Supreme Court May Allow Creditors to Recoup Fees in Bankruptcy Cases

In bankruptcy news that will probably be exciting to someone — it’s looking like the Supreme Court may rule in favor of creditors recovering attorneys’ fees incurred while litigating federal bankruptcy issues.

Back in 1991, the 9th Circuit U.S. Court of Appeals created something called the Fobian rule.  The Fobian rule said that attorneys’ fees could not be recovered, because federal law does not authorize it.  Now, the Supreme Court might be about to change the Fobian rule.

Attorneys against the Fobian rule argue, ironically, that the rule that says there’s no federal law basis for collecting attorneys’ fees itself doesn’t have a basis in federal law, existing in a nebulous wasteland outside of the bankruptcy code.

According to a story running on the Forbes.com site, the dispute stems from PG&E’s bankruptcy filing in April 2001. Travelers had provided PG&E with a $100 million bond to cover PG&E’s workers’ compensation obligations. Travelers filed a claim related to the bond in bankruptcy court and PG&E subsequently sued Travelers.

As part of a contract providing for the issuance of the bond, PG&E had committed to pay Travelers’ attorneys’ fees in the event of litigation. Travelers sought to recover $167,000 in fees, but PG&E refused.

The 9th Circuit sided with PG&E in February 2006, citing the Fobian rule.

However, if that pesky Fobian rule can be knocked out of the way – a whole new world of recouped costs will open.

The case is Travelers v. Pacific Gas & Electric, 05-1429.