2011 Crystal Drive,
Ste. 400
Arlington, VA 22202

Officers

Chair
Gerrit Pronske
Pronske & Patel PC
1700 Pacific Ave Ste 2260 (O)
Dallas, TX 75201
gpronske@pronskepatel.com

Chair-Elect
Michelle L. Carter
King Spalding LLP
1180 Peachtree Street NE
Atlanta, GA 30309
(404) 572-3550
mcarter@kslaw.com

Secretary/Treasurer
Janice M. Karlin
US Bankruptcy Court
444 SE Quincy Street Suite 215
Topeka, KS 66049
(785) 295-2646
judge_karlin@lsb.uscourts.gov

Immediate Past Chair
Hon. Harlin D. Hale
U.S. Bankruptcy Court
Federal Building Rm 1254
1100 Commerce Street
Dallas, TX 75242
(214) 753-2060

Board Members
Marc W. Taubenfeld
McGuire Craddock & Strother PC
500 N Akard Street Suite 3550
Dallas, TX 75201
(214) 954-6800
mtaubenfeld@mcguirecraddock.com

Ron Maroko
Office of the United States Trustee
725 S Figueroa Street #2600
Los Angeles, CA 90017-5524
(213) 894-4520
ron.maroko@usdoj.gov

Mission Statement

The mission of the Bankruptcy Law Section is to enhance the practice of insolvency and bankruptcy law in all bankruptcy courts of the United States, and to foster an exchange of information, legal developments, and practice tips among the bankruptcy bench and bar.

A Message from the Section Chair

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Monthly Mailings

October 2006: Recent Developments Under the BAPCPA: What’s happened in the first year?

November 2006: Robert Louis Marrama v. Citizens Bank of Massachusetts et al.

January 2007: An Overview of the Bankruptcy Code

June 2007: Bankruptcy Briefs Newsletter

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Bankruptcy News

Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co.: A Case for Attorney’s Fees for a Creditor
2007 WL 816795
by Ellen Kline and Neil Ferrari

The Supreme Court, in a unanimous opinion delivered by Justice Alito, permitted the recovery of post-petition attorney’s fees on an unsecured, pre-petition contract where such fees would have been recoverable outside of bankruptcy. Travelers Casualty & Surety Co of America v. Pacific Gas & Electric Co., 2007 WL 816795.

Before Pacific Gas and Electric Company (PG&E) filed a voluntary Chapter 11 petition, Travelers Casualty & Surety Company (Travelers) issued PG&E a surety bond to guarantee PG&E’s payment of state workers’ compensation benefits. Because Travelers wanted protection in the event PG&E defaulted, it asserted a claim in the bankruptcy action. The Bankruptcy Court allowed the insertion of language into the Chapter 11 reorganization plan to protect Travelers. The parties ultimately reached an agreement in which Travelers could assert a general unsecured claim for its attorney’s fees. However, when Travelers amended its claim to add the attorney’s fees, PG&E objected based upon a Ninth Circuit decision, which held that attorney’s fees were not recoverable for litigating bankruptcy issues. In re Fobian, 951 F.2d 1149 (9th Cir. 1991). The Bankruptcy Court sustained the objection, rejecting Travelers’ claim on that basis. The District Court and Ninth Circuit affirmed.

The Supreme Court unanimously reversed the decision of the Ninth Circuit, finding that the Code does not support the Ninth Circuit’s Fobian rule. The issue before the High Court was “whether the Bankruptcy Code disallows contract-based claims for attorney’s fees based solely on the fact that the fees at issue were incurred litigating issues of bankruptcy law.” The Supreme Court found that the Code does not. Ordinarily in litigation, a party is not allowed to collect reasonable attorney’s fees from the loser. However, this general rule can be overcome by statute or by an “enforceable contract.” Under the current Bankruptcy Code an “enforceable contract allocating attorney’s fees is allowable in bankruptcy except where the Bankruptcy Code provides otherwise.”

Under Bankruptcy Code 501(a), a claim is allowed unless a party of interest objects. However, even if there is an objection the court shall allow the claim unless the claim implicates one of the nine exceptions in section 502(b). According to the Court, Traveler’s claim implicates none of the exceptions of sections 502(b)(2)-502(b)(9). Thus, the claim must be allowed unless it is unenforceable under 502(b).

