In the Matter of: SNTL CORPORATION; SN INSURANCE SERVICES, INC.; SNTL HOLDINGS CORPORATION; SN INSURANCE ADMINISTRATORS, INC.; INFONET MANAGEMENT, Debtors, SNTL CORPORATION; SN INSURANCE SERVICES, INC.; SNTL HOLDINGS CORPORATION; SN INSURANCE ADMINISTRATORS, INC.; INFONET MANAGEMENT, Appellants, v. CENTRE INSURANCE COMPANY, Appellee.
No. 08-60001
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
June 23, 2009
571 F.3d 826
Before: Cynthia Holcomb Hall, Andrew J. Kleinfeld and Barry G. Silverman, Circuit Judges.
Appeal from the Ninth Circuit Bankruptcy Appellate Panel. Klein, Montali, and Dunn, Bankruptcy Judges, Presiding. Argued and Submitted May 6, 2009—Pasadena, California. BAP No. CC-06-1350-MoDK.
Per Curiam Opinion
Iain A.W. Nasatir, Jonathan J. Kim, and Jeremy V. Richards, Pachulski, Stang, Ziehl & Jones LLP, Los Angeles, California, for the appellants.
Christopher E. Prince and Robert B. Millner, Sonnenschein Nath & Rosenthal, LLP, Los Angeles, California and Chicago, Illinois, for the appellee.
OPINION
PER CURIAM:
The Bankruptcy Appellate Panel is AFFIRMED for the reasons stated in its opinion in this case sub nom. We adopt the BAP opinion, In re SNTL Corp., 380 B.R. 204 (B.A.P. 9th Cir. 2007), as our own and attach it as an appendix to this opinion. See Appendix, infra.
UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE NINTH CIRCUIT
In re: SNTL CORP.; SN INSURANCESERVICES, INC.; SNTL HOLDINGS CORP.; SN INSURANCE ADMINISTRATORS, INC.; INFONET MANAGEMENT SYSTEMS, INC.; PACIFIC INSURANCE BROKERAGE, INC., Debtors.
CENTRE INSURANCE COMPANY, SNTL CORP.; Appellant, v. SN INSURANCE SERVICES, INC.; SNTL HOLDINGS CORP.; SN INSURANCE ADMINISTRATORS, INC.; INFONET MANAGEMENT SYSTEMS, INC.; PACIFIC INSURANCE BROKERAGE, INC., Appellees.
BAP No. CC-06-1350-MoDK
Bk. Nos. SV 00-14099-GM, SV 00-14100-GM, SV 00-14101-GM, SV 00-14102-GM, SV 02-14236-GM, SV 02-14239-GM (Jointly Administered)
OPINION
Argued and Submitted on September 21, 2007 at Pasadena, California
Filed — December 19, 2007
Appeal from the United States Bankruptcy Court for the Central District of California
Before: MONTALI, DUNN and KLEIN, Bankruptcy Judges.
MONTALI, Bankruptcy Judge:
In this complicated and high-stakes case, we apply a somewhat obscure doctrine that involves the intersection of insolvency law principles and guaranty law, illustrating the temporal nature of a release of a guarantor when a voidable preference is recovered from the obligee. We also will be one of the first courts to address a question left unanswered by the Supreme Court earlier this year: May an unsecured creditor include attorneys’ fees incurred postpetition but arising from a prepetition contract as part of its unsecured claim?
Here a creditor contended that the debtor‘s previously released liability as a guarantor of an affiliate‘s obligation was revived when the creditor compromised a preference action against it. The bankruptcy court disagreed and entered summary judgment disallowing the creditor‘s multimillion dollar claim and denying the creditor‘s request for postpetition attorneys’ fees and costs. The creditor appeals, and we REVERSE and REMAND.
