Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. (03/20/2007)
Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. (03/20/2007)
BY ZENA McFADDEN, MEDILL NEWS SERVICE
Should attorneys be able to collect their fees for services they provide during bankruptcy? There are two trains of thought in the legal community regarding this question.
One says no, attorneys should not be able to collect. The thinking is that if attorneys could collect their fees during bankruptcy there would be lawyers filing claims even if they didn't have valid claims to pursue just to get the attorneys fees.
If creditors without valid claims were allowed to get their attorneys' fees awarded in bankruptcy, the system would be overwhelmed. Those fee applicants would take up so much money that none would be left to pay creditors who had the right to awards.
More importantly, there may be no money left to reorganize the company and get it on its feet again. Reorganizing a company so that it can continue in business is the essence of Chapter 11 bankruptcy law.
The other side in this debate says state law must not be ignored during bankruptcy proceedings. In certain circumstances if a creditor has a legitimate claim that can be litigated in state court, the bankruptcy court must respect this claim.
If state law requires that the creditor should get attorneys' fees, then bankruptcy code should not stand in the way of a company that is owed money from colleting.
The Supreme Court has agreed to hear the case, Travelers Casualty & Surety Company of America v. Pacific Gas and Electric Company, No. 05-1429 and resolve this apparent conflict.
Pacific Gas and Electric Co. (PG&E) is an energy company based in San Francisco. Travelers Casualty & Surety Co. (Travelers) is a commercial and property insurance firm, based in St. Paul, Minnesota.
Sometime before April 2001, PG&E and Travelers entered into a contract. Travelers promised to pay PG&E's workers' compensation claims in the event that PG&E could not. A provision in the contract said that if PG&E did not fulfill its obligation to repay Travelers, PG&E would pay attorneys' fees to litigate for their right to repayment.
PG& E filed for bankruptcy in April 2001. During its time in bankruptcy, PG&E continued to pay its workers compensation obligations. PG&E never said that it would stop making these payments.
Travelers, fearing that PG&E would default and fail to make its workers compensation payments, filed a claim on its own behalf in the bankruptcy court. Out of this claim, Travelers was assured that its rights under bankruptcy law were in tact.
Travelers demanded that PG&E pay the legal fees and expenses they incurred in defending their financial claims before the bankruptcy court. Travelers said they had a right to attorneys' fees and pointed to the contract that Travelers had signed with PG&E prior to bankruptcy.
PG&E said that Federal Bankruptcy law does not allow attorneys to collect fees for pursuing a claim.
The bankruptcy court and the district court both rejected Travelers request for fees citing a 1991 9th U.S. Circuit case Fobian v. W. Farm Credit Board. They believe that federal bankruptcy law closes the door on collection of attorneys' costs.
Travelers disagrees, pointing to federal court decisions that clearly say that state law allows them to get paid as promised in the contract signed with PG&E. This is why the insurance firm brought their case to the attention of the Supreme Court.
A split in the court decisions around an issue makes it difficult for those in the field to know how to proceed. Should attorneys' fees be allowed when a company is in bankruptcy? The Supreme Court will hear the oral arguments on January 16, 2007.