« PSLF in the Time of Coronavirus | Main | CARES ACT Student Loan Relief »

How to Treat Post-Petition Attorneys' Fees

posted by Adam Levitin

This is a hyper-technical bankruptcy question that's been bothering me for a while: what happens with post-petition attorneys' fees for undersecured/unsecured creditors after the Supreme Court's 2007 decision in Travellers v. PG&E? Specifically, assuming that the post-petition attorneys' fees fees are allowed as an unsecured claim, are they credited against a collateral cushion before or after post-petition interest?  

Some quick background. Secured creditors are entitled to post-petition interest in bankruptcy to the extent of their collateral cushion. So if a secured creditor is owed 80 and has collateral of 100, it can accrue up to 20 in post-petition interest. Usually this is at the contract rate, but the entitlement is statutory and applies even if there is no contractual right to interest.  

Prior to Travellers, most courts disallowed post-petition attorneys' fees for unsecured claims under what was known as the Fobian rule. In contrast, secured claims were allowed post-petition attorneys' fees (as specifically authorized by section 506(b)), but that applied only as long as the there was a collateral cushion, as otherwise the overage would be an unsecured claim, and thus disallowed.  In other words, prior to Travellers, post-petition attorneys' fees worked much like post-petition interest. They were allowed for secured claims if there was a contractual or statutory right to them, but only up to the extent of the collateral cushion. Once the cushion was exhausted, no attorneys' fees and no post-petition interest.

Travellers held that one of the traditional rationales for disallowing post-petition attorneys' fees for unsecured claims—the common law Fobian rule, rather than any statutory provision—was not valid. Travellers left open the possibility of other rationales for denying post-petition attorneys' fees to unsecured claims, but there's no prevailing rationale for it any more. Instead, it would seem that post-petition attorneys' fees are generally allowed for unsecured (and therefore also undersecured and thus bifurcated) claims.  

To be sure, lower courts have still been reluctant to allow post-petition attorneys' fees for unsecured claims (see a good summary of the situation here), but the 4th Circuit last year joined the 2nd and 9th Circuits in holding that that unsecured claims get post-petition contractual/statutory attorneys' fees. (Notice that this is different from 506(b)/Ron Pair Enterprises, where a right to post-petition interest/fees for secured claims exists no matter what the contract provides). 

Let's suppose that the 4th Circuit has the right. If so, there's still a thorny calculation question: what is the order in which post-petition interest and attorneys' fees are applied against the collateral cushion? In a world in which attorneys' fees, but not interest, spill over into an unsecured claim, this matters.

To illustrate, suppose that a creditor is owed 80 on a loan with a simple interest rate of 10% annually and has collateral worth 100. The bankruptcy drags on for three years, during which time the creditor incurs attorneys fees of 5. What is the creditor's claim? 

Before Traveller's it was simple: the creditor has a secured claim for 100 and that's all. But now it's not so clear. Here are some possibilities:

(1) interest is applied before attorneys' fees. The creditor has a secured claim of 100 (80 principal plus 20 post-petition interest, which stops accruing once the collateral cushion is exhausted) and an unsecured claim of 5 for post-petition attorneys' fees.

(2) attorneys' fees are applied before interest. The creditor has a secured claim of 100 (80 principal plus 5 post-petition attorneys' fees plus 15 post-petition interest) and that's all.  

(3) interest and attorneys' fees are in the order they accrue (FIFO, essentially). The creditor will have a secured claim of 100 consisting of 80 principal and, assuming that some of the attorneys' fees accrued before the collateral cushion was exhausted, a mix of post-petition interest and post-petition attorneys' fees. The creditor will also have an unsecured claim for something less than 5.  

