Sntl Corporation v. Centre Insurance Company ( 2009 )


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  •                  FOR PUBLICATION
    UNITED STATES COURT OF APPEALS
    FOR THE NINTH CIRCUIT
    In the Matter of: SNTL                
    CORPORATION; SN INSURANCE
    SERVICES, INC.; SNTL HOLDINGS
    CORPORATION; SN INSURANCE
    ADMINISTRATORS, INC.; INFONET
    MANAGEMENT,
    Debtors,         No. 08-60001
    BAP
    SNTL CORPORATION; SN INSURANCE           No. CC-06-1350-
    SERVICES, INC.; SNTL HOLDINGS                  MoDK
    CORPORATION; SN INSURANCE                    OPINION
    ADMINISTRATORS, INC.; INFONET
    MANAGEMENT,
    Appellants,
    v.
    CENTRE INSURANCE COMPANY,
    Appellee.
    
    Appeal from the Ninth Circuit
    Bankruptcy Appellate Panel
    Klein, Montali, and Dunn, Bankruptcy Judges, Presiding
    Argued and Submitted
    May 6, 2009—Pasadena, California
    Filed June 23, 2009
    Before: Cynthia Holcomb Hall, Andrew J. Kleinfeld and
    Barry G. Silverman, Circuit Judges.
    Per Curiam Opinion
    7437
    7438               IN THE MATTER OF SNTL
    COUNSEL
    Iain A.W. Nasatir, Jonathan J. Kim, and Jeremy V. Richards,
    Pachulski, Stang, Ziehl & Jones LLP, Los Angeles, Califor-
    nia, for the appellants.
    Christopher E. Prince and Robert B. Millner, Sonnenschein
    Nath & Rosenthal, LLP, Los Angeles, California and Chi-
    cago, Illinois, for the appellee.
    OPINION
    PER CURIAM:
    The Bankruptcy Appellate Panel is AFFIRMED for the rea-
    sons stated in its opinion in this case sub nom. We adopt the
    BAP opinion, In re SNTL Corp., 
    380 B.R. 204
     (B.A.P. 9th
    Cir. 2007), as our own and attach it as an appendix to this
    opinion. See Appendix, infra.
    IN THE MATTER OF SNTL   7439
    APPENDIX
    7440               IN THE MATTER OF SNTL
    ORDERED PUBLISHED
    UNITED STATES BANKRUPTCY
    APPELLATE PANEL
    FOR THE NINTH CIRCUIT
    In re: SNTL CORP.; SN                
    INSURANCESERVICES, INC.; SNTL
    HOLDINGS CORP.; SN INSURANCE
    ADMINISTRATORS, INC.; INFONET
    MANAGEMENT SYSTEMS, INC.;                    BAP No.
    PACIFIC INSURANCE BROKERAGE,             CC-06-1350-MoDK
    INC.,
    Debtors.            Bk. Nos.
    SV 00-14099-GM
    SV 00-14100-GM
    CENTRE INSURANCE COMPANY,
    SNTL CORP.;                              SV 00-14101-GM
    SV 00-14102-GM
    Appellant,        SV 02-14236-GM
    v.                       SV 02-14239-GM
    (Jointly
    SN INSURANCE SERVICES, INC.;               Administered)
    SNTL HOLDINGS CORP.; SN
    INSURANCE ADMINISTRATORS, INC.;              OPINION
    INFONET MANAGEMENT SYSTEMS,
    INC.; PACIFIC INSURANCE
    BROKERAGE, INC.,
    Appellees.
    
