Attorney Fees for Unsecured Creditors

A major decision as to the rights of unsecured creditors to obtain awards of attorney fees for litigating bankruptcy claims is sneaking up on us. Last October, the Supreme Court granted certiorari in Travelers Casualty & Surety Co. v. Pacific Gas and Electric Co. Travelers issued unsecured surety bonds for PG&E, and appeared in the chapter 11 case to protect its contingent claim. Travelers, represented by Millbank Tweed, appeared and made apparently unsuccessful objections to the disclosure statement, running up $167,000 in attorney fees in the process (nice work if you can get it?) Bankruptcy Judge Montali found that the fees were unnecessary and that PG&E was not the prevailing party. Undaunted, PG&E appealed unsuccessfully to the District Court (2004 WL 5167592) and to the Ninth Circuit (2006 WL 285977). The case was argued on January 16, 2007.
In re Fobian, 951 F.2d 1149, 1153 (9th Cir.1991) held that a bank which successfully objected to confirmation of a chapter 12 plan could not recover attorney fees against the debtor, since the issue of plan confirmation was solely one of bankruptcy law, not state law. Travelers is arguing to overrule Fobian. The case has huge ramifications for consumers and bankruptcy trustees. For example, in dischargeability litigation attorney fees are required to be apportioned between state law and bankruptcy law issues. In re Baroff, 105 F.3d 439 (9th Cir. 1997). If Fobian is overruled, it will open the door to recovery of fees in objections to unsecured claims, for example.