In bankruptcy, an oversecured creditor is generally entitled to post-petition interest on their underlying claims, and post-petition reasonable fees, costs, or charges provided for under a contract or state statute. Although an oversecured creditor might be entitled to attorneys’ fees under a contract provision or a state statute, bankruptcy courts will review such fees for reasonableness. However, the Bankruptcy Code does not provide what laws govern on the issue of whether fees are reasonable. Currently, there is a three-way split among courts: (1) the majority of courts rule that federal law preempts state law as to the enforceability and reasonableness of oversecured claims; (2) some courts rule that state law governs enforceability and federal law governs reasonableness; (3) some outlier courts ruled that state law governs, which have been overruled and is no longer good law in their jurisdictions.
Practically, even if a court determines that a fee is not reasonable, the oversecured creditor may still recover a proportion of its "unreasonable" fees under section 502. The majority of courts will allow oversecured creditors to recover part of the unreasonable portion of the fees as an unsecured claim. However, some circuit courts have not specifically reach this issue.
This Article will examine the split among courts regarding whether state or federal law governs post-petition attorneys’ fees. Part I generally examines section 506(b) of the Bankruptcy Code. Part II discusses the spilt on whether state or federal law govern post-petition attorneys’ fees and how the majority and minority of courts have ruled on this issue, analyzing the reasoning and arguments behind those courts’ decisions. Part III discusses how an oversecured creditor may be entitled to an unsecured claim for the “unreasonable” portion of it attorneys’ fees under section 502 of the Bankruptcy Code. Finally, Part IV identifies the implications for an oversecured creditor’s attorneys in bankruptcy proceedings.