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
COUNSEL

Iain A.W. Nasatir, Jonathan J. Kim, and Jeremy V. Richards,

Pachulski, Stang, Ziehl & Jones LLP, Los Angeles, California, for the appellants.

Christopher E. Prince and Robert B. Millner, Sonnenschein

Nath & Rosenthal, LLP, Los Angeles, California and Chicago, Illinois, for the appellee.

OPINION

PER CURIAM:

The Bankruptcy Appellate Panel is AFFIRMED for the reasons 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. 

7438 IN THE MATTER OF SNTL
APPENDIX

IN THE MATTER OF SNTL 7439
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, SV 00-14101-GM  SNTL CORP.; SV 00-14102-GM

Appellant, SV 02-14236-GM

v. SV 02-14239-GM

(Jointly

SN INSURANCE SERVICES, INC.; Administered)

SNTL HOLDINGS CORP.; SN

OPINION INSURANCE ADMINISTRATORS, INC.;

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

7440 IN THE MATTER OF SNTL
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 somewhat obscure doctrine that involves the intersection of insolvency 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 summary judgment disallowing the creditor’s multimillion dollar

claim and denying the creditor’s request for postpetition attorneys’ 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

1SNTL Corporation is the post-confirmation successor to Superior

National Insurance Group and will be referred to as “SNIG” in this opinion. 

IN THE MATTER OF SNTL 7441
its non-insurer affiliates SN Insurance Services, Inc., SNTL

Holdings Corporation (formerly known as Business Insurance

Group, Inc.), and SN Insurance Administrators, Inc. (collectively, “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 attorneys’ 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 objection 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 transactions summarized below, are complex and perhaps unique

to the insurance and reinsurance industry. Reduced to their

central elements, however, they can be summarized as follows: Debtor SNIG guaranteed the performance of its affili2Unless 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 Consumer Protection Act of 2005, Pub. L. 109-8, 119 Stat. 23 (Apr. 20, 2005).

7442 IN THE MATTER OF SNTL
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 guarantor (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. Centre 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 affiliated with SNIG: California Compensation Insurance Company (“CalComp”) and Superior National Insurance Company

(“SNIC”). SNIG guaranteed performance of one of these reinsurance agreements known as the “QSR Contract.” 

In addition, the parties also entered into fronting (service)

agreements known as the Underwriting Management Agreement (“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 Agreements.”3

 The Fronting Agreements provide for the recovery of

all reasonable expenses, including attorney’s fees, incurred in

the enforcement of SNIG’s guaranty. 

3The 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. 

IN THE MATTER OF SNTL 7443
The Fronting Agreements were breached in late 1999. On

December 31, 1999, Centre entered into a Partial Commutation and Settlement Agreement (“PCSA”) with CalComp,

SNIC and SNIG. The PCSA modified the Fronting Agreements 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 “Release”).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 CalComp 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 guarantor) 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 prepetition. 

4The Release provided in pertinent part: 

Subject to receipt of the Commutation Payment, [Centre] does

hereby release and forever discharge the Reinsurers, their predecessors, successors, parents, affiliates, agents, officers, directors 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, liabilities 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.

7444 IN THE MATTER OF SNTL
Article X of the PCSA provided that the Release could be

revoked by Centre if the PCA or other payments made pursuant 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 parties 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 . . . constitutes a voidable or preferential transfer, such payment 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 complaint in state court against Centre and others, seeking in part

IN THE MATTER OF SNTL 7445
the return of the Payment from Centre as an avoidable preference under state law preference provisions. 

Centre subsequently agreed to settle that state court litigation, and on February 17, 2005, the state court entered an

order approving a settlement agreement between the Commissioner and Centre (among others) providing that the Commissioner’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 additional 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

5Paragraph F provided: “The property that the Liquidator [Commissioner] 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 SNICIL [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.” 

7446 IN THE MATTER OF SNTL
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 preferential 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 Payment was a preference, and (4) Centre was an unsecured creditor 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 conducting a hearing, the bankruptcy court entered a memorandum and order on August 22, 2006, granting the motion on

both grounds. The court held that the Release became effective prepetition and Centre did not invoke its power of revocation 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 Opinion at pages 12-13. 

