Unsecured and Undersecured Creditors Not Entitled to Post-Petition Attorneys' Fees and Costs

On July 6, 2007, the court in In re Electric Machinery Enterprises, Inc., ___ B.R. ___, 2007 WL 3031445 (Bkrtcy.M.D.Fla.)(Williamson, J.) issued its decision holding that unsecured creditors are not entitled to collect post-petition attorneys' fees, costs, and other similar charges even if there is an underlying contractual right to them.

The court noted that the majority of the courts have concluded that unsecured and undersecured creditors are not entitled to recover post-petition attorneys' fees, costs, and other charges. The court stated that there are four primary reasons for this view. First, a number of court have focused on the plain language of section 506(b) and applied the legal maxim of expressio unius est exclusio alterius. Section 506(b) provides that to the extent that an allowed secured claim is oversecured, there shall be allowed to the holder of such claim, interest and any reasonable fees, costs and charges. Second, is the Supreme Court's opinion and reasoning in United Saving Ass'n v. Timbers, 484 U.S. 365 (1988), which permitted post-petition interest to be paid only out of an equity cushion and ruling that an undersecured creditor without an equity cushion fell within the general rule of disallowing post-petition interest. Timber's rationale would then apply equally to unsecured and undersecured creditors. Third, courts rely on the plain language of section 502(b) which provides that the court shall determine the amont of the claim "as of the date of the filing of the petition" and that the time for determining the amount of the claim is as it existed as of the time of the filing of the case without the inclusion of post-petition interest, attorneys' fees or costs unless the claim is oversecured where such amounts are allowed under section 506(b). Fourth, courts rely on equitable considerations and policy of providing equality of distribution among similary situated creditors according to the priorites set out in the Bankruptcy Code. Thereby, unsecured creditors with attorney fees provisions in their contracts are not allowed to recover their fees just as unsecured tort claimants are not able.

The court adopted the majority view even though the Supreme Court recently declined to express an opinion as to whether unsecured creditors are entitled to post-petition attorneys' fees in a case under the Bankruptcy Code. Travelers Casualty & Surety Co. of America v. Pacific Gas & Elec. Co., ___ U.S. ___ (2007). The court stated that there is existing Supreme Court precedent under pre-Code law to support he majority view. "Specifically, in Randolph v. Scruggs, 190 U.S. 533 (1903), the Supreme Court formulated the requirement of "benefit to the estate" for the allowance of unsecured creditor's contract claims for post-petition legal fees." The court disagreed with the creditor's contention that the Eleventh Circuit implicity recognized an unsecured creditor's entitlement to attorney's fees in In re Welzel, 275 F.3d 1308 (11th Cir.2001).

Robert Eisenbach, III of In the (Red) Business The Bankruptcy Blog points out in a post dated July 26, 2007 that the Middle District of Florida Bankruptcy Court did not cite to the In re Qmect, Inc. May 2007 decision by the Northern District of California Bankruptcy Court which Bob discussed in a previous post. Bob notes that in In re Qmect, Inc.., the California Bankruptcy Court adopted a view opposite to that of the Florida Bankruptcy Court and held that an unsecured creditor could recover post-petition attorneys' fees as part of its claim if its contract with the debtor provided for recovery of such fees. The court pointed to the policy of the preservation of nonbankruptcy legal rights except to the extent necessary to facilitate the purpose of the bankruptcy proceeding. Bob notes that he expects more decisions to follow on this issue in the wake of the Travelers decision as creditors with attorney's fees provisions in their contracts seek to include post-petition fees in their unsecured claims.

The case of In re Busch, ___ B.R. ___, 2007 WL 1584650 (10th Cir.BAP(Utah))(Berger, J.), also adopted a view opposite to that of the Florida Bankruptcy Court where the court allowed the Debtor's ex-wife, who was an unsecured creditor, to recover certain of her attorney fees incurred in the bankruptcy case. The court reasoned that as the attorney fees would be awardable under state law in state court, that the enforcement of her interests should not be analyzed differently in the bankruptcy court.(305) 891-4055 - Jordan E. Bublick is a Miami Bankruptcy Lawyer with over 25 years of experience in filing Chapter 13 and Chapter 7 Bankrkuptcy Cases.