OCTOBER 9, 2006

On Friday, October 6, the Supreme Court granted certiorari in one case of interest to the business community.

Bankruptcy Law—Creditors’ Right to Contract for Attorneys’ Fees.  Under federal bankruptcy law, a creditor has no general right to recover attorneys’ fees when it litigates claims against a debtor. But what if a contract between the parties specifically allows for attorneys’ fees related to claims in bankruptcy litigation? The Supreme Court granted certiorari in Travelers Casualty & Surety Co. of America v. Pacific Gas and Electric Co., No. 05-1429, to resolve a conflict among the courts of appeals regarding whether and under what circumstances such attorneys’ fees claims should be allowed.

Travelers issued a variety of surety bonds on PG&E’s behalf, including a $100 million bond assuring PG&E’s payment of its employees’ workers’ compensation benefits. In return, PG&E agreed to indemnify Travelers for all of its costs, including attorneys’ fees, if Travelers were ever required to pay out on any of the bonds. In April 2001, PG&E filed a voluntary chapter 11 bankruptcy petition. In connection with subsequent litigation in the bankruptcy proceeding, Travelers eventually filed a proof of claim seeking $167,000 in fees that it “incurred in protecting its indemnity and subrogation rights during the course of PG&E’s chapter 11 case.” The bankruptcy court for the Northern District of California, as well as the district court on appeal, denied the claim based on Fobian v. Western Farm Credit Bank (In re Fobian), 951 F.2d 1149 (9th Cir. 1991). The Ninth Circuit affirmed in a memorandum opinion. 2006 WL 285977 (Feb. 7, 2006).

In Fobian, the Ninth Circuit held that only certain types of claims for contractual attorneys’ fees could be satisfied in bankruptcy. According to that court, “[w]here a contract or statute provides for an award of attorneys’ fees, a creditor may be entitled to such fees in bankruptcy proceedings. Such an award is governed by state law. However, 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 (citations omitted). Three other courts of appeals apply the same rule. See Burns v. Great Lakes Higher Ed. Corp. (In re Burns), 3 Fed. Appx. 689, 691 (10th Cir. 2001); BankBoston, N.A. v. Sokolowski (In re Sokolowski), 205 F.3d 532, 535 (2d Cir. 2000); In re Sheridan, 105 F.3d 1164, 1166-68 (7th Cir. 1997). In contrast, five other circuits allow creditors to recover fees incurred in litigating federal bankruptcy issues. See Cadle Co. v. Martinez (In re Martinez), 416 F.3d 1286, 1290-91 (11th Cir. 2005); Three Sisters Partners LLC v. Harden (In re Shangra-La, Inc.), 167 F.3d 843, 848 (4th Cir. 1999); 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); Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163, 1168 (6th Cir. 1985).

This case is important to all businesses that have contracted regarding attorneys’ fees but may later find themselves on one side or the other of a bankruptcy petition. In particular, the Court may decide whether contractual attorneys’ fees are ever available, and if so under what circumstances. Amicus briefs in support of the petitioner are currently due on November 20, 2006; amicus briefs in support of the respondent will be due 35 days after petitioner’s brief is filed. Any questions about this case should be directed to appellate@mayerbrown.com.

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On October 2, 2006, the Supreme Court invited the Solicitor General to file briefs expressing the views of the United States in the following cases of interest to the business community:

UGI Utilities Inc. v. Consolidated Edison Co. of New York, Inc., No. 05-1323. The question presented is whether persons potentially liable for cleanup costs, who have neither been sued under CERCLA nor resolved their liability to the government, but who have incurred cleanup costs, can recover those costs from other potentially liable parties under Section 107(a)(4)(B) of CERCLA, thereby avoiding Section 113(f)’s limitations on contribution claims.