A Valentine for Creditors

Just in time for Valentine’s Day, unsecured creditors may now recover legal fees incurred in a bankruptcy.  This is the kind of love only courts can provide.  Because of a recent court ruling, even an unsecured creditor with a pre-existing legal right to legal fees now has a legal basis to file an unsecured claim for legal fees incurred in connection with its involvement in the debtor’s bankruptcy proceeding.  This may help creditors realize more timely resolutions in the bankruptcy process and in bankruptcy litigation.

On February 8, 2019, the Fourth Circuit Court of Appeals joined the ranks of the Second, Ninth and Sixth Circuit Courts of Appeal, by expanding a lender’s right to assert claims for legal fees that are incurred by the lender on a post-bankruptcy basis.  Generally, creditor claims are determined and fixed at the point in time a bankruptcy petition is filed.  However, what happens when a creditor must advocate its interests in the context of that bankruptcy proceeding, and they have a contract that serves as the basis for their standing as a creditor, which provides that the debtor is responsible for the creditor’s legal fees?  The answer used to be that most creditors were out of luck on all claims for fees that arose post-petition (after the filing of the bankruptcy), excepting of course over-secured creditors who retained the ability to assert claims for legal fees and add it to their claim.  Unsecured creditors had no such rights.  However, the tide has certainly changed since the U.S. Supreme Court’s landmark decision in 2007 (Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007).

This Fourth Circuit Case, Summitbridge National Investments III, LLC v. Faison, No, 17-2441 (4^th Cir. 2019), makes clear that even unsecured creditors can assert a claim for post-petition legal fees that were incurred by reason of the bankruptcy process, provided they had a pre-petition right to legal fees.  That invites a much different question: whether or not that unsecured claim for fees will actually result in any collection of money by reason of that claim.  Yet, for years debtors in bankruptcy court have used to their benefit that unsecured creditors do not like to advocate their claims in bankruptcy court because those creditors had no right or ability to recover their legal fees incurred in connection with that battle.  No more.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.