6The bankruptcy court noted that Centre was not seeking to nullify the

PCSA under subsections (a) through (d) of Article X, but was instead

IN THE MATTER OF SNTL 7447
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 provided 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 remedies 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. 

7448 IN THE MATTER OF SNTL
(b) If so, is any remedy available to Centre under which SNIG’s liability could be

revived?

(c) If the triggering event has occurred

and a remedy is available at law, does section 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 contract but incurred postpetition?

III. STANDARD OF REVIEW

We review de novo the bankruptcy court’s grant of summary 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 reviewing 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 Centre’s claim. As the bankruptcy court certified its order disallowing a portion of the claim as final under FRCP 54(b) and

IN THE MATTER OF SNTL 7449
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 remedies 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 settlement 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 original 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 available 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

7450 IN THE MATTER OF SNTL
of competent jurisdiction asserting jurisdiction over the subject 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,” Centre 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. Paragraph 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 specifically 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 preferential transfers.” The state court order thus constituted an

order or finding that the PCSA payment was subject to a preference 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 preference claim. 

8Neither party disputes that the state court had jurisdiction as contemplated by Article X. 

9As acknowledged by Centre in its opening brief, the primary obligors

and SNIG “as guarantor” were “released from liability for up to $180 million” 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

IN THE MATTER OF SNTL 7451
That order acknowledges that the Payment was subject to the

Commissioner’s preference claim. Therefore, Centre is entitled to invoke those remedies available to it under Article X.

2. Centre’s Return of $110 Million to the Commissioner in Settlement of a Preference Claim Revived

Its Guaranty Claim Against SNIG

Article X of the PCSA, entitled “Voidable Transfers,” governs 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 contemplated 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 liability 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 Robinson Drilling, Inc.), 6 F.3d 701, 704 (10th Cir. 1993). “Alguarantor. This omission is irrelevant. The Release applies to all parents

and affiliates of the primary obligors, for all liabilities or debts whatsoever. 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. 

7452 IN THE MATTER OF SNTL
though a surety usually is discharged by payment of the 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.” 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 performance 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 creditor 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 principal 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

IN THE MATTER OF SNTL 7453
revived by a return of a preferential transfer to a primary obligor (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 settlement. 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 satisfaction of the obligor’s debt. Thereafter, the obligor filed for

bankruptcy relief and the trustee filed an action to have the

10A 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 reaching 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 settlement of a lawsuit is not “voluntary” and of why the general principles of

section 70 of the Restatement (Third) of Surety & Guaranty apply here.

7454 IN THE MATTER OF SNTL
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 preference 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 guarantor 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 Hardware 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 Article 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 supersede the release provisions of Article III. 

11In 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 obligation otherwise released by that payment — should operate with equal

force whatever preference law applies. 

IN THE MATTER OF SNTL 7455
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 obligation, particularly where Article X itself requires merely a finding that the Payment was subject to a preference claim.

Instead, we find Wallace Hardware’s position more persuasive 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 conservatorship had begun prepetition, giving rise to a possible (and foreseen) preference action by the Commissioner. 

12Trustee has not suggested that Centre could have defeated the Commissioner’s state court action or that the settlement was inappropriate. 

7456 IN THE MATTER OF SNTL
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 postpetition, a consequence that is plainly at odds with the Bankruptcy 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, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, 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 obligations 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 quotations 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

IN THE MATTER OF SNTL 7457
the contingency occurred postpetition.13 As we stated in a

recent decision, we “must find a basis in section 502 to disallow 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 section 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 allowable claim in a bankruptcy proceeding even if it is a cause of

13If 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 guarantor 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 available 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 Bankruptcy 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). 

7458 IN THE MATTER OF SNTL
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 contemplation” test for determining when a claim accrues for the purposes 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 contemplate 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 primary 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). Consequently, 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 Attorneys’ Fees To Its Unsecured Claim

This appeal presents a question currently pending before

the Ninth Circuit: May an unsecured creditor include attorneys’ fees incurred postpetition as part of its unsecured claim?

IN THE MATTER OF SNTL 7459
In Travelers, the Supreme Court did not resolve this issue but

instead remanded it to the Ninth Circuit for resolution. Travelers, 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 disallowed on this ground, overruling Fobian. It specifically

refused, however, to decide whether Travelers’ claim for postpetition attorneys’ fees was disallowed under section

502(b)(1) because of Travelers’ status as an unsecured creditor. 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 pre14First, we owe it to the parties to decide cases before us promptly. Second, 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). 

