US Bankruptcy Fee Flip: Legal Expenses for Unsecured Creditors; Considerations for Lenders and Administrative Agents

Pacific Gas and Electric Company’s Chapter 11 filing earlier this year has highlighted an issue that is well settled but sometimes overlooked: Unsecured creditors generally have no right to receive immediate payment of their legal fees from a bankrupt borrower, regardless of any contractual rights they might otherwise have absent the bankruptcy. Further complicating this, courts are divided as to whether legal fees incurred post-petition are eligible to be allowed as valid unsecured claims. Administrative agents also should not assume their indemnification will always protect them. This Legal Update discusses all of these issues.