    Argued and Submitted on September 21, 2007
    at Pasadena, California
    Filed — December 19, 2007
    Appeal from the United States Bankruptcy Court
    for the Central District of California
    IN THE MATTER OF SNTL                       7441
    Honorable Geraldine Mund, Bankruptcy Judge, Presiding
    Before: MONTALI, DUNN and KLEIN, Bankruptcy
    Judges.
    MONTALI, Bankruptcy Judge:
    In this complicated and high-stakes case, we apply a some-
    what obscure doctrine that involves the intersection of insol-
    vency law principles and guaranty law, illustrating the
    temporal nature of a release of a guarantor when a voidable
    preference is recovered from the obligee. We also will be one
    of the first courts to address a question left unanswered by the
    Supreme Court earlier this year: May an unsecured creditor
    include attorneys’ fees incurred postpetition but arising from
    a prepetition contract as part of its unsecured claim?
    Here a creditor contended that the debtor’s previously
    released liability as a guarantor of an affiliate’s obligation was
    revived when the creditor compromised a preference action
    against it. The bankruptcy court disagreed and entered sum-
    mary judgment disallowing the creditor’s multimillion dollar
    claim and denying the creditor’s request for postpetition attor-
    neys’ fees and costs. The creditor appeals, and we REVERSE
    and REMAND.
    I.   FACTS
    A.    The Parties
    On April 26, 2000 (the “petition date”), SNTL Corporation
    (formerly known as Superior National Insurance Group)1 and
    1
    SNTL Corporation is the post-confirmation successor to Superior
    National Insurance Group and will be referred to as “SNIG” in this opin-
    ion.
    7442                    IN THE MATTER OF SNTL
    its non-insurer affiliates SN Insurance Services, Inc., SNTL
    Holdings Corporation (formerly known as Business Insurance
    Group, Inc.), and SN Insurance Administrators, Inc. (collec-
    tively, “Debtors”) each filed chapter 11 petitions2 for relief.
    Pursuant to a confirmed joint plan of reorganization
    (“Plan”), an SNTL Litigation Trust (“Trust”) was formed and
    an SNTL Litigation Trustee (“Trustee”) was appointed. The
    Trustee was authorized to prosecute certain claims, rights and
    causes of actions and to oversee and initiate actions pertaining
    to the allowance and payment of claims, including objections
    to proofs of claims.
    Appellant Centre Insurance Company (“Centre”) filed a
    proof of claim in November 2000 asserting a claim in excess
    of $294,488,911 (including approximately $3 million in attor-
    neys’ fees but not including contingent and unliquidated
    amounts) and an amended proof of claim in March 2005 in
    the amount of $232,748,280.40. The Trustee filed an objec-
    tion to Centre’s claim arguing, inter alia, that Centre had
    released claims against SNIG prepetition, that the released
    claims could not be revived by postpetition events and that
    Centre, as an unsecured creditor, could not include in its claim
    attorneys’ fees incurred postpetition.
    B.     Pertinent Transactions and Events
    The relationship of the parties, and the nature of the trans-
    actions summarized below, are complex and perhaps unique
    to the insurance and reinsurance industry. Reduced to their
    central elements, however, they can be summarized as fol-
    lows: Debtor SNIG guaranteed the performance of its affili-
    2
    Unless otherwise indicated, all chapter, section and rule references are
    to the Bankruptcy Code, 
    11 U.S.C. §§ 101-1330
    , and to the Federal Rules
    of Bankruptcy Procedure, Rules 1001-9036, as enacted and promulgated
    prior to the effective date of The Bankruptcy Abuse Prevention and Con-
    sumer Protection Act of 2005, Pub. L. 109-8, 
    119 Stat. 23
     (Apr. 20, 2005).
    IN THE MATTER OF SNTL                        7443
    ates’ obligations to Centre. Following default on these
    obligations, the parties reached an agreement whereby the
    affiliates paid Centre $163.4 million to satisfy an obligation
    of $180 million and Centre simultaneously released the guar-
    antor (SNIG). Thereafter, in settlement of a preference action
    brought by the liquidator of the affiliate insurance companies,
    Centre returned a portion of the $163.4 million payment. Cen-
    tre now seeks to recover the returned amount ($110 million)
    from the guarantor SNIG; Trustee asserts that SNIG’s
    released liability cannot be revived.
    More specifically, on December 18, 1998, SNIG sold its
    affiliate Business Insurance Company (“BICO”) to Centre
    Solutions Holdings (Delaware Limited) (“Centre Solutions”);
    BICO became known as Centre. On the same day, Centre
    entered into certain reinsurance agreements (the “LPT and
    Quota Share Agreements”) with insurance companies affili-
    ated with SNIG: California Compensation Insurance Com-
    pany (“CalComp”) and Superior National Insurance Company
    (“SNIC”). SNIG guaranteed performance of one of these rein-
    surance agreements known as the “QSR Contract.”
    In addition, the parties also entered into fronting (service)
    agreements known as the Underwriting Management Agree-
    ment (“UMA”) and the Claims Administration Services
    Agreement (“CSA”). SNIG also guaranteed performance of
    these agreements. The UMA, CSA, LPT and Quota Share
    Agreements are collectively referred to as the “Fronting Agree-
    ments.”3 The Fronting Agreements provide for the recovery of
    all reasonable expenses, including attorney’s fees, incurred in
    the enforcement of SNIG’s guaranty.
    3
    The Fronting Agreements provide for the recovery of all reasonable
    expenses, including attorneys’ fees, incurred in the enforcement of SNIG’s
    guaranty. Under the Fronting Agreements, SNIG sold insurance policies
    using Centre’s name and “A” financial rating. SNIG marketed, underwrote
    and administered the policies, and received the premiums and paid the
    claims arising under them. Centre received a fee for the use of its name
    and financial rating.
    7444                     IN THE MATTER OF SNTL
    The Fronting Agreements were breached in late 1999. On
    December 31, 1999, Centre entered into a Partial Commuta-
    tion and Settlement Agreement (“PCSA”) with CalComp,
    SNIC and SNIG. The PCSA modified the Fronting Agree-
    ments and provided for a partial release of the reinsurance
    obligations of SNIG, CalComp, SNIC and all of their parents
    and affiliates (among others) up to $180 million (the “Re-
    lease”).4
    In exchange for the Release, SNIG, CalComp and SNIC
    agreed to meet six conditions, including payment of a $163.4
    million Partial Commutation Payment (“Payment”) by Cal-
    Comp and SNIC. Centre received the Payment; no evidence
    was introduced that any of the six conditions for the Release
    were unsatisfied. In its opening brief, Centre acknowledges
    that “the primary obligors and SN Holdings [SNIG] (the guar-
    antor) were released from liability for up to $180 million” in
    exchange for the Payment. Appellant’s Opening Brief at 13.
    Consequently, the Release in the PCSA became effective pre-
    petition.
    4
    The Release provided in pertinent part:
    Subject to receipt of the Commutation Payment, [Centre] does
    hereby release and forever discharge the Reinsurers, their pre-
    decessors, successors, parents, affiliates, agents, officers, direc-
    tors and shareholders and assigns from any and all past, present
    and future payment obligations, adjustments, executions, offsets,
    actions, causes of action, suits, debts, sums of money, accounts,
    reckonings, bonds, bills, covenants, contracts, controversies,
    agreements, promises, damages, judgments, claims, demands, lia-
    bilities and/or losses whatsoever, all whether known or unknown,
    which [Centre] and their successors and assigns ever had, now
    have, or hereinafter may have, whether grounded in law or equity
    relating, directly or indirectly, to the terms and conditions of the
    LPT and Quota Share Agreements . . . .
    PCSA at 3. In addition, Article III of the PCSA excepted from the Release
    claims exceeding $180 million, stating that the LPT and Quota Share
    Agreements remained in full force and effect “with respect to the cession
    of Losses, Loss Adjustment Expenses and unearned premium reserves, in
    excess of $180,000,000.” 
    Id.
    IN THE MATTER OF SNTL                     7445
    Article X of the PCSA provided that the Release could be
    revoked by Centre if the PCA or other payments made pursu-
    ant to the PCSA were found to be voidable or preferential
    transfers, stating in pertinent part:
    In the event that any court of competent jurisdiction
    or governmental or regulatory authority asserting
    jurisdiction over the subject matter hereof or the par-
    ties hereto enters a final order, judgment, or other
    finding that: (i) the payment of all or any part of the
    $22,300,000, described above, or (ii) the payment by
    Reinsurers of all or any part of the [Payment] of
    $163,400,000, or (iii) any of the consideration
    described in the Recitals to this Agreement . . . con-
    stitutes a voidable or preferential transfer, such pay-
    ment constitutes an improper or disproportionate
    payment, or the payment is otherwise in violation of
    law or subject to a claim or [sic] preference, then
    [Centre] may in its sole discretion, in addition to any
    other remedy provided by law, equity, statute, or
    contract: (a) enforce this Agreement according to its
    express terms and conditions; or (b) declare this
    Agreement to be null and void in its entirety, and
    thereupon enforce the terms and conditions of the
    LPT and Quota Share Agreements as though this
    Agreement (including without limitation the releases
    and discharges set forth in Articles III and IV) had
    not been executed . . . .
    PCSA at 8-9.
    In March 2000, the Insurance Commissioner for the State
    of California (the “Commissioner”) placed certain insurance
    companies affiliated with Debtors into conservation, followed
    by liquidation. In January 2002 (approximately fourteen
    months after the petition date), the Commissioner filed a com-
    plaint in state court against Centre and others, seeking in part
    7446                   IN THE MATTER OF SNTL
    the return of the Payment from Centre as an avoidable prefer-
    ence under state law preference provisions.
    Centre subsequently agreed to settle that state court litiga-
    tion, and on February 17, 2005, the state court entered an
    order approving a settlement agreement between the Commis-
    sioner and Centre (among others) providing that the Commis-
    sioner’s avoidance action would be dismissed in exchange for
    Centre’s partial return (in the amount of $110 million) of the
    Payment. Paragraph F of the state court order indicated that
    the Commissioner sought to recover property transferred by
    the insurance companies to Centre and that the Commissioner
    had sought avoidance of such transfers.5
    The order also provided that the settlement agreement
    between the Commissioner and Centre was “fully and finally
    approved.” In turn, the settlement agreement itself provided
    that “[t]he payments to the Liquidator under section III.C.1 of
    this Settlement Agreement are payments on account of the
    claims of the Liquidator arising from payments asserted to be
    preferential transfers . . . and not payments on account of any
    tort claims.” Settlement Agreement and Mutual Release at 15.
    In its initial proof of claim filed in November 2000, Centre
    stated that SNIG’s liability as guarantor was for amounts “in
    excess of $180,000,000” and reserved the right to seek addi-
    tional amounts if any portion of the Payment was “deemed
    void or avoidable,” specifically mentioning the then-pending
    avoidance action by the Commissioner. The amended proof of
    5
    Paragraph F provided: “The property that the Liquidator [Commis-
    sioner] seeks to recover in the Action (including, without limitation, the
    property which is the subject of each claim in the Action seeking the
    avoidance of a transfer of property) is property of one or more of the SNI-
    CIL [Superior National Insurance Company, Superior Pacific Casualty
    Company, California Compensation Insurance Company, Commercial
    Compensation Casualty Company, and Combined Benefits Insurance
    Company], which property was transferred to CIC [Centre] (or, in certain
    instances, certain other defendants) from one or more of the SNICIL.”
    IN THE MATTER OF SNTL                      7447
    claim does not specifically mention the avoidance action or its
    effect on the Release, but as will be shown, the battle is all
    about Centre’s contention that the amended claim can include
    the amount paid to the Commissioner as well as postpetition
    attorneys’ fees.
    Trustee objected to Centre’s claim and amended claim on
    many grounds, although only four are relevant to this appeal:
    (1) Centre’s claim arising from SNIG’s guaranty obligations
    had been released and could not be revived as Centre had not
    obtained a judicial finding or judgment that the Payment (or
    other payment made under the PCSA) constituted a preferen-
    tial transfer as required by Article X of the PCSA, (2) even
    if Centre had obtained such a judicial finding or judgment, it
    has not exercised its right of revocation and no other remedy
    is available, (3) Centre’s claim arising from SNIG’s guaranty
    obligations was not contingent but was instead extinguished
    prepetition under the Release and, under section 502(b), could
    not be revived by any postpetition determination that the Pay-
    ment was a preference, and (4) Centre was an unsecured cred-
    itor and thus could not assert a claim for attorneys’ fees
    incurred postpetition.
    In April 2006, Trustee filed a motion for partial summary
    judgment that the Release extinguished SNIG’s liability as
    guarantor, at least up to $180 million, and that Centre could
    not recover attorneys’ fees incurred postpetition. After con-
    ducting a hearing, the bankruptcy court entered a memoran-
    dum and order on August 22, 2006, granting the motion on
    both grounds. The court held that the Release became effec-
    tive prepetition and Centre did not invoke its power of revoca-
    tion under Article X prior to the petition date. “Therefore, as
    of the petition date, the only claim Centre could have had
    against SNIG is above $180 million.”6 Memorandum of Opin-
    ion at pages 12-13.
    6
    The bankruptcy court noted that Centre was not seeking to nullify the
    PCSA under subsections (a) through (d) of Article X, but was instead
    7448                    IN THE MATTER OF SNTL
    On August 31, 2006, the bankruptcy court entered an order
    approving a stipulation granting Centre an extension of time
    to September 21 to file a notice of appeal. Centre thereafter
    filed its timely notice of appeal.
    On December 19, 2006, the clerk of this panel issued an
    order requiring Centre to (1) explain how the order was final,
    (2) move for leave to file an interlocutory appeal, or (3) obtain
    a certification of finality from the bankruptcy court pursuant
    to Federal Rule of Civil Procedure (“FRCP”) 54(b) (made
    applicable by Rules 7054 and 9014). The bankruptcy court
    entered its order directing entry of final judgment pursuant to
    FRCP 54(b) on February 14, 2007, and the panel entered an
    order on April 23, 2007, treating the order on appeal as final.
    II.   ISSUES
    (1) Did the Release under the PCSA irrevocably extinguish
    Centre’s claim against SNIG up to $180 million or was
    SNIG’s liability revived to the extent of $110 million upon
    Centre’s payment of that amount to the Commissioner?
    (a) Has a finding or final order triggering
    the remedies set forth in Article X been
    made or entered?
    attempting to exercise its rights in accordance with “any other remedy pro-
    vided by law, equity, statute, or contract.” Memorandum of Opinion at 7.
    The court held that any such remedy arose postpetition and thus was
    unavailable to Centre. “Centre’s postpetition attempt to exercise any reme-
    dies it may be entitled to under [Article] X is beyond the scope of this
    memorandum because no legal theory exists (and Centre has been unable
    to articulate one) where the postpetition exercise of remedies by Centre
    would somehow impact the prepetition release.” 
    Id. at 13
    . Specifically, the
    court rejected Centre’s argument that it held a prepetition contingent claim
    against SNIG and that there was a failure of consideration for the release.
    We disagree with the bankruptcy court’s conclusion that Centre does not
    hold an allowable contingent claim under section 502(b), as explained
    later in this opinion.
    IN THE MATTER OF SNTL                  7449
    (b) If so, is any remedy available to Cen-
    tre under which SNIG’s liability could be
    revived?
    (c) If the triggering event has occurred
    and a remedy is available at law, does sec-
    tion 502(b) nonetheless preclude allowance
    of Centre’s claim?
    (2) Can Centre, as an unsecured creditor, include in its
    proof of claim attorneys’ fees arising from a prepetition con-
    tract but incurred postpetition?
    III.    STANDARD OF REVIEW
    We review de novo the bankruptcy court’s grant of sum-
    mary judgment. Marshack v. Orange Comm’l Credit (In re
    Nat’l Lumber & Supply, Inc.), 
    184 B.R. 74
    , 77 (9th Cir. BAP
    1995); Mordy v. Chemcarb, Inc. (In re Food Catering &
    Housing, Inc.), 
    971 F.2d 396
    , 397 (9th Cir. 1992). In review-
    ing a summary judgment, the task of an appellate court is the
    same as a trial court under FRCP 56 (made applicable by Rule
    7056). Hifai v. Shell Oil Co., 
    704 F.2d 1425
    , 1428 (9th Cir.
    1983); Gertsch v. Johnson & Johnson, Fin. Corp. (In re
    Gertsch), 
    237 B.R. 160
    , 165 (9th Cir. BAP 1999). Viewing
    the evidence in the light most favorable to the non-moving
    party, we must determine for ourselves whether there was no
    genuine issue of material fact and whether the moving party
    is entitled to judgment as a matter of law. Hifai, 
    704 F.2d at 1428
    ; see FRCP 56(c).
    IV.   JURISDICTION
    Pursuant to 
    28 U.S.C. § 157
    (b)(2)(B), the bankruptcy court
    had jurisdiction over the allowance or disallowance of Cen-
    tre’s claim. As the bankruptcy court certified its order disal-
    lowing a portion of the claim as final under FRCP 54(b) and
    7450                   IN THE MATTER OF SNTL
    this panel has determined that the appeal is final, we have
    jurisdiction over the appeal under 
    28 U.S.C. § 158
    .
    V.    DISCUSSION
    A.     The Release Did Not Irrevocably Extinguish
    Centre’s Claim Against SNIG
    Trustee contends Centre cannot invoke its Article X reme-
    dies in the absence of a final order, judgment, or other finding
    that the Payment was subject to a preference claim. Trustee
    further argues that even if the triggering event (the entry of
    such an order) had occurred, Centre is not seeking any relief
    or remedy available under Article X. Finally, Trustee asserts
    that even if the triggering event had occurred and Centre were
    seeking relief available under Article X, Centre could not
    obtain such relief because section 502(b) does not allow
    claims arising postpetition. The bankruptcy court did not
    address the first two arguments, as it agreed with Trustee’s
    third argument: Centre’s claim was not allowable because it
    was based on postpetition actions to revive a debt that was
    released prepetition. On de novo review, we are not persuaded
    by any of the Trustee’s arguments.
    1.    The “Triggering Event” Under Article X Has
    Occurred
    Centre contends that when it paid $110 million in settle-
    ment of the Commissioner’s preference action against it,
    SNIG’s obligations as guarantor were restored in that amount.
    Centre does not seek to revive the entire amount of the origi-
    nal guaranty. Article X of the PCSA requires a court finding
    or judgment that the payments made under the PCSA were
    preferential before Centre could exercise the remedies avail-
    able to it under that section.7 Article X states that if any court
    7
    As the bankruptcy court stated in its Memorandum of Opinion, Centre
    is not attempting to revoke the Release or declare it null and void under
    IN THE MATTER OF SNTL                         7451
    of competent jurisdiction asserting jurisdiction over the sub-
    ject matter of or the parties to the PCSA8 “enters a final
    order, judgment, or other finding that . . . a payment under the
    PCSA] . . . constitutes a voidable or preferential transfer, . . .
    an improper or disproportionate payment . . . or is otherwise
    in violation of law or subject to a claim or preference,” Cen-
    tre may declare the PCSA null and void or exercise “any
    other remedy provided by law, equity, statute or contract[.]”
    PCSA, Article X (emphasis added). According to Trustee,
    Centre has not obtained such a court finding or judgment, and
    thus Centre cannot overcome the release of SNIG.
    We disagree. The state court order approving the settlement
    agreement between the Commissioner and Centre satisfies
    Article X’s requirement for a court order or finding. Para-
    graph F of the order indicated that the Commissioner was
    attempting to avoid the transfers and the order provided that
    the settlement agreement was “fully and finally approved.”
    The settlement agreement which was fully approved specifi-
    cally stated that the payments by Centre to the Commissioner
    “are payments on account of the claims of the Liquidator
    [Commissioner] arising from payments asserted to be prefer-
    ential transfers.” The state court order thus constituted an
    order or finding that the PCSA payment was subject to a pref-
    erence claim. As a consequence, Article X and its remedies
    govern and supersede the release provisions of Article III.9
    subsections (a)-(d) of Article X. Rather, it is invoking its other remedies
    provided by law or equity which become available under Article X upon
    entry of a court order or finding that the Payment was subject to a prefer-
    ence claim.
    8
    Neither party disputes that the state court had jurisdiction as contem-
    plated by Article X.
    9
    As acknowledged by Centre in its opening brief, the primary obligors
    and SNIG “as guarantor” were “released from liability for up to $180 mil-
    lion” when the $163.4 payment was made to Centre under the PCSA.
    Appellant’s Opening Brief at 13. Despite this admission, Centre notes on
    page 17 of its Opening Brief that the Release did not mention SNIG as
    7452                    IN THE MATTER OF SNTL
    That order acknowledges that the Payment was subject to the
    Commissioner’s preference claim. Therefore, Centre is enti-
    tled to invoke those remedies available to it under Article X.
    2.    Centre’s Return of $110 Million to the Commis-
    sioner in Settlement of a Preference Claim Revived
    Its Guaranty Claim Against SNIG
    Article X of the PCSA, entitled “Voidable Transfers,” gov-
    erns the rights of Centre in the event payments made pursuant
    to the PCSA constituted preferential transfers. Upon entry of
    the requisite court order or finding, Centre may exercise “any
    other remedy provided by law, equity, statute or contract[.]”
    PCSA, Article X (emphasis added). In other words, because
    the state court’s order was the type of court order contem-
    plated by Article X, it triggered whatever remedies Centre had
    at law as a result of the return of the PCSA payment.
    Centre argues that under applicable law, SNIG’s guaranty
    obligation was revived upon and to the extent of the return of
    the PCSA Payment. While we located no Ninth Circuit or
    California case precisely on point, we agree that the return of
    a preferential payment by a creditor generally revives the lia-
    bility of a guarantor.
    As the Tenth Circuit has observed (in dicta), courts “have
    recognized, without regard to any special guaranty language,
    that guarantors must make good on their guaranties following
    avoidance of payments previously made by their principal
    debtors.” Lowrey v. Mfrs. Hanover Leasing Corp. (In re Rob-
    inson Drilling, Inc.), 
    6 F.3d 701
    , 704 (10th Cir. 1993). “Al-
    guarantor. This omission is irrelevant. The Release applies to all parents
    and affiliates of the primary obligors, for all liabilities or debts whatso-
    ever. PCSA, Article III. Recital 3 of the PCSA states that the “Guarantor”
    [SNIG], the primary obligors (the reinsurers) and Centre wish “to fully
    and finally to [sic] settle and determine their respective obligations and
    liabilities.” PCSA, Recital 3.
    IN THE MATTER OF SNTL                        7453
    though a surety usually is discharged by payment of the debt,
    he continues to be liable if the payment constitutes a prefer-
    ence under bankruptcy law. A preferential payment is deemed
    by law to be no payment at all.” Herman Cantor Corp. v.
    Cent. Fidelity Bank (In re Herman Cantor Corp.), 
    15 B.R. 747
    , 750 (Bankr. E.D. Va. 1981).
    The Restatement (Third) of Suretyship and Guaranty and
    the Corpus Juris Secundum on Principal and Surety echo
    these general principles.
    When a secondary obligation is discharged in whole
    or part by performance by the principal obligor or
    another secondary obligor, or by realization upon
    collateral securing such performance, the secondary
    obligation revives to the extent that the obligee,
    under a legal duty to do so, later surrenders that per-
    formance or collateral, or the value thereof, as a
    preference or otherwise.
    Restatement (Third) of Suretyship & Guaranty § 70 (1996).
    Similarly, the Corpus Juris Secundum provides that if a credi-
    tor is forced to refund a payment to a primary obligor, the
    guarantor’s liability is revived:
    [T]o discharge the surety, the payment of the princi-
    pal debt or obligation must be valid and binding,
    and, if the creditor is forced to refund the payment,
    the surety’s liability is restored. Thus, a surety is not,
    as a general rule, released by a payment that is a
    preference under the bankruptcy laws, which the
    creditor is obliged to refund.
    72 C.J.S. Principal and Surety § 129 (Updated 2007).
    Trustee disputes the applicability of the cases that follow or
    recognize the general principle, but cites no case law holding
    the contrary: that the liability of a surety or guarantor is not
    7454                      IN THE MATTER OF SNTL
    revived by a return of a preferential transfer to a primary obli-
    gor (or its assigns). Rather, Trustee contends that the general
    principle is inapplicable because, inter alia, the repayment of
    the preference must be involuntary for the principle to apply.
    Trustee’s contention is based on the assumption that a return
    of a payment is “voluntary” if it was made pursuant to a set-
    tlement. We disagree.10 While Corpus Juris Secundum and the
    Restatement do indicate that the repayment must be “forced”
    or made “under a legal duty to do so,” the Sixth Circuit in
    Wallace Hardware Co., Inc. v. Abrams, 
    223 F.3d 382
    , 408-09
    (6th Cir. 2000), held that when the obligee returns a payment
    as part of a settlement of a preference avoidance action, the
    guarantor is not discharged of his obligation to pay the debt.
    We find Wallace Hardware persuasive. In that case, the
    creditor repossessed inventory of a primary obligor in satis-
    faction of the obligor’s debt. Thereafter, the obligor filed for
    bankruptcy relief and the trustee filed an action to have the
    10
    A state appellate court recently tackled the issue of whether a return
    of a payment pursuant to a settlement constituted a “voluntary” payment
    outside the scope of the Restatement’s revival rule set forth in section 70.
    Because the case is not published and the local rules of the court prohibit
    citation to its unpublished decisions, we will not cite it. We nonetheless
    agree with its reasoned holding.
    In that case, like Trustee here, the guarantor argued that its liability on
    the guaranty was not revived when the creditor “voluntarily” returned the
    payment to the primary obligor in settlement of a preference action. Like
    us, the appellate court rejected this argument, stating (emphasis added):
    [T]his argument misconstrues the nature of voluntariness. [The
    creditor/obligee] did not spontaneously return the money to [the
    primary obligor]. It responded to a lawsuit, and entered lengthy
    negotiations with [the primary obligor] before ultimately reach-
    ing a settlement. We do not regard the settlement as uncoerced.
    A lawsuit necessarily implies a degree of compulsion. A payment
    made in settlement of contested litigation is not truly voluntary.
    We agree with this analysis of why a return of a payment made in settle-
    ment of a lawsuit is not “voluntary” and of why the general principles of
    section 70 of the Restatement (Third) of Surety & Guaranty apply here.
    IN THE MATTER OF SNTL                         7455
    repossession avoided as a preference. The creditor settled
    with the trustee and sued the guarantors for the amount of the
    debt that remained outstanding upon the creditor’s partial
    return of the proceeds of its inventory repossession.11
    In holding that the guarantors were obligated to repay the
    amounts returned by the creditor to the trustee under the pref-
    erence action settlement, the Sixth Circuit stated that “courts
    have uniformly held that a payment of a debt that is later set
    aside as an avoidable preference does not discharge a guaran-
    tor of his obligation to repay that debt.” 
    Id.
     at 408 (citing
    cases). The Sixth Circuit also observed that the repossession
    operated as an accord and satisfaction, and that “an accord
    and satisfaction, like any contract, can be set aside, in whole
    or in part, for such reasons as mutual mistake, supervening
    illegality, or frustration of purpose.” 
    Id.
    Trustee contends that we should disregard Wallace Hard-
    ware because there the obligations of the guarantors, unlike
    those of SNIG, had not been contractually released by the
    creditor. This distinction is not significant because while Arti-
    cle III of the PCSA did release SNIG, Article X provided
    Centre with whatever remedies were available in law upon
    entry of the requisite court order or finding. As we have
    already held, the triggering event of Article X’s remedies
    occurred when the state court entered the order approving the
    settlement agreement. As one of the remedies available at law
    permits revival of otherwise released guaranty obligations
    upon return of a preferential payment of the primary obligor,
    the remedies available under Article X and under law super-
    sede the release provisions of Article III.
    11
    In Wallace Hardware, the payment made by the primary obligor was
    attacked under the Bankruptcy Code’s preference provisions, while the
    Payment here was alleged to be preferential under California’s Insurance
    Code. Nonetheless, the general principle — that the return of a preferential
    payment of a primary obligor by the obligee revives a guarantor’s obliga-
    tion otherwise released by that payment — should operate with equal
    force whatever preference law applies.
    7456                  IN THE MATTER OF SNTL
    Thus, Trustee’s reliance on Article III’s Release in an effort
    to distinguish Wallace Hardware and the other cases is not
    convincing, particularly because Trustee’s position (unlike
    that of Wallace Hardware) would discourage settlement of
    preference litigation.12 It would be a strange result, indeed, if
    we were to require Centre to litigate with the Commissioner
    to the bitter end, lose, then satisfy a judgment of at least
    $163.4 million before it could revive SNIG’s guaranty obliga-
    tion, particularly where Article X itself requires merely a find-
    ing that the Payment was subject to a preference claim.
    Instead, we find Wallace Hardware’s position more persua-
    sive because it does not require full and costly litigation but
    instead acknowledges that the general principle should also
    apply when the creditor returns at least a portion of a primary
    obligor’s payment in settlement of a preference action.
    3.   Section 502(b) Does Not Preclude Allowance of
    Centre’s Claim
    Trustee argues that even if Centre’s claim against SNIG
    could be revived under Article X and applicable law, the
    release of Article III was still in effect as of its petition date
    and thus Centre’s claim was extinguished prepetition and not
    allowable under section 502(b). In other words, the claim
    could not be revived postpetition, even if the PCSA and other
    governing law permitted revival outside of bankruptcy. The
    bankruptcy court agreed with Trustee, holding that Centre
    was attempting to invoke postpetition remedies and thus
    asserting postpetition claims. We hold, however, that Centre
    held a prepetition contingent claim inasmuch as the guaranty
    claim was subject to revival once the state court conservator-
    ship had begun prepetition, giving rise to a possible (and fore-
    seen) preference action by the Commissioner.
    12
    Trustee has not suggested that Centre could have defeated the Com-
    missioner’s state court action or that the settlement was inappropriate.
    IN THE MATTER OF SNTL                  7457
    Section 502(b) provides that a court is to determine the
    amount of a prepetition claim “as of the date of the filing of
    the petition, and . . . allow such claim in such amount.” The
    bankruptcy court agreed, concluding because Centre’s claims
    against SNIG had been released and extinguished as of the
    petition date, its claim was disallowed, and section 502(b)
    precluded Centre from relying on postpetition events to revive
    the claim. Centre argues that its claim for recovery of any
    preferential payments it made postpetition constitutes an
    allowable contingent claim under section 502(b). We agree;
    Centre’s claim should not be disallowed merely because the
    removal of the contingency affecting its claim will occur post-
    petition, a consequence that is plainly at odds with the Bank-
    ruptcy Code.
    A claim is broadly defined under the Bankruptcy Code. It
    includes a right to payment or equitable remedy “whether or
    not such right is reduced to judgment, liquidated, unliqui-
    dated, fixed, contingent, matured, unmatured, disputed, undis-
    puted, legal, equitable, secured, or unsecured.” 
    11 U.S.C. § 101
    (5) (emphasis added). The Code utilizes this “broadest
    possible definition” of claim to ensure that “all legal obliga-
    tions of the debtor, no matter how remote or contingent, will
    be able to be dealt with in the bankruptcy case.” Cal. Dep’t
    of Health Servs. v. Jensen (In re Jensen), 
    995 F.2d 925
    , 929-
    30 (9th Cir. 1993) (emphasis in original) (citations and quota-
    tions omitted).
    Section 502(b)(1) provides that a claim is not allowable if
    it is unenforceable under the applicable agreement or law “for
    a reason other than because such claim is contingent or
    unmatured.” 
    11 U.S.C. § 502
    (b)(1) (emphasis added). Here,
    the parties provided in Article X remedies for Centre in the
    event a court entered an order or finding that the Payment was
    subject to a preference claim. Upon the occurrence of that
    contingency or triggering event, Centre would have certain
    rights and claims against SNIG. Under section 502(b)(1),
    those contingent claims cannot be disallowed simply because
    7458                    IN THE MATTER OF SNTL
    the contingency occurred postpetition.13 As we stated in a
    recent decision, we “must find a basis in section 502 to disal-
    low a claim, and absent such basis, we must allow it.” Wells
    Fargo Fin. Acceptance v. Rodriguez (In re Rodriguez), 
    375 B.R. 535
    , 545 (9th Cir. BAP 2007), citing Travelers Cas. &
    Sur. Co. of Am. v. Pacific Gas & Elec. Co., ___ U.S. ___, 
    127 S.Ct. 1199
    , 1206 (2007) (“we generally presume that claims
    enforceable under applicable state law will be allowed in
    bankruptcy unless they are expressly disallowed” under sec-
    tion 502). Contingent claims are allowed under section
    502(b).
    Moreover, as the parties concede, federal law determines
    when a claim arises under the Bankruptcy Code. Zilog, Inc.
    v. Corning (In re Zilog, Inc.), 
    450 F.3d 996
    , 1000 (9th Cir.
    2006). “It is well-established that a claim is ripe as an allow-
    able claim in a bankruptcy proceeding even if it is a cause of
    13
    If SNIG had filed bankruptcy before the primary obligors had
    defaulted on the Fronting Agreements and QSR Contract, Centre would
    hold a claim against SNIG even though SNIG’s liability was contingent
    on the primary obligors’ future postpetition default. See In re All Media
    Props., Inc., 
    5 B.R. 126
    , 133 (Bankr. S.D. Tex. 1980), aff’d, 
    646 F.2d 193
    (5th Cir. 1981) (“[I]n the case of the classic contingent liability of a guar-
    antor of a promissory note executed by a third party, both the creditor and
    guarantor knew that there would be liability only if the principal defaulted.
    No obligation arises until such default.”). Similarly, here, the parties knew
    that Centre’s remedies against SNIG under Article X would not be avail-
    able until the occurrence of a contingent, triggering event: the entry of a
    court order or finding that the Payment was subject to a preference claim.
    Another subsection of section 502 demonstrates that Congress did not
    intend for claims to be disallowed simply because of their contingent
    nature. Section 502(c)(1) establishes a procedure for the estimation of
    such claims by the bankruptcy court. Even though such claims could not
    be enforced on the petition date outside the bankruptcy court, the Bank-
    ruptcy Code clearly contemplates that the bankruptcy estate will deal with
    contingent and unliquidated claims, including contingent or unliquidated
    guaranty claims against debtors. In re Tiegen, 
    228 B.R. 720
    , 722-23
    (Bankr. D. S.D. 1998) (estimating claims of holders of guaranties executed
    by chapter 7 debtors).
    IN THE MATTER OF SNTL                  7459
    action that has not yet accrued.” Cool Fuel, Inc. v. Bd. of
    Equalization (In re Cool Fuel, Inc.), 
    210 F.3d 999
    , 1007 (9th
    Cir. 2000). The Ninth Circuit has adopted the “fair contem-
    plation” test for determining when a claim accrues for the pur-
    poses of section 502(b). Zilog, 
    450 F.3d at 1000
    ; Cool Fuel,
    