I. FACTS
A. The Parties
On April 26, 2000 (the “petition date“), SNTL Corporation (formerly known as Superior National Insurance Group)1 and
Pursuant to a confirmed joint plan of reorganization (“Plan“), an SNTL Litigation Trust (“Trust“) was formed and an SNTL Litigation Trustee (“Trustee“) was appointed. The Trustee was authorized to prosecute certain claims, rights and causes of actions and to oversee and initiate actions pertaining to the allowance and payment of claims, including objections to proofs of claims.
Appellant Centre Insurance Company (“Centre“) filed a proof of claim in November 2000 asserting a claim in excess of $294,488,911 (including approximately $3 million in attorneys’ fees but not including contingent and unliquidated amounts) and an amended proof of claim in March 2005 in the amount of $232,748,280.40. The Trustee filed an objection to Centre‘s claim arguing, inter alia, that Centre had released claims against SNIG prepetition, that the released claims could not be revived by postpetition events and that Centre, as an unsecured creditor, could not include in its claim attorneys’ fees incurred postpetition.
B. Pertinent Transactions and Events
The relationship of the parties, and the nature of the transactions summarized below, are complex and perhaps unique to the insurance and reinsurance industry. Reduced to their central elements, however, they can be summarized as follows: Debtor SNIG guaranteed the performance of its affili-
More specifically, on December 18, 1998, SNIG sold its affiliate Business Insurance Company (“BICO“) to Centre Solutions Holdings (Delaware Limited) (“Centre Solutions“); BICO became known as Centre. On the same day, Centre entered into certain reinsurance agreements (the “LPT and Quota Share Agreements“) with insurance companies affiliated with SNIG: California Compensation Insurance Company (“CalComp“) and Superior National Insurance Company (“SNIC“). SNIG guaranteed performance of one of these reinsurance agreements known as the “QSR Contract.”
In addition, the parties also entered into fronting (service) agreements known as the Underwriting Management Agreement (“UMA“) and the Claims Administration Services Agreement (“CSA“). SNIG also guaranteed performance of these agreements. The UMA, CSA, LPT and Quota Share Agreements are collectively referred to as the “Fronting Agreements.”3 The Fronting Agreements provide for the recovery of all reasonable expenses, including attorney‘s fees, incurred in the enforcement of SNIG‘s guaranty.
In exchange for the Release, SNIG, CalComp and SNIC agreed to meet six conditions, including payment of a $163.4 million Partial Commutation Payment (“Payment“) by CalComp and SNIC. Centre received the Payment; no evidence was introduced that any of the six conditions for the Release were unsatisfied. In its opening brief, Centre acknowledges that “the primary obligors and SN Holdings [SNIG] (the guarantor) were released from liability for up to $180 million” in exchange for the Payment. Appellant‘s Opening Brief at 13. Consequently, the Release in the PCSA became effective prepetition.
In the event that any court of competent jurisdiction or governmental or regulatory authority asserting jurisdiction over the subject matter hereof or the parties hereto enters a final order, judgment, or other finding that: (i) the payment of all or any part of the $22,300,000, described above, or (ii) the payment by Reinsurers of all or any part of the [Payment] of $163,400,000, or (iii) any of the consideration described in the Recitals to this Agreement . . . constitutes a voidable or preferential transfer, such payment constitutes an improper or disproportionate payment, or the payment is otherwise in violation of law or subject to a claim or [sic] preference, then [Centre] may in its sole discretion, in addition to any other remedy provided by law, equity, statute, or contract: (a) enforce this Agreement according to its express terms and conditions; or (b) declare this Agreement to be null and void in its entirety, and thereupon enforce the terms and conditions of the LPT and Quota Share Agreements as though this Agreement (including without limitation the releases and discharges set forth in Articles III and IV) had not been executed . . . .
PCSA at 8-9.
