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IN THE SUPREME COURT OF THE UNITED STATES
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TRAVELERS CASUALTY AND :
SURETY COMPANY OF :
AMERICA, :
Petitioner :
v. : No. 05-1429
PACIFIC GAS AND ELECTRIC :
COMPANY. :
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Washington, D.C.
Tuesday, January 16, 2007
The above-entitled matter came on for oral
argument before the Supreme Court of the United States
at 11:01 a.m.
APPEARANCES:
G. ERIC BRUNSTAD, JR., Hartford, Conn.; on behalf of
Petitioner.
E. JOSHUA ROSENKRANZ, New York, N.Y.; on
behalf of Respondent.
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ORAL ARGUMENT OF PAGE
G. ERIC BRUNSTAD, JR.
On behalf of the Petitioner 3ORAL ARGUMENT OFE. JOSHUA ROSENKRANZ
On behalf of the Respondent 25REBUTTAL ARGUMENT OFG. ERIC BRUNSTAD, JR.
On behalf of Petitioner 51
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authorizes that right, in this case, contractual rights,
or alternatively rights available under State statute.
That, we submit, is an impermissible
creation of a Federal common law rule. There is no
basis for it under this Court's preemption precedents.
There's no conflict between Federal policy and State
policy which would justify the creation of the rule, and
accordingly, it is unwarranted.
JUSTICE KENNEDY: Can you tell me -- this is
just basic bankruptcy. I should know, but I looked it
up and couldn't find it. A standard promissory note
which provides for attorneys' fees, the holder of the
note is the creditor, the maker of the note is the
bankrupt -- the maker of the note goes bankrupt. The
holder of the note gets his attorney and says: File a
claim in bankruptcy. And the attorney sends him a bill.
Is the attorneys' fees, the attorney fee for filing the
bankruptcy claim, recoverable as part of the claim?
MR. BRUNSTAD: It depends, Justice Kennedy.
It depends on what their contractual right provides.
Here we have a contractual --
JUSTICE KENNEDY: It's the standard, it's
the standard attorneys' fee provision, all attorneys'
fees in connection with collection of this note and
enforcement of the terms of this note.
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MR. BRUNSTAD: Then, yes, Justice Kennedy, I
would say it probably would be covered. It probably
would be covered and the analysis --
JUSTICE KENNEDY: Is there something where I
can look that up in Collier? Are there millions of
cases? I mean, this seems to me fairly rudimentary.
MR. BRUNSTAD: Yes, Justice Kennedy. In our
reply brief, we do cite to Collier, where we talk about
exactly that scenario and it is described. And it
basically works like this. A claim under the Bankruptcy
Code is defined under Section 1015. The claim includes
any right to payment whether it's contingent or fixed,
matured, unmatured, et cetera. Any right to payment,
literally any right to payment, when the debtor files
for bankruptcy, that becomes a claim. If the right --
JUSTICE KENNEDY: No, no. But in my case,
it's a post-petition action.
MR. BRUNSTAD: Yes, Justice Kennedy. The
key concept -- and this is explained clearly in Collier
-- is where does the right come from? If it arises out
of a pre-petition contract, then the right is
pre-petition in nature, even though the fees are
incurred post-petition. Think of a guarantee. Think of
if PG&E had guaranteed its parent's debt for the $100
million, let's say.
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JUSTICE STEVENS: Could you just back up
just for a second? Supposing at the time of the
bankruptcy that the services have not been performed.
It's post-petition conduct by the lawyer.
MR. BRUNSTAD: Right.
CHIEF JUSTICE ROBERTS: Now, in that case,
are you saying that routinely the lawyer recovers fees
in the bankruptcy case even if the debtor, the debtor
was insolvent? And we're assuming insolvency in the
hypothetical, although it may not fit this case.
MR. BRUNSTAD: Exactly, yes, Justice
Stevens, if in fact, though, the creditor bothers to
assert the claim for fees in the bankruptcy case. In
most cases, creditors don't, because it's not worth the
effort of asserting the claim for fees subsequently. In
cases such as this, where you have a solvent debtor who
can pay all claims in full, there's no reason why they
should be able to get out of their contractual
obligations in bankruptcy.
JUSTICE STEVENS: Well, why wouldn't it be
worth -- I know here. But why wouldn't it be worth the
effort, instead of getting $90 on the note, to get 95?
MR. BRUNSTAD: Well, because there's a
transaction cost in actually filing the additional claim
setting forth the amount that you've incurred. In most
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cases, Justice Stevens, creditors don't even hire
attorneys to pursue or file a claim in bankruptcy. In
most Chapter 7 cases, for example, they are no-asset
cases.
JUSTICE STEVENS: Are you telling me just
based on your experience that in Justice Kennedy's
hypothetical, normally, no fees are recovered?
MR. BRUNSTAD: Normally, there's no
distribution on unsecured claims in most bankruptcy
cases. So why bother?
JUSTICE STEVENS: But assuming in those
cases where there's some distribution, is it correct, as
I'm assuming your answer to Justice Kennedy's question,
that the normal practice is you don't bother because
there is not enough involved?
MR. BRUNSTAD: Typically, Justice Stevens,
that is correct. But in cases such as this, where the
attorneys' fees are substantial, the debtor is solvent,
and there are substantial --
JUSTICE KENNEDY: Just in the hypothetical,
I would think that in many cases, there's going to be
some payout for the promissory note, and the holder of
the note tells his attorneys: Make sure I get that
claim in bankruptcy. The attorney files a claim. And
every attorney that files a claim for a promissory note
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which is entitled to a fee from the bankruptcy court for
filing in the bankruptcy court.
MR. BRUNSTAD: For the work done in
performing, filing the proof of claim, that's correct.
And even though, Justice Kennedy, the attorney's conduct
was after the debtor filed for bankruptcy, the right to
payment arises out of the pre-petition contract. Again,
think of the guarantee hypothetical. There you had the
JUSTICE STEVENS: The pre-petition contract,
but not out of pre-petition conduct.
MR. BRUNSTAD: That's correct, Justice
Stevens. But just think about the pre-petition tort
claim, where there has been exposure to asbestos
products pre-petition, but the injury arises
post-petition. It's still a pre-petition claim.
JUSTICE SOUTER: Okay, but you're one step
ahead of that here, because here there hasn't been any,
in effect, any exposure. Here there isn't any certain
default on the note. So far as we know, here, there may
never be any default on the workers comp obligation. So
that your contingency is a much more remote contingency.
Why should that, why should this case fall into the same
category as the promissory note?
MR. BRUNSTAD: Justice Souter, it's
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different in this sense. This is an indemnity, all-loss
indemnity provision. The surety is not supposed to
incur any loss, any cost whatsoever, for supplying these
surety bonds to PG&E.
JUSTICE SOUTER: And so far as we know, it
won't.
MR. BRUNSTAD: But it has, because when PG&E
filed for bankruptcy --
JUSTICE SOUTER: Well, it has, but that
depends on a totally circular argument. The minute it
filed for bankruptcy, although there had been no default
on the comp obligation, your client started incurring
attorneys' fees, and it was not incurring attorneys'
fees based on any default by the, by the debtor.
MR. BRUNSTAD: Justice Souter, you can
visualize bankruptcy itself as being a default. When
the debtor files for bankruptcy, you must come to the
bankruptcy court to present your rights --
JUSTICE SOUTER: You can call bankruptcy a
default, but that's not what I mean, and you know that's
not what I mean. I'm talking about a default on the
workers comp obligation.