The Bankruptcy Court rejected Travelers’ claim based on the Fobian rule, which had held “attorney fees are not recoverable in bankruptcy for litigating issues ‘peculiar to federal bankruptcy law.’” The Supreme Court found no support for this rule anywhere in the Code. The Court reiterated “that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.”

PG&E raised a few arguments in the oral argument that had not been raised in the lower courts and therefore were not considered. It argued “506(b) categorically disallows unsecured claims for contractual attorney’s fees.” PG&E argued that the Code allows attorney’s fees only to the extent that the creditor is oversecured. The issue was not raised below and remains open to litigation for another day.

PG&E also argued that Congress did not intend to allow unsecured creditors to collect attorney’s fees because of the structure and purpose of the Code. The Supreme Court also did not consider this argument, which was not raised in the lower courts. That argument, perhaps a little harder to enunciate, remains open.

For the present, a creditor’s contract providing for attorney’s fees will be enforced in a bankruptcy case, except where the Bankruptcy Code provides otherwise.

The Right to Convert Is Not Absolute
by Ellen Kline and Neil Ferrari

The Supreme Court, in a 5-4 opinion delivered by Justice Stevens, held that a debtor does not have an absolute right to convert a Chapter 7 case to a Chapter 13. Marrama v. Citizens Bank of Massachusetts, 2007 WL 517340.

When Robert Marrama filed his petition under Chapter 7 of the Bankruptcy Code, he misrepresented the substantial value of his house. He also denied transferring any property other than in the ordinary course of business during the year preceding his filing, when in reality, Marrama transferred property to a newly created trust to protect it from creditors. After the trustee indicated he intended to recover the house as property of the estate, Marrama sought to convert the proceeding from Chapter 7 to Chapter 13. Both the trustee and the bank objected to the request to convert, contending the motion was made in bad faith and constituted an abuse of the bankruptcy process. The bankruptcy judge denied Marrama’s request, finding bad faith in concealing his assets. This judgment was first affirmed by the Bankruptcy Appellate Panel for the First Circuit; then later affirmed by the Court of Appeals for the First Circuit.

The Supreme Court affirmed. The High Court held that Marrama forfeited his right to convert his case to Chapter 13 under a “bad faith” exception to the conversion right created by section 706(a). The Court found this exception in section 707(d), which provides that a case may not be converted to another chapter if the debtor may not be a debtor under that chapter. The majority found Marrama did not qualify as a Chapter 13 debtor under section 1307(c), which provides that a judge may dismiss a Chapter 13 proceeding or convert it to a Chapter 7 proceeding “for cause.” A bankruptcy court’s ruling that an individual’s Chapter 13 case should be dismissed or converted to Chapter 7 because of pre-petition bad-faith conduct, including fraud, is equivalent to ruling the individual does not qualify as a debtor under Chapter 13. Additionally, the Court explained that a bankruptcy judge's broad authority, described in section 105(a), to take any action necessary “to prevent an abuse of process” includes denying a motion to convert that “merely postpones the allowance of equivalent relief and may provide the debtor with an opportunity to take action prejudicial to creditors.”

The dissent acknowledged that in situations of obvious fraud, the bankruptcy court faces a real problem: a debtor is attempting to abuse the system. However, disregarding the Code to punish this individual is not the correct remedy. According to the dissent, only two restrictions apply to Chapter 7 debtor’s rights of conversion. First, a debtor may not convert if the case has already been converted under section 1112, 1208, or 1307. Second, the debtor “must meet the conditions that are needed in order to ‘be a debtor under such chapter.’” Nothing in section 706 or in the entire Code suggests that a judge has discretion to limit a debtor’s power under section 706(a). And, no provision of the Code justifies a denial of conversion based on “bad faith,” according to four justices.

The dissent also points out that the majority should be reading section 706(d) along with section 109(e). There are two requirements under section 109(e) for an individual to be a debtor under that section. Neither requirement deals with “cause” or “bad faith.” Instead, the Court reads 706(d) along with 1307(c). However, 1307(c) applies when a Chapter 13 case is already filed and does not deal with what requirements a debtor must satisfy before conversion.

Ellen Kline is a second year law student at Southern Methodist University Dedman School of Law. Neil Ferrari is a second year law student at Southern Methodist University Dedman School of Law. Both students are externs for the Honorable H. DeWayne “Cooter” Hale, United States Bankruptcy Judge, Northern District of Texas.