In March 2000, the Insurance Commissioner for the State of California (the “Commissioner“) placed certain insurance companies affiliated with Debtors into conservation, followed by liquidation. In January 2002 (approximately fourteen months after the petition date), the Commissioner filed a complaint in state court against Centre and others, seeking in part
Centre subsequently agreed to settle that state court litigation, and on February 17, 2005, the state court entered an order approving a settlement agreement between the Commissioner and Centre (among others) providing that the Commissioner‘s avoidance action would be dismissed in exchange for Centre‘s partial return (in the amount of $110 million) of the Payment. Paragraph F of the state court order indicated that the Commissioner sought to recover property transferred by the insurance companies to Centre and that the Commissioner had sought avoidance of such transfers.5
The order also provided that the settlement agreement between the Commissioner and Centre was “fully and finally approved.” In turn, the settlement agreement itself provided that “[t]he payments to the Liquidator under section III.C.1 of this Settlement Agreement are payments on account of the claims of the Liquidator arising from payments asserted to be preferential transfers . . . and not payments on account of any tort claims.” Settlement Agreement and Mutual Release at 15.
In its initial proof of claim filed in November 2000, Centre stated that SNIG‘s liability as guarantor was for amounts “in excess of $180,000,000” and reserved the right to seek additional amounts if any portion of the Payment was “deemed void or avoidable,” specifically mentioning the then-pending avoidance action by the Commissioner. The amended proof of
Trustee objected to Centre‘s claim and amended claim on many grounds, although only four are relevant to this appeal: (1) Centre‘s claim arising from SNIG‘s guaranty obligations had been released and could not be revived as Centre had not obtained a judicial finding or judgment that the Payment (or other payment made under the PCSA) constituted a preferential transfer as required by Article X of the PCSA, (2) even if Centre had obtained such a judicial finding or judgment, it has not exercised its right of revocation and no other remedy is available, (3) Centre‘s claim arising from SNIG‘s guaranty obligations was not contingent but was instead extinguished prepetition under the Release and, under section 502(b), could not be revived by any postpetition determination that the Payment was a preference, and (4) Centre was an unsecured creditor and thus could not assert a claim for attorneys’ fees incurred postpetition.
In April 2006, Trustee filed a motion for partial summary judgment that the Release extinguished SNIG‘s liability as guarantor, at least up to $180 million, and that Centre could not recover attorneys’ fees incurred postpetition. After conducting a hearing, the bankruptcy court entered a memorandum and order on August 22, 2006, granting the motion on both grounds. The court held that the Release became effective prepetition and Centre did not invoke its power of revocation under Article X prior to the petition date. “Therefore, as of the petition date, the only claim Centre could have had against SNIG is above $180 million.”6 Memorandum of Opinion at pages 12-13.
On December 19, 2006, the clerk of this panel issued an order requiring Centre to (1) explain how the order was final, (2) move for leave to file an interlocutory appeal, or (3) obtain a certification of finality from the bankruptcy court pursuant to Federal Rule of Civil Procedure (“FRCP“) 54(b) (made applicable by Rules 7054 and 9014). The bankruptcy court entered its order directing entry of final judgment pursuant to FRCP 54(b) on February 14, 2007, and the panel entered an order on April 23, 2007, treating the order on appeal as final.
II. ISSUES
(1) Did the Release under the PCSA irrevocably extinguish Centre‘s claim against SNIG up to $180 million or was SNIG‘s liability revived to the extent of $110 million upon Centre‘s payment of that amount to the Commissioner?
- Has a finding or final order triggering the remedies set forth in Article X been made or entered?
If so, is any remedy available to Centre under which SNIG‘s liability could be revived? - If the triggering event has occurred and a remedy is available at law, does section 502(b) nonetheless preclude allowance of Centre‘s claim?
(2) Can Centre, as an unsecured creditor, include in its proof of claim attorneys’ fees arising from a prepetition contract but incurred postpetition?
