By: Scott B. Riddle, Esq. (thanks to the Supreme Court Blog for the tip).

In an opinion entered today in the case of Travelers Casualty & Surety v. Pacific Gas & Electric (05-1429), the Supreme Court reversed the Ninth Circuit and held that the Bankruptcy Code does not forbid a claim for attorneys fees where such fees are provided for in a contract, even where the fees were generated in litigating Bankruptcy issues. 

The facts from the Syllabus –

After respondent (PG&E) filed for Chapter 11 bankruptcy, petitioner (Travelers), which had previously issued a surety bond to guarantee PG&E’s payment of state workers’ compensation benefits, asserted a claim in the bankruptcy action to protect itself should PG&E default on the benefits. With the Bankruptcy Court’s approval, PG&E agreed to insert language into its reorganization plan and disclosure statement to protect Travelers in case of such a default. Additional litigation over the negotiated language nevertheless ensued and was ultimately resolved by a court-approved stipulation stating, inter alia, that Travelers could assert a general unsecured claim for attorney’s fees, which were authorized in the parties’ original indemnity agreements. When Travelers filed an amended claim for such fees, PG&E objected based on the rule the Ninth Circuit adopted in its prior Fobian decision that where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees generally will not be awarded. The Bankruptcy Court rejected Travelers’ claim on that basis, and the District Court and the Ninth Circuit affirmed.

  The Court first reviewed the general law regarding the filing of claims –

When a debtor declares bankruptcy, each of its creditors is entitled to file a proof of claim—i.e., a document providing proof of a “right to payment,” 11 U. S. C. §101(5)(A)— against the debtor’s estate. Once a proof of claim has been filed, the court must determine whether the claim is “allowed ” under §502(a) of the Bankruptcy Code: “A claim or interest, proof of which is filed under section 501 . . . is deemed allowed, unless a party in interest . . . objects.”

But even where a party in interest objects, the court “shall allow” the claim “except to the extent that” the claim implicates any of the nine exceptions enumerated in §502(b). Ibid.

Travelers’ claim for attorney’s fees has nothing to do with property tax, child support or alimony, services provided by an attorney of the debtor, damages resulting from the termination of a lease or employment contract, or the late payment of any employment tax. See §§502(b)(2)–(8). Nor does it appear that the proof of claim was untimely. See §502(b)(9). Thus, Travelers’ claim must be allowed under §502(b) unless it is unenforceable within the meaning of §502(b)(1).

The Court then rejected the analysis of the Ninth Circuit –

In rejecting Travelers’ claim for contractual attorney’s fees, the Court of Appeals did not conclude that the claim was “unenforceable” under §502(b)(1) as a matter of applicable nonbankruptcy law. Nor did it conclude that Travelers ’ claim was rendered unenforceable by any provision of the Bankruptcy Code. To the contrary, the court acknowledged that, in at least some circumstances, a “ ‘prevailing party in a bankruptcy proceeding may be entitled to an award of attorney fees in accordance with applicable state law . . . .’ ” 167 Fed. Appx., at 594 (quoting Baroff, 105 F. 3d, at 441).

The court nevertheless rejected Travelers’ claim based solely on a rule of that court’s own creation—the so-called Fobian rule—which dictates that “attorney fees are not recoverable in bankruptcy for litigating issues peculiar to federal bankruptcy law.’ ” 167 Fed. Appx., at 594 (quoting Fobian, 951 F. 2d, at 1153). The court explained that, because the fees claimed by Travelers were incurred litigating issues that were “governed entirely by federal bankruptcy law,” 167 Fed. Appx., at 594, Travelers’ claim necessarily failed.

The Fobian rule finds no support in the Bankruptcy Code, either in §502 or elsewhere. In Fobian, the court did not identify any provision of the Bankruptcy Code as providing support for the new rule. See 951 F. 2d, at 1153. Instead, the court cited three of its own prior decisions, In re Johnson, 756 F. 2d 738 (1985); In re Coast Trading Co., 744 F. 2d 686 (1984); and In re Fulwiler, 624 F. 2d 908 (1980) (per curium). Significantly, in none of those cases did the court identify any basis for disallowing a contractual claim for attorney’s fees incurred litigating issues of federal bankruptcy law. Nor did the court have occasion to do so; in each of those cases, the claim for attorney’s fees failed as a matter of state law. See Johnson, supra, at 741–742; Coast Trading, supra, at 693; Fulwiler, supra, at 910.

The Court then dismissed the Debtor’s additional argument –

PG&E argues that §506(b) categorically disallows unsecured claims for contractual attorney’s fees and—noting that Travelers’ claim is unsecured—asks us to affirm on that basis. Section 506(b) provides as follows: “To the extent that an allowed secured claim is secured by property the value of which . . . is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.” 11 U. S. C.A. §506(b) (Supp. 2006).

According to PG&E, this provision authorizes claims for contractual attorney’s fees to the extent the creditor is oversecured, but disallows such claims to the extent the creditor is either not oversecured or (like Travelers) completely unsecured. This reading of the Code, PG&E argues, “is not a matter of negative implication, but of explicit negation.” Brief for Respondent 18. PG&E also argues that the structure and purpose of the Bankruptcy Code, examined against the backdrop of pre-Code bankruptcy law, confirm that Congress did not intend to allow unsecured creditors to recover attorney’s fees. See id., at 25–38.

PG&E did not raise these arguments below. Consequently, none of the lower courts had occasion to address them. Nor were these arguments presented in PG&E’s brief in opposition to certiorari. PG&E nevertheless insists that we should address these arguments as though they were “fairly included” within the question presented in Travelers’ petition for certiorari. See id., at 41. That contention appears to be premised on the theory that “the Fobian rule reaches the correct conclusion in this case,” but “doesn’t go far enough in . . . preventing creditors from requiring other creditors to pay for their attorneys’ fees.” Tr. of Oral Arg. 25.

We are not persuaded. We granted certiorari to resolve a conflict among the lower courts regarding the Fobian rule, which is analytically distinct from, and fundamentally at odds with, PG&E’s reading of §506(b).4

4 PG&E’s new reading of the Code would prohibit all unsecured creditors from recovering contractual, postpetition attorney’s fees in bankruptcy proceedings – even if those fees were incurred while litigating issues of state law. See Brief for Respondent 17-19. The Fobian rule, by contrast, would allow such a recovery-even by unsecured creditors -so long as the litigation resulting in the claimed fees did not involve "issues peculiar to federal bankruptcy law." See In re Fobian, 951 F. 2d 1149, 1153 (CA9 1991)

In any event, we ordinarily do not consider claims that were neither raised nor addressed below, Cooper Indus-tries, Inc. v. Aviall Services, Inc., 543 U. S. 157, 168–169 (2004), and PG&E has failed to identify any circumstances that would warrant an exception to that rule in this case. We therefore will not consider these arguments.