Qmect, Inc. v. Burlingame Capital Partners II et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 04-41044 T
Chapter 11
QMECT, INC., etc.,
Debtor-in-Possession.
__________________________________/
In re 	No. 04-46443 T
Chapter 11
FRED AND LINDA KOELLING,
Debtors-in-Possession.
__________________________________/
QMECT, INC., etc., 	A.P. No. 04-4190 AT
(Consolidated with
Plaintiff, 	A.P. Nos. 04-4365 AT
and 04-4366 AT)
vs.
BURLINGAME CAPITAL PARTNERS II,
L.P., etc. et al.,
Defendants.
__________________________________/
AND RELATED ADVERSARY PROCEEDINGS
__________________________________/
Signed: May 17, 2007
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
May 17, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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MEMORANDUM OF DECISION RE MOTION FOR
POST-PETITION ATTORNEYS’ FEES
Defendant 	Burlingame 	Capital 	Partners 	II, 	L.P. 	(“Burlingame”)
seeks 	an 	award 	of 	post-petition 	attorneys’ 	fees 	pursuant 	to 	its
various 	contracts 	with 	the 	above-captioned 	debtors 	as 	part 	of 	its
undersecured 	claim 	against 	Qmect, 	Inc. 	(“Qmect”) 	and 	its 	general,
unsecured 	claim 	against 	Fred 	and 	Linda 	Koelling 	(the
“Koellings”)(referred to hereinafter collectively as its “unsecured
claim”). 	For 	the 	reasons 	stated 	below, 	the 	Court 	concludes 	that
Burlingame 	is 	entitled 	to 	include 	its 	reasonable 	post-petition
attorneys’ 	fees 	in 	its 	unsecured 	claim 	against 	these 	debtors. 	A
determination 	of 	a 	specific 	amount 	of 	those 	fees 	must 	await 	the
submission of a more detailed description of the work done litigating
issues peculiar to bankruptcy law.
A. 	PROCEDURAL BACKGROUND
On or about August 29, 2006, Burlingame sought an award of post-
petition 	attorneys’ 	fees 	and 	costs 	as 	part 	of 	its 	judgment 	in 	the
above-captioned consolidated adversary proceedings. 	After the motion
was fully briefed and a hearing conducted, the Court took the motion
under submission. 	On October 16, 2006, the Court issued its decision
denying the motion without prejudice.
In 	its 	decision, 	the 	Court 	observed 	that, 	at 	that 	time, 	the
controlling law in the Ninth Circuit was represented by In re Fobian,
951 F.2d 1149 (9 th Cir. 1991). 	The Fobian court held that attorneys’
fees 	were 	not 	recoverable 	for 	litigating 	issues 	peculiar 	to
bankruptcy law. 	Fobian, 951 F.2d at 1153. 	The Court observed that
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1None of the fees in Travelers were requested for work
performed litigating issues of state law. 	See Travelers, 127 S.Ct.
at 1202-03.
3
the 	motion 	was 	insufficiently 	specific 	to 	permit 	the 	Court 	to
determine 	what 	portion 	of 	the 	fees 	were 	requested 	for 	litigating
issues peculiar to bankruptcy law. 	It also observed that the issue
presented 	in 	Fobian 	was 	currently 	before 	the 	United 	States 	Supreme
Court 	in 	Travelers 	Casualty 	& 	Surety 	Co. 	v. 	Pacific 	Gas 	& 	Electric
Co., 	167 	Fed.Appx. 	593 	(9 th 	Cir.)(unpublished), 	cert. 	granted, 	127
S.Ct. 	377 	(2006). 	The 	Court 	directed 	Burlingame 	to 	resubmit 	its
motion 	after 	segregating 	the 	time 	spent 	on 	bankruptcy 	issues 	from
that spent on nonbankruptcy issues.
On 	February 	8, 	2007, 	Burlingame 	filed 	an 	amended 	motion 	for
attorneys’ 	fees, 	complying 	with 	this 	instruction. 	The 	motion 	was
heard 	on 	March 	8, 	2007 	and 	was 	again 	taken 	under 	submission. 	On
March 	20, 	2007, 	the 	Supreme 	Court 	issued 	its 	decision 	in 	Travelers
Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 127
S.Ct. 1199 (2007). 	The Travelers court expressly overruled Fobian.