III. STANDARD OF REVIEW
We review de novo the bankruptcy court‘s grant of summary judgment. Marshack v. Orange Comm‘l Credit (In re Nat‘l Lumber & Supply, Inc.), 184 B.R. 74, 77 (9th Cir. BAP 1995); Mordy v. Chemcarb, Inc. (In re Food Catering & Housing, Inc.), 971 F.2d 396, 397 (9th Cir. 1992). In reviewing a summary judgment, the task of an appellate court is the same as a trial court under FRCP 56 (made applicable by Rule 7056). Hifai v. Shell Oil Co., 704 F.2d 1425, 1428 (9th Cir. 1983); Gertsch v. Johnson & Johnson, Fin. Corp. (In re Gertsch), 237 B.R. 160, 165 (9th Cir. BAP 1999). Viewing the evidence in the light most favorable to the non-moving party, we must determine for ourselves whether there was no genuine issue of material fact and whether the moving party is entitled to judgment as a matter of law. Hifai, 704 F.2d at 1428; see FRCP 56(c).
IV. JURISDICTION
Pursuant to
V. DISCUSSION
A. The Release Did Not Irrevocably Extinguish Centre‘s Claim Against SNIG
Trustee contends Centre cannot invoke its Article X remedies in the absence of a final order, judgment, or other finding that the Payment was subject to a preference claim. Trustee further argues that even if the triggering event (the entry of such an order) had occurred, Centre is not seeking any relief or remedy available under Article X. Finally, Trustee asserts that even if the triggering event had occurred and Centre were seeking relief available under Article X, Centre could not obtain such relief because section 502(b) does not allow claims arising postpetition. The bankruptcy court did not address the first two arguments, as it agreed with Trustee‘s third argument: Centre‘s claim was not allowable because it was based on postpetition actions to revive a debt that was released prepetition. On de novo review, we are not persuaded by any of the Trustee‘s arguments.
1. The “Triggering Event” Under Article X Has Occurred
Centre contends that when it paid $110 million in settlement of the Commissioner‘s preference action against it, SNIG‘s obligations as guarantor were restored in that amount. Centre does not seek to revive the entire amount of the original guaranty. Article X of the PCSA requires a court finding or judgment that the payments made under the PCSA were preferential before Centre could exercise the remedies available to it under that section.7 Article X states that if any court
We disagree. The state court order approving the settlement agreement between the Commissioner and Centre satisfies Article X‘s requirement for a court order or finding. Paragraph F of the order indicated that the Commissioner was attempting to avoid the transfers and the order provided that the settlement agreement was “fully and finally approved.” The settlement agreement which was fully approved specifically stated that the payments by Centre to the Commissioner “are payments on account of the claims of the Liquidator [Commissioner] arising from payments asserted to be preferential transfers.” The state court order thus constituted an order or finding that the PCSA payment was subject to a preference claim. As a consequence, Article X and its remedies govern and supersede the release provisions of Article III.9
2. Centre‘s Return of $110 Million to the Commissioner in Settlement of a Preference Claim Revived Its Guaranty Claim Against SNIG
Article X of the PCSA, entitled “Voidable Transfers,” governs the rights of Centre in the event payments made pursuant to the PCSA constituted preferential transfers. Upon entry of the requisite court order or finding, Centre may exercise “any other remedy provided by law, equity, statute or contract[.]” PCSA, Article X (emphasis added). In other words, because the state court‘s order was the type of court order contemplated by Article X, it triggered whatever remedies Centre had at law as a result of the return of the PCSA payment.
Centre argues that under applicable law, SNIG‘s guaranty obligation was revived upon and to the extent of the return of the PCSA Payment. While we located no Ninth Circuit or California case precisely on point, we agree that the return of a preferential payment by a creditor generally revives the liability of a guarantor.
As the Tenth Circuit has observed (in dicta), courts “have recognized, without regard to any special guaranty language, that guarantors must make good on their guaranties following avoidance of payments previously made by their principal debtors.” Lowrey v. Mfrs. Hanover Leasing Corp. (In re Robinson Drilling, Inc.), 6 F.3d 701, 704 (10th Cir. 1993). “Al-
The Restatement (Third) of Suretyship and Guaranty and the Corpus Juris Secundum on Principal and Surety echo these general principles.