    210 F.3d at 1007
    ; Jensen, 
    995 F.2d at 930
    . Under that test, a
    claim arises when a claimant can fairly or reasonably contem-
    plate the claim’s existence even if a cause of action has not
    yet accrued under nonbankruptcy law. Cool Fuel, 
    210 F.3d at 1007
    .
    Here, the parties contemplated that Centre could have a
    claim against SNIG in the event a payment made by the pri-
    mary obligors under the PCSA constituted a preferential
    transfer. Article X was drafted to cover that contingency. The
    Debtors filed their respective chapter 11 petitions after the
    Commissioner placed the primary obligors into conservation.
    As the conservation was commenced approximately three
    months after the PCSA payments were made, an action by the
    Commissioner to recover those payments as preferential could
    have been reasonably and fairly contemplated by SNIG and
    Centre as of the petition date. See 
    Cal. Ins. Code § 1034
    (c)(1)
    (transfers made within four months before filing of the
    liquidation/conservation petition are avoidable). Conse-
    quently, those claims accrued (even if they were contingent
    and not fixed) as of the petition date, even if the Release were
    still effective as of that date.
    Hence, because Centre’s claim based on a revival of
    SNIG’s guaranty was an allowable claim as of the date of the
    petition, we will reverse.
    B.   Centre May Be Entitled to Add Its Postpetition Attor-
    neys’ Fees To Its Unsecured Claim
    This appeal presents a question currently pending before
    the Ninth Circuit: May an unsecured creditor include attor-
    neys’ fees incurred postpetition as part of its unsecured claim?
    7460                    IN THE MATTER OF SNTL
    In Travelers, the Supreme Court did not resolve this issue but
    instead remanded it to the Ninth Circuit for resolution. Travel-
    ers, 
    127 S.Ct. at 1207-08
    . Rather than delay this appeal to
    await that outcome, we will answer the question ourselves.14
    In Travelers, the bankruptcy court had followed the Ninth
    Circuit’s holding in Fobian v. W. Farm. Credit Bank (In re
    Fobian), 
    951 F.2d 1149
     (9th Cir. 1992), that creditors could
    not recover attorneys’ fees for litigating issues particular to
    bankruptcy law and disallowed the claim for such fees by
    Travelers. The district court and the Ninth Circuit affirmed.
    The Supreme Court reversed to the extent the claim was disal-
    lowed on this ground, overruling Fobian. It specifically
    refused, however, to decide whether Travelers’ claim for post-
    petition attorneys’ fees was disallowed under section
    502(b)(1) because of Travelers’ status as an unsecured credi-
    tor. Travelers, 
    127 S.Ct. at 1207-08
    .
    Since Travelers was issued by the Supreme Court, two
    bankruptcy courts have disagreed on the issue of whether an
    unsecured creditor can recover fees incurred postpetition, with
    a split result.15 Compare Qmect, Inc. v. Burlingame Capital
    Partners II, LP (In re Qmect, Inc.), 
    368 B.R. 882
     (Bankr.
    N.D. Cal. 2007) (unsecured creditor was entitled to include its
    contract-based attorneys’ fees incurred postpetition in its pre-
    14
    First, we owe it to the parties to decide cases before us promptly. Sec-
    ond, our decision is subject to review by the Ninth Circuit. Third, we
    believe the Ninth Circuit values the views of the Bankruptcy Appellate
    Panel on bankruptcy issues. Sigma Micro Corp. v. Healthcentral.com (In
    re Healthcentral.com), 
    504 F.3d 775
    , 784 n.3 (9th Cir. 2007).
    15
    In addition, the First Circuit issued a post-Travelers opinion that
    favorably cited authority supporting the allowance of postpetition attor-
    neys’ fees to unsecured creditors, but that decision is not on point. UPS
    Capital Bus. Credit v. Gencardelli (In re Gencardelli), 
    501 F.3d 1
    , 6 (1st
    Cir. 2007). The Gencardelli court was not addressing the issue of postpeti-
    tion attorneys’ fees but instead held that an oversecured creditor was enti-
    tled to collect a prepayment penalty from a solvent debtor regardless of
    reasonableness.
    IN THE MATTER OF SNTL                          7461
    petition claim) to In re Elec. Mach. Enter., Inc., 
    371 B.R. 549
    (Bankr. M.D. Fla. 2007) (disallowing unsecured creditor’s
    postpetition attorneys’ fees).
    The split is unsurprising, as the cases decided prior to Trav-
    elers also reached opposite conclusions, with the majority
    holding that unsecured creditors could not assert attorneys’
    fees incurred postpetition as part of their claims.16 While the
    holdings may diverge, these cases analyze the four primary
    arguments asserted in favor of and against the allowance of
    such claims: whether section 506(b) operates to disallow such
    claims; whether section 502(b) disallows such claims because
    they were not fixed “as of the date of the filing of the peti-
    tion;” whether the Supreme Court’s decision in United Sav-
    ings Ass’n of Texas v. Timbers of Inwood Forest Assocs., Ltd,
    
