Fourth Circuit Allows Unsecured Claim for Post-Petition Legal Fees

Dechert LLP

Dechert LLP

It is a well-established principle of bankruptcy law that claims generally crystallize as of the bankruptcy petition date. Of course, section 506(b) of the bankruptcy code allows over-secured, secured creditors to recover post-petition interest and costs, including reasonable legal fees, if their documentation provides them with the right to recover these costs. But what about unsecured creditors – are post-petition legal fees incurred by an unsecured creditor whose contract with the debtor provides for reimbursement of legal fees allowed or not?

Yes says the Court of Appeals for the Fourth Circuit. The debtor opposed the allowance of these fees relying, for the most part, on section 506(b). Since that section allows these fees only on over-secured, secured claims, clearly, the argument goes, they are not allowed on unsecured claims. The bankruptcy and district court agreed, but the Fourth Circuit reversed.

Relying on the Supreme Court opinion in Travelers, where that Court held that the assumption is that claims allowed under state law are allowed in bankruptcy “unless they are specifically disallowed,” and because there is nothing in the bankruptcy code that specifically disallows claims for post-petition attorneys’ fees incurred on a valid pre-petition contract, the Court reversed. In rejecting the argument that the fees are disallowed under section 506(b), the Court held that disallowance by negative inference fails under Travelers.

This decision, Summitbridge Nat. Invs. III, LLC v. Faison, 915 F.3d 288 (4th Cir. 2019), aligns the Fourth Circuit with the Second and the Ninth Circuits and appears to be gaining strength at the courts of appeals level.

Read the opinion >>

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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