Contracted-for Post-Petition Attorney’s Fees and Collection Costs: United Merchants Revisited

Wednesday, January 1st, 1992 at 12:00 am by Liore Z. Alroy, J. Michael Mayerfield
Liore Z. Alroy, J. Michael Mayerfield, Contracted-for Post-Petition Attorney’s Fees and Collection Costs: United Merchants Revisited, 1992 Colum. Bus. L. Rev. 309

The federal Bankruptcy Code provides a new and useful statutory framework to guide the reorganization of corporate debtors. The Bankruptcy represents an improvement over the old Bankruptcy Act, under which courts had to struggle unassisted to balance the varied competing interests of secured and unsecured creditors as well as those of equity holders in an attempt to rehabilitate a corporate entity. Of course, Congressional reform did not resolve all substantive disputes. In many cases, issues were addressed only indirectly or by implication; in others, the statute gave no clear guidance at all.

This note addresses one such unclear issue: the treatment of an unsecured creditor’s claim in Bankruptcy Court for collection costs and attorneys’ fees sought pursuant to an express provision in an underlying contract. While it is certainly true that the Bankruptcy Code treats attorneys’ fees as secured claims if they are contractually provided for in association with a sufficiently oversecured claim – a subject to which we will return later – the statute is silent on whether an unsecured creditor’s contractual claim for attorneys’ fees is likewise allowable in a reorganization.

While the U.S. Supreme Court has also never directly addressed this issue, several other lower courts have. These decisions generally follow the Second Circuit’s decision in In re United Merchants & Manufacturers, Inc., holding that an unsecured creditor’s otherwise valid contractual claim for collection costs is enforceable in bankruptcy on the grounds that “allowing a claim under a collection costs provision merely effectuates the bargained-for terms of the loan contract.” Legal commentators have challenged this decision on policy grounds. This note will add to those critiques an argument based on statutory construction and a contention that, while the Supreme Court has not directly overruled United Merchants, two decisions, United States v. Ron Pair Enterprises, Inc., 489 U.S. 235 (1989), and United Savings Ass’n v. Timbers of Inwood Forest, 484 U.S. 365 (1988), suggest that the Supreme Court would likely disagree with the Second Circuit on the enforceability of collection cost provisions associated with otherwise valid unsecured claims.

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