Unsecured Claims for a Lender’s Contractual Attorneys’ Fees Related to the Costs of Collection in Bankruptcy

In a February 8, 2019 opinion the Fourth Circuit joined the First, Second, Seventh, Ninth and Eleventh Circuits by allowing attorneys unsecured claims for post-petition attorneys’ fees when the underling creditor is entitled by contract to recover the costs of collection.

In Summitbridge National Investments III LLC v. Faison, 17-2441 (4th Cir. Feb. 8, 2019), a secured creditor had a loan agreement allowing the lender to recover the costs of collection, including attorneys’ fees. The debtor’s chapter 11 plan gave the creditor an allowed, secured claim for $1.7 million, an amount that covered principal, interest, and some of the lender’s post-petition attorneys’ fee. The plan further permitted the lender to file an unsecured claim for additional post-petition attorneys’ fees. Upheld in district court, the bankruptcy court disallowed the lender’s unsecured claim for post-petition attorneys’ fees, and the lender appealed and won a reversal.

Writing for the Fourth Circuit, Judge Pamela Harris said that bankruptcy and district courts “long have wrestled with this question, disagreeing as to whether creditors may assert unsecured claims for post-petition fees based on pre-petition contracts.” She said that Supreme Court’s opinion in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007), requires a determination of whether the Bankruptcy Code “expressly disallows” the claim. Section 502(b) of the Bankrutpcy Code requires the court to “determine the amount of such claim . . . as of the date of the filing of the petition.” The subsection goes on to list nine specific categories of otherwise valid claims that are disallowed, such as unmatured interest.

According to Judge Harris the question is whether the lender has a claim for post-petition counsel fees as of the filing date? Permitted under the loan agreement, the claim, she said, was “contingent on a future, post-petition event.”  Judge Harris went on to say that the term “claim” is defined broadly in Section 101(5)(A) to include a “right to payment” that is “contingent,” and because the lender’s claim was valid under state law and did not fall into any of the nine categories of disallowed claims, the claim was allowable because “nothing in Section 502(b)…expressly disallows unsecured claims for post-petition attorneys’ fees.”

Judge Harris further declined to disallow the lender’s claim for “policy considerations.” In that regard, the debtor had argued that allowance of unsecured claims for post-petition attorneys’ fees would dilute the recovery by other unsecured creditors. Judge Harris said the Bankruptcy Code answered the question of whether the claim is allowable, and the court “must defer to Congress’ chosen policy” because the debtor’s fairness argument “has no basis in the text of the relevant Code provisions.”