Unsecured Creditors May Assert Contractual Post-Petition Bankruptcy Attorneys’ Fees as Allowed Claims (No Disallowance by Negative Implication from §§ 502(b) or 506(b))

Introduction

In AE OPCO III, LLC v. AAR CORP. (11th Cir. Apr. 15, 2026), the Eleventh Circuit resolved a cross-appeal arising from the bankruptcy of AE OpCo III, LLC (“AE OpCo”). The dispute centers on a three-party commercial structure: (1) a prepetition Procurement Contract between AAR and Short Brothers; (2) AE OpCo’s acquisition of AAR’s composite-materials operation via an Asset Purchase Agreement; and (3) AAR’s continuing guaranty to Short Brothers of AE OpCo’s performance, paired with AE OpCo’s agreement to indemnify AAR (the “Indemnