The Supreme Court recently granted certiorari to hear an appeal from the Ninth Circuit, arising out of the Pacific Gas and Electric ("PG&E") bankruptcy case, concerning a creditor’s claim for attorney fees. The appeal, brought by Travelers Casualty and Surety Company of America (Travelers"), seeks review of the Ninth Circuit’s holding that, in bankruptcy, creditors are only entitled to attorney fees for litigating substantive state law issues (if provided for by contract), but not issues "peculiar to bankruptcy law" including disclosure statement and chapter 11 plan objections. Travelers Casualty and Surety Co. v. Pacific Gas and Electric Co., 167 Fed. Appx. 593, 593-94 (9th Cir. 2006). Because there is substantial Ninth Circuit authority for this proposition, the appeal will test an entire line of cases underlying the recent Ninth Circuit decision.
Before PG&E filed its chapter 11 petition, Travelers issued a $100 million surety bond to the California Department of Industrial Relations, guaranteeing PG&E’s payment of workers compensation obligations. PG&E agreed to reimburse Travelers for any amounts paid under the surety bond pursuant to certain indemnity agreements, which also provided that Travelers would be entitled to attorney fees sustained in enforcing the relevant agreements. PG&E never defaulted on its workers compensation obligations, so Travelers never had to assume liability as surety. Travelers nevertheless filed a protective proof of claim in the bankruptcy case, asserting future reimbursement and subrogation rights in the event of PG&E’s default. No claim for a default was asserted because no default existed.
Shortly thereafter, PG&E filed a plan of reorganization and disclosure statement. Travelers filed an objection to the disclosure statement, and later objected to the plan.
PG&E objected to Travelers’ claim around the same time, seeking disallowance under Section 502(e)(1)(B) of the Bankruptcy Code because the reimbursement claim remained ". . . contingent as of the time of allowance or disallowance. . ." See 11 U.S.C. § 502(e)(1)(B).The parties stipulated that the contingent reimbursement claim would be disallowed on that basis, but that Travelers’ right to pursue attorney fees would be preserved. Travelers subsequently filed an amended proof of claim seeking attorney fees, and PG&E objected.
The Bankruptcy Court for the Northern District of California found that Travelers’ attorney fees could not, as a matter of bankruptcy law, be assessed against PG&E in any amount. The District Court for the Northern District of California affirmed, emphasizing that, under Ninth Circuit precedent, attorneys fees are not available despite an express contractual provision if the issues being litigated are purely federal bankruptcy law issues rather than contract enforcement questions. Travelers Casualty and Surety Co. of America v. Pacific Gas and Electric Co., No. 03-03499, slip op. at 10 (N.D. Cal. February 18, 2004); see, e.g., Fobian v. Western Farm Credit Bank (In re Fobian), 951 F.2d 1149, 1153 (9th Cir. 1991). According to the District Court, the matters for which Travelers sought fees, including claims allowance litigation and plan and disclosure statement objections, were "exclusively bankruptcy proceedings. Travelers, slip op. at 10.Id. at 7-8.
The Ninth Circuit affirmed in a one-page opinion, citing Fobian and a more recent Ninth Circuit case, Deroche v. Ariz. Indus. Comm’n. (In re DeRoche), 434 F.3d 1188 (9th Cir. 2006). The Supreme Court granted certiorari on October 6, 2006. Travelers Casualty and Surety Co. of America v. Pacific Gas and Electric Co., 2006 U.S. LEXIS 7488 at *1 (October 6, 2006).