AE OpCo III, LLC v. AAR Corp. (In re: AE OpCo III, LLC)

Summarized by David Treacy , U.S. Bankruptcy Court, Eastern District of Kentucky
4 days 7 hours ago

Case Type:

Business

Case Status:

Affirmed in part and Reversed in part

Citation:

25-11348 (11th Circuit, Apr 15,2026) Published

Tag(s):

Ruling:

The U.S. Court of Appeals for the Eleventh Circuit held that while contingent indemnification claims by co-liable creditors are disallowed under 11 U.S.C. § 502(e)(1)(B), claims for accrued defense costs are allowable as noncontingent. The court also clarified that post-petition attorneys' fees are not categorically barred under the 11 U.S.C. §§ 502(b) or 506(b).

Procedural context:

After the bankruptcy court ruled on the allowance/disallowance of three claims, the Eleventh Circuit granted the parties' request for a direct appeal under 28 U.S.C. § 158(d)(2). The Eleventh Circuit's opinion squarely addresses how claims allowance under the Code applies to "contingent" claims and ongoing litigation expenses. It also distinguishes between a covenant not to sue and a release under Delaware law.

Facts:

Creditor AAR Corp. had a manufacturing subsidiary making airline parts. In 2009, it entered into a procurement contract with Short Brothers, a UK-based company. In 2020, a private equity fund became interested in Creditor's subsidiary's operations and formed AE OpCo III, LLC (the “Debtor”) to acquire the business. Debtor assumed the obligation to perform under the Short Brothers procurement contract. Importantly, Creditor agreed to guarantee Debtor's performance under the procurement contract, and Debtor agreed to indemnify Creditor in the event of Debtor's default under the procurement contract. Thus, both Debtor and Creditor were potentially liable to Short Brothers. In 2022, Debtor filed a bankruptcy petition in the U.S. Bankruptcy Court for the Middle District of Florida and rejected the procurement contract with Short Brothers. Short Brothers and Creditor then filed claims in Debtor's bankruptcy case. Debtor and Short Brothers reached a settlement--governed under Delaware law--which the bankruptcy court approved. As part of the settlement, Short Brothers executed a covenant not to sue Debtor. Meanwhile, Short Brothers sued Creditor in Northern Ireland, "demand[ing] that [Creditor] pay it more than $30 million that it had incurred following [Debtor's] rejection of the Procurement Contract. [This litigation] gave rise to an additional claim that [Creditor] made in [Debtor's] bankruptcy: the defense-costs claim." Ultimately, Creditor filed three claims in Debtor's bankruptcy case: "(1) the indemnification claim for the money that [Creditor] is estimated to have to pay Short Brothers as part of its guaranty of [Debtor]’s performance; (2) the defense-costs claim for certain incurred attorneys’ fees and costs in the Northern Ireland litigation with Short Brothers; and (3) the bankruptcy-costs claim for the attorneys’ fees and costs incurred in the [Debtor's] bankruptcy proceeding. All three claims arise out of the Indemnification Agreement executed between [Debtor] and [Creditor]." "Citing 11 U.S.C. § 502(e)(1)(B), the bankruptcy court disallowed [Creditor]’s indemnification claim as a contingent claim for reimbursement [. . . ,] allowed [Creditor]’s defense-costs claim as a fixed, non-contingent claim outside § 502(e)(1)(B)’s ambit[, and] disallowed [Creditor]’s bankruptcy-costs claim as a post-petition unsecured claim for attorneys’ fees." Debtor and Creditor both sought a direct appeal of these rulings to the Eleventh Circuit.

Judge(s):

Newsom, Lagoa, and Kidd

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