MR. BRUNSTAD: Yes, sir.
JUSTICE SOUTER: There has been no default
on the workers comp obligation, and because they intend
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to keep on running this business, there is reason to
suppose that there will not be.
MR. BRUNSTAD: Well, by analogy, Justice
Souter, in the LTV case, the same posture at the
beginning of the case. We don't know what's going to
happen in the future. You must file your claim at the
beginning of the case. In LTV --
JUSTICE SOUTER: Yes, and maybe you don't
have a claim at the beginning of the case. I mean,
that's what we're getting at. We can understand the
claim when the note -- when you've got a promissory note
and you're out of money. The claim is inevitable. In
this case, there is no inevitable claim.
MR. BRUNSTAD: But that's precisely the
point of why claim is defined so broadly to include
contingent claims.
JUSTICE SOUTER: But if it is defined as
broadly as this, we're in a situation exactly like this.
There has been no default on the obligation, and prior
to getting to this Court, $167,000 has been racked up in
legal fees that accomplishes absolutely nothing.
MR. BRUNSTAD: Absolutely false, Justice
Souter. In bankruptcy, if you do not present your
rights, if the rights of the workers themselves are not
properly treated, they are lost. Under Section 1141,
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they are extinguished.
JUSTICE SOUTER: All right, in this case,
$167,000 has been spent to come to the conclusion, as I
understand it. That if the time comes to assert a right
of indemnification, you can assert a right of
indemnification and we can oppose it. If we are going
to construe the bankruptcy law to provide a law like
this, then maybe there is something wrong in the, in the
construction of the bankruptcy law.
MR. BRUNSTAD: No, Justice Souter, because
if you look at what Section 1141 of the Bankruptcy Code
does, it provides that a plan of reorganization binds
all parties. If you're not provided for adequately in
the plan under Section 1141(d), your rights are
extinguished forever. You must come to the bankruptcy
court; you must be sure that the rights are properly
characterized. Excuse me.
JUSTICE GINSBURG: But that's not what this
bankruptcy court thought about the claim. This
bankruptcy court said some rather critical things.
MR. BRUNSTAD: Yes, Justice Ginsburg, but I
think we need to distinguish two different things.
There was the work that was performed in preserving the
rights of the injured employees, to make sure they were
properly classified, that their rights were rendered
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unimpaired. If that hadn't been in the plan, then their
rights would have been extinguished under Section 1141.
Then there was the claim that the surety
provides for having had to have done all of that work.
JUSTICE GINSBURG: And I don't -- there was
never a time that the plan said we are not going to pay
our workers' compensation.
MR. BRUNSTAD: The problem, Justice
Ginsburg, is that the plan said nothing at all. And
when the plan says nothing at all, the default rule in
bankruptcy is that rights are extinguished; they are
discharged under Section 1141(d). It must be in the
plan in order to be invalid after the confirmation of
the plan. We had to assure those rights were properly
treated in the plan, because if they weren't, they would
have been discharged under the general -- general
discharge provision.
That is why one must come to the bankruptcy
court, one must file a proof of claim, one must enforce
your rights in bankruptcy; if you don't, you lose them.
That's why the surety here stepped forward, said it has
subrogation rights; the workers have rights. And the
bankruptcy court agreed with Travelers. It directed the
debtor to put that language in the plan. Travelers --
JUSTICE GINSBURG: I thought there was a
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section of the code that preserved subrogation rights.
MR. BRUNSTAD: That's Section 509, Justice
Ginsburg.
JUSTICE GINSBURG: Yes.
MR. BRUNSTAD: But that's not what I was
speaking of just momentarily. The rights of the injured
employees, the workers, when they filed for -- when PG&E
filed for bankruptcy, the injured workers had claims.
They were going to receive periodic benefit payments off
into the future. If PG&E had not properly provided for
those claims in the bankruptcy case in their plan, those
claims would have been extinguished. As a result,
though, Travelers would not have been off the hook on
its surety bond, Travelers would have had to have
stepped forward and make the payments if PG&E did not.
But if Travelers hadn't come to the
bankruptcy court and said, these are our rights, these
need to be preserved, its recourse against PG&E would
have extinguished as well. If one does not come to the
bankruptcy court and assert one's rights, one loses
them. And of course, creditors when they do have to
assert their rights, incur attorneys' fees for doing so.
And here we had a pre-petition contract that said,
whatever loss we incur, including attorneys' fees, we
have a right to recover, a right to payment. That
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becomes the claim.
JUSTICE SOUTER: Let's assume, let's assume
that one of the recipients of comp payments had come
forward and said: I object to the plan, I have a claim
for comp payments and I object to the plan because it
doesn't provide for them. And the -- the court said,
you're, you're right. The plan is going to include
provision for comp payments and it had been so amended,
and it was then -- the plan was then amended.
Would you, under those circumstances, have
had any -- would Travelers, under those circumstances,
have had any reason to assert a claim?
MR. BRUNSTAD: We would not have done that
work. No, Justice Souter, because the injured worker
him or herself would have done it.
JUSTICE SOUTER: No, I know it. But would
you have had any other claim that you would have
asserted, had that been done?
MR. BRUNSTAD: Well, with respect to the,
the treatment of the workers under the plan, no. With
respect to --
JUSTICE SOUTER: With respect to any
interest of Travelers?
MR. BRUNSTAD: Yes, Justice Souter.
JUSTICE SOUTER: If that had been done,
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would Travelers have asserted a claim?
MR. BRUNSTAD: Yes, Justice Souter.
JUSTICE SOUTER: What?
MR. BRUNSTAD: We would have said, in our
proof of claim, as we did: If we must make payment in
the future, we are entitled to two things. One, we are
entitled to reimbursement from PG&E for any amount that
we must spend in the future whenever that might occur.
Two, if we have to pay any of the employees, we are
subrogated. We stand in the shoes of the employees and
may assert those rights.
The subrogation right would have been fully
protected, though, Justice Souter, because of the
treatment of the workers in the plan rendering them
unimpaired. We would have left simply -- with simply
saying we have these reimbursement rights which we would
have in case we have to make payment.
Now, in the LTV case, which we cite in our
papers, at the beginning of the LTV case, the surety who
has had $40 million in surety bonds was in a position,
very much the same as in this case, when PG&E filed.
PG&E got an order authorizing it to continue to pay but
not requiring it to pay. That can only be done in the
plan of reorganization. LTV started paying the workers'
comp benefits, but then defaulted and stopped, long
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after the bankruptcy case had commenced, but far short
of when it concluded. The surety had to step up to the
plate and make the payments.
If the surety had not filed a proof of claim
at the beginning of the case, the surety would have lost
its recourse against the debtor, LTV, even though it
subsequently, far later, had to make payment.
JUSTICE GINSBURG: Correct me if I'm
wrong --
MR. BRUNSTAD: That's how bankruptcy works.
JUSTICE GINSBURG: In -- in this case, I
thought that if a contingency claim for indemnification
is not allowed, but if it becomes fixed at some time,
then the claim can be made and is not lost.
MR. BRUNSTAD: No, Justice Ginsburg. There
is a bar date set in the beginning of Chapter 11 cases.