15In addition, the First Circuit issued a post-Travelers opinion that

favorably cited authority supporting the allowance of postpetition attorneys’ 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 postpetition attorneys’ fees but instead held that an oversecured creditor was entitled to collect a prepayment penalty from a solvent debtor regardless of

reasonableness. 

7460 IN THE MATTER OF SNTL
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 Travelers 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 petition;” whether the Supreme Court’s decision in United Savings 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. 

16In 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. Zimmerman, 73 F.3d 1164, 1177 (1st Cir. 1996); Waterman v. Ditto (In re Waterman), 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 prepetition 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). 

IN THE MATTER OF SNTL 7461
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 section 506(b) precludes such claims: 

The emphasized language of section 506(b) demonstrates 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, mandates 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 postpetition 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’

7462 IN THE MATTER OF SNTL
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 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 Circuit 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 reasonable 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 “reasonable” fees and that the percentage recovery was unreasonable. Id. at 675-77. The Ninth Circuit then remanded to allow

IN THE MATTER OF SNTL 7463
the creditor to claim those attorneys’ fees exceeding the “reasonable” 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 Eleventh 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. 

17While 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 reasonable. See CAL. CIV. CODE § 1717. Thus, with respect to California cases,

“applicable law” limits postpetition contractual attorney’s fees to “reasonable” amounts for the purposes of section 502(b)(1). 

7464 IN THE MATTER OF SNTL
Comparing the two provisions, the Ninth and Eleventh Circuits 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 completely silent with regard to the allowance/

disallowance issue. This silence suggests that [section] 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 classification 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

IN THE MATTER OF SNTL 7465
B.R. at 545. As discussed below, section 502(b) does not specifically 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, disallowed 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, section 502(b) purportedly precludes their allowance. Id. We disagree 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 containing 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 prepetition, 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 necessary, pursuant to § 502(c).”

18 New Power, 313 B.R. at 508.

18To the extent that we hold that fees incurred postpetition but arising

out of a prepetition contract or agreement constitute contingent, unliquidated 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 Payment and the Commissioner’s conservation — all occurred prepetition,

thus making Centre’s claim less remote and less contingent. 

7466 IN THE MATTER OF SNTL
“So long as the right to collect the fees existed pre-petition,

the fact that the fees were actually incurred during the postpetition 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 contract, and thus had an allowable unsecured claim under section 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 earlier — for determining when a claim accrues. Postpetition

fees can be fairly contemplated when the parties have provided 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

19In 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 pursuant 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 abandoned its claim for attorneys’ fees (145 F.3d at 1331), we find the analysis

of Keaton persuasive. Quoting the bankruptcy court with approval, the district 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 [creditor] actually incurring attorneys’ fees in collecting the debt.” Id.

IN THE MATTER OF SNTL 7467
Collier on Bankruptcy § 553.03[1][i] (15th ed. Updated

2007). 

Because we hold that attorneys’ fees arising out of a prepetition contract but incurred postpetition fall within the Bankruptcy 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 interest to be paid only out of an equity cushion, an

undersecured creditor who had no such equity cushion fell within the general rule of disallowing postpetition interest. Courts that rely on Timbers to disallow post-petition attorneys’ fees and costs reason

that the rationale applies equally to the disallowance

of post-petition attorneys’ fees and costs to unsecured 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 portion of its debt. Timbers, 484 U.S. at 380. This holding is consistent 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

7468 IN THE MATTER OF SNTL
(“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 postpetition 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 disallowance 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 reason for allowance of such claims (i.e., to prevent the unfairness 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

20While there is intuitive appeal to the Electric Machinery court’s concern that an overactive creditor could unfairly run up fees, several factors

reduce the potential for trouble. First, the fee doctrines of many jurisdictions, 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 comIN THE MATTER OF SNTL 7469
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 bankruptcy 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 Commissioner. 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 unsecured 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 creditor’s extra fees will be fully compensated only in the unusual situations

where funds are available to pay 100 percent of claims. Thus, the opportunities for gamesmanship are limited. 

7470 IN THE MATTER OF SNTL

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