Attorney Fees

by Jack Weinberg and John Greco

The Bankruptcy Strategist, Vol. XIV, No. 6, April 1997

Can an Unsecured Creditor Include

Attorney Fees, for Services Rendered

Postpetition, as Part of its Prepetition Claim?

May an unsecured or undersecured creditor include in its prepetition claim attorney fees for services performed postpetition? Most courts that have considered the question have allowed inclusion, but a significant number of courts have rejected such claims.

Rationale for Allowing Such Claims

Courts that have allowed unsecured or undersecured creditors to include postpetition attorney fees as part of their prepetition claims have held that, where the creditorís prepetition agreement with the debtor provided for payment of attorney fees, and where such an agreement is enforceable under state law, the creditor has a valid, but contingent, unliquidated or unmatured prepetition claim for attorney fees as of the petition date.

These courts have based their decisions on (i) the broad definition of “claim” contained in§101(5) of the Bankruptcy Code (“Code”) (which includes contingent, unmatured and unliquidated claims); (ii) the absence of an express prohibition against allowance of attorney fees in Code §502(b) or elsewhere in the Code; and (iii) the power to estimate contingent or unliquidated claims contained in Code §502(c). See In re Hemingway Transport, Inc., 954 F.2d 1 (1st Cir. 1992), In re Ladycliff College, 46 B.R. 141 (Bankr. S.D.N.Y. 1985), In re Byrd, 192 B.R. 917 (Bankr. E.D. Tenn. 1996). Seealso United Merchants & Mfrs., Inc. v. Equitable Life Assurance Socíy of the U.S. (In re United Merchants & Mfrs., Inc.), 674 F.2d 134 (2d Cir. 1982)(based on the Bankruptcy Act).

In In re Byrd, Chief Judge Richard S. Stair found that the undersecured creditorís claim for attorney fees could be included as part of its prepetition unsecured claim. The Judge first analyzed Code §101(5) by looking at its plain language, which defines the term “claim” as, among other things, a “right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” 193 B.R. at 918. Judge Stair then analyzed Code §502(c), which provides that the amount of a contingent or unliquidated claim “shall be estimated for purpose of allowance” where “the fixing or liquidation . . . would unduly delay the administration of the case.” Id.

Based on the plain language of these Code sections, the court in Byrd found that “[a] contractual right to payment of contingent, unliquidated, postpetition attorney fees is a prepetition claim . . .î Id. at 919. The court also found significant that, while §502(b) provides “for the disallowance of claims for unmatured interest, [it] makes no mention of unsecured prepetition claims for postpetition attorney fees.” Id.

Accordingly, based upon the broad definition of “claim” contained in Code §101(5), the absence of an express prohibition against allowance of attorney fees in §502(b), or elsewhere in the Code, and the courtís power under Code §502(c) to estimate claims, the court in Byrd held that the undersecured creditor may include a claim for postpetition attorney fees in its prepetition unsecured claim. Id. Similar opinions were issued by other courts. SeeIn re Hemingway Transport, Inc., In re Ladycliff College, In re Keaton, 182 B.R. 203 (Bankr. E.D. Tenn. 1995). Seealso United Merchants & Mfrs., Inc. v. Equitable Life Assurance Socíy of the U.S. (In re United Merchants & Mfrs., Inc.).

Grounds for Disallowing Such Claims

In contrast to the courts which have allowed postpetition attorney fees by creditors with unsecured or undersecured claims, courts that have denied such claims have looked beyond Code §§101(5) and 502, and have focused on Code §506(b) (which allows an oversecured creditor to recover postpetition interest and fees). These courts reason that since Congress has stated in Code §506(b) that an oversecured creditor may recover postpetition “fees”, unsecured and undersecured creditors may not recover postpetition attorney fees. See In re Sakowitz, 110 B.R. 268 (Bankr. S.D. Tex. 1989), In re Saunders, 130 B.R. 208 (Bankr. W.D. Va. 1991), In re Woodmere Investors Limited Partnership, 178 B.R. 346 (Bankr. S.D.N.Y. 1995).

In In reSakowitz the court examined the language of Code §506(b). Relying on the maxim of statutory interpretation “that the expression of one thing is the exclusion of another,” the court said:

Congress provided for attorney fees only for the secured portion of such a claim. Congress must be presumed to have understood what it was doing. It could easily have provided for attorney fees for the unsecured portion of the claim as well as the secured portion. That it did not do so this Court feels is determinative of the issue before the Court . . .