    484 U.S. 365
     (1988), precludes allowance of such claims; and
    whether public policy favors disallowance of such claims. We
    address each argument in turn.
    16
    In the majority line of cases, courts have held that unsecured creditors
    are not entitled to claim such fees, as section 506(b) is the only provision
    in the Code that permits the recovery of postpetition fees from the estate,
    and that section applies only to secured creditors. See Adams v. Zimmer-
    man, 
    73 F.3d 1164
    , 1177 (1st Cir. 1996); Waterman v. Ditto (In re Water-
    man), 
    248 B.R. 567
    , 573 (8th Cir. BAP 2000); Pride Cos., L.P. v. Johnson
    (In re Pride Cos., L.P.), 
    285 B.R. 366
    , 372-73 (Bankr. N.D. Tex. 2002)
    (collecting cases).
    In the sizable minority line of cases, courts have permitted unsecured
    creditors to claim attorneys’ fees incurred postpetition but based on a pre-
    petition contract. See Martin v. Bank of Germantown (In re Martin), 
    761 F.2d 1163
    , 1168 (6th Cir. 1985); United Merchs. & Mfrs. Inc. v. Equitable
    Life Assurance Soc’y of the U.S. (In re United Merchs. & Mfrs. Inc.), 
    674 F.2d 134
     (2d Cir. 1982) (decided under the former Bankruptcy Act, but
    commenting on section 506(b) of the current Code); In re New Power Co.,
    
