The federal Bankruptcy Code ("Code"), 11 U.S.C. §§ 101 et seq., does not explicitly state whether an unsecured creditor can collect post-petition attorneys' fees based on a pre-petition indemnity agreement. In United Merchants Manufacturers, Inc. v. Equitable Life Assurance Society of the United States, 674 F.2d 134 (2d Cir. 1982), this Court held, under the Bankruptcy Act then current, that such claims are allowable. In Travelers Casualty Surety Co. of America v. Pacific Gas Electric Co., 549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007), the Supreme Court rejected a Ninth Circuit rule disallowing such claims if the fees were incurred litigating issues of bankruptcy law, but reserved decision on the precise question presented on this appeal: whether such claims are allowable categorically.
94 B.R. at 644 (emphasis added). Moreover, United Merchants and Manufacturers, Inc. v. Equitable Life, 674 F.2d 134 (2d Cir. 1982) and Parker Plaza West Partners v. UNUM Pension Insurance, 941 F.2d 349 (5th Cir. 1991), reh. denied, serve fatal blows to Debtor's position. The United Merchants court, refusing to follow 14 N.Y.Jur.Damages § 167 (1969), conducted its own survey of New York law and enforced a loan agreement provision that entitled the lender to receive a pre-payment charge resulting from lender's acceleration of the note. 674 F.2d at 140.
This contention is supported by Second Circuit authority. In United Merchants and Mfr., Inc. v. Equitable Life Assurance Soc'y of the United States (In re United Merchants and Mfr., Inc.), 674 F.2d 134 (2d Cir. 1982), the court was called upon to consider the enforceability under New York law of a term of a loan agreement that provided upon default, the lender would be entitled to receive (in addition to principal and interest) "`an amount equal to the pre-payment charge that would be payable if [the borrower] were pre-paying such Note at the time'." Id. at 140.
The debtors say that the language of the attorneys' fee provision in the FinanceAmerica note is limiting and should not be construed to cover costs incurred in a bankruptcy proceeding. In United Merchants and Manufacturers, Inc. v. The Equitable Life Assurance Society of the United States (In re United Merchants and Manufacturers, Inc.), 674 F.2d 134 (2d Cir. 1982), a loan document contained, as here, general language concerning attorneys' fees: [The debtor] covenants that, if it shall default in the making of any payment due under the note, it will pay to the holders hereof such further amounts to the extent lawful as shall be sufficient to pay the costs and expenses of collection, including reasonable attorneys' fees.
Under Section 502, courts consider whether prepayment consideration is due under the parties' agreement, and whether that agreement is enforceable under controlling nonbankruptcy law. See, e.g., United Merchs. & Mfrs. v. Equitable Life Assurance Soc'y of the U.S. (In re United Merchs. & Mfrs.), 674 F.2d 134, 137 (2d Cir.1982). If prepayment consideration is due under an enforceable agreement, it will generally be allowed unless one of the exceptions in Section 502(b) applies.
See United Merchants and Manufacturers, Inc. v. Equitable Life Assur. Soc. ( In re United Merchants and Mfrs.), 674 F.2d 134, 143-44 (2d Cir. 1982) (Chapter XI case); In re Vanderveer Estates Holdings, Inc., 283 B.R. 122, 130 (Bankr. E.D.N.Y. 2002); JMD Holding Corp. v. Congress Fin. Corp., 4 N.Y.3d 373, 379, 795 N.Y.S.2d 502, 506, 828 N.E.2d 604, 609 (2005). A liquidated damages clause is enforceable if it "specif[ies] a liquidated amount which is reasonable in light of the anticipated probable harm, and actual damages must be difficult to ascertain at the time the parties entered into the contract."
See e.g., In Re United Merchants and Manufacturers, Inc., 674 F.2d 134 (2nd Cir. 1982); In re American Metals Corp., 31 B.R. 229 (Bankr.D.Kan. 1983). If the clause is valid and enforceable as a liquidated damages clause under state law, then it is also valid and enforceable in bankruptcy. United Merchants, 674 F.2d at 144[14].
Chase maintains that, in this circuit, a different standard has been developed that applies state law to the issue of reasonableness. In support of its construction of the Second Circuit rule, Chase relies on In Re Continental Vending Machine Corp., 543 F.2d 986 (2d Cir. 1976); In Re United Merchants and Manufacturers, Inc., 674 F.2d 134 (2d Cir. 1982); and Matter of Salisbury, 58 B.R. 635 (Bankr.D.Conn. 1985).
Whether a contractual provision is an unenforceable penalty is determined by applicable state law. United Merchants Manufacturers v. Equitable Life Assurance Society (In re United Merchants Manufacturers), 674 F.2d 134, 141 (2d Cir. 1982); O.P.M. Leasing, 23 B.R. at 111. 1. State Law
Whether a contractual provision is an unenforceable penalty is determined by applicable state law. United Merchants & Manufacturers v. Equitable Life Assurance Society (In re United Merchants & Manufacturers), 674 F.2d 134, 141 (2d Cir.1982); O.P.M. Leasing, 23 B.R. at 111. 1.