Summary
The Eleventh Circuit addressed a bankruptcy cross-appeal involving three claims arising from an indemnification agreement: an indemnification claim, defense-costs claim, and bankruptcy-costs claim. The court affirmed disallowance of the indemnification claim under 11 U.S.C. § 502(e)(1)(B), affirmed allowance of the defense-costs claim, and reversed disallowance of the bankruptcy-costs claim, remanding for further proceedings.
Topics
Practice areas
Questions Presented
- Whether AAR's indemnification claim was disallowable under 11 U.S.C. § 502(e)(1)(B) because AAR remained liable with AE OpCo on Short Brothers' claim after the settlement.
- Whether AAR's claim for attorneys' fees and costs already incurred in defending the Northern Ireland litigation was contingent under 11 U.S.C. § 502(e)(1)(B).
- Whether 11 U.S.C. §§ 502(b) or 506(b) implicitly disallow an unsecured creditor's post-petition claim for contractual attorneys' fees and costs.
Holdings
- The indemnification claim was properly disallowed because the settlement's covenant not to sue did not release AE OpCo or extinguish its liability to Short Brothers; AAR therefore remained liable with AE OpCo, and the claim satisfied the co-liability requirement of § 502(e)(1)(B).
- The defense-costs claim was not contingent because all events necessary to establish its validity and value had occurred, and the claim sought reimbursement only for legal fees and costs already incurred.
- Neither § 502(b) nor § 506(b) authorizes disallowance by negative implication of an otherwise valid unsecured claim for post-petition contractual attorneys' fees and costs.
Key quotations
“For all these reasons, we hold that under Delaware law, the covenant not to sue in the Settlement doesn’t formally release AE OpCo or extinguish its liability to Short Brothers.” (17)
“To sum up, we agree with the bankruptcy court that AAR’s claim for defense costs in its Northern Ireland litigation against Short Brothers is not contingent and therefore not disallowable under § 502(e)(1)(B).” (22)
“We therefore agree that it would have made little sense for the Supreme Court to have analyzed § 502(b)’s exceptions if the sort of general prohibition that AE OpCo imagines existed.” (28)
“Properly understood, then, the provisions operate in sequence rather than in competition: Section 502 determines allowance; § 506(b) (where it applies) confers secured treatment to the extent that a claim is oversecured.” (29)
Factual background
AAR and Short Brothers entered a procurement agreement under which AAR's manufacturing subsidiary supplied aircraft parts, and AAR guaranteed the subsidiary's performance. AE OpCo later acquired the business and assumed the associated liabilities, while agreeing to indemnify AAR if AE OpCo defaulted on the procurement contract. After AE OpCo filed bankruptcy and rejected the contract, Short Brothers settled with AE OpCo through a covenant not to sue, while separately suing AAR in Northern Ireland under AAR's guaranty. AAR filed claims for estimated indemnity liability, defense costs in the Northern Ireland litigation, and attorneys' fees incurred in the bankruptcy proceeding.
Procedural history
AE OpCo filed for bankruptcy and rejected its procurement contract with Short Brothers. AAR filed indemnification, defense-costs, and bankruptcy-costs claims based on an indemnification agreement with AE OpCo. The bankruptcy court disallowed the indemnification claim under 11 U.S.C. § 502(e)(1)(B), allowed the defense-costs claim, and disallowed the bankruptcy-costs claim under §§ 502(b) and 506(b). AAR appealed the disallowed claims, AE OpCo cross-appealed the allowance of the defense-costs claim, and the Eleventh Circuit affirmed in part, reversed in part, and remanded.
Remand instructions
Remand for further proceedings consistent with the opinion, including treatment of AAR's bankruptcy-costs claim as not disallowed under 11 U.S.C. §§ 502(b) or 506(b).