    313 B.R. 496
     (Bankr. N.D. Ga. 2004); but see Pride Cos., 
    285 B.R. at 374
    (listing the “sizable minority” cases decided before 2002).
    7462                  IN THE MATTER OF SNTL
    1.     Section 502 vs. Section 506
    In Electric Machinery, as in almost all of the cases in the
    majority line, the court held that unsecured creditors cannot
    recover postpetition fees because the “plain language” of sec-
    tion 506(b) precludes such claims:
    The emphasized language of section 506(b) demon-
    strates the congressional intent to create an exception
    to the general rule that claims are to be determined
    as of the petition date, exclusive of post-petition
    interest, attorneys’ fees, and other charges. The use
    of the words “to the extent” a claim is oversecured,
    and “there shall be allowed” interest and fees, man-
    dates the conclusion that in all other circumstances,
    post-petition interest, attorneys’ fees, and charges
    shall not be allowed. These courts have concluded
    that if Congress intended for unsecured creditors to
    receive post-petition attorneys’ fees, then it would
    have done so explicitly by authorizing unsecured
    creditors to collect fees under section 506(b).
    Elec. Mach., 
    371 B.R. at 551
    , citing Pride Cos, 
    285 B.R. at 372
    . In contrast, the Qmect court rejected the argument that
    section 506(b) permits only secured creditors to recover post-
    petition fees:
    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).
    Moreover, 
    11 U.S.C. § 506
    (b) does not distinguish
    between pre-petition and post-petition attorneys’
    IN THE MATTER OF SNTL                       7463
    fees. Thus, if 
    11 U.S.C. § 506
    (b) is read as an addi-
    tional ground for objecting to claims, arguably, an
    unsecured creditor would be prohibited from includ-
    ing its pre-petition attorneys’ fees in its claim as well
    as its postpetition fees.
    Qmect, 
    368 B.R. at 885
    .
    We are not persuaded by the approach of the Electric
    Machinery court and, like Qmect, we reject the argument that
    section 506(b) preempts postpetition attorneys’ fees for all
    except oversecured creditors. While we cannot predict how
    the Ninth Circuit will decide this issue in Travelers, we do
    find a clue in Joseph F. Sanson Inv. Co. v. 268 Ltd. (In re 268
    Ltd.), 
    789 F.2d 674
    , 678 (9th Cir. 1986), where the Ninth Cir-
    cuit observed that section 506(b) defines secured claims and
    does not limit unsecured claims:
    When read literally, subsection (b) arguably limits
    the fees available to the oversecured creditor. When
    read in conjunction with § 506(a), however, it may
    be understood to define the portion of the fees which
    shall be afforded secured status. We adopt the latter
    reading.
    268 Ltd., 
    789 F.2d at 678
    .
    In 268 Limited, an oversecured creditor sought postpetition
    attorneys’ fees based on its contract with the debtor, which
    provided that the creditor could recover five percent of the
    balance due at the time of default as attorneys’ fees. 
    Id. at 675
    . The creditor argued that because Nevada law permitted
    recovery of fees on such a percentage basis, the fees were rea-
    sonable and allowable under section 506(b) as a matter of
    law. 
    Id.
     The Ninth Circuit disagreed, holding that section
    506(b) permitted the creditor to claim as secured only its “rea-
    sonable” fees and that the percentage recovery was unreason-
    able. 
    Id. at 675-77
    . The Ninth Circuit then remanded to allow
    7464                    IN THE MATTER OF SNTL
    the creditor to claim those attorneys’ fees exceeding the “rea-
    sonable” amount as an unsecured claim under section
    502(b)(1). The court noted that “other creditors may claim
    such expenses” under that section and that section 506(b)
    does not “limit the fees available” as an unsecured claim but
    merely “define[s] the portion of the fees which shall be
    afforded secured status.”17 
    Id. at 678
    .
    We agree with the Ninth Circuit, as well as with the Elev-
    enth Circuit in Welzel v. Advocate Realty Inv., LLC (In re
    Welzel), 
    275 F.3d 1308
    , 1316-20 (11th Cir. 2001), that the
    allowance functions of section 506(b) and 502(b) have been
    incorrectly conflated. Section 502(b), which applies to claims
    generally, does disallow unmatured interest (see 
    11 U.S.C. § 502
    (b)(2)); it does not specifically disallow attorneys’ fees
    of creditors or certain other charges. Section 506(b), on the
    other hand, specifies what may be included in a secured
    claim.
    17
    While the Ninth Circuit in 268 Limited distinguished the allowability
    of claims under section 502(b)(1) (which incorporates “applicable law”
    and is silent about “reasonableness”) from the definition of secured claim
    under section 506, it is important to note that its determination that an
    unsecured claim may be asserted for the amount of fees in excess of the
    amount that was “reasonable” under section 506(b) does not mean that the
    claim necessarily had to be allowed. Rather, the court of appeals remanded
    to allow the creditor to “seek” the balance of its fees under section 502 and
    expressed “no opinion on the enforceability under the governing state law
    of the deed of trust’s attorney’s fees provision.” 268 Ltd., 
    789 F.2d at 678
    .
    In other words, the claim would still be subject to objection on the merits
    based on Nevada law, the precise terms of which were not discussed by
    the Ninth Circuit (although the contentions of the creditor suggest that
    Nevada law did not impose a separate reasonableness requirement for
    recovery of contractual attorneys’ fees but instead permitted recovery of
    such fees on a percentage basis). In this instance, “applicable” California
    law permits recovery of contractual attorneys’ fees only if they are reason-
    able. See CAL. CIV. CODE § 1717. Thus, with respect to California cases,
    “applicable law” limits postpetition contractual attorney’s fees to “reason-
    able” amounts for the purposes of section 502(b)(1).
    IN THE MATTER OF SNTL                   7465
    Comparing the two provisions, the Ninth and Eleventh Cir-
    cuits courts have held that a creditor may assert an unsecured
    claim for fees and costs arising under its contract with the
    debtor, even though the creditor’s claim was not an allowed
    secured claim under section 506(b). See Welzel, 
    275 F.3d at 1317-18
     (contains a thorough analysis of the two sections and
    their respective roles in the Bankruptcy Code).
    [W]e must determine how to interpret the general
    instructions concerning allowance and disallowance
    contained in [section] 502 and the more specific
    instructions concerning attorney’s fees in [section]
    506(b) such that the two provisions are rendered
    consistent. We first note that [section] 506(b) does
    not state that attorney’s fees deemed unreasonable
    are to be disallowed. In fact, the subsection is com-
    pletely silent with regard to the allowance/
    disallowance issue. This silence suggests that [sec-
    tion] 506(b) is meant not to displace the general
    instructions laid down in [section] 502, but to be
    read together in a complementary manner.
    