You must file your claim by the bar date or you'll be
forever barred, even if your liability becomes fixed
later.
JUSTICE GINSBURG: I'm talking about
502(e)(1).
MR. BRUNSTAD: Yes, Justice Ginsburg, if
your reimbursement claim is contingent, it will be
disallowed, subject to reconsideration under Section
502(j). And that's what the parties stipulated to in
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this case in our stipulation. We filed our proof of
claim, then PG&E objected to our proof of claim, but
Justice Ginsburg, PG&E did a lot more than just object
to our contingent reimbursement rights. They
mischaracterized our subrogation rights as claims; they
sought to disallow our subrogation claims; and they
sought to subordinate our claims. Plus in addition,
they sought to disallow the claims of the injured
workers.
So we had to respond to the litigation that
was commenced. We had to defend our rights, and we were
successful. The workers' claims were ultimately left
unimpaired in the bankruptcy as they should have been.
PG&E was fully responsible for paying the workers'
claims.
JUSTICE GINSBURG: In any case, this has
nothing to do with the, Fobian, so-called Fobian issue,
whether the Ninth Circuit drew the bright line.
MR. BRUNSTAD: Correct, Justice Ginsburg.
The Fobian rule, we submit, is an impermissible creation
of Federal common law. It's not justified by any
concept of preemption; there is no conflict with
bankruptcy policy --
JUSTICE KENNEDY: Are they --
JUSTICE BREYER: Question --
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JUSTICE KENNEDY: Let me just ask you about
the Fobian, and I know Justice Breyer has a question.
Let's assume that you're correct in that the
fees are allowable. Can the bankruptcy court make the
determination of the reasonableness of the fees?
MR. BRUNSTAD: It depends, Justice Kennedy.
If State law, if it's an unsecured claim under Section
501(b)(1) --
JUSTICE KENNEDY: In this case.
MR. BRUNSTAD: In this case, that would be a
determination under State law. Every State, Your Honor,
has a reasonableness requirement.
JUSTICE KENNEDY: So -- so if the bankruptcy
judge isn't sure of what the amount is, he looks to
State law to determine the amount?
MR. BRUNSTAD: Yes, Justice Kennedy. Under
Section 501(b)(1) --
JUSTICE KENNEDY: But the bankruptcy court
does determine reasonableness.
MS. MAHONEY: If State law provides for it,
and all States do. The bankruptcy court adopts the
State reasonableness standard for unsecured claims under
Section 502(b)(1). Yes, Justice Breyer?
JUSTICE BREYER: I'm sort of back where
Justice Kennedy started on this. Forget -- I'd like to
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forget your case, because your case seems to me to be a
case where parties argue reasonably about whether the
contract itself covers this kind of fee. And maybe it
doesn't, if it's very unreasonable, et cetera.
But let's take a very straightforward case.
It's an obvious contract to collect a debt, or maybe a
mortgage, and in the debt or the mortgage agreement, it
says, attorneys' fees will be paid for collection. It
clearly covers bankruptcy, too, by its language.
And now there must be many instances or
some, anyway, where the security is inadequate.
MR. BRUNSTAD: The security --
JUSTICE BREYER: And there must be other
instances in which there wasn't any security. And if I
read Collier as you pointed to, that seems to say, in
such cases, very simple, the creditor has the status of
an unsecured creditor in respect to those attorneys'
fees.
BRUNSTAD: And in --
JUSTICE BREYER: Overage in the secured
case, and the whole claim in the unsecured case. So get
in the queue and you can collect your pro-rata share.
MR. BRUNSTAD: Absolutely, Justice Breyer.
JUSTICE BREYER: My question is, I have 19
professors on the other side coming to tell me that
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that's never happened. They can't even find an
instance. So it isn't as if, it isn't as if you haven't
found an instance, it is that they are prepared to say
it never happened. And then there may be one exception
or two or something like that.
And I can't, that -- I'm now totally
puzzled. Because if it's so clear as you say, and I
follow your logic, and I followed Collier, why? After
all, there are bankrupt people who do have some assets.
Explain it.
MR. BRUNSTAD: Justice Breyer it happens all
the time. In our brief, we cite to many, many cases in
which attorneys' fees are allowed as unsecured claims.
It's actually been happening for over 100 years, it
happened in the Bankruptcy Act of 1998.
JUSTICE KENNEDY: No, no. But -- but we are
talking about attorneys' fees for services performed in
the bankruptcy proceeding?
MR. BRUNSTAD: Correct, Your Honor.
JUSTICE KENNEDY: The cost of filing the
claim, the cost of talking to the bankruptcy judge, et
cetera.
MR. BRUNSTAD: Correct, Your Honor. And in
a key case we cited, the Second Circuit's decision,
United Manufacturers and Merchants, where they didn't
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even hire an attorney until after the bankruptcy case
was filed, the attorney performed services, filing a
proof of claim, protecting the equitable rights, and the
Second Circuit clearly held that those attorneys' fees
were properly part of the unsecured claim, but it
couldn't be any clearer. And the Second Circuit --
JUSTICE STEVENS: But what I don't -- there
is a body of law on the other side of that issue, too,
isn't there?
MR. BRUNSTAD: There is, Justice Stevens,
but those are lower court decisions.
JUSTICE STEVENS: Yes. Absolutely. The
Second Circuit is a lower court.
MR. BRUNSTAD: Well, compared to this Court,
certainly, Justice Stevens.
JUSTICE STEVENS: That's exactly right.
There are no cases from this Court speaking to this
precise issue, are there? On which there is a
disagreement among the lower courts?
MR. BRUNSTAD: Justice Stevens, I think it's
important to say that the alternative rule that PG&E
asked for is one that every court of appeals to have
addressed has rejected. What they are saying is, oh,
you can't get your attorneys' fees based on a
construction of the Bankruptcy Code. No court of
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appeals has accepted it. There are some lower
bankruptcy court decisions that have accepted it, but
that is routinely overturned on appeal.
The issue of whether you get your attorneys'
fees as part of an unsecured claim, Cohen versus De La
Cruz, in that case this Court had to construe whether
the term debt, which means under the Bankruptcy Code the
same thing as a claim, is defined as liability on a
claim, there the Court, this Court concluded that that
debt included attorneys' fees, the treble damages, the
whole nine yards.
JUSTICE BREYER: You would have thought that
the one group of people who ought to know this
thoroughly, or at least have a view are the bankruptcy
bar.
MR. BRUNSTAD: Well --
JUSTICE BREYER: And, and yet there are no
briefs from them; there are not -- there is no article
that I could find in Bankruptcy Journal.
CHIEF JUSTICE ROBERTS: Well, there may be
no briefs from them because it isn't the question on
which we granted cert, is it?
MR. BRUNSTAD: Chief Justice Roberts, that's
correct. And our view is that the Court should deal
only with the Fobian rule. And the alternative argument
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which Respondent presented was never argued below, was
not decided below, was not presented in the opposition
to certiorari. It's been rejected by every single court
of appeals --
JUSTICE GINSBURG: But it would be proper to
remand for the Ninth Circuit to consider those other
arguments?
MR. BRUNSTAD: Yes, Justice Ginsburg. And
that's exactly what this Court should do. It should
remand their statutory interpretation argument to the
Court of Appeals to consider, for the lower courts to
consider. This Court deserves more than just a 20-page
reply brief in response to 80 pages of briefing by the
other side on an issue that was never raised below, not
presented in the opposition to certiorari.
