Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. (549 U.S. 443, 2007)

Justice Alito

delivered the opinion of the Court.

We are asked to consider whether federal bankruptcy law precludes an unsecured creditor from recovering attorney’s fees authorized by a prepetition contract and incurred in postpetition litigation. The Court of Appeals for the Ninth Circuit held, based on a rule previously adopted by that court, that such fees are categorically prohibited — even where the contractual allocation of attorney’s fees would be enforceable under applicable nonbankruptey law — to the extent the litigation involves issues of federal bankruptcy law. Because that rule finds no support in the Bankruptcy Code, we vacate and remand.

I

Respondent Pacific Gas and Electric Company (PG&E) filed a voluntary Chapter 11 bankruptcy petition in April 2001, 11 U. S. C. §1101 et seq., and continued thereafter to operate its business as a “debtor in possession,” §§ 1107(a), 1108. The bankruptcy filing caught the attention of petitioner Travelers Casualty & Surety Company (Travelers), which had previously issued a $100 million surety bond on PG&E’s behalf to the California Department of Industrial Relations, guaranteeing PG&E’s payment of state workers’ compensation benefits to injured employees. In connection with the bond, PG&E executed a series of indemnity agreements in favor of Travelers. The indemnity agreements provide that PG&E will be responsible for any loss Travelers might incur in connection with the bonds, including any attorney’s fees incurred in pursuing, protecting, or litigating Travelers’ rights in connection with those bonds.

Although no default occurred, Travelers asserted a claim in the bankruptcy action to protect itself in case PG&E defaulted on its workers’ compensation benefits at some point in the future, requiring Travelers to make payments under its bond. In response to Travelers’ claim, and with the knowledge and approval of the Bankruptcy Court, PG&E agreed to insert language into its reorganization plan and disclosure statement to protect Travelers' right to indemnity and subrogation in the event of a default by PG&E.

Travelers claimed, however, that PG&E then unilaterally altered the negotiated language in a way that substantially diminished the protection it had been seeking. According to Travelers, that development resulted in additional litigation, but Travelers and PG&E ultimately resolved the dispute by entering into a stipulation that was later approved by the Bankruptcy Court. In addition to accommodating Travelers’ substantive concerns, the stipulation stated that Travelers “‘may assert its claim for attorneys’ fees under the [ijndemnity [ajgreements’” (subject to PG&E’s right to object) as a general unsecured claim against PG&E. Brief for Petitioner 17.

Travelers subsequently filed an amended proof of claim seeking to recover the attorney’s fees it incurred in connection with PG&E’s bankruptcy proceedings. PG&E objected, arguing that Travelers could not recover attorney’s fees incurred while litigating issues of bankruptcy law.

The Bankruptcy Court agreed and rejected Travelers’ claim on that basis. App. to Pet. for Cert. 23a-25a. Travelers appealed that ruling to the District Court. The District Court affirmed, relying on In re Fobian, 951 F. 2d 1149 (CA9 1991), which held that “where the litigated issues involve not basic contract enforcement questions, but issues peculiar to federal bankruptcy law, attorney’s fees will not be awarded absent bad faith or harassment by the losing party,” id., at 1153. See App. to Pet. for Cert. 10a, 17a.

Travelers appealed again, and the United States Court of Appeals for the Ninth Circuit affirmed. 167 Fed. Appx. 593 (2006). The panel acknowledged that, in at least some circumstances, a “ ‘prevailing party in a bankruptcy proceeding may be entitled to an award of attorney fees in accordance with applicable state law ....’” Id., at 594 (quoting In re Baroff, 105 F. 3d 439,441 (CA9 1997)). The panel nevertheless rejected Travelers’ claim based on the Fobian rule, which it cited for the proposition that “attorney fees are not recoverable in bankruptcy for litigating issues ‘peculiar to federal bankruptcy law.’” 167 Fed. Appx., at 594 (quoting Fobian, supra, at 1153). The panel explained that, because the fees claimed by Travelers were incurred litigating issues that were “governed entirely by federal bankruptcy law,” Travelers’ claim necessarily failed. 167 Fed. Appx., at 594.