It 	noted 	that 	the 	only 	reason 	given 	by 	the 	lower 	courts 	for
disallowing 	the 	fees 	was 	that 	the 	work 	performed 	related 	to 	issues
peculiar to bankruptcy law. 	The Supreme Court found that there was
no basis in the Bankruptcy Code for barring post-petition attorneys’
fees 	on 	this 	ground. 1 	Travelers, 	127 	S.Ct. 	at 	1205. 	However, 	it
declined 	to 	rule 	on 	the 	debtor’s 	contention 	that 	no 	post-petition
fees could be included in an unsecured creditor’s claim because the
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debtor 	had 	failed 	to 	make 	this 	argument 	to 	the 	lower 	courts 	or 	in
opposition to the creditor’s petition for certiorari.
On April 3, 2007, Burlingame filed a supplemental brief asking
whether the Court wished further briefing on the effect of Travelers
on 	its 	motion 	for 	post-petition 	fees. 	On 	April 	6, 	2007, 	the 	Court
issued 	an 	order 	setting 	a 	briefing 	schedule 	and 	indicating 	that 	no
hearing would be scheduled unless the Court concluded, after reading
the papers, that a hearing was necessary. 	The Court has concluded
that no hearing is required.
B. 	DISCUSSION
1. 	Introduction
Burlingame contends that existing Ninth Circuit law, other than
Fobian, 	recognizes 	an 	unsecured 	creditor’s 	right 	to 	include 	post-
petition 	attorneys’ 	fees 	in 	its 	unsecured 	claim 	to 	the 	extent 	they
are 	provided 	for 	by 	contract 	or 	nonbankruptcy 	statute. 	It 	further
notes that all of the other Circuits that have addressed this issue
have 	reached 	the 	same 	conclusion. 	It 	argues 	that 	the 	various
provisions of the Bankruptcy Code compel this conclusion. 	It notes
that 	11 	U.S.C. 	§ 	502(b) 	provides 	that 	a 	creditor’s 	claim 	shall 	be
allowed 	unless 	one 	of 	nine 	enumerated 	exceptions 	applies. 	None 	of
the 	nine 	enumerated 	exceptions 	refers 	to 	post-petition 	attorneys’
fees.
In 	response, 	the 	Koellings 	rely 	on 	the 	theory 	advanced 	by 	the
debtor 	in 	Travelers, 	which 	the 	Supreme 	Court 	declined 	to 	address
given the debtor’s failure to raise it earlier: i.e., that 11 U.S.C.
§ 506(b) implicitly provides for the disallowance of unsecured claims
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2But see In re Esgro Inc., 645 F.2d 794, 798 (9 th Cir. 1981)
and In re THC Fin. Corp., 686 F.2d 799, 803 (9 th Cir. 1982),
Bankruptcy Act cases holding that a contingent claim outside the
creditor’s control is too uncertain to value and is thus not
“provable”: i.e., in Bankruptcy Act terminology, allowable against
the bankruptcy estate.
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for post-petition attorneys’ fees. 	Burlingame contends that this is
not a fair reading of 11 U.S.C. § 506(b).
2. 	Analysis
A. 	Is It a Claim?
In its argument, Burlingame assumes without discussion that its
post-petition 	attorneys’ 	fees 	qualify 	as 	a 	“claim” 	against 	the
bankruptcy 	estate. 	The 	definition 	of 	“claim” 	is 	very 	broad 	and
includes “contingent” claims. 	See 11 U.S.C. § 101(5). 	Black’s Law
Dictionary defines a “contingent liability” as “a liability that will
occur only if a specific event happens; a liability that depends on
the 	occurrence 	of 	a 	future 	and 	uncertain 	event.” 	Black’s 	Law
Dictionary 926 (7 th ed. 1999), as cited in In re ML & Assocs., Inc.,
2003 WL 23742550, *2 (Bankr. N.D. Tex.).
Arguably, the definition of “contingent liability” cited above
may 	be 	read 	to 	require 	that 	the 	specific 	event 	triggering 	the
contingent claim be outside the claimant’s control. 	Incurring post-
petition 	attorneys’ 	fees 	is 	not 	outside 	a 	creditor’s 	control. 	The
need to incur the fees may be triggered by conduct of the debtor or
some other third party but the creditor could choose to do nothing.
However, the Court has been unable to find any authority to support
this reading of “contingent liability.” 2
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26 3See Chandler Act, ch. 575, § 63(a)(8), 52 Stat. 840, 873
(1938)(adding contingent claims to the list of provable claims in §
63 of the Bankruptcy Act).
6
Moreover, 	as 	discussed 	below, 	there 	is 	case 	authority 	decided
under the Bankruptcy Act, authorizing the inclusion of post-petition
attorneys’ fees in a creditor’s unsecured claim. 	The Bankruptcy Act,
as 	amended 	by 	the 	Chandler 	Act 	in 	1938, 	also 	included 	contingent
claims 	within 	its 	definition 	of 	“claim.” 3 	If 	this 	was 	error, 	one
would have expected Congress to clarify the meaning of “contingent”
when it enacted the Bankruptcy Code. 	Therefore, the Court holds that
Burlingame’s 	post-petition 	attorneys’ 	fees 	do 	qualify 	as 	a 	“claim”
under 11 U.S.C. § 101(5).
