Eleventh Circuit Rules Bankruptcy Law Does Not Bar Unsecured Creditors' Post-Petition Attorney's Fees

Writing for a unanimous panel, Circuit Judge Newsom reversed in part and affirmed in part in a dispute arising from AE OpCo III's 2022 bankruptcy filing. The case centered on whether AAR could claim attorneys' fees incurred after the bankruptcy petition, both from defending a related lawsuit in Northern Ireland and from the bankruptcy proceeding itself.

The dispute traced back to a 2020 acquisition in which AE OpCo purchased AAR's composite-materials operation for $1.5 million. The deal included AAR's $6 million manufacturing facility and liabilities under a procurement contract with Short Brothers. AAR guaranteed AE OpCo's performance under that contract, and AE OpCo agreed to indemnify AAR for any defaults.

When AE OpCo filed for bankruptcy and rejected the Short Brothers contract, AAR filed three claims: an indemnification claim, a defense-costs claim for fees from a Northern Ireland lawsuit brought by Short Brothers, and a bankruptcy-costs claim.

The court rejected AE OpCo's argument that Sections 502(b) and 506(b) of the Bankruptcy Code implicitly bar unsecured claims for post-petition fees. "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.

Following the Second and Fourth Circuits, the Eleventh Circuit declined to read "a rule of disallowance-by-negative-implication" into those statutory provisions. The court relied on the Supreme Court's decision in Travelers Casualty & Surety Co. v. Pacific Gas & Electric Co., which established that 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 panel affirmed the bankruptcy court on two other points. It upheld the disallowance of AAR's indemnification claim, finding 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. It also upheld the allowance of AAR's defense-costs claim. "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.

The ruling joins the Second and Fourth Circuits in holding that the Bankruptcy Code does not categorically bar unsecured creditors' post-petition attorney's fees claims.