When a secondary obligation is discharged in whole or part by performance by the principal obligor or another secondary obligor, or by realization upon collateral securing such performance, the secondary obligation revives to the extent that the obligee, under a legal duty to do so, later surrenders that performance or collateral, or the value thereof, as a preference or otherwise.
Restatement (Third) of Suretyship & Guaranty § 70 (1996). Similarly, the Corpus Juris Secundum provides that if a creditor is forced to refund a payment to a primary obligor, the guarantor‘s liability is revived:
[T]o discharge the surety, the payment of the principal debt or obligation must be valid and binding, and, if the creditor is forced to refund the payment, the surety‘s liability is restored. Thus, a surety is not, as a general rule, released by a payment that is a preference under the bankruptcy laws, which the creditor is obliged to refund.
72 C.J.S. Principal and Surety § 129 (Updated 2007).
Trustee disputes the applicability of the cases that follow or recognize the general principle, but cites no case law holding the contrary: that the liability of a surety or guarantor is not
We find Wallace Hardware persuasive. In that case, the creditor repossessed inventory of a primary obligor in satisfaction of the obligor‘s debt. Thereafter, the obligor filed for bankruptcy relief and the trustee filed an action to have the
In holding that the guarantors were obligated to repay the amounts returned by the creditor to the trustee under the preference action settlement, the Sixth Circuit stated that “courts have uniformly held that a payment of a debt that is later set aside as an avoidable preference does not discharge a guarantor of his obligation to repay that debt.” Id. at 408 (citing cases). The Sixth Circuit also observed that the repossession operated as an accord and satisfaction, and that “an accord and satisfaction, like any contract, can be set aside, in whole or in part, for such reasons as mutual mistake, supervening illegality, or frustration of purpose.” Id.
Trustee contends that we should disregard Wallace Hardware because there the obligations of the guarantors, unlike those of SNIG, had not been contractually released by the creditor. This distinction is not significant because while Article III of the PCSA did release SNIG, Article X provided Centre with whatever remedies were available in law upon entry of the requisite court order or finding. As we have already held, the triggering event of Article X‘s remedies occurred when the state court entered the order approving the settlement agreement. As one of the remedies available at law permits revival of otherwise released guaranty obligations upon return of a preferential payment of the primary obligor, the remedies available under Article X and under law supersede the release provisions of Article III.
3. Section 502(b) Does Not Preclude Allowance of Centre‘s Claim
Trustee argues that even if Centre‘s claim against SNIG could be revived under Article X and applicable law, the release of Article III was still in effect as of its petition date and thus Centre‘s claim was extinguished prepetition and not allowable under
A claim is broadly defined under the Bankruptcy Code. It includes a right to payment or equitable remedy “whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.”
Moreover, as the parties concede, federal law determines when a claim arises under the Bankruptcy Code. Zilog, Inc. v. Corning (In re Zilog, Inc.), 450 F.3d 996, 1000 (9th Cir. 2006). “It is well-established that a claim is ripe as an allowable claim in a bankruptcy proceeding even if it is a cause of
Here, the parties contemplated that Centre could have a claim against SNIG in the event a payment made by the primary obligors under the PCSA constituted a preferential transfer. Article X was drafted to cover that contingency. The Debtors filed their respective chapter 11 petitions after the Commissioner placed the primary obligors into conservation. As the conservation was commenced approximately three months after the PCSA payments were made, an action by the Commissioner to recover those payments as preferential could have been reasonably and fairly contemplated by SNIG and Centre as of the petition date. See
Hence, because Centre‘s claim based on a revival of SNIG‘s guaranty was an allowable claim as of the date of the petition, we will reverse.
B. Centre May Be Entitled to Add Its Postpetition Attorneys’ Fees To Its Unsecured Claim
This appeal presents a question currently pending before the Ninth Circuit: May an unsecured creditor include attorneys’ fees incurred postpetition as part of its unsecured claim?
