This article is part of the PLC Global Finance February 2010 e-mail update for the United States.
In its recent decision in Ogle v. Fidelity & Deposit Co. of Maryland (586 F.3d 143 (2d Cir. 2009)) (Ogle), the Second Circuit Court of Appeals held that, under the Bankruptcy Code, an unsecured creditor is entitled to recover post-petition attorneys' fees that were authorised by an otherwise enforceable pre-petition indemnity agreement, but contingent on post-petition events. This article examines the case.Close speedread
In its recent decision in Ogle v. Fidelity & Deposit Co. of Maryland (586 F.3d 143 (2d Cir. 2009)) (Ogle), the Second Circuit Court of Appeals held that, under the Bankruptcy Code, an unsecured creditor is entitled to recover post-petition attorneys' fees that were authorised by an otherwise enforceable pre-petition indemnity agreement, but contingent on post-petition events.
The facts of the case were as follows:
Fidelity & Deposit Company of Maryland (Fidelity) asserted a claim for attorneys' fees that it had incurred in connection with the enforcement of certain agreements (Agreements) against Agway Inc. after the filing of Agway's chapter 11 petition.
Under the Agreements, Fidelity provided surety bonds (Bonds) to Agway's insurers, and Agway in turn agreed to indemnify Fidelity for any payments that it made under the Bonds, as well as legal fees incurred to enforce the Agreements.
After the commencement of its chapter 11 case, Agway defaulted on payments to its insurers.
The insurers in turn sought payment from Fidelity, and Fidelity made these payments consistent with its obligations under the Bonds.
Fidelity incurred additional costs, including legal fees, in prolonged litigation concerning enforcement of its indemnity rights against Agway.
The Bankruptcy Court in Agway's chapter 11 proceedings concluded that Fidelity had an allowable claim for the recovery of these post-petition attorneys' fees under the Agreements, a decision affirmed by the District Court for the Northern District of New York.
Agway's liquidating trustee, D. Clark Ogle, appealed this decision, claiming that, while Fidelity had a right to payment of the post-petition attorneys' fees under state law, the Bankruptcy Code bars any such recovery.
In rejecting Ogle's appeal, the Second Circuit concluded that the Bankruptcy Code entitled an unsecured creditor to recover post-petition attorneys' fees under a pre-petition contract, even though such fees were contingent on post-petition events. The court examined two provisions of the Bankruptcy Code in reaching this decision: section 502(b) and section 506(b).
Section 502(b) of the Bankruptcy Code provides that a claim will be allowed in an amount as of the date of the filing of the petition, unless one of the enumerated exceptions contained in section 502(b) applies to the claim. The definition of "claim" in the Bankruptcy Code includes contingent rights to payment. The Second Circuit noted that, under contract law, a right to payment based on a written indemnification contract arises at the time the indemnification agreement is executed. The court therefore characterised Fidelity's claim for post-petition attorneys' fees as a contingent right that arose pre-petition. Although the dollar amount of Fidelity's claim for post-petition attorneys' fees had not been fixed as of the day that Agway's chapter 11 petition was filed, the Bankruptcy Code did not bar Fidelity from recovering such fees on that basis.
The Second Circuit relied on the Supreme Court decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. (549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007)) (Travelers) in reaching this conclusion, noting that all of the claims at issue in Travelers were for post-petition amounts, and that "if an unsecured claim for post-petition fees was for that reason unrecoverable, the Travelers court could have disposed of the claim on that simple, available ground alone."
At issue in Travelers was the recoverability of legal fees incurred post-petition solely to litigate issues of bankruptcy law. The Travelers court started from the premise that "an otherwise enforceable contract allocating attorney's fees . . . is allowable in bankruptcy except where the Bankruptcy Code provides otherwise" (Id. at 448, 127 S.Ct. 1199). The Supreme Court went on to explain that, because none of the section 502(b) exceptions applied, and because the claim was valid under applicable state law, Travelers' claim for post-petition fees was permitted under section 502(b)of the Bankruptcy Code.
In Ogle, as in Travelers, none of the section 502(b) exceptions applied to Fidelity's claim, and the claim was based on a contract valid as a matter of state law. Extending the Supreme Court's reasoning, the Second Circuit thus found that Fidelity had an allowed claim for its post-petition attorney's fees, even though, unlike in Travelers, these fees were not incurred to litigate bankruptcy issues.
The Second Circuit next turned to Ogle's argument that section 506(b) of the Bankruptcy Code amounted to a bar to Fidelity's claim, by negative inference or otherwise. Section 506(b) provides, in the relevant part, that an oversecured creditor can recover interest on a claim, and any reasonable fees, costs, or charges provided for under the agreement or state statute under which such claim arose, to the extent that the value of the collateral exceeds the secured debt.
The court considered whether section 506(b) of the Bankruptcy Code, by limiting the amount of unmatured interest that oversecured creditors could recover on their claims, implied that unsecured creditors were barred from recovering post-petition attorneys' fees. The Second Circuit had previously held, in United Merchs. & Mfrs., Inc. v. Equitable Life Assurance Soc'y of the U.S. (674 F.2d 134, 137-39 (2d Cir. 1982)), that neither the wording of section 506(b) nor its legislative history sheds any light on the status of an unsecured creditor's contractual claims for attorney's fees. The court went on to conclude that there was nothing in the later Supreme Court decision in Travelers that was inconsistent with United Merchants. Accordingly, the Second Circuit ruled that section 506(b) does not implicate unsecured claims for post-petition attorneys' fees, and it did not, therefore, operate to bar Fidelity's claim.
Ogle raised a number of additional arguments that were also rejected by the Second Circuit. One such argument was that allowing an unsecured creditor to collect post-petition attorneys' fees based on a pre-petition contract would unfairly disadvantage other creditors, such as tort claimants and trade creditors, whose distributions would thereby be reduced. The Second Circuit rejected this argument, holding that where equally sophisticated parties negotiate a loan agreement that provides for recovery of collection costs on default, courts should presume, absent a clear showing to the contrary, that the creditor gave value, in the form of a contract term favourable to the debtor or otherwise, in exchange for the collection costs provision. The court should therefore give effect to this provision bargained for between the parties.
The importance of the Ogle decision is that it provides a clear statement that, in the Second Circuit, unsecured claims for post-petition attorneys' fees are recoverable where such claims are based on a valid pre-petition agreement, or otherwise arise under applicable state law. Ogle leaves open the question of whether claims for amounts other than attorneys' fees are similarly recoverable by unsecured creditors.
The ISDA Master Agreement provides that, in case of a default under the agreement, the defaulting party indemnifies the non-defaulting party for and against all reasonable out-of-pocket expenses, including legal fees, incurred by the non-defaulting party by reason of the enforcement and protection of its rights under the ISDA Master Agreement and related documents. Counterparties of debtors under ISDA Master Agreements may thus attempt to rely on Ogle to argue that they have a valid claim for costs of enforcement of their rights under the ISDA Master Agreement, even where these costs arose post-petition.