Eleventh Circuit Reverses Bankruptcy Court on Creditor's Attorney's Fees Claim in Complex Indemnification Dispute

The case emerged from a complex triangular arrangement involving AE OpCo III, aircraft parts manufacturer AAR Corp., and Short Brothers. In 2020, AE OpCo acquired AAR's composite-materials operation for $1.5 million. The acquisition included AAR's $6 million manufacturing facility and associated liabilities under a procurement contract with Short Brothers. To reassure Short Brothers about the counterparty swap, AAR guaranteed AE OpCo's performance while AE OpCo agreed to indemnify AAR for any defaults.

When AE OpCo filed for bankruptcy in 2022 and rejected the Short Brothers contract, AAR filed three claims: an indemnification claim for potential payments to Short Brothers, a defense-costs claim for attorneys' fees incurred defending against Short Brothers' lawsuit in Northern Ireland, and a bankruptcy-costs claim for fees from the bankruptcy proceeding itself.

Writing for a unanimous panel, Circuit Judge Newsom delivered pointed criticism of arguments that would categorically bar post-petition attorney's fees claims. "By suggesting that we should infer disallowance from § 506(b)'s failure to expressly allow unsecured claims for post-petition attorneys' fees, AE OpCo makes the very move that Travelers rejected—and does so at the expense of the usual respect we show for pre-bankruptcy contracts formed under state law," Newsom wrote.

The court affirmed the bankruptcy court's disallowance of AAR's indemnification claim, holding that AAR remained "liable with" AE OpCo under Section 502(e)(1)(B) despite a settlement between AE OpCo and Short Brothers that included only a covenant not to sue rather than a formal release.

Following the Second and Fourth Circuits, the Eleventh Circuit declined to read "a rule of disallowance-by-negative-implication" into Sections 502(b) or 506(b). The court emphasized that the Supreme Court's decision in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co. established courts should "generally presume that claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed" by federal statute.

The court also affirmed the bankruptcy court's allowance of AAR's defense-costs claim, rejecting AE OpCo's argument that those costs were contingent on the outcome of the Northern Ireland litigation. "There's no language in the Indemnification Agreement that conditions AE OpCo's obligation to pay AAR's legal fees on AAR's success in the underlying suit," Newsom wrote.