Court Considers Dumping Bankruptcy Rule

Supreme Court Signals Willingness to Overturn Bankruptcy Rule

WASHINGTON (AP) — Several Supreme Court justices on Tuesday signaled the court could overturn a longstanding lower court ruling to make it easier for creditors to recover attorneys’ fees in bankruptcy disputes.
The justices grappled with the intricacies of federal bankruptcy law during oral argument in a case pitting PG&E Corp.’s Pacific Gas & Electric unit against Travelers Casualty & Surety Co., a division of St. Paul Travelers Co.

A decision by the court allowing creditors to recover attorneys’ fees would benefit banks, financial services companies and other likely creditors in bankruptcy cases.

At issue in the case is whether a creditor can recover attorneys’ fees incurred while litigating federal bankruptcy issues. The 9th Circuit U.S. Court of Appeals ruled in a 1991 case that attorneys’ fees could not be recovered, because federal law does not authorize it. That ruling, in Fobian v. Western Farm Credit Bureau, is known as the "Fobian rule."

On Tuesday, G. Eric Brunstad, a lawyer representing Travelers, argued before the justices that the Fobian rule should be overturned because it has no basis in federal law and "exists outside the structure of the bankruptcy code."

Justice Stephen Breyer admitted at one point to being "totally puzzled" by an arcane aspect of bankruptcy law, while Justices Anthony Kennedy and Ruth Bader Ginsburg signaled a willingness to overturn the Fobian rule.

PG&E’s attorneys, meanwhile, argued in court filings that to allow the recovery of fees would encourage frivolous claims and overwhelm bankruptcy courts.

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.

E. Joshua Rosenkranz, PG&E’s lawyer, did not defend the Fobian rule during oral argument, but instead told the justices that several provisions of federal bankruptcy law barred Travelers from recovering the fees.

Rosenkranz also said in court filings that Travelers’ participation in its bankruptcy proceedings was unnecessary because PG&E never defaulted on the surety bond and did not owe Travelers money when it entered bankruptcy.

Justice David Souter echoed that view, telling Brunstad that Travelers’ $167,000 litigation "accomplished absolutely nothing."

"That’s absolutely false, Justice Souter," Brunstad responded. He argued that Travelers had to secure its rights to be reimbursed for any future default during PG&E’s bankruptcy proceedings or risk losing those rights.

Chief Justice John Roberts criticized Rosenkranz, PG&E’s attorney, for dropping his defense of the Fobian rule and submitting alternative arguments to the court after the justices agreed to hear the case. In earlier filings, PG&E had defended the Fobian rule.

"You want us to reach out and decide a question" not before the court, Roberts said.

Nevertheless, Roberts said the court should rule on the 9th Circuit’s standard. Ginsburg and Stevens said the court should send PG&E’s other arguments regarding federal bankruptcy law back to the 9th Circuit to resolve.

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

Shares of St. Paul Travelers Co. slipped a penny to close at $51.05 on the New York Stock Exchange, while shares of PG&E also fell one penny to finish at $46.17 on the NYSE.

Source: Yahoo! Finance

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