Remand would be the proper thing to do with
respect to their claim. I do believe that is true,
Justice Ginsburg.
JUSTICE GINSBURG: On both their statutory
interpretation and the contract?
MR. BRUNSTAD: The contract, reasonableness,
all of those issues. The circuit split, which we
presented to the Court, and which I understand
certiorari was -- well, I'm guessing -- certiorari was
granted on, it deals with the Fobian rule. As this
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common law rule, this sort of construct, that if you're
litigating Federal law issues, well, as a matter of
general Federal common law, you can't get the attorneys'
fees unless it's authorized by Federal law.
And our brief was entirely devoted to that.
You can't justify that rule in our view under preemption
principles; there's no conflict; there is no Congress
preempting the field in any way; you can't justify this
under Atherton as a, as a -- something that's necessary
because of a conflict with Federal policy.
And also the Fobian rule is inappropriately
categorical, in violation of what we submit are these
Court's principles in the Nolan case, in the CF and I
case. In those cases, the Court said: It's not for the
courts to create these claims processing rules in
bankruptcy. But that exactly is what the Ninth Circuit
did here.
If there are no further questions I'd like
to reserve the balance of my time for rebuttal.
JUSTICE STEVENS: One quick question, if I
may. Would one of the issues open on remand be the
construction of the contract? Is there an issue at
State law as to whether Travelers pays for these
particular services?
MR. BRUNSTAD: Yes, Justice Stevens. That
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would be appropriate on remand. I reserve the balance
of my time.
CHIEF JUSTICE ROBERTS: Thank you, Counsel.
MR. BRUNSTAD: Thank you.
CHIEF JUSTICE ROBERTS: Mr. Rosenkranz.
ORAL ARGUMENT OF E. JOSHUA ROSENKRANZ
ON BEHALF OF THE RESPONDENT
MR. ROSENKRANZ: Mr. Chief Justice, and may
it please the Court:
Let me begin at the threshold, on whether
this Court should consider the statutory construction
argument that we've presented. The issue of statutory
JUSTICE GINSBURG: And can we be, take one
step before that and tell us if you are conceding that
the Fobian rule has no basis in the statute and is
wrong?
MR. ROSENKRANZ: Your Honor, the Fobian rule
reaches the correct conclusion in this case, but Your
Honor is correct. The problem with the Fobian rule is
that it doesn't go far enough in presenting, in
preventing creditors from requiring other creditors to
pay for their attorneys' fees.
JUSTICE KENNEDY: Well, if you say it
doesn't go far enough then I infer from that you say
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that it's valid as far as it goes?
MR. ROSENKRANZ: It is valid as far as it
covers this case but not on the rationale of the Ninth
Circuit. In other words, the Ninth Circuit did begin in
the wrong place, which was not to read the statute,
Section 502, which is why that is a rational predicate
to the issue that Travelers is presenting here.
CHIEF JUSTICE ROBERTS: I'm not sure I
agree, Counsel, that the Fobian rule is both narrower
and broader than the question you try to present. For
example it applies to the claims of a secured creditor
for attorneys fees on a secured claim as well.
MR. ROSENKRANZ: No, Your Honor --
CHIEF JUSTICE ROBERTS: Why -- it doesn't?
MR. ROSENKRANZ: No, Mr. Chief Justice. No
court has ever held that the Fobian rule applies to
oversecured creditors. Everyone acknowledges that
Section 506(b) applies to oversecured creditors so.
CHIEF JUSTICE ROBERTS: So if you're an
oversecured creditor with a claim for attorneys' fees
arising under solely issues of matters of Federal
bankruptcy law, the Fobian rule doesn't prevent that?
MR. ROSENKRANZ: No, Your Honor. Everyone
is absolutely clear that Fobian to the extent that it
applies --
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CHIEF JUSTICE ROBERTS: Well, not everyone.
I'm not clear on it.
MR. ROSENKRANZ: I'm sorry, Your Honor. All
the bankruptcy practitioners and courts are clear that
to the extent that Fobian applies, it applies only to
unsecured creditors. But again this is a rational
predicate to this Court's analysis of Fobian. How do we
know?
CHIEF JUSTICE ROBERTS: If it is a rational
predicate, we might have expected to hear about it in
the opposition to certiorari.
MR. ROSENKRANZ: Yes, Your Honor. I
apologize for focusing only on the issue that Travelers
was focusing on, which was whether this was, whether the
Fobian rule was itself cert-worthy question. But it is
a rational predicate because, as you can see from
Travelers' brief, Travelers says no fewer than a dozen
times, including in two point headings: Read the code;
read the code. It will tell you that unsecured
creditors have an allowable claim for post-petition
attorneys' fees, and only if you begin by reading the
code can you figure out whether the Fobian common law
overlay is correct or not. So when we say, Your Honors,
yes, let's read the code, that's not an ambush and that
is not smuggling in.
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CHIEF JUSTICE ROBERTS: No, it's an ambush
and it is smuggling in the sense we don't have a court
of appeals decision one way or the other on that
question, do we?
MR. ROSENKRANZ: Your Honor, we do have
court of appeals decisions on this precise question, not
in this case because the court of appeals had Fobian and
the rule that underlay Fobian for 20 years. But there
are three courts of appeals --
JUSTICE KENNEDY: Justice Ginsburg has a
question I'm very interested in. Do you defend the
Fobian rule?
MR. ROSENKRANZ: We do not, Your Honor. The
Fobian rule is wrong at least, especially as to the
distinction that it draws between State law and Federal
litigation. There's only one answer to the question --
JUSTICE STEVENS: Well, why then isn't the
proper disposition of this case to send it back to the
Ninth Circuit to consider all these other arguments?
MR. ROSENKRANZ: Well, Your Honor, because
this issue has been fully ventilated among the lower
courts.
JUSTICE GINSBURG: Yes, but we are not a
court of first view and you know that very well. We are
a court of review. So no matter how well it's been
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aired, we wait to see what the lower courts have said on
a question. We don't take it in the first instance.
MR. ROSENKRANZ: Yes, I understand that,
Your Honor. It would have been futile to argue this
before the Ninth Circuit. The Ninth Circuit would have
said that --
JUSTICE GINSBURG: I understand that because
they have the Fobian rule.
MR. ROSENKRANZ: Yes. Now, but, Your Honor,
let me just add two additional reasons why this Court
should consider it now. The first is this has been
fully ventilated in the lower courts. There is not a
single argument in the briefs on either side on which
there is not a lower court opinion going one way or
another on every argument.
Secondly, there is an enormous amount of
affirmative harm that can come from this Court simply
saying, let us conclude that the Ninth Circuit was wrong
in disallowing these claims on the logic that the Ninth
Circuit followed, but we will reserve for a later day an
open question of law on what Section 502(b) and 506(b)
means. And the harm comes from the fact that
overwhelmingly the lower courts in the last 10 years
have concluded that 502(b) and 506(b) mean that
unsecured creditors do not have these claims.
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If this Court declares that it is now an
open question --
JUSTICE STEVENS: Let me ask you a question
about that. Your argument depends -- you analogize --
you would agree, I take it, that if this was an
oversecured, secured creditor they'd be entitled to
fees?
MR. ROSENKRANZ: Your Honor, we would
dispute the contractual interpretation, but yes, Your
Honor.
