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ICR Intelligence
- April 2007 -
Recovery of Post-Petition Attorney Fees by an
Unsecured Creditor Non Prohibited Under Section 502 of the Code
By: Beverly Weiss Manne, Esquire
The United States Supreme Court ruled that under Section 502 of the
Bankruptcy Court an unsecured creditor is not categorically precluded
from recovering attorney fees that were authorized by a pre-petition
contract but were incurred post-petition. (TRAVELERS CASUALTY & SURETY
CO. OF AMERICA v. PACIFIC GAS & ELECTRIC CO. No. 05–1429. Decided March
20, 2007).
Travelers had issued a surety bond to guarantee payment of workers
compensation premiums by the Debtor, PG&E. Travelers filed a claim in
the bankruptcy case to preserve its rights in the event the Debtor
defaulted on those benefits. PG&E then filed a chapter 11 plan
disclosure statement which included language to protect Travelers in
case of a default. Travelers and PG&E had disputes about the language.
PG&E and Travelers ultimately entered into a stipulation that allowed
Travelers to assert a general unsecured claim for attorney’s fees, which
were authorized in the original indemnity agreements. Travelers filed an
amended claim for such fees, which caused PG&E to object based on
earlier 9th Circuit Ruling (the Fobian decision) which had held that if
in a bankruptcy case the issues being litigated involved bankruptcy
issues only (as opposed to contract enforcement questions) attorney fees
could not be awarded. The Bankruptcy Court sustained the Debtor’s
objection, and Travelers appealed. Both the District Court and the Ninth
Circuit affirmed the disallowance of the attorney fees.
The U.S. Supreme Court unanimously reversed that ruling and remanded to
the Bankruptcy Court. The Court noted that the Travelers’ claim for
contractual attorney fees was neither “unenforceable” under §502(b)(1)
as a matter of applicable non-bankruptcy law nor did any provision of
the Bankruptcy Code render it unenforceable. Because in some
circumstances, a “ ‘prevailing party in a bankruptcy proceeding may be
entitled to an award of attorney fees in accordance with applicable
state law . . . .’ ” the Court found that the wholesale disallowance was
improper because federal bankruptcy law does not disallow contract-based
claims for attorney’s fees based solely on the fact that the fees were
incurred litigating bankruptcy law issues. The Court also overruled the
Fobian rule as having “no support in federal bankruptcy law”.
The Court did send the case back to the Bankruptcy Court to determine
whether other principles of bankruptcy law – specifically Section
506(c), might provide an independent basis for disallowing Travelers’
claim for attorney’s fees. Since that issue had not been raised in the
Petition to the U.S. Supreme Court, they were not going to consider that
argument.
Beverly Weiss Manne, Chair of the firm’s Insolvency & Creditors’ Rights
Department, represents commercial lending and leasing clients in
troubled credit situations, including workout, loan restructurings,
forbearance, enforcement actions and bankruptcy and reorganization
proceedings. Beverly may be reached at 412.594.5525 or via e-mail at
bmanne@tuckerlaw.com.
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Changes to Pennsylvania Sheriff’s Sale Law
By: Brett A. Solomon, Esquire
The Pennsylvania legislature recently approved changes to Pennsylvania
Rule of Civil Procedure 3129.3 regarding postponement of sheriff’s sales
in Pennsylvania. Previously, the law provided that a sheriff’s sale
could be continued one time from its original sale date to a date
certain within 100 days of the originally scheduled sale. Provided the
continuance was announced publicly at the sheriff’s sale, no new notice
would be required. The new rule provides that a sale may be continued to
a date certain within 130 days of the originally scheduled sale and that
there may be two continuances within the 130 day period without new
notice. The continuance must still be announced publicly at the sale by
the Sheriff. By way of example, a creditor who has scheduled a sale and
learns on the day of the sale that a bankruptcy has been filed by the
foreclosure defendant, may continue the sale 30 days in an attempt to
obtain relief from the automatic stay during that 30 day period. If
relief has not been granted within that 30 day period, the plaintiff in
the foreclosure matter may attend the sale and request a second
continuance of the sale of 30 to 100 more days, in order to obtain
relief from the automatic stay. Previously, a foreclosure plaintiff was
only entitled to one continuance of the sale from its original sale
date. As was the case previously, once you have exhausted your two stays
or 130 days, you may still present a motion to the court to obtain a
court order continuing the sale after you have exhausted your two
continuances and /or the 130 day time period has passed.