B. 	Is Claim Subject to Disallowance?
As 	Burlingame 	notes, 	11 	U.S.C. 	§ 	502(b) 	provides 	that, 	with
exceptions not relevant here, if an objection is made to a claim, the
claim 	shall 	be 	allowed, 	except 	to 	the 	extent 	that 	the 	claim 	falls
into one of nine categories. 	11 U.S.C. § 502(b). 	The only category
that 	arguably 	supports 	the 	disallowance 	of 	an 	unsecured 	claim 	for
post-petition 	attorneys’ 	fees 	is 	11 	U.S.C. 	§ 	502(b)(1): 	i.e., 	that
“such 	claim 	is 	unenforceable 	against 	property 	of 	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 U.S.C. § 502(b)(1).
The debtor contends that this category applies to post-petition
attorneys’ 	fees 	because 	11 	U.S.C. 	§ 	506(b) 	renders 	the 	claim 	for
post-petition 	attorneys’ 	fees 	unenforceable 	against 	the 	debtor 	and
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26 	4See 11 U.S.C. § 502(b)(2)(disallowing claims for post-
petition interest).
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property 	of 	the 	debtor. 	Section 	502(b)(1) 	refers 	to 	“applicable
law,” 	not 	“applicable 	nonbankruptcy 	law.” 	Thus, 	Section 	506(b)
qualifies as “applicable law.” 	Section 506(b) provides as follows:
(b) To the extent that an allowed secured claim
is 	secured 	by 	property, 	the 	value 	of 	which 	is
greater 	than 	the 	amount 	of 	such 	claim, 	there
shall 	be 	allowed 	to 	the 	holder 	of 	such 	claim,
interest 	on 	such 	claim, 	and 	reasonable 	fees,
costs 	or 	charges 	provided 	for 	under 	which 	such
claim arose.
Thus, 	according 	to 	the 	debtor, 	by 	providing 	that 	a 	secured 	claim
shall be allowed reasonable fees to the extent the claim is secured
by property, the Bankruptcy Code is implicitly saying that fees are
not available to an unsecured creditor.
The Court finds this reading of 11 U.S.C. §§ 502(b) and 506(b)
too 	strained 	to 	be 	persuasive. 	First, 	11 	U.S.C. 	§ 	506 	is 	entitled
“Determination of Secured Status.” 	A statute so entitled would not
be a logical place to provide for the disallowance of an element of
an 	unsecured 	claim. 	If 	Congress, 	in 	enacting 	the 	Bankruptcy 	Code,
had wanted to disallow claims for post-petition attorneys’ fees, the
logical 	place 	for 	it 	to 	have 	done 	so 	was 	surely 	in 	11 	U.S.C. 	§
502(b). 4 	Moreover, 11 U.S.C. § 506(b) does not distinguish between
pre-petition and post-petition attorneys’ fees. 	Thus, if 11 U.S.C.
§ 	506(b) 	is 	read 	as 	an 	additional 	ground 	for 	objecting 	to 	claims,
arguably, 	an 	unsecured 	creditor 	would 	be 	prohibited 	from 	including
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5But see Rake v. Wade, 508 U.S. 464, 468 (1993) and United
States v. Ron Pair Enterp., Inc., 489 U.S. 235, 240 (1989), which
appear to construe similar language in 11 U.S.C. § 506(b) regarding
interest to apply only to post-petition interest.
6The Court views In re Welzel, 275 F.3d 1308 (11 th Cir. 2001)
as inapposite. 	In that case, the creditor was fully secured.
However, some of the fees sought were deemed not reasonable as
required by 11 U.S.C. § 506(b). 	The Welzel court allowed the
reasonable fees as part of the creditor’s secured claim and the
unreasonable fees as a general, unsecured claim. 	Id. at 1313-20.
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its 	pre-petition 	attorneys’ 	fees 	in 	its 	claim 	as 	well 	as 	its 	post-
petition fees. 5
The Court has been unable to find any Court of Appeals decided
under 	the 	Bankruptcy 	Code, 	in 	either 	in 	this 	Circuit 	or 	any 	other,
that directly addresses this issue. 6 	The Ninth Circuit cases cited
by 	Burlingame 	are 	for 	the 	most 	part 	inapposite. 	They 	are 	either
nondischargeability 	cases, 	cases 	where 	the 	estate 	was 	requesting
fees, or cases where the Fobian distinction was at issue. 	However,
the cases establishing the estate’s right to attorneys’ fees as the
prevailing 	party 	in 	post-petition 	litigation–-e.g., 	In 	re 	Eastview
Estates 	II, 	713 	F.2d 	443, 	451-52 	(9 th 	Cir. 	1983)–-provide 	an
additional 	equitable 	rationale 	supporting 	the 	Court’s 	conclusion.