JUSTICE STEVENS: But assuming, assuming the
contract provides that.
MR. ROSENKRANZ: Yes, Your Honor.
CHIEF JUSTICE ROBERTS: And if that's true
-- and the reason for that I suppose is that doesn't
impair the rights of the general creditors at all.
MR. ROSENKRANZ: That's one logic of the --
JUSTICE STEVENS: If that's so, why isn't
their argument that, well, your client is solvent, the
complete answer to your position?
MR. SHORR: Well, Your Honor, because
Congress didn't say that. Congress gave only one answer
to the question whether unsecured creditors get their
attorneys' fees allowed, that is post-petition
attorneys' fees allowed. It's either yes or no. There
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attorneys' fees. The fees will be pre- petitioned in
nature, constituting a contingent pre-petition
obligation that became fixed post-petition when the fees
were incurred. All right. Now, what is your response
to that?
MR. ROSENKRANZ: Your Honor, my response is
I urge you, Justice Breyer, to look back at Colliers,
because that is absolutely accurate and it doesn't apply
to this case.
JUSTICE BREYER: Because?
MR. ROSENKRANZ: Because, Your Honor, that
is a statement about whether it is a pre-petition claim,
not about whether the claim is allowable or not, which
is what we are arguing about.
JUSTICE BREYER: Then you explain that to
me?
MR. ROSENKRANZ: Yes, Your Honor. Step one
is, is it a claim. No one disputes that this is a
claim. It is a right to payment. Step two, is this an
allowable claim? The answer under the code is
absolutely not, because the code says there is only one
class of creditors that gets their attorneys' fees
claims allowed and that is oversecured creditors and so
JUSTICE BREYER: Well, that's because 506
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had to do that in order to tell the bankruptcy courts
how to deal with secured claims.
MR. ROSENKRANZ: No, Your Honor.
JUSTICE KENNEDY: That doesn't -- and then
you have the negative inference or the exclusio unius
argument, whatever, which I think is misplaced in this
context.
MR. ROSENKRANZ: Your Honor, Congress put
506(b) in the code for one purpose and one purpose only,
and that was to allow claims that are not elsewhere
allowed, because if it doesn't do that 506(b) serves no
purpose at all. 506(b) says nothing at all about
whether the claim is secured.
JUSTICE GINSBURG: Why doesn't it serve the
purpose of saying that the fees will be covered by the
security? They'll not be just be claims for fees that
would stand together with the unsecured creditors, but
that the oversecured -- the security will cover the
interest, will cover the attorneys' fees, and that's the
function of 506 whatever --
MR. ROSENKRANZ: Your Honor, the answer is
506(b) does not say anything about whether the allowed
claim is secured or not. It is completely silent about
that. Now, if we accept, as we explain in our brief in
much more detail, if we accept Travelers' argument that
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it was an allowed claim in the first instance and it is
therefore furthermore an allowed security claim, 506(a)
tells you what to do with that. 506(a) tells us that an
allowed claim to a secured creditor is a secured claim.
It still leaves Section 506(b) with nothing left to do.
Now, let me just back up and underscore:
Any creditor would love to get the other creditors to
pay its attorneys' fees. Tort claimants would love it,
trade creditors would love it, local tax collectors
would love it. But Congress said only one category of
claimants get to claim their post-petition attorneys'
fees.
JUSTICE BREYER: Of course, that is exactly
what's puzzling me. But why haven't they gone out and
got? So why -- what you're pointing to so far is that
Congress has said a particular class of people get the
attorneys' fees out of the security insofar as the
security will support it. It doesn't say a word about
what happens to the attorneys' fees after the security
is exhausted, nor about anybody else's attorneys' fees,
where so provided by contract. Colliers says they can
get it.
MR. ROSENKRANZ: Your Honor, Congress said
JUSTICE BREYER: Same puzzlement.
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MR. ROSENKRANZ: Your Honor, Congress has
said no such thing. What Congress says is that an
allowed claim is allowed as of the date of the filing of
the petition. That is when you value the claim and you
value the claim as of the date of the filing of the
petition. At that point, it is worth zero because no
post-petition attorneys' fees have been incurred. And
the fact of the matter is it may well have never
occurred to the drafters of the code when --
JUSTICE BREYER: Suppose I sell you a house
and I make a promise that I'll fix any leaks in the
bathroom. And lo and behold, before there's a leak
the -- I'm bankrupt. And while I'm bankrupt it floods,
the bathroom. No claim?
MR. ROSENKRANZ: Your Honor, that is a
claim. It is a --
JUSTICE BREYER: It is a contingent claim.
And you're saying this is the same.
MR. ROSENKRANZ: I'm saying -- they are
saying this is a contingent claim. If -- and it is a
very strange sort of a contingency. It is Travelers
saying, we have a claim, it is a contingent claim; the
contingency is whether tomorrow morning we're going to
pick up the phone and called Weil Gotshal to monitor the
bankruptcy proceeding.
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But let's assume it is a contingent claim.
It is still a disallowed claim and Congress provided
numerous statutory indications that it was. I already
mentioned 506(b) but there are more. Congress said that
attorneys' fees are available only, quote, "to the
extent that a claim is oversecured." Now that would be
a very --
CHIEF JUSTICE ROBERTS: No. It's quite
unlike the situation, for example in Timbers, where had
you in 502 a disallowance of post-petition interest.
There is not in 502 a disallowance of attorneys' fees.
MR. ROSENKRANZ: Well, Your Honor, I was
just going to get there. Timbers underscores this
proposition. Timbers focused on the structure of 506
and it began with and it underscored, the only words
that it underscored were, "to the extent that." But let
me turn to that.
JUSTICE KENNEDY: Well, Timbers cited, as
the Chief Justice indicates, the interest section in
506. That's all it's about. I don't -- I think Timbers
is misleading on this point.
MR. ROSENKRANZ: Your Honor, Timbers has the
structural argument that focuses on what the purpose of
506(b) is. But there are more indications. It would be
odd for Congress, for example, to draft this provision
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506(b) that purports to put post-petition attorneys'
fees on the same footing at post-petition interest if it
intended to put them on different footings. It's an
observation this Court made in Ron Pair. Moreover,
Congress was not oblivious to the existence of
attorneys' fees post-petition. There are 15 occasions
in the code where Congress spoke to attorneys' fees and
if Congress had intended attorneys' fees to be available
to this enormous class of unsecured creditors, one would
think that it would not have hidden that in the
definition of "claim" --
JUSTICE BREYER: Well, are those 15 places
-- do they involve attorneys' fees as administrative
expenses? Do any of them involve attorneys' fees simply
as an unsecured claim for attorneys' fees?
MR. ROSENKRANZ: Your Honor, as to
creditors, four of them apply to attorneys' fees as
administrative expenses. It's a very important point
because the code says and it adopts this age old rule
that if you are going to take money away from some
unsecured creditors and give it to attorneys it better
be because you're expanding the pot for all of the other
creditors.
JUSTICE BREYER: What's the answer to my
question? Is the answer that 11 of them say you can
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collect attorneys' fees, but only as an unsecured claim
against creditors.
MR. ROSENKRANZ: Your Honor, for the, for
creditors there are only six that apply. Four of them
are the administrative.
JUSTICE BREYER: All right, so six.
MR. ROSENKRANZ: Yes.
