Court Opinion

ID: 3064802
Source: CourtListenerOpinion
Date Created: 2015-10-14 22:27:11.930262+00
Date Added: 2024-06-11T11:49:41.700644
License: Public Domain

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.
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                          © 2009 Thomson Reuters/West.