It would seem highly inequitable to permit the estate to recover fees
incurred 	in 	post-petition 	with 	a 	creditor 	while 	at 	the 	same 	time
denying the creditor the right even to include its post-petition fees
in its unsecured claim.
The Court has identified one Bankruptcy Act case decided by the
Second Circuit case that addresses this issue: i.e., United Merchants
& Manufacturers, Inc. v. Equitable Life Assurance, 674 F.2d 134, 137-
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7The Bankruptcy Code had been enacted by the time this case
came up on appeal. 	The argument was made that, by enacting 11
U.S.C. § 506(b), Congress had intended to codify a rule applicable
also under the Bankruptcy Act, prohibiting the award of post-
petition fees to unsecured creditors. 	The United Merchants court
rejected this theory, concluding that 11 U.S.C. § 506(b) was only
intended to address the rights of secured creditors to post-
petition fees. 	Id. at 138.
9
38 (2d. Cir. 1982)(Bankruptcy Act). 	In United Merchants, the lower
court 	had 	allowed 	the 	unsecured 	creditor’s 	contractual 	claims 	for
“collection 	costs” 	but 	only 	to 	the 	extent 	the 	litigation 	was
conducted 	outside 	the 	bankruptcy 	court. 	On 	appeal, 	the 	Second
Circuit 	removed 	this 	limitation. 	It 	rejected 	the 	argument 	that 	it
was 	unfair 	to 	give 	a 	creditor 	with 	a 	contractual 	attorneys’ 	fee
clause a greater claim than unsecured creditors without a basis for
fees. 	Id. 	at 	143-44. 	The 	only 	basis 	for 	distinguishing 	United
Merchants is that it was decided under the Bankruptcy Act, which did
not have an express provision comparable to 11 U.S.C. § 506(b). 	The
Court finds this distinction without significance. 7
The 	strongest 	rationale 	for 	implying 	a 	prohibition 	on 	the
inclusion of post-petition attorneys’ fees in a unsecured creditor’s
pre-petition 	claim 	is 	that, 	unless 	the 	debtor 	is 	solvent, 	the
unsecured 	creditor’s 	augmented 	claim 	will 	diminish 	the 	dividend 	to
other 	unsecured 	creditors. 	However, 	a 	similar 	effect 	flows 	from
allowing secured creditors to include their post-petition attorneys’
fees in their secured claims. 	While equality of distribution is one
of 	the 	basic 	tenets 	of 	bankruptcy 	law, 	another 	important 	policy 	in
bankruptcy is the preservation of nonbankruptcy legal rights except
to the extent necessary to facilitate the purpose of the bankruptcy
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proceeding. 	Absent 	a 	clear 	provision 	of 	the 	Bankruptcy 	Code
modifying 	a 	creditor’s 	nonbankruptcy 	legal 	rights, 	the 	Court
concludes that those rights should be deemed to be left intact.
CONCLUSION
The Court concludes that Burlingame is entitled to include all
its reasonable post-petition fees in its unsecured claim against the
debtors. 	Burlingame is directed to file an amended motion for fees
within 	60 	days 	from 	the 	date 	of 	this 	decision, 	segregating 	by 	task
the 	work 	done 	on 	bankruptcy 	related 	issues 	and 	and 	providing 	the
additional detail describing the work done as previously provided for
the nonbankruptcy litigation. 	The debtors will be given 30 days from
the date of service of the amended motion to file an objection to the
fees 	as 	unreasonable 	in 	amount. 	Burlingame 	will 	be 	given 	15 	days
from 	the 	date 	of 	service 	of 	the 	opposition 	to 	reply 	and 	alert 	the
judge’s law clerk when the matter is fully briefed.
END OF DOCUMENT
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COURT SERVICE LIST
Chris D. Kuhner
Kornfield, Paul & Nyberg, P.C.
1999 Harrison St., Ste. 2675
Oakland, CA 94612
Paul E. Manasian
Manasian & Rougeau, LLP
400 Montgomery St., Ste. 1000
San Francisco, CA 94104
Robert R. Moore
Allen Matkins Leck Gamble & Mallory LLP
Three Embarcadero Center, 12 th Floor
San Francisco, CA 94111
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