    Id. at 1317
    ; see also In re Tricca, 
    196 B.R. 214
    , 219-20
    (Bankr. D. Mass. 1996) (“Section 506(b) is not a provision
    which concerns itself with claim allowance. Section 506(b)
    addresses only the question of what is part of an ‘allowed
    secured claim.’ Those courts which have examined [section]
    506(b) in conjunction with [section] 502 have concluded that
    [section] 506(b) does not create additional exceptions to the
    allowance of claims; rather it only provides for the classifica-
    tion of allowed claims as secured or unsecured”); see also
    Rodriguez, 
    375 B.R. at 545
     (section 502, not section 506,
    governs the allowance or disallowance of unsecured claims).
    Therefore, if section 506(b) is — as the Ninth Circuit has
    hinted — irrelevant to determining the allowability of an
    unsecured claim, we must look to section 502 to determine
    allowability. Travelers, 
    127 S.Ct. at 1206
    ; Rodriguez, 375
    7466                    IN THE MATTER OF SNTL
    B.R. at 545. As discussed below, section 502(b) does not spe-
    cifically disallow such fees. Qmect, 
    368 B.R. at 885
    ; New
    Power, 
    313 B.R. at 509-10
    .
    2.    Date That The Claim Arose
    The Electric Machinery court, like the bankruptcy court
    here and many of the pre-Travelers majority courts, disal-
    lowed the postpetition fees of an unsecured creditor because
    section 502(b)(1) provides that a bankruptcy court “shall
    determine the amount of such claim . . . as of the date of the
    filing of the petition” and the postpetition fees did not exist
    as of that date. Elec. Mach., 
    371 B.R. at 551
    ; Pride Cos., 
    285 B.R. at 373
    . Because the amount of fees incurred postpetition
    cannot be determined or calculated as of the petition date, sec-
    tion 502(b) purportedly precludes their allowance. 
    Id.
     We dis-
    agree with this approach, as it is inconsistent with the
    Bankruptcy Code’s broad definition of “claim,” which — as
    discussed previously — includes any right to payment,
    whether or not that right is contingent and unliquidated. See
    