In Travelers, the bankruptcy court had followed the Ninth Circuit‘s holding in Fobian v. W. Farm. Credit Bank (In re Fobian), 951 F.2d 1149 (9th Cir. 1992), that creditors could not recover attorneys’ fees for litigating issues particular to bankruptcy law and disallowed the claim for such fees by Travelers. The district court and the Ninth Circuit affirmed. The Supreme Court reversed to the extent the claim was disallowed on this ground, overruling Fobian. It specifically refused, however, to decide whether Travelers’ claim for postpetition attorneys’ fees was disallowed under
Since Travelers was issued by the Supreme Court, two bankruptcy courts have disagreed on the issue of whether an unsecured creditor can recover fees incurred postpetition, with a split result.15 Compare Qmect, Inc. v. Burlingame Capital Partners II, LP (In re Qmect, Inc.), 368 B.R. 882 (Bankr. N.D. Cal. 2007) (unsecured creditor was entitled to include its contract-based attorneys’ fees incurred postpetition in its pre-
The split is unsurprising, as the cases decided prior to Travelers also reached opposite conclusions, with the majority holding that unsecured creditors could not assert attorneys’ fees incurred postpetition as part of their claims.16 While the holdings may diverge, these cases analyze the four primary arguments asserted in favor of and against the allowance of such claims: whether
In Electric Machinery, as in almost all of the cases in the majority line, the court held that unsecured creditors cannot recover postpetition fees because the “plain language” of
The emphasized language of section 506(b) demonstrates the congressional intent to create an exception to the general rule that claims are to be determined as of the petition date, exclusive of post-petition interest, attorneys’ fees, and other charges. The use of the words “to the extent” a claim is oversecured, and “there shall be allowed” interest and fees, mandates the conclusion that in all other circumstances, post-petition interest, attorneys’ fees, and charges shall not be allowed. These courts have concluded that if Congress intended for unsecured creditors to receive post-petition attorneys’ fees, then it would have done so explicitly by authorizing unsecured creditors to collect fees under section 506(b).
Elec. Mach., 371 B.R. at 551, citing Pride Cos, 285 B.R. at 372. In contrast, the Qmect court rejected the argument that
The Court finds this reading of
11 U.S.C. §§ 502(b) and506(b) too strained to be persuasive. First,11 U.S.C. § 506 is entitled “Determination of Secured Status.” A statute so entitled would not be a logical place to provide for the disallowance of an element of an unsecured claim. If Congress, in enacting the Bankruptcy Code, had wanted to disallow claims for post-petition attorneys’ fees, the logical place for it to have done so was surely in11 U.S.C. § 502(b) . Moreover,11 U.S.C. § 506(b) does not distinguish between pre-petition and post-petition attorneys’fees. Thus, if 11 U.S.C. § 506(b) is read as an additional ground for objecting to claims, arguably, an unsecured creditor would be prohibited from including its pre-petition attorneys’ fees in its claim as well as its postpetition fees.
We are not persuaded by the approach of the Electric Machinery court and, like Qmect, we reject the argument that
When read literally, subsection (b) arguably limits the fees available to the oversecured creditor. When read in conjunction with
§ 506(a) , however, it may be understood to define the portion of the fees which shall be afforded secured status. We adopt the latter reading.
In 268 Limited, an oversecured creditor sought postpetition attorneys’ fees based on its contract with the debtor, which provided that the creditor could recover five percent of the balance due at the time of default as attorneys’ fees. Id. at 675. The creditor argued that because Nevada law permitted recovery of fees on such a percentage basis, the fees were reasonable and allowable under
We agree with the Ninth Circuit, as well as with the Eleventh Circuit in Welzel v. Advocate Realty Inv., LLC (In re Welzel), 275 F.3d 1308, 1316-20 (11th Cir. 2001), that the allowance functions of
[W]e must determine how to interpret the general instructions concerning allowance and disallowance contained in [section] 502 and the more specific instructions concerning attorney‘s fees in [section] 506(b) such that the two provisions are rendered consistent. We first note that [section] 506(b) does not state that attorney‘s fees deemed unreasonable are to be disallowed. In fact, the subsection is completely silent with regard to the allowance/disallowance issue. This silence suggests that [section] 506(b) is meant not to displace the general instructions laid down in [section] 502, but to be read together in a complementary manner.