Travelers sought review in this Court, noting a conflict among the Courts of Appeals regarding the validity of the Fobian rule. Compare Fobian, supra, at 1153, with In re Shangra-La, Inc., 167 F. 3d 843, 848-849 (CA4 1999). We granted certiorari to resolve that conflict, post, p. 948.

II

Under the American Rule, “the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys’ fee from the loser.” Alyeska Pipeline Service Co. v. Wilderness Society, 421 U. S. 240, 247 (1975); see Hauenstein v. Lynham, 100 U. S. 483, 490-491 (1880); Arcambel v. Wiseman, 3 Dall. 306 (1796). This default rule can, of course, be overcome by statute. Fleischmann Distilling Corp. v. Maier Brewing Co., 386 U. S. 714, 717 (1967). It can also be overcome by an “enforceable contract” allocating attorney’s fees. Ibid.

In a case governed by the Bankruptcy Act of 1898, we observed that “[t]he character of [a contractual] obligation to pay attorney’s fees presents no obstacle to enforcing it in bankruptcy, either as a provable claim or by way of a lien upon specific property.” Security Mortgage Co. v. Powers, 278 U. S. 149, 154 (1928). Similarly, under the terms of the current Bankruptcy Code, it remains true that an otherwise enforceable contract allocating attorney’s fees (i. e., one that is enforceable under substantive, nonbankruptcy law) is allowable in bankruptcy except where the Bankruptcy Code provides otherwise. See 4 Collier on Bankruptcy ¶ 506.04[3][a], p. 506-118 (rev. 15th ed. 2006) (hereinafter Collier).

This case requires us to consider whether the Bankruptcy Code disallows contract-based claims for attorney’s fees based solely on the fact that the fees at issue were incurred litigating issues of bankruptcy law. We conclude that it does not.

A

When a debtor declares bankruptcy, each of its creditors is entitled to file a proof of claim — i. e., a document providing proof of a “right to payment,” 11 U. S. C. § 101(5)(A) — against the debtor’s estate. Once a proof of claim has been filed, the court must determine whether the claim is “allowed” under § 502(a) of the Bankruptcy Code: “A claim or interest, proof of which is filed under section 501 ... is deemed allowed, unless a party in interest. .. objects.”

But even where a party in interest objects, the court “shall allow” the claim “except to the extent that” the claim implicates any of the nine exceptions enumerated in § 502(b). Those exceptions apply where the claim at issue is “unenforceable against the debtor . . . under any agreement or applicable law,” § 502(b)(1); “is for unmatured interest,” § 502(b)(2); “is for [property tax that] exceeds the value of the [estate’s] interest” in the property, § 502(b)(3); “is for services of an insider or attorney of the debtor” and “exceeds the reasonable value of such services,” § 502(b)(4); is for unmatured debt on certain alimony and child support obligations, § 502(b)(5); is for certain “damages resulting from the termination” of a lease or employment contract, §§ 502(b)(6) and (7); “results from a reduction, due to late payment, in the amount of. . . credit available to the debtor in connection with an employment tax on wages, salaries, or commissions earned from the debtor,” § 502(b)(8); or was brought to the court’s attention through an untimely proof of claim, § 502(b)(9).

Travelers’ claim for attorney’s fees has nothing to do with property tax, child support or alimony, services provided by an attorney of the debtor, damages resulting from the termination of a lease or employment contract, or the late payment of any employment tax. See §§ 502(b)(2) — (8). Nor does it appear that the proof of claim was untimely. See § 502(b)(9). Thus, Travelers’ claim must be allowed under § 502(b) unless it is unenforceable within the meaning of § 502(b)(1).

B

Section 502(b)(1) disallows any claim that is “unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” This provision is most naturally understood to provide that, with limited exceptions, any defense to a claim that is available outside of the bankruptcy context is also available in bankruptcy. See 4 Collier ¶ 502.03[2][b], at 502-22 (explaining that § 502(b)(1) is generally understood to “make available to the trustee any defense” available to the debtor “under applicable nonbankruptcy law” — i.