    11 U.S.C. § 101
    (5)(A); Qmect, 
    368 B.R. at 884
    .
    Here, the parties’ execution of a prepetition agreement con-
    taining an attorneys’ fees provision gives rise to a contingent,
    unliquidated attorney-fee claim. As the New Power court
    held: “[w]hen a creditor’s right to payment for fees exists pre-
    petition, the right to payment constitutes a ‘claim,’ within the
    meaning of § 101(5)(A), albeit an unliquidated, unmatured
    claim that may be estimated for purposes of allowance, if nec-
    essary, pursuant to § 502(c).”18 New Power, 
    313 B.R. at 508
    .
    18
    To the extent that we hold that fees incurred postpetition but arising
    out of a prepetition contract or agreement constitute contingent, unliqui-
    dated prepetition claims, describing them as “postpetition fees” may be
    inaccurate. Nonetheless, our use of this term is a shorthand means of
    describing attorney fees actually incurred postpetition but based on the
    debtor’s prepetition contract. More to the point, the critical events that no
    doubt relate to a portion of Centre’s attorneys fees — the Release, the Pay-
    ment and the Commissioner’s conservation — all occurred prepetition,
    thus making Centre’s claim less remote and less contingent.
    IN THE MATTER OF SNTL                           7467
    “So long as the right to collect the fees existed pre-petition,
    the fact that the fees were actually incurred during the post-
    petition period is not relevant to the determination of whether
    the creditor has an allowable pre-petition claim for the fees.”19
    Id.; see also Mfrs. Hanover Trust Co. v. Bartsh (In re Flight
    Trans. Corp. Sec. Litig.), 
    874 F.2d 576
     (indenture trustee had
    a “right of payment” for attorneys’ fees under prepetition con-
    tract, and thus had an allowable unsecured claim under sec-
    tion 502(b) even though such fees were unknown as of the
    petition date).
    This approach is consistent with the Ninth Circuit’s “fair
    contemplation” test — which we discussed in more detail ear-
    lier — for determining when a claim accrues. Postpetition
    fees can be fairly contemplated when the parties have pro-
    vided for them in their contracts and thus are contingent
    claims as of the petition date. They cannot be disallowed
    merely because they are contingent. Qmect, 
    368 B.R. at 884
    .
    As stated by one leading commentator: “In general, if the
    creditor incurs the attorneys’ fees postpetition in connection
    with exercising or protecting a prepetition claim that included
    a right to recover attorneys’ fees, the fees will be prepetition
    in nature, constituting a contingent prepetition obligation that
    became fixed postpetition when the fees were incurred.” 5
    19
    In Keaton v. Boatmen’s Bank of Tenn., 
    212 B.R. 587
     (E.D. Tenn.
    1997), vacated as moot, 
    145 F.3d 1331
     (6th Cir. 1998), the district court
    engaged in a thorough analysis of whether fees incurred postpetition pur-
    suant to a prepetition claim are disallowable because they were not fixed
    “as of the date of the filing of the petition.” Keaton, 
    212 B.R. at 589-91
    .
    Even though the decision was vacated as moot when the creditor aban-
    doned its claim for attorneys’ fees (145 F.3d at 1331), we find the analysis
    of Keaton persuasive. Quoting the bankruptcy court with approval, the dis-
    trict court held: “While the representation may have been performed after
    the petition was filed, [the creditor’s] right to collect attorney’s fees arose
    out of the contract and is a prepetition claim.” Keaton, 
    212 B.R. at 591
    .
    The creditor “had a prepetition right to collect attorneys’ fees, albeit an
    unmatured, contingent right; i.e., the right was contingent upon the [credi-
    tor] actually incurring attorneys’ fees in collecting the debt.” 
    Id.
    7468                IN THE MATTER OF SNTL
    Collier on Bankruptcy § 553.03[1][i] (15th ed. Updated
    2007).
    Because we hold that attorneys’ fees arising out of a prepe-
    tition contract but incurred postpetition fall within the Bank-
    ruptcy Code’s broad definition of claim, we reject the position
    of the majority line of cases that section 502(b) precludes
    such fees.
    3.   Does Timbers Control?
    Like many other courts in the majority line, the Electric
    Machinery court concluded that the Supreme Court’s holding
    in Timbers, 
    484 U.S. at 380
    , mandated disallowance of claims
    by unsecured creditors for postpetition attorneys’ fees:
    In Timbers, the Supreme Court concluded that
    because section 506(b) permitted post-petition inter-
    est to be paid only out of an equity cushion, an
    undersecured creditor who had no such equity cush-
    ion fell within the general rule of disallowing post-
    petition interest. Courts that rely on Timbers to disal-
    low post-petition attorneys’ fees and costs reason
    that the rationale applies equally to the disallowance
    of post-petition attorneys’ fees and costs to unse-
    cured or undersecured creditors.
    Elec. Mach., 
    371 B.R. at 551
    .
    We believe that Electric Machinery’s reliance on Timbers
    is misplaced. Timbers provided that an undersecured creditor
    could not receive postpetition interest on the unsecured por-
    tion of its debt. Timbers, 
    484 U.S. at 380
    . This holding is con-
    sistent with section 502(b)(2), which specifically disallows
    claims for unmatured interest. Inasmuch as section 502(b)
    does not contain a similar prohibition against attorneys’ fees,
    the comparison between the current issue and that presented
    in Timbers is not persuasive. New Power, 
    313 B.R. at
    510
    IN THE MATTER OF SNTL                         7469
    (“there is no exception within 502(b) which would prevent the
    collection of attorneys’ fees by a creditor who has a valid
    nonbankruptcy right to do so” and neither section 506(b) nor
    Timbers bars unsecured creditors from asserting a contractual
    or statutory claim for attorneys’ fees); see also Gencardelli,
    