Id. at 1317; see also In re Tricca, 196 B.R. 214, 219-20 (Bankr. D. Mass. 1996) (“Section 506(b) is not a provision which concerns itself with claim allowance. Section 506(b) addresses only the question of what is part of an ‘allowed secured claim.’ Those courts which have examined [section] 506(b) in conjunction with [section] 502 have concluded that [section] 506(b) does not create additional exceptions to the allowance of claims; rather it only provides for the classification of allowed claims as secured or unsecured“); see also Rodriguez, 375 B.R. at 545 (
Therefore, if
2. Date That The Claim Arose
The Electric Machinery court, like the bankruptcy court here and many of the pre-Travelers majority courts, disallowed the postpetition fees of an unsecured creditor because
Here, the parties’ execution of a prepetition agreement containing an attorneys’ fees provision gives rise to a contingent, unliquidated attorney-fee claim. As the New Power court held: “[w]hen a creditor‘s right to payment for fees exists prepetition, the right to payment constitutes a ‘claim,’ within the meaning of
This approach is consistent with the Ninth Circuit‘s “fair contemplation” test — which we discussed in more detail earlier — for determining when a claim accrues. Postpetition fees can be fairly contemplated when the parties have provided for them in their contracts and thus are contingent claims as of the petition date. They cannot be disallowed merely because they are contingent. Qmect, 368 B.R. at 884. As stated by one leading commentator: “In general, if the creditor incurs the attorneys’ fees postpetition in connection with exercising or protecting a prepetition claim that included a right to recover attorneys’ fees, the fees will be prepetition in nature, constituting a contingent prepetition obligation that became fixed postpetition when the fees were incurred.” 5
Because we hold that attorneys’ fees arising out of a prepetition contract but incurred postpetition fall within the Bankruptcy Code‘s broad definition of claim, we reject the position of the majority line of cases that
3. Does Timbers Control?
Like many other courts in the majority line, the Electric Machinery court concluded that the Supreme Court‘s holding in Timbers, 484 U.S. at 380, mandated disallowance of claims by unsecured creditors for postpetition attorneys’ fees:
In Timbers, the Supreme Court concluded that because section 506(b) permitted post-petition interest to be paid only out of an equity cushion, an undersecured creditor who had no such equity cushion fell within the general rule of disallowing post-petition interest. Courts that rely on Timbers to disallow post-petition attorneys’ fees and costs reason that the rationale applies equally to the disallowance of post-petition attorneys’ fees and costs to unsecured or undersecured creditors.
We believe that Electric Machinery‘s reliance on Timbers is misplaced. Timbers provided that an undersecured creditor could not receive postpetition interest on the unsecured portion of its debt. Timbers, 484 U.S. at 380. This holding is consistent with
4. Public Policy
Finally, Electric Machinery cites policy reasons why courts should disallow claims by unsecured creditors for postpetition attorneys’ fees; in particular, the court opines that disallowance of these claims would promote “equality of distribution” and would prevent individual creditors from utilizing scorched-earth litigation tactics or absorbing an inequitable amount of estate assets. Elec. Mach., 371 B.R. at 551-53. In contrast, the court in Qmect identifies a different policy reason for allowance of such claims (i.e., to prevent the unfairness of a debtor recovering such fees while the creditor is prohibited from similar recovery). Because we find that the Bankruptcy Code itself provides the answer to this issue (by not specifically disallowing postpetition fees), we do not attempt to reconcile these policy concerns. In the end, it is the province of Congress to correct statutory dysfunctions and to resolve difficult policy questions embedded in the statute.20
VI. CONCLUSION
For the foregoing reasons, we REVERSE the bankruptcy court‘s holding that Centre‘s claim against SNIG up to the amount of $180 million be disallowed and REMAND for allowance of the $110 million paid by Centre to the Commissioner. We further REVERSE the disallowance of Centre‘s postpetition fees to the extent the disallowance was based solely on Centre‘s status as an unsecured creditor and REMAND for a determination of whether Centre is entitled to the fees under the relevant contracts or state law or whether other grounds exist (apart from Centre‘s status as an unsecured creditor) for disallowing the postpetition attorneys’ fees claim.
