Los Angeles-based Levene, Neale, Bender, Rankin & Brill, a bankruptcy boutique.

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