Recovering Contractual Attorneys’ Fees in Bankruptcy Litigation

Kit J. Gardner

Kit J. Gardner is the principal of the Law Offices of Kit J. Gardner in San Diego, California. His practice emphasizes Chapter 11 representation of debtors, creditors, and committees, as well as non-dischargeability litigation and defense of avoidance actions.

Many practitioners may remember the "Fobian Rule," eponymously named for the Ninth Circuit’s decision in In re Fobian, addressing recovery of contractual attorneys’ fees incurred in bankruptcy litigation.¹ In Fobian, the Ninth Circuit denied a lender’s request for contractual attorneys’ fees after resolving certain contested issues concerning confirmation of the debtors’ Chapter 12 plan of reorganization in favor of the lender. The court found that the litigation involved "solely issues of federal bankruptcy law," namely, the debtors’ proposed treatment of the lender’s claim in the plan. The court declared that "where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party."²

The Fobian Rule remained in effect in the Ninth Circuit until the United States Supreme Court expressly overturned it in 2007 in Travelers Casualty and Surety Co. of America v. Pacific Gas and Electric Co.³ In Travelers, the Supreme Court found no support for the Fobian Rule in the text of the Bankruptcy Code "or elsewhere," and held that "an otherwise enforceable contract allocating attorney’s fees (i.e., one that is enforceable under substantive, nonbankruptcy law) is allowable in bankruptcy except where the Bankruptcy Code provides otherwise."⁴