Notes
PCSA at 3. In addition, Article III of the PCSA excepted from the Release claims exceeding $180 million, stating that the LPT and Quota Share Agreements remained in full force and effect “with respect to the cession of Losses, Loss Adjustment Expenses and unearned premium reserves, in excess of $180,000,000.” Id.Subject to receipt of the Commutation Payment, [Centre] does hereby release and forever discharge the Reinsurers, their predecessors, successors, parents, affiliates, agents, officers, directors and shareholders and assigns from any and all past, present and future payment obligations, adjustments, executions, offsets, actions, causes of action, suits, debts, sums of money, accounts, reckonings, bonds, bills, covenants, contracts, controversies, agreements, promises, damages, judgments, claims, demands, liabilities and/or losses whatsoever, all whether known or unknown, which [Centre] and their successors and assigns ever had, now have, or hereinafter may have, whether grounded in law or equity relating, directly or indirectly, to the terms and conditions of the LPT and Quota Share Agreements . . . .
In that case, like Trustee here, the guarantor argued that its liability on the guaranty was not revived when the creditor “voluntarily” returned the payment to the primary obligor in settlement of a preference action. Like us, the appellate court rejected this argument, stating (emphasis added):
We agree with this analysis of why a return of a payment made in settlement of a lawsuit is not “voluntary” and of why the general principles of section 70 of the Restatement (Third) of Surety & Guaranty apply here.[T]his argument misconstrues the nature of voluntariness. [The creditor/obligee] did not spontaneously return the money to [the primary obligor]. It responded to a lawsuit, and entered lengthy negotiations with [the primary obligor] before ultimately reaching a settlement. We do not regard the settlement as uncoerced. A lawsuit necessarily implies a degree of compulsion. A payment made in settlement of contested litigation is not truly voluntary.
If SNIG had filed bankruptcy before the primary obligors had defaulted on the Fronting Agreements and QSR Contract, Centre would hold a claim against SNIG even though SNIG‘s liability was contingent on the primary obligors’ future postpetition default. See In re All Media Props., Inc., 5 B.R. 126, 133 (Bankr. S.D. Tex. 1980), aff‘d, 646 F.2d 193 (5th Cir. 1981) (“[I]n the case of the classic contingent liability of a guarantor of a promissory note executed by a third party, both the creditor and guarantor knew that there would be liability only if the principal defaulted. No obligation arises until such default.“). Similarly, here, the parties knew that Centre‘s remedies against SNIG under Article X would not be available until the occurrence of a contingent, triggering event: the entry of a court order or finding that the Payment was subject to a preference claim.
Another subsection of
In the majority line of cases, courts have held that unsecured creditors are not entitled to claim such fees, as
In the sizable minority line of cases, courts have permitted unsecured creditors to claim attorneys’ fees incurred postpetition but based on a prepetition contract. See Martin v. Bank of Germantown (In re Martin), 761 F.2d 1163, 1168 (6th Cir. 1985); United Merchs. & Mfrs. Inc. v. Equitable Life Assurance Soc‘y of the U.S. (In re United Merchs. & Mfrs. Inc.), 674 F.2d 134 (2d Cir. 1982) (decided under the former Bankruptcy Act, but commenting on