One other administrative change to Pennsylvania Rule of Civil Procedure
3129.3 is that the plaintiff or a representative of the plaintiff must
be present at the sale, or the sheriff shall return the writ of
execution to the prothonotary and indicate that the real property has
not sold because the plaintiff or a representative of the plaintiff was
not present at the sale. The majority of the sheriff’s offices across
the state are now requiring that if the plaintiff or the attorney for
the plaintiff are not present at the sale, that some authorization be
given to the sheriff to allow another person to attend the sale on
behalf of the plaintiff. This has been accomplished by sending letters
to sheriffs allowing counsel other than plaintiff’s counsel on the
complaint to attend the sale on behalf of the plaintiff and bid at said
sale.
Brett A. Solomon, a shareholder in the firm’s Insolvency and Creditor’s
Rights Department, concentrates his practice in the areas of creditors’
rights, loan workout, insolvency and restructuring of distressed loans.
Brett may be reached at 412.594.3913 or via e-mail at bolomon@tuckerlaw.com
^Top
Recent Third Circuit Decision
Affecting Equipment Lessors
T & N Ltd. v. Computer Sales
Int’l, Inc. (In re Federal-Mogul Global, Inc.), 2007 U.S. App. LEXIS
6120 (3d Cir. 2007) The United States Court of Appeals for the Third
Circuit reversed the decision of the United States Bankruptcy Court for
the District of Delaware and United States District Court for the
District of Delaware and held that the Bankruptcy Court improperly
modified an equipment lease under 11 U.S.C. §365(d)(5) by permitting
proration of payment obligations as of the date of rejection of the
lease.
Summary and Factual Background
In October of 2001, Federal-Mogul Corporation (“Federal-Mogul”) filed
for bankruptcy in the United States Bankruptcy Court for the District of
Delaware. In 1992, Federal-Mogul and Computer Sales International
(“CSI”) (a computer equipment lessor) entered into a Master Lease
Agreement and during the period of time between 1992 and 2001,
Federal-Mogul leased hundreds of items of equipment from CSI under at
least 70 leasing schedules. The Master Lease Agreement (the “Lease”)
provided for the first of the month as a payment due date. In 2002,
Federal-Mogul negotiated a new lease with IBM and sought to approve the
IBM lease and reject CSI’s Lease. The Bankruptcy Court allowed
Federal-Mogul to reject the Lease and included language in the order
that “with such rejection taking effect upon the Debtors giving notice
to the applicable Computer Equipment Lessor.”
Federal-Mogul began replacing the leases and when it rejected mid-month,
it did not pay on the first of the month but sometime later in the
month, and made a prorated payment to CSI. CSI filed a motion to compel
payment for the entire month in which the lease was rejected. The
Bankruptcy Court denied the motion to compel and found that the order of
court allowing rejection stipulated that the rent would be prorated and
that equity supported the modification of the Lease to allow proration.
The United States District Court for the District of Delaware affirmed
the Bankruptcy Court and CSI appealed to the Third Circuit.
Discussion
In determining whether the Bankruptcy Court properly modified an
equipment lease under 11 U.S.C. §365(d)(5) by permitting proration of
payment obligations as of the date of rejection of the lease the Third
Circuit had to first address whether or not CSI waived its argument
against proration. The Debtor argued and the District Court and
Bankruptcy Court found that proration was implied in the Motion to
Reject CSI’s Lease and in the order of court. The Third Circuit found
that proration was not explicitly stated in either the Motion to Reject
or the order of court. The Third Circuit held that the order of court
did not provide for proration of payments and further stated that
debtors should explicitly make requests to modify a lease under 11 U.S.C.
§365(d)(5) and that debtors would have to set forth any equities that
support such a modification.
The Third Circuit next addressed whether the equities of the case
supported a modification of the lease to allow for proration of the
lease obligation following rejection of the lease. The Third Circuit
found that the equities of the case weighed against Federal-Mogul and
did not support modification of the Lease for the following reasons:
• Federal-Mogul failed to meet their lease obligations on time and then
sought a modification of the lease.
• Federal-Mogul sought modification only after all of the leases had
been rejected.
• Federal-Mogul controlled the date of rejection and had every
opportunity to structure the rejection to take full benefit of the full
month’s rent.
• It is not inequitable to holding Federal-Mogul to its bargain under
the Lease, which was for rent due on the first of the month for the full
month despite the date of rejection.
Practical Advice
Equipment lessors whose lessees have filed for bankruptcy are entitled
to payment of a full month’s rent under their leases, even when the
lessee rejects the equipment mid-month. Proration is only available if
the lessee seeks to modify the lease prior to rejection under 11 U.S.C.
§365(d)(5). Even then, a lessee would have to set forth the equities of
the case that would support a modification to include proration.
^Top
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