    501 F.3d at 6, n.2
     (finding Timbers inapposite because postpe-
    tition interest is “made unavailable as [an] unsecured claim[ ]
    by an explicit statutory provision”).
    4.    Public Policy
    Finally, Electric Machinery cites policy reasons why courts
    should disallow claims by unsecured creditors for postpetition
    attorneys’ fees; in particular, the court opines that disallow-
    ance of these claims would promote “equality of distribution”
    and would prevent individual creditors from utilizing
    scorched-earth litigation tactics or absorbing an inequitable
    amount of estate assets. Elec. Mach., 
    371 B.R. at 551-53
    . In
    contrast, the court in Qmect identifies a different policy rea-
    son for allowance of such claims (i.e., to prevent the unfair-
    ness of a debtor recovering such fees while the creditor is
    prohibited from similar recovery). Because we find that the
    Bankruptcy Code itself provides the answer to this issue (by
    not specifically disallowing postpetition fees), we do not
    attempt to reconcile these policy concerns. In the end, it is the
    province of Congress to correct statutory dysfunctions and to
    resolve difficult policy questions embedded in the statute.20
    20
    While there is intuitive appeal to the Electric Machinery court’s con-
    cern that an overactive creditor could unfairly run up fees, several factors
    reduce the potential for trouble. First, the fee doctrines of many jurisdic-
    tions, including the general California attorney’s fee doctrine that applies
    here, impose requirements in the nature of reasonableness. Second, the
    sections of the Bankruptcy Code that expressly focus on compensation for
    attorneys generally include limitations premised on reasonableness: e.g.,
    section 303(i)(1)(B) (“reasonable attorney’s fee”); section 329(b)
    (“reasonable value of any such services”); section 330(a) (“reasonable
    compensation”); section 331 (incorporates section 330); section 502(b)(4)
    (“reasonable value of such services”); section 503(b)(4) (“reasonable com-
    7470                    IN THE MATTER OF SNTL
    In summary, we agree with the Qmect court that claims for
    postpetition attorneys’ fees cannot be disallowed simply
    because the claim of the creditor is unsecured. Because Centre
    is entitled to claim postpetition attorneys’ fees as part of its
    unsecured claim under section 502, we remand for the bank-
    ruptcy court to determine whether Centre has satisfied the
    requisites for allowance of that portion of its claim under the
    relevant contracts and state law.
    VI.    CONCLUSION
    For the foregoing reasons, we REVERSE the bankruptcy
    court’s holding that Centre’s claim against SNIG up to the
    amount of $180 million be disallowed and REMAND for
    allowance of the $110 million paid by Centre to the Commis-
    sioner. We further REVERSE the disallowance of Centre’s
    postpetition fees to the extent the disallowance was based
    solely on Centre’s status as an unsecured creditor and
    REMAND for a determination of whether Centre is entitled
    to the fees under the relevant contracts or state law or whether
    other grounds exist (apart from Centre’s status as an unse-
    cured creditor) for disallowing the postpetition attorneys’ fees
    claim.
    pensation”). It is counterintuitive to suppose that a court of equity would
    fully allow a claim for creditor’s unreasonable attorneys’ fees in litigating
    with an attorney who can receive only “reasonable” compensation. Third,
    economic constraints on creditors exist in the typical bankruptcy case
    where resources are not available to pay unsecured claims in full; a credi-
    tor’s extra fees will be fully compensated only in the unusual situations
    where funds are available to pay 100 percent of claims. Thus, the opportu-
    nities for gamesmanship are limited.
    PRINTED FOR
    ADMINISTRATIVE OFFICE—U.S. COURTS
    BY THOMSON REUTERS/WEST—SAN FRANCISCO
    The summary, which does not constitute a part of the opinion of the court, is copyrighted
    © 2009 Thomson Reuters/West.
    

Document Info

Docket Number: 08-60001

Filed Date: 6/23/2009

Precedential Status: Precedential

Modified Date: 10/14/2015

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