Publications

Greetings, Court fans!

Spring has finally arrived, but the deluge of opinions it typically brings is nowhere in sight. This week, we have a solitary bankruptcy decision to report.

In Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. (05-1429), the Court (Alito, J.) unanimously overruled the Ninth Circuit’s decision (based on that Circuit’s prior holding in In re Fobian) that contractually based attorney’s fees are not recoverable in bankruptcy where the fees were incurred litigating issues “peculiar to federal bankruptcy law.” The so-called “Fobian rule” received a sound thumping from the Court, which noted that the rule “finds no support in the Bankruptcy Code” and is “solely a rule of [the Ninth Circuit’s] own creation.”

For those who want the facts (and we won’t purport to give you all of them), here goes: In connection with Travelers’ issuance of $100M in surety bonds to guarantee PG&E’s payment of state workers’ compensation benefits, PG&E executed indemnity agreements assuming responsibility for any loss incurred by Travelers in connection with the bonds, including attorneys’ fees. PG&E filed for bankruptcy; Travelers asserted a claim; and the claim was resolved by agreement in PG&E’s reorganization plan. But litigation ensued when Travelers claimed that PG&E had unilaterally altered the language of the parties’ agreement, diminishing the protection it would receive. The parties resolved that dispute too and further agreed that Travelers could submit a claim for attorneys’ fees pursuant to the indemnity agreements in the bankruptcy proceedings. But when Travelers asserted the agreed-upon claim, PG&E objected, relying on the Fobian rule. (Fool me once, shame on you. Fool me twice . . . .) The bankruptcy court agreed with PG&E, as did the district court and Ninth Circuit – all relying on the Fobian rule. But that’s as far as it went. The Court rejected the rule out of hand, explaining that claims must be allowed unless they fall within one of the enumerated exceptions specified in the § 502(b)(2)-(8) of the Code (none of which were applicable here) or are unenforceable within the meaning of § 502(b)(1), which simply permits a debtor to raise any defense to the claim that existed outside the bankruptcy process in that process. Even PG&E made “no effort to defend the Fobian rule,” instead claiming that § 506(b) categorically disallows unsecured claims for contractual attorneys’ fees. The Court refused to consider this argument, however, finding that it was not raised and addressed below.

Finally, there is one small oddity to report: The Court vacated its December 7th cert grant in Credit Suisse First Boston Ltd. v. Billing (05-1157), after Justice Kennedy concluded that he should have recused himself from the initial determination since his son is a managing director of Credit Suisse. The Court (less Kennedy and the Chief, who did not participate) then reconsidered the petition and again granted it. The case will consider the interplay between the antitrust laws and securities laws (see our December 13th update for specifics).

That’s all for now. We expect more decisions to be released next week.

Kim & Ken

From the Appellate Practice Group at Wiggin and Dana For more information, contact Kim Rinehart, Ken Heath, Aaron Bayer, or Jeff Babbin at 203-498-4400