110 B.R. at 272.

Based upon that reasoning, the court in Sakowitz found that, since Code §506(b) expressly allows oversecured creditors to recover postpetition fees, unsecured or undersecured creditors should not be permitted to recover postpetition fees. Id.

The court in Sakowitz also distinguished between prepetition and postpetition fees based upon the provisions of Code §502(b), stating:

[§502(b)] provides for the determination of a claim as of the date of the filing of the petition, it is clear that the statutory scheme provided for by the Congress in the Bankruptcy Code excludes attorney fees earned post-petition on unsecured proofs of claim or on the unsecured portion of a secured claim, notwithstanding any contractual (or statutory) provision which would allow such fees outside of bankruptcy [emphasis in original].

Id. See also In re Saunders (court agrees with reasoning of Sakowitz),

In re Woodmere Investors L.P., (finding the statutory interpretation in Sakowitz convincing).

In In re Woodmere Investors L.P., Judge Blackshear stated that the United States Supreme Courtís decision in United Savings Assín of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed.2d 740 (1988), provided a “more convincing reason to prohibit the recovery of post-petition attorney fees.” 178 B.R. at 356. Judge Blackshear found that the rationale in Timbers, which held that Code §506(b) permitted payment of postpetition interest only out of the “security cushion”, also was applicable to a claim for attorney fees and costs. He noted that “[s]ection 506(b) does not distinguish between interest rates and attorney fees,” and held that “[i]f no ‘security cushion’ exists to allow for post-petition interest, none exists for the allowance of attorney fees and costs.” Id.

Distinguishing between Attorney Fees and Postpetition Interest

In Byrd, supra, Chief Judge Stair distinguished the treatment of postpetition attorney fees from postpetition interest, noting that while Code §502(b) contains an express prohibition against allowing claims for postpetition interest, the Code does not contain an express prohibition against postpetition attorney fees. The court stated:

. . . § 502 . . . establishes certain conditions under which a claim shall not be allowed. These conditions include if, at the time the petition is filed, the ìclaim is for unmatured interest,î . . . [citation omitted]. Section 502 does not expressly disallow contingent, unliquidated, or unmatured claims for attorney fees. [emphasis added]

192 B.R. at 918.

Distinguishing Timbers, Chief Judge Stair stated: “[c]ontrary to the situation in Timbers [which involved Code §§361 and 506(b) relating to payment of postpetition interest], there is no general rule disallowing postpetition attorney fees set forth in §502(b).” Byrd, 192 B.R. at 919. Based upon this distinction, Chief Judge Stair rejected the decision In re Woodmere Investors Ltd. Partnership. Id.

In In re Keaton, the court criticized other courts for failing to distinguish between unmatured interest and attorney fees, stating:

Even though different rules clearly affect the allowance of unmatured interest and contingent, unliquidated attorneyís fees, some courts have converged the rules based on §506(b). . . . By isolating on §506(b), [footnote omitted] the rules on allowance of claims that apply to contingent, unliquidated attorneyís fees and to unmatured interest may appear to be singular. . . . Congress, however, chose not to exclude attorneyís fees under §502(b).

182 B.R. at 207-208.

The court then explained the special purpose for mentioning fees in §506(b), which does not apply to unsecured prepetition claims for postpetition attorney fees:

The question, then, is why §506(b) mentions fees as something that can be included in the creditorís ìallowed secured claim.î Without the clause in §506(b) concerning fees, there would be no specific rule in the bankruptcy statutes allowing the court to limit the fees to a reasonable amount. . . . Section 506(b) was intended to express limits on the extent to which the creditorís attorneyís fees will be treated as secured. It was not intended to define what fees can be included in the creditorís unsecuredclaim.

Id. at 208.

Similarly, in In the Matter of 268 Ltd., 789 F.2d 674 (9th Cir. 1986) the court stated that “Congress has chosen to treat contractual fees as part of the secured claim only to the extent they are ‘reasonable.’ ” 789 F.2d at 677. “When read in conjunction with §506(a), however, it [§506(b)] may be understood to define the portion of the fees which shall be afforded secured status.” Id. at 678. The court then held that the fees in excess of what the court deemed reasonable, could be included in an unsecured claim. The court stated: “[b]ecause §501 contemplates that undersecured creditors may pursue the unsecured portion of their claim as unsecured creditors, we find that oversecured creditors with valid contractual fee claims may do the same.”

Id.

Conclusion

Although there is a split in authority, a majority of the courts that have considered the question have not viewed Code §506(b) as a bar to a creditor including a claim for postpetition attorney fees as part of its prepetition unsecured claim.