Circuit Judge Newsom, writing for a panel that included Circuit Judges Lagoa and Kidd, described the dispute as a "thorny bankruptcy cross-appeal" arising from AE OpCo's rejection of a procurement contract with Short Brothers, a UK-based company. That rejection left AAR potentially liable on a guaranty of AE OpCo's performance, triggering indemnification rights under a 2020 asset purchase agreement.
AAR filed three claims in AE OpCo's 2022 bankruptcy: an indemnification claim pegged to what AAR might owe Short Brothers, a defense-costs claim for fees incurred in related Northern Ireland litigation, and a claim for attorneys' fees incurred in the bankruptcy itself.
The panel upheld the disallowance of the indemnification claim under 11 U.S.C. Section 502(e)(1)(B), which bars contingent reimbursement claims by entities "liable with the debtor." AAR argued that a post-petition settlement between AE OpCo and Short Brothers severed their co-liability, but the court found the settlement was a covenant not to sue, not a release. "Under Delaware law, '[a] covenant not to sue and a release are different things,'" Newsom wrote, quoting New Enterprise Associates 14 v. Rich. The covenant "formally preserves the cause of action, even as the covenanting party agrees to a (potentially temporary) stand-down."
AAR pressed an analogy to Article III mootness doctrine, citing the Supreme Court's decision in Already LLC v. Nike Inc. The panel rejected the comparison. "Mootness and liability ask different questions, and in different ways," Newsom wrote. "The former concerns the continued existence of a live controversy; the latter concerns whether a legal obligation exists at all."
On the defense-costs claim, the court agreed with the bankruptcy court that AAR's fees already incurred in the Northern Ireland litigation were not "contingent" under Section 502(e)(1)(B). "All events that would need to occur to determine the validity and value of the claim have already occurred," the panel held, rejecting AE OpCo's argument that the outcome of the overseas suit made the fees contingent. The court cited the "overwhelming body of precedent" rejecting the view "that the mere existence of an ongoing legal dispute alone renders a claim 'contingent' under the Bankruptcy Code."
The panel reversed on the bankruptcy-costs claim, joining the Second and Fourth Circuits in holding that neither Section 502(b) nor Section 506(b) authorizes disallowance of unsecured post-petition attorneys' fees by negative implication. Relying on the Supreme Court's reasoning in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., the court wrote 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 also pointed to its own en banc decision in In re Welzel, which it said "anticipated the Supreme Court's own" analysis in Travelers.
The case was remanded for further proceedings on the bankruptcy-costs claim.