Almost all loan documents that we enforce on behalf of our lender clients contain an attorneys' fees clause that requires the borrower to pay the bank's attorneys' fees, whether or not litigation or bankruptcy is required to enforce the loan. In California, Civil Code Section 1717 makes such clauses reciprocal. In other words, if a bank brings a lawsuit against the borrower and loses, the bank may be obligated to pay the borrower's attorneys' fees. Usually, because there is little doubt that the borrower does owe the money to the bank, the bank prevails and the borrower has to pay the bank's fees on top of the loan balances.
In bankruptcy court, secured lenders take the position that under Bankruptcy Code § 506(b), they are entitled to attorneys' fees if the loan agreements provide for them. Prior to 2007, the prevailing view in the Ninth Circuit, which includes California, was that unsecured creditors could not be awarded attorneys' fees. However, in 2007, the United States Supreme Court held that attorneys' fees should not be denied in bankruptcy, whether or not the lender was secured. Travelers Cas. & Sur. Co. of America v. Pacific Gas & Elec. Co. (In re Travelers), 549 U.S. 442 (2007).
The Travelers opinion has created uncertainty for creditors seeking relief from the automatic stay. On the one hand, a stay relief motion is not an action by itself, but rather simply a motion that is part of a larger case, usually a Chapter 7 or Chapter 11 bankruptcy case. On the other hand, stay relief can be the determining factor as to whether or not the lender or the debtor prevails. My partner, Bob Kaplan, notes that the Travelers decision has now been held to affect motions for stay relief and cautions lenders to consider this factor:
Continue reading "Bankruptcy News--CAUTION: Attorneys' Fees Awarded To Debtor" »