Supremes Go Out of Their Way to Overrule Fobian, But Not to Decide the Case

In a post last month, I warned that 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.” On March 20, the Supreme Court issued the decision in Travelers Casualty & Surety Co. v. Pacific Gas and Electric Co., 2007 WL 816795.

Travelers, represented by Millbank Tweed, appeared in the PG&E chapter 11 case 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.

In defending against the claim for attorney fees, PG&E, represented by Howard Rice Nemerovski, invoked the Ninth Circuit case of In re Fobian, 951 F.2d 1149, 1153 (9th Cir.1991). Fobian 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. The District Court and the Ninth Circuit affirmed the Bankruptcy Court’s disallowance of the attorney fees, based on Fobian.

The Supreme Court, in a unanimous decision, expressly overruled Fobian, stating that the lack of “textual support” for its rule in the Bankruptcy Code was fatal. The opinion then reminds anyone who didn’t realize this: “Congress, of course, has the power to amend the Bankruptcy Code by adding a provision expressly disallowing claims for attorney’s fees incurred by creditors in the litigation of bankruptcy issues.”

Amazingly, no argument was made in the Bankruptcy Court, the District Court or the Court of Appeal that adding attorney fees to an unsecured claim is prohibited by implication under 11 U.S.C. § 506(b), which expressly allows the addition of attorney fees to secured claims. Perhaps the addition of Akin Gump and Heller Ehrman to the team on appeal to the Supreme Court raised the average IQ on that side? – No, there’s got to be another explanation, please someone tell me? According to the opinion, PG&E argued section 506(b) for the first time in the Supreme Court. The Supremes declined to consider the issue and remanded the case for further proceedings consistent with their opinion.

Wait a minute, what about Judge Montali’s ruling that the fees were unreasonable and that Travelers was not the prevailing party? It looks like the Supreme Court “reached” to grant certiorari in this case just to resolve a conflict between the circuits by overruling Fobian. What is going to happen on remand? Will the decision be to now grant the unreasonable attorney fees to the nonprevailing party? Are we going to ignore section 506(b) the next time around? Travelers didn’t resolve the suddenly very hot issue of whether creditors get to recover attorney fees in claims litigation, although it does contain some favorable language in that regard, in addition to the trashing of Fobian. The immediate impact of this decision will be felt in dischargeability litigation. I’ll post on that shortly.