This dispute arose from a triangular relationship involving AE OpCo (the debtor), AAR (a creditor and guarantor), and Short Brothers (another creditor). In 2020, AE OpCo acquired AAR's manufacturing business, including AAR's guarantee of AE OpCo's performance under a procurement contract with Short Brothers. To secure this, AE OpCo agreed to indemnify AAR for losses arising from the contract. When AE OpCo filed for bankruptcy in 2022, it rejected the procurement contract. Short Brothers subsequently sued AAR in Northern Ireland for over $30 million based on the guarantee. AAR filed three claims in the bankruptcy proceeding: an indemnification claim for the potential payout to Short Brothers, a defense-costs claim for fees incurred in the Northern Ireland litigation, and a bankruptcy-costs claim for fees incurred in the bankruptcy proceeding itself. The bankruptcy court disallowed the indemnification and bankruptcy-costs claims but allowed the defense-costs claim. AAR appealed the disallowances, while AE OpCo appealed the allowance.
The court analyzed the three claims under the Bankruptcy Code, specifically 11 U.S.C. § 502(e)(1)(B) and § 502(b). First, regarding the indemnification claim, the court addressed whether AAR was 'liable with' the debtor. AAR argued that a settlement with Short Brothers, which included a covenant not to sue, released AE OpCo from liability, thereby ending AAR's co-liability. The court rejected this, citing Delaware law which distinguishes between a release and a covenant not to sue. A covenant not to sue is a forbearance of a right, not a discharge of liability. Because AE OpCo remained formally liable to Short Brothers, AAR remained co-liable, satisfying the second condition of § 502(e)(1)(B) and requiring disallowance of the contingent indemnification claim. Second, for the defense-costs claim, the court determined that the claim was not 'contingent' under § 502(e)(1)(B). The fees had already been incurred in the Northern Ireland litigation, and the indemnification agreement did not condition payment on the outcome of that suit. The existence of an ongoing dispute does not render a claim contingent if the events giving rise to the liability have already occurred. Third, regarding the bankruptcy-costs claim, the court rejected the bankruptcy court's interpretation that § 502(b) implicitly disallows post-petition fees for unsecured creditors. Relying on Supreme Court precedent in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., the court held that claims enforceable under state law should be allowed unless expressly disallowed by federal statute. Neither § 502(b) nor § 506(b) contains clear textual support to disallow such fees by negative inference.
The decision clarifies that post-petition attorney fees incurred in bankruptcy proceedings are generally allowable for unsecured creditors if permitted by state law, absent a specific statutory bar. It also reinforces that a covenant not to sue does not extinguish liability for the purposes of co-liability analysis under § 502(e)(1)(B). The case is remanded to the bankruptcy court to determine the specific amount of AAR's bankruptcy-costs claim as a valid unsecured claim.