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Score One (or Two) for the Creditors! In re SNTL Corp. (9th Cir. BAP)

American Bankruptcy Institute Journal, Mar 2008 by Larsen, Stuart

Can a guarantee of an obligation that has previously been paid spring back to life when the creditor to whom the underlying guarantee is owed must pay the bankruptcy trustee amounts previously received from the primary obligor? May an unsecured creditor receive postpetition attorneys' fees as part of its claim? The Ninth Circuit Bankruptcy Appellate Panel (BAP) recently answered both of these questions in the affirmative.1 SNTL involved a "complicated highstakes case" where a creditor, Centre Insurance Company, asserted a $294 million claim against a chapter 11 debtor insurance carrier based on a previously released guaranty of an affiliate's debt. The creditor argued that its claim against the chapter 11 debtor/guarantor was revived based on a contractual provision that specifically contemplated the future possibility that the creditor would be required to disgorge any payments made to it as a preference under state or federal law. The creditor claimed that itsguaranty sprung to life when it would be required to pay the California Insurance Commissioner in settlement of a state law preference claim based on payments received from the primary obligor. The creditor and the bankruptcy trustee also disputed whether the creditor could recover $3 million in post-petition attorney fees.

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BAP Holds that Guaranties May Spring Back to Life

Standard language in most bank guaranties provides that the guarantee will be reinstated against the original guarantor in the event that the bankruptcy estate recovers any payments to the bank as a preference. However, little if any case law existed as to the enforceability of such contract provisions. Much to the relief of bankers everywhere, the BAP in the SNTL case enforced a contractual provision in a release which provided that it would be ineffective if the obligee creditor was later required to disgorge any payments received to a bankruptcy trustee or state court liquidator based on a preference theory.2

The BAP applied "a somewhat obscure doctrine that involves the intersection of insolvency law principles and guaranty law."3 "Although a surety usually is discharged by payment of a debt, he continues to be liable if the payment constitutes a preference under bankruptcy law. A preferential payment is deemed by law to be no payment at all."4

The BAP concluded that Bankruptcy Code §502(b) did not mandate a different result. Section 502(b) requires that the court determine the amount of a prepetition claim "as of the date of the filing of the petition, and...allow such claim in such amount." Nevertheless, the court held that §502(b) did not prohibit the previously released claim from being revived post-petition. The BAP determined that the contractual provision for revival of the claim based on a preference merely made the creditor's claim contingent. A contingent claim may not be disallowed merely because "the contingency occurred post-petition."5 "[A] claim arises when a claimant can fairly or reasonable contemplate the claim's existence even if a cause of an action has not yet accrued under nonbankruptcy law."6 In this case, the parties drafted a specific provision contemplating a contingency which subsequently occurred. That contingency was removed by events which occurred post-petition. The BAP enforced the contingent provision as drafted by the parties.

The BAP concluded that the plain language of §502(b) of the Code does not prohibit unsecured creditors from recovering their attorneys' fees. In a parallel analysis of the plain language of §502(b), the BAP held that the courts must look to the terms of unsecured creditors' underlying contracts to determine whether they may recover post-petition attorneys' fees.7 First, the court determined that §506 which applies to "determination of secured status" does not limit the terms of unsecured claims. They are entirely different concepts. "The allowance functions of §506(b) and 502(b) have been incorrectly conflated."8

Nor did the court believe that §502(b), providing for the determination of claims "as of the date of the filing of the petition," precludes post-petition attorneys' fees. To be sure, post-petition attorneys' fees do not exist "as of the date of the filing of the petition." Nonetheless, according to the BAP, "the parties' execution of a pre-petition agreement containing an attorneys' fees provision gives rise to a contingent, unliquidated attorney-fee claim."9 "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."10 Finally, the BAP ruled that the Supreme Court's decision in United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates Ltd. did not preclude attorneys' fees.11 According to the BAP, unlike §502(b)'s preclusion of unmatured interest noted in Timbers, the Code contains no probihition against the recovery of unmatured attorney's fees on unsecured claims.12

Score One (or Two) for the Creditors! In re SNTL Corp. (9th Cir. BAP)

American Bankruptcy Institute Journal, Mar 2008 by Larsen, Stuart

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