Licensor Recovery of Attorneys’ Fees in Bankruptcy

Photo Courtesy tristam sparks under the cc 2.0 license

The only thing worse for a licensor than losing money when its licensee files for bankruptcy is paying attorneys’ fees on top of that to stop the bleeding.

Two of the most common bankruptcy proceedings that licensor creditors get involved in are: 1) hearings related to the licensee’s attempt to assume an executory license agreement; and 2) lawsuits against the licensor to recover so-called preferential transfer payments from the licensee.

But can a clever licensor recover attorneys’ fees incurred in post-petition bankruptcy proceedings, if it had the foresight to include a well-drafted attorneys’ fee provision in its boilerplate license agreement?

Since a 2007 Supreme Court decision, the answer has been “maybe,” which was a big improvement over the previous answer of “almost never.”

Until 2007, there were two hurdles against a licensor creditor recovering its attorneys’ fees in a bankruptcy proceeding. The first was that many courts invalidated attorneys’ fee provisions to the extent that they applied to bankruptcy proceedings, arguing that the Bankruptcy Code had a general policy to invalidate contractual clauses that were triggered by bankruptcy. The second was that some courts interpreted the Bankruptcy Code to prohibit recovery of attorneys’ fees by unsecured creditors under any circumstances.

In 2007, the US Supreme Court removed the first hurdle in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., which held that the Bankruptcy Code did not contain a blanket prohibition on recovery of attorneys’ fees for bankruptcy related proceedings, as long as the attorneys’ fees provision is valid under state law.

But the Travelers case did not address the second hurdle, and there is currently a split among various courts whether unsecured creditors can recover attorneys’ fees even pursuant to a contractual provision valid under state law. So far, the Second Circuit, Ninth Circuit, and Sixth Circuit federal appeals courts have permitted such recovery, while the First Circuit and Eighth Circuit (in pre-Travelers opinions) have not.

Sigh, so confusing. What is a licensor to do? Well of course, put attorneys’ fee recovery language in your boilerplate license agreement. The worst that can happen is the court says no.

A starter attorneys’ fee provision might read as follows:

“If any legal action, arbitration, or other proceeding is brought under or in relation to this Agreement, including but not limited to any legal action, arbitration, or proceeding under the U.S. Bankruptcy Code, then in addition to any other relief to which the Licensor is entitled, if the Licensor is the successful or prevailing party, then the Licensor is also entitled to recover, and the Licensee shall pay, all: (a) reasonable attorneys’ fees of the Licensor; (b) court costs; and (c) expenses, even if not recoverable by law as court costs (including, without limitation, all fees, taxes, costs and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings); incurred in that action, arbitration, or proceeding and all appellate proceedings. For purposes of this Section, the term ‘attorneys’ fees’ includes, without limitation, paralegal fees, investigative fees, expert witness fees, administrative costs, disbursements, and all other charges billed by the attorney to the Licensor.”

Adjust the above to be valid under the state law that governs the license agreement. Check whether that state law makes the provision reciprocal, by deeming that if an agreement grants one party the right to recover attorneys’ fees, then the other party is automatically entitled to recover its attorneys’ fees under like circumstances. Then cross your fingers.

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