Creditors are already in a vulnerable position once their borrower files a bankruptcy petition. From the disruption of cash flow due to nonpayment of monthly debt obligations, to the fees and costs incurred in hiring counsel to assert their rights in the bankruptcy forum, is there an opportunity for the secured creditor to recoup fees and costs when they prevail on a motion for relief per the language of the underlying contract?
Current case law is split as to whether this is a certainty for the prevailing party.
Arguments for the Awarding of Fees and/or Costs
Look to specific contractual language: If the contract explicitly states that the prevailing party in any dispute, including motions for relief, is entitled to fees and/or costs, then this language would generally be given effect. Courts are often hesitant to override clear contractual provisions.
Generally, some courts argue that the rationale behind prevailing party fee provisions, which is to discourage litigation and make the prevailing party whole, applies equally to motions for relief as it does to full-blown lawsuits. They reason that awarding fees and/or costs to the prevailing party on a motion incentivizes both parties to act reasonably and resolve their differences efficiently.
Efficient administration of justice: Some courts find that awarding fees and/or costs on motions for relief can promote the efficient administration of justice by deterring frivolous motions and encouraging parties to focus on the merits of their claims.
Arguments Against Awarding Fees and/or Costs
Limited scope of motions for relief: Motions for relief are generally considered interlocutory proceedings, meaning they deal with procedural matters rather than the ultimate merits of the case. Some courts argue that it is premature to award fees and/or costs at this stage, as the ultimate outcome of the case is still uncertain.
Potential for abuse: Awarding fees and/or costs on motions for relief could create an incentive for parties to file frivolous motions simply to recoup their fees. This could increase litigation costs and burden the court system.
Contractual silence: If the contract is silent on the issue of fees and/or costs for motions for relief, then some courts argue that the prevailing party is not entitled to them. In these cases, the general rule that each party bears its own fees and costs applies.
Case Law
It is important to note that the relevant case law will vary depending on the specific jurisdiction and the language of the underlying contract. However, here are some examples of cases that have gone both ways:
Cases supporting awarding fees and/ or costs:
In re Estate of Miller, 872 N.E.2d 355 (Ill. App. Ct. 2007): The court held that the prevailing party on a motion for summary judgment was entitled to fees and/or costs under the underlying contract, even though the contract was silent on the issue of motions for relief.
Johnson v. Equitable Life Assurance Society of the United States, 838 F. Supp. 547 (D. Kan. 1993): The court held that the prevailing party on a motion to compel arbitration was entitled to fees and/or costs under the underlying arbitration agreement.
Cases against awarding fees and/or costs:
Greenberg v. Boal & Co., 559 F. Supp. 368 (S.D.N.Y. 1983): The court held that the prevailing party on a motion to transfer venue was not entitled to fees and/or costs under the underlying loan agreement, which was silent on the issue of motions for relief.
In re American Home Products Corp., 952 F.2d 605 (2d Cir. 1991): The court held that the prevailing party on a motion to dismiss was not entitled to fees and/ or costs under the underlying contract, even though the contract contained a prevailing party fee provision. The court reasoned that the contract was specifically aimed at resolving substantive contract disputes, not procedural matters.
What to Do
The sword cuts both ways and moving parties will want to be mindful their motion has merit because in the event it is denied debtor can also request fees as prevailing party on the contract. Given the conflicting case law on this issue, it is best to consult with an attorney who is familiar with the relevant jurisdiction and the specific language of your contract. The attorney can advise you on your rights and the likelihood of success in seeking fees and/or costs for a motion for relief based on your specific circumstances.