TRAVELERS CASUALTY & SURETY CO. OF AMERICA V. PACIFIC GAS & ELECTRIC CO. : CASE SUMMARY

The Supreme Court in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. 549 U.S. 443 (2007) held that the Bankruptcy Code does not contain a general rule disallowing claims for attorneys’ fees authorized by a valid pre-petition contract and enforceable under applicable state law. The Court rejected the Ninth Circuit’s Fobian rule.

FACTS OF THE CASE

Pacific Gas and Electric Company (PG&E) filed for Chapter 11 bankruptcy protection. Prior to bankruptcy, PG&E had entered into various agreements with Travelers Casualty & Surety Company of America under which Travelers issued surety bonds on PG&E’s behalf. The agreements required PG&E to reimburse Travelers for losses and expenses, including attorneys’ fees, incurred in enforcing the agreements.

During the bankruptcy proceedings, Travelers filed claims seeking not only principal amounts but also attorneys’ fees incurred after the bankruptcy filing. The lower courts disallowed the fee claims based on a Ninth Circuit rule known as the Fobian rule, which generally prohibited recovery of attorneys’ fees incurred while litigating issues peculiar to bankruptcy law.

ISSUE BEFORE THE SUPREME COURT

The issue before the Supreme Court was whether the Bankruptcy Code disallows an unsecured creditor’s claim for contractual attorneys’ fees incurred while litigating issues of bankruptcy law when the underlying contract validly provides for such fees under state law.

FINDINGS OF THE SUPREME COURT

Justice Samuel A. Alito Jr. delivered the opinion of the Court. The Supreme Court observed that  Claims are generally allowed in bankruptcy unless expressly disallowed by the Bankruptcy Code. Nothing in § 502(b) of the Bankruptcy Code disallows a claim merely because the attorneys’ fees were incurred litigating bankruptcy-law issues.

The Ninth Circuit had created a judicial exception that lacked support in the text of the Bankruptcy Code.

Bankruptcy courts should ordinarily enforce contractual rights recognized under applicable non-bankruptcy law unless Congress has clearly provided otherwise. The Court emphasized that courts are not free to create additional categories of disallowed claims beyond those specified in the statute.

The Supreme Court reversed the judgment of the Court of Appeals and remanded the case for further proceedings consistent with its opinion.

The Supreme Court laid down the principle that a  claim for attorneys’ fees arising from a valid pre-petition contract and enforceable under applicable state law cannot be disallowed solely because the fees were incurred litigating issues of bankruptcy law, absent a specific provision of the Bankruptcy Code requiring disallowance.

SIGNIFICANCE OF THE JUDGMENT

This case is one of the most important Supreme Court decisions concerning the allowance of claims in bankruptcy.The decision – (i) reinforced the principle that bankruptcy courts must respect substantive rights created under non-bankruptcy law,  (ii) limited judicial creation of extra-statutory disallowance rules,  (iii) strengthened contractual rights of creditors,  (iv) reaffirmed the influence of Butner v. United States, which generally requires bankruptcy courts to honor state-law rights unless Congress provides otherwise.

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Mukesh Suman is a lawyer and legal author based at Delhi, India. He has extensive experience in insolvency and bankruptcy matters. He also provides legal support services to USA based bankruptcy lawyers. Mukesh can be approached at mukesh_suman@outlook.com or +91 9717864570.