On June 23, 2009, in the case of SNTL Corp. 2009 WL 1758759 (9th Cir. Cal.), the Ninth Circuit Court of Appeals concluded that unsecured creditors may claim attorney fees incurred postpetition based on a prepetition contract with the debtor. The Ninth Circuit essentially adopted the Bankruptcy Appellate Panel decision and attached the same as an appendix to its opinion.
While attorney fees may not be considered an “allowed secured claim” in light of 506(b), they nevertheless can be considered an “allowed unsecured claim.” Moreover, even though the attorney fees are incurred post-petition, the parties’ execution of a prepetition agreement containing an attorney fees provision gives rise to a contingent, unliquidated attorney-fee claim.
The Court noted that the Bankruptcy Code provision dealing with the determination of a claim’s secured or unsecured status and with what may be included in oversecured claim 11 U.S.C.A. 506 does not provide an additional ground for the allowance/disallowance of unsecured claims, which is governed exclusively by 502. Thus 506 only concerns claim classification, whereas 502 concerns claim allowance.
So how does this affect the typical chapter 13 case in the Ninth Circuit? First, one must look at the plan percentage. If it is a 0% plan, the new unsecured claim for attorney fees may be meaningless since it will receive no distribution anyways.
More importantly, there must be an underlying attorney fee provision in connection with exercising or protecting the pre-petition claim. In many cases, especially with respect to real estate claims, such provisions are often never triggered. This is because generally those attorney fee provisions arise only where the entire balance is accelerated and/or to protect the security interest which generally is already protected under 1322(b)(2). Finally, Bankruptcy Rule 2016 may require a fee application to be filed unless the proof of claim is specific enough with respect to the fees.
As an aside, also be sure to check your state law to see if you too are entitled to fees if you prevail. In California, for instance, there exists Civil Code 1717 which provides reciprocity of attorney fees to the prevailing party in one sided attorney fee provisions. Thus if the claimant is not entitled to fees after all since the attorney fee provision did not apply, the creditor may still be responsible for your fees. Ironically, you may be able to both eliminate the attorney fees in the proof of claim and obtain an attorney fee award as well under such situations.
Written by Michael G. Doan
Bankruptcy Law Network (BLN)
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Last modified: March 23, 2013