A Path Forward for Indenture Trustees - Delaware District Court Reverses Bankruptcy Court’s Disallowance of Indenture Trustee’s Postpetition Attorney’s Fees

The allowance of unsecured claims for postpetition attorneys’ fees and expenses under a valid prepetition contract continues to be the subject of disagreement among courts nationwide. In a memorandum order, Judge Richard G. Andrews remanded the matter back to the Bankruptcy Court for further consideration, ruling that postpetition attorneys’ fees under and pursuant to an indenture as a contract can be an allowed unsecured claim. In holding that unsecured claims for postpetition fees are not “expressly” disallowed by Bankruptcy Code section 506(b), Judge Andrews’ decision is consistent with all courts of appeal considering this issue to date.

Procedural and Statutory Background

In November 2015, the Bankruptcy Court disallowed WTC’s claim for over $30 million in postpetition fees, concluding that by expressly providing a claim for fees to oversecured creditors in section 506(b), the Bankruptcy Code implicitly prohibits allowance of such fee claims for unsecured or undersecured creditors pursuant to section 502. WTC appealed the Bankruptcy Court decision. The issue on appeal was whether, considering the 2007 US Supreme Court decision in Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 US 443 (2007), WTC is entitled to an allowed, unsecured claim for its attorneys’ fees incurred after the filing of the Tribune cases when WTC was entitled to payment of such fees under a valid prepetition contract. Travelers, in the Court’s words, “reaffirmed a requirement that claims that are within the scope of Section 502 are allowed unless they are expressly disallowed in the Bankruptcy Code.” 
 
The relevant provisions of the Bankruptcy Code are section 502 (“Allowance of claims or interests”) and section 506 (“Determination of secured status”). Section 502(a) provides that a filed claim is deemed allowed unless a party in interest objects. When a party objects to a claim, section 502(b) provides that the bankruptcy court must “determine the amount of such claim…and…allow such claim in such amount, except to the extent that”, among other exceptions not relevant here, “such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured[.]”  11 USC § 502(b)(1). Separately, section 506(b) provides that holders of oversecured claims shall be entitled to an allowed secured claim for the amount of “reasonable fees, costs, or charges” to which they are entitled under an agreement or state law.

The Parties’ Arguments

Appellant WTC argued that the Bankruptcy Court’s disallowance of its claim for postpetition fees is at odds with Travelers, which WTC argued stands for the proposition that claims arising under a valid prepetition contract must be allowed unless prohibited by state law or expressly disallowed by a provision of the Bankruptcy Code. WTC asserted that, because section 506(b) does not expressly disallow attorneys’ fee claims for unsecured creditors, the Bankruptcy Court erred in basing its disallowance on that provision and its postpetition fees must be allowed.

Appellee Tribune argued that because section 506(b) expressly allows a claim for reasonable attorney’s fees where the creditor is oversecured, such provision also implicitly limits such claims for unsecured creditors under section 502. Section 502(b), Tribune argued, only governs the allowance of claims as of the petition date, which necessarily excludes postpetition fees. Moreover, Tribune cited the existence of section 503(b), which authorizes unsecured creditors to recover postpetition fees in the course of making a “substantial contribution” to the bankruptcy case, as further evidence of Tribune’s position that Congress must have intended for an unsecured claim for postpetition attorneys’ fees to be disallowed. They contend further that the Travelers opinion did not address unsecured creditors’ claims for postpetition fees and, as a result, is neither controlling nor supportive of WTC’s assertion that their fees should be allowed. Thus, Tribune argued, the Bankruptcy Court’s decision should be affirmed.

The District Court’s Opinion

In a short memorandum opinion (Wilmington Trust Co. v. Tribune Media Co. (In re Tribune Media Company, et al.), No. 15-01116 (RGA) (D. Del. Nov. 26, 2018)), the Court reversed the Bankruptcy Court decision, dismissing the argument that section 506(b) implicitly disallows an unsecured claim for postpetition fees. Quoting Travelers (“[C]laims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed.” 549 US at 452-54), the Court held that section 506(b) does not “expressly” disallow such claims and rejected Tribune’s assertion that implied disallowance is sufficient. The Court noted that, while the Third Circuit has not addressed the issue on appeal, every court of appeals to consider the question both before and after Travelers “[has] allowed unsecured claims for contractual attorneys’ fees that accrued post-filing of the bankruptcy petition”, citing decisions by the Seventh, Second, Ninth, First, and Eleventh circuits. While acknowledging that several bankruptcy and district courts have held otherwise, Judge Andrews wrote:
 

I do not have anything new to add to this debate.  I merely note that I cannot conclude that Section 506(b) “expressly” disallows the claims at issue here.  Thus, I agree with the position adopted by every court of appeals faced with this question; Section 506(b) does not limit the allowability of unsecured claims for contractual post-petition attorneys’ fees under Section 502.

 
Though disagreement among courts on this issue continues, the Tribune decision represents a growing body of case law declining to limit the award of postpetition attorneys’ fees to oversecured creditors, thereby increasing the value of contractual fee-shifting provisions and potential recoveries for unsecured and undersecured creditors in bankruptcy cases. 

Basis to Have Fees and Expenses of Indenture Trustee Paid

Judge Andrews’ holding is a positive development for indenture trustees, who no longer need to be concerned that postpetition, pre-confirmation fees and expenses, including professional fees and expenses, are statutorily precluded in Delaware. The decision bolsters the arguments available to indenture trustees for satisfaction of their postpetition fees and expenses. In order to preserve its unsecured claim for contractual postpetition attorneys’ fees, a proof of claim filed by an indenture trustee should include a claim in an unliquidated amount for (a) the trustee’s fees and expenses, including reasonable fees and disbursements of counsel and other agents and professionals, and (b) indemnity, in accordance with the terms of the applicable indenture.  

While the Tribune decision addresses the ability of an indenture trustee to assert its postpetition fees as an unsecured claim, an alternative basis for the allowance, priority and payout of such postpetition, pre-confirmation fees and expenses for indenture trustees exists and is available. As discussed further in detail here, section 365 may not apply to an indenture since an indenture is not an executory contract and, even if deemed an executory contract, it is a financial instrument, rendering section 365 inapplicable. Since it is likely that section 365 is not available, the only way to modify or terminate an indenture is under section 1123(a)(5)(F) of the Bankruptcy Code, and then only through confirmation of a plan.^[1] Absent such modification or termination through a confirmed plan under section 1123, the indenture rides through the bankruptcy proceeding. Thus, the indenture trustee’s fees and expenses are continued obligations of the debtor that must be satisfied. In fact, because under the indenture the claim for postpetition fees and expenses must be satisfied, this may be a better argument to ensure priority and payment of the fees and expenses of an indenture trustee.

[1] Section 1123(a)(5)(F) provides that “[n]otwithstanding any otherwise applicable nonbankruptcy law, a plan shall – provide for the adequate means for the plan’s implementation such as – cancellation or modification of any indenture or similar instrument.”