JUSTICE BREYER: So six are administrative,
and then the remaining two say that the creditor can
collect it as an unsecured debt?
MR. ROSENKRANZ: Yes, Your Honor.
JUSTICE BREYER: Which are those two?
MR. ROSENKRANZ: Well, one of them does.
JUSTICE BREYER: Which is that?
MR. ROSENKRANZ: That is the provision that
Travelers cites -- and I apologize it's not in any of
the appendices -- 502(b)(4). And 502(b)(4) underscores
our point. 502(b)(4) says, and I'm quoting directly
from the code: "A claim is allowed to the" -- "is
disallowed to the extent that," and then "(4) if such
claim is for services of an insider or attorney and such
claim exceeds the reasonable value of such services."
That is focused on pre-petition activities of the
lawyers on behalf of the debtor.
JUSTICE BREYER: That seems to cut the other
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way because it says it's disallowed insofar as it's
unreasonable of course, and therefore it would be
allowed insofar as it's reasonable.
MR. ROSENKRANZ: Well, yes. Pre-petition
claims for services provided by an attorney before for
the petition.
JUSTICE KENNEDY: No, attorney for the
debtor.
MR. ROSENKRANZ: An attorney for the debtor
and, Your Honor, the code is clear it's noteworthy.
JUSTICE BREYER: Yes, but I mean you don't
have exactly what I was driving to. I was quite
interested that you said there are 11 other provisions
that we could look at for support, and I wouldn't think
it was support if those consider -- concern
administrative expenses, which nobody's asking for here,
they just want an unsecured claim, or if they concern
some other --
MR. ROSENKRANZ: Fair enough Your Honor.
JUSTICE BREYER: -- irrelevant thing.
MR. ROSENKRANZ: Fair enough, Your Honor.
My point is that Congress knew about attorneys' fees and
if it wanted this huge class of unsecured creditors to
collect their attorneys' fees for post-petition
activities, it wouldn't have hidden that in a general
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definition of claim or in the general statement of
allowability.
CHIEF JUSTICE ROBERTS: Counsel, your
brother in his reply brief said that no court of appeals
has endorsed your theory, and I -- earlier you told me
one had. Which one in particular?
MR. ROSENKRANZ: Your Honor, the First
Circuit -- there are three courts of appeals that have
addressed the question, all in dictum but in very
extensive dictum. So the First Circuit comes out our
way in Adams versus Zimmerman. The Second Circuit comes
out also in dictum on Travelers' side in United
Merchants. And then the Sixth Circuit splits the baby
in half, or reads the code all the way up to our
position as we do, and then takes a detour in another
direction.
CHIEF JUSTICE ROBERTS: So you really want
us to reach out and decide a question that's not
presented when there has been no holding of the court of
appeals one way or the other on the issue?
MR. ROSENKRANZ: Your Honor, we didn't come
here asking this Court to address this question.
Travelers put it front and center. They conceded --
CHIEF JUSTICE ROBERTS: If you thought the
Fobian rule was wrong, you could have said that.
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MR. ROSENKRANZ: Well, Your Honor, it would
have made no sense for us to argue that Fobian was wrong
when we were trying to defend the judgment below. But I
concede, Your Honor, this Court has discretion to decide
whether it's going to address what we believe is an
absolute factual predicate, and what Travelers seems --
I'm sorry, legal predicate -- and what Travelers seems
to believe is a legal predicate, which is why we're
saying to the Court this case, this issue has been
ventilating for 20 years, and a lot of mischief can be
JUSTICE BREYER: How -- can we decide? But
I'm wondering about, maybe you don't want to answer
this, but I mean, if we were to say Fobian is wrong,
everybody will agree with us. But we should have to say
why it's wrong. And if we say the reason that it's
wrong is because you can't collect attorneys' fees at
all, you'll be delighted. And if we say the reason it's
wrong is because you can collect attorneys' fees
regardless, they'll be delighted. And our only other
alternative is to not say why it's wrong or -- I mean,
that's the problem.
MR. ROSENKRANZ: That's exactly --
CHIEF JUSTICE ROBERTS: That's an added
complication. There's another case on which the Ninth
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Circuit's based its decision in your case, DeRoche.
Your proposed solution here doesn't address the issue in
DeRoche because there it's the debtor that's seeking
attorneys' fees.
MR. ROSENKRANZ: Absolutely, Your Honor.
CHIEF JUSTICE ROBERTS: So we still have to
decide the Fobian issue. And your failure to defend it
here means that we're going to have to decide in on that
inadequate record. If you have mentioned that in an
opposition to certiorari, perhaps we would have granted
cert in the DeRoche case and had an argument about the
rule that we have to decide.
MR. ROSENKRANZ: Your Honor, I appreciate
that, and I apologize for not having raised it in the
cert petition, cert opposition, we were simply focused
on why it is that this little sliver of the Fobian rule
was not worth this Court's attention. But I understand
that this Court needs to look forward and try and figure
out what exactly the issues are that are presented. I
only add that the statutory question that is presented
in DeRoche and in this case are as Your Honor has
pointed out, mirror images of each other.
So whatever this Court decides as to the
statutory construction question on 502(b), this Court
can say it's not resolving Fobian because this is a
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predicate question. And this Court can say there may
well be circumstances in which a creditor can say, you
know what, for State law litigation we have this common
law right, and we reserve for a later day the question
of whether there is an exception to the statutory rule
that we are articulating.
Now I want to underscore that Congress had
very important reasons that are built into the code for
coming out this way and disallowing unsecured creditors
attorneys' fees. Bear in mind that these sorts of fee
shifting provisions are absolutely ubiquitous. They are
in every credit card contract. They are in every bank
loan. They are in virtually any written contract, and
when a contract doesn't provide for it, quite often
State law statutes do. Allowing all of these unsecured
creditors to pay their lawyers out of the hides of all
of the other unsecured creditors --
JUSTICE STEVENS: Yes, but that's not the
facts of this case. Isn't that correct?
MR. ROSENKRANZ: Well, Your Honor --
JUSTICE STEVENS: This will not have any
adverse, if I understand the facts, any adverse impact
whatsoever on any unsecured creditor.
MR. ROSENKRANZ: Your Honor, on the facts of
this case if the rule had been otherwise, we don't know
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whether PG&E would have been solvent at all. But we are
arguing about a rule that is not one rule for Travelers
and one rule for everyone else. We are arguing about a
rule for the vast majority of cases.
JUSTICE STEVENS: No, but just looking at
this case itself, if there is plenty of money there to
pay a State law obligation, why shouldn't just ordinary
rules of contract law apply?
MR. ROSENKRANZ: Well, Your Honor, the
answer is, Congress dealt with this issue and decided
that no one gets to get in line and get their attorneys'
fees, regardless of whether they're solvent or not.
It's a --
JUSTICE GINSBURG: You're raising a
provision that says just that, it's the absence of a
provision for attorneys' fees that you're relying on.
MR. ROSENKRANZ: Well, no, Your Honor.
We've been talking about why the only natural way to
read the code is to disallow attorneys' fees, and I'm
explaining that if attorneys' fees are generally
disallowed to everyone, there's no exception to that
rule in the code that says ah, yes, but if there's an
insolvent -- if there's a solvent debtor, the rule is
otherwise.
JUSTICE GINSBURG: Where is the provision
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that generally disallows attorneys' fees?
MR. ROSENKRANZ: I'm sorry. What I'm saying
is 502(b) when you read "as of the time of the filing of
the petition," it says -- that means, that must mean
that it doesn't apply to post-petition attorneys' fees,
especially when you look at 502(b) through the lens, as
this Court did in Timbers, of the rest of the code.
506(b), all of these other attorneys' fees --
JUSTICE KENNEDY: Well, on that point you
disagree with the Collier citation at page 9 of the
reply brief then?
MR. ROSENKRANZ: Yes, Your Honor, I disagree
with Colliers, but I don't think Colliers comes out one
way or another on this particular question. That was
the same question that was asked earlier about whether
it's a claim, whether it's a pre-petition claim.
JUSTICE KENNEDY: Well, it says if the
creditor incurs the attorneys' fees post petition in
connection with protecting a pre-petition claim --
MR. ROSENKRANZ: Yes, Your Honor.
JUSTICE KENNEDY: -- the fees will be
pre-petition.
MR. ROSENKRANZ: That was the same --
JUSTICE KENNEDY: So you disagree with that?
MR. ROSENKRANZ: I don't disagree with that,
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Your Honor. I was referring to another provision of
Colliers, not the one that's cited in the reply brief.
That is a correct statement but it has no application
here because we are not arguing about whether it's a
pre-petition obligation. Of course it's a pre-petition
obligation. Just like pre-petition interest -- excuse
me -- post-petition interest is a pre-petition
obligation we are arguing that the code cancels that
obligation because there are very important reasons,
such as equality among all unsecured creditors, the --
JUSTICE BREYER: You're saying this
particular set of pre-petition obligations. Collier, I
think in context must be saying, you get paid the money.
I mean, he goes on in the next sentence and says by the
way, despite my last sentence, you don't get the money?
MR. ROSENKRANZ: No, Your Honor. What
Colliers is talking about is a completely different
question. He doesn't answer that question one way or
another in Colliers.
JUSTICE BREYER: Oh, in other words what he
implies, if I ready the whole page I'll see, although he
just said what we quoted, the whole page means, by the
way, I'm not telling you if you get the money or not?
MR. ROSENKRANZ: This was a completely
different discussion on a --
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JUSTICE BREYER: Sorry, I'll --
MR. ROSENKRANZ: -- completely different
section referring to setoffs.
JUSTICE BREYER: I think your 506(b)
argument, I see your point, I see your point, is there
-- I mean, and you'd have to say well, 506(b) simply
repeats 506(a), as sometimes provisions do, and then it
becomes somewhat superfluous, somewhat not. I got that
point. I also have your point about, well, there are
other references. Now, is there any other point in the
code?
MR. ROSENKRANZ: Yes, Your Honor. There is
one other point and that is, 502(c) tells the court what
it is supposed to do with contingent claims. It is
supposed to either liquidate them or estimate them.
These are -- this is a very strange sort of contingency,
as I mentioned earlier.
JUSTICE SCALIA: That's not in the
materials, 502(c)?
MR. ROSENKRANZ: 502(c) is, Your Honor.
It's on the very back of the cert petition appendix on
page, I believe 28. And so it says either estimate or
liquidate, but always as of the date of the filing of
the petition. Now as of the date of the filing of the
petition it would be impossible to estimate without a
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crystal ball.
JUSTICE BREYER: How do they do it with my
leaky bathroom?
MR. ROSENKRANZ: Your Honor, what you do is
-- that is a classic contingency. What you do is to
estimate the likelihood that the bathroom will in fact
leak and the cost of those expenses, and you put
something into the, into the bankruptcy estate for that
purpose. That would be something that Congress would
never have wanted to do with thousands and thousands of
unsecured creditors.
JUSTICE KENNEDY: I -- I am concerned about
your point that there are all kinds of attorneys' fees
contracts out there and if everybody can get fees for
filing the claim post-petition act, we have a huge
amount of claims to pay.
Travelers would tell us, though, that a
surety is different, that they somehow stand in the
shoes of PG&E or something.
MR. ROSENKRANZ: Your Honor, I don't
understand why a surety is different from any other
contract. All contractual creditors will want their
fees. The reason that they haven't been applying for
them is that the overwhelming majority of bankruptcy
courts will tell you no, you can't have them, because
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the overwhelming majority of cases have been saying
exactly what I'm saying to you. 502(b) does not allow
them, and we can tell that by looking at 506(b).
And there are other reasons that Congress
would not have wanted to do that. It would have
burdened the administration of the state -- of the
estate. The court would be spending more time
administering claims about fees and what does this
contract mean, and fees upon fees upon fees, than it
would be spending administering the basic bankruptcy
estate.
JUSTICE SOUTER: Well, of course the
argument here is that this is something different from
the general abuse that you're describing, because the
plan didn't make any provision here for, for paying the
workers comp obligation at all. What is your response
to that?
MR. ROSENKRANZ: Your Honor, my response is
that is absolutely wrong. The first draft of the plan
which you can see on page 28 of the appendix says
explicitly, and I quote, "all workers compensation
programs are treated as executory contract." Treated as
executory contracts and deemed assumed by the debtor,
and that means that the workers got the most favorable
treatment that they could have gotten. These are not
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just unsecured claims.
CHIEF JUSTICE ROBERTS: Your friend says
it's more favorable to say the claims are unimpaired.
MR. ROSENKRANZ: Your Honor, that's what
they argued. The bankruptcy court explicitly held
otherwise and the Ninth Circuit agreed with the
bankruptcy court. The bankruptcy court said, none of
your interventions were reasonably necessary to reach --
excuse me -- to advance your interests. Therefore, you
are absolutely wrong when you argue to us that you are
on the State law side of the Fobian rule.
Now if you ask me, Your Honor, where in the
bankruptcy court decision does it say that, I would
refer the Court to page 24a of the -- of the cert
petition appendix, where you see asterisks for a missing
paragraph right in the middle of the opinion. That, and
just to orient the Court, we're looking at the first
paragraph that says first of all. Then there's a --
there is an asterisk eliminating a paragraph. Look at
page 140a, 141 of the joint appendix where the missing
paragraph that Travelers eliminated is filled in, and
there the court summarizes a 15-page colloquy with
Travelers about why it is completely wrong in claiming
that its steps were reasonably necessary.
And on page 141, just to orient the Court
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again, you see that it begins, second paragraph, first
of all. That's the same paragraph. The next paragraph
refers to Mr. Brunstad's arguments. It says, "I just
simply don't by it. I don't think you can sort of say,
you know, we thought there was a thief hiding under the
bed so we had to clear out under the bed. I don't think
there was a risk there." And that was the gist of 15
pages proceeding the joint appendix, where the court
methodically demolishes each of the argument Travelers
presents here.
Thank you, Your Honor.
CHIEF JUSTICE ROBERTS: Thank you, counsel.
Mr. Brunstad, you have eight minutes remaining.
REBUTTAL ARGUMENT OF G. ERIC BRUNSTAD, JR.
ON BEHALF OF THE PETITIONER
MR. BRUNSTAD: Justice Breyer, in our brief
on pages 25 and 26, we cite to a number of cases where
the courts allowed attorneys' fees as an unsecured
claim, both for pre-petition work done and also
post-petition work done where the contractual right was
pre-petitioned. We also cite a bunch of cases around
page 44 -- 43 and 44 of our brief, including an article
in the middle of page 44, quote: "In cases decided
under the Bankruptcy Act, the higher courts consistently
held that attorneys' fees were allowable even as
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unsecured claims in bankruptcy." Close quote. I've
been a bankruptcy lawyer for over 20 years. I've been
teaching bankruptcy law for 17 years. It is absolutely
not true that courts routinely disallow claims for
attorneys' fees as part of unsecured claims. It's the
opposite is true it's routine that they are allowed in
practical reality however they are not presented because
creditors don't bother to present them because
distributions are generally so low in bankruptcy.
On the point about the plan completely
protected the rights of the injured workers, nothing
could be farther from the truth. The provision that
counsel cites in the plan refers to exec, as executory
contracts, workers' compensation benefit programs.
Those are the contractual relationships between PG&E and
its administrators, not the claims of the workers
themselves. Tellingly, PG&E never argued in the
bankruptcy court that the claims of the workers were
fine under the plan. In fact, they said, we will do
what Travelers wants after the bankruptcy court directed
-- and it's in the transcript -- that that was the
appropriate thing to do.
In fact, what Travelers insisted is
required by Section 1123 of the Bankruptcy Code, claims
such as the workers' must be classified, their treatment
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must be specified. If they are not they are eliminated.
The reference to executory contracts
clearly doesn't apply. As we explain in our reply
brief, the workers' claims were not executory contracts
under applicable law. That section does not apply.
Of course, I think, Chief Justice
Roberts, there is a lot more that we would like to say
about their alternative arguments than we were able to
put in our 20-page reply brief. The issue that they
raised has not been fully ventilated in the lower
courts. In fact, there are many more things we would
say about it on remand.
I also think it's important to point out,
Justice Stevens, they are a solvent debtor, and under
the concept of absolute priority shareholders are not
allowed to recover anything unless creditors are paid in
full. What they are trying to do is they're trying to
get rid of their contractual obligations in bankruptcy
for the benefit of their shareholders. There's no
implication between creditors, creditors' recoveries in
this case one versus the other.
In the Dow Corning case which we cite in
our reply brief the Sixth Circuit expressly held where
you have a solvent debtor you have to pay all of the
attorneys' fees. That is an additional argument we
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would develop on remand.
But all of their arguments about Section
506 and their interpretation of 502 simply don't matter,
because as a solvent debtor they're not entitled to take
advantage of that theory even if it were valid. And we
contend that it isn't valid. The court of appeals have
resoundingly rejected it. The Second Circuit rejected
it in United Merchants and Manufacturers. The Sixth
Circuit rejected it in Dow Corning. The Eleventh
Circuit it en banc in the Wellsville case. All of them
considered the 506 argument that they're making and
rejected it, and properly so.
Counsel cites to Section 502(b)(4).
That's an important section because that demonstrates
that Congress understood that attorneys' fees would be
allowable as an unsecured claim under Section 502. And
in Section 502(b)(4) it provided the only exception, the
only one where attorneys' fees would not be allowable as
an unsecured claim. It provided expressly attorneys'
fees would not be allowable for the attorney for the
debtor to the extent the claim for the fees exceeded the
reasonable value of the services performed. Why is that
provision there? Because Congress saw there was a
problem. There was a problem of debtors sending money
to their attorneys. Congress understood that to be a
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problem and it remedied it.
Congress did not think there was a
problem with respect to this historic practice of going
on over 100 years of attorneys' fees being allowed as
unsecured claims, and so in Section 502 it allows them.
Respondents' argument about Section 506(b) renders
Section 502(b)(4) superfluous. If attorneys' fees were
never allowable as part of an unsecured claim except for
how 506(b) allows it, then there would not be a need for
Section 502(b)(4). In addition, Respondent overstates
the office of Section 506. 506, as this Court explained
in Ron Pair, provides, essentially tells us what secured
creditors get out of their collateral and in what order
-- the pre-petition amount and then, if there's any
value left, the value of the collateral. After you pay
the pre-petition amount of the claim, you can add
attorneys' fees and you can add, post-petition you can
add interest. Their interpretation of Section 506(b)
would render Section 502(b)(2) superfluous. Under their
theory, only oversecured creditors get post-petition
interest, get interest.
JUSTICE KENNEDY: If you prevail, why can't
every attorney who represents a creditor who has a
credit card or a promissory note providing for
attorneys' fees file something in bankruptcy and get
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attorneys' fees for the filing of the claim?
MR. BRUNSTAD: That already happens, Justice
Kennedy. In all the circuits that recognize that
attorneys' fees are allowed as unsecured claims, that
already happens. And that has not cause any disaster or
any problem. It's been a practice for 100 years. If
Congress had wished to change the practice, it would
have when it codified the Bankruptcy Code in 1979. The
fact that it hasn't perceived it to be a problem
demonstrates that Congress wanted to leave the practice
unchanged.
Now, what happens, though, again, Justice
Kennedy, is that creditors don't bother to file claims
for those amounts. And where it matters is in cases
where it should matter, like in this case, in the PG&E
case, where a solvent debtor is simply trying to get out
of its contractual relationships. And under principles
of absolute priority they are not allowed to do that for
the benefit of shareholders where creditors are not
being paid in full. And I think it's important to
underscore again, Justice Kennedy.
JUSTICE STEVENS: It's interesting. You're
of course a teacher too. The amicus brief by a bunch of
professors has a different view of the history than
you're describing.
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MR. BRUNSTAD: Justice Stevens, what I take,
what I take from their analysis is a hostility towards
attorneys' fees being allowed in bankruptcy. And
perhaps maybe as a matter of policy, if we were to start
from scratch, well, maybe we shouldn't allow attorneys'
fees to be allowed in bankruptcy. Maybe we shouldn't
allow tort claims to be allowed in bankruptcy. Maybe we
shouldn't allow certain kinds of environmental claims to
be allowed in bankruptcy. They don't like the rule,
apparently, but their analysis of the history is wrong.
And we cite innumerable cases and law review
articles that demonstrate that the practice is as we say
that it is. And policy reasons are no grounds to sort
of create these Federal common law rules or these
categorical rules of preclusions.
JUSTICE STEVENS: Would you say a word about
Justice Holmes' opinion in the Scruggs case.
MR. BRUNSTAD: Yes, Justice Stevens. The
Randolph case was decided in 1903 and the law changed
dramatically since then. For example, in 1903
contingent claims were not provable under the Bankruptcy
Act. That changed in 1938 when contingent claims became
provable under the Bankruptcy Act.
Randolph & Randolph versus Scruggs involved
the claim of a custodian, a custodian, an assignee, who
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took control of all the debtor's assets before the
bankruptcy filing. Now under Section 503(b)(3)(E), the
Randolph versus Scruggs analysis as it pertains to the
claims of the assignee, those are now treated as an
administrative expense under Section 503 dealing with
administrative expenses.
In Randolph, it's interesting, the fees --
Justice Kennedy, the fees incurred in preparing the
assignment were allowed as an unsecured claim in the
bankruptcy case. Justice Holmes for the Court said they
are allowed. So in fact Randolph I think refutes their
analysis rather than supports it.
CHIEF JUSTICE ROBERTS: Thank you, counsel.
The case is submitted.
(Whereupon, at 12:01 p.m., the case in the
above-entitled matter was submitted.)
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Official - Subject to Final Review
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