Now I recognize that the universe could be more complicated, especially if post-petition interest would accrue on the post-petition attorneys' fees, as well as on the principal (which would make sense if the attorneys' fees are part of the secured claim). And that's not even accounting for depreciation or expansion of collateral or the crediting of adequate protection payments or when 506(c) charges are applied (when accrued or at the end of the case?),

So here are my questions for the great Internet bankruptcy hive-mind:

(1) Does the 4th Circuit have it right? Is there any other good basis for disallowing post-petition attorneys' fees to unsecured claims? 

(2) If the 4th Circuit is correct, what's the right answer in terms of how to apply interest/attorneys' fees? #1 and #2 are administratively simple, but seem less accurate than #3. #1 is the best for the secured creditor; #2 is the best for the other unsecured creditors.

(3) Why hasn't this ordering issue come up in a reported decision since Travellers (or have I just not found it)? 

Comments

The 4th circuit, I think had it right. It has come up in few cases, chapter 13 also. To me, it comes up when it matters. Many cases, it may not matter or affect the distributional share to unsecured creditors.

IN RE EMERALD GRANDE, LLC
Bankr. Court, ND West Virginia, 2019 - Google Scholar
… The court conducted an evidentiary hearing in July 2018, and the parties simultaneously
submitted post-trial briefs thereafter. Since then, the United States Court of Appeals for
the Fourth Circuit issued its opinion in SummitBridge Nat'l Invs …
Related articles
IN RE DERBY
Bankr. Court, ED Virginia, 2019 - Google Scholar
… This does not lead the Court to reconsider the ruling in Maddux, but it does support PRA's
argument that its claim would be enforceable under state law. The Fourth Circuit's recent decision
in SummitBridge Nat'l Invs. III, LLC v. Faison, 915 F.3d 288 (4th Cir …
Related articles
IN RE BAKER
Bankr. Court, WD Arkansas, 2019 - Google Scholar
… 2000) (holding that "generally, a creditor's claim is determined as of the date of the filing of the
bankruptcy petition [internal citation omitted] and that amounts incurred post-petition are not
usually permitted as part of the claim"); but see Summitbridge Nat'l Inv …
Related articles
Unsecured Claim for Post-Petition Contractual Attorneys' Fees? File It!
SA Wolfson, RM Walton - American Bankruptcy Institute …, 2019 - search.proquest.com
there has never been a nationwide consensus on the allowability of bankruptcy claims for
contractual post-petition fees." 6 Below are some of the points noted in the decision. Since
506 (b) expressly provides for the allowance of post-petition attorneys' fees for oversecured …
Related articles
IN RE HUNTER
610 BR 479 - Bankr. Court, MD North Carolina, 2019 - Google Scholar
… payment of any nature. A basic principle of federal bankruptcy law is "that state law
governs the substance of claims." Summitbridge Nat'l Invs. III, LLC v. Faison, 915
F.3d 288, 296 (4th Cir. 2019). Therefore, before reaching the …

IN RE STEPHENSON
Bankr. Court, WD Louisiana, 2019 - Google Scholar
… Those creditors, it is presumed, "gave value, in the form of a contract term favorable
to the debtor ... in exchange for the [attorneys' fees] provision." SummitBridge
Nat'l Investments III, LLC v. Faison, 915 F.3d 288, 296 (4th Cir …
Related articles
IN RE HUNTER
Bankr. Court, MD North Carolina, 2019 - Google Scholar
… payment of any nature. A basic principle of federal bankruptcy law is "that state law
governs the substance of claims." Summitbridge Nat'l Invs. III, LLC v. Faison, 915
F.3d 288, 296 (4th Cir. 2019). Therefore, before reaching the …
Related articles
IN RE SIMON
Bankr. Court, WD Louisiana, 2019 - Google Scholar
… Allowing creditors to assert contract-based claims for pre-petition interest, late fees and interest
on late fees, as permitted by state law, simply "effectuates the bargained-for terms of the loan
contract." SummitBridge Nat'l Investments III, LLC v. Faison, 915 F.3d 288, 296 (4th Cir …
Related articles

The comments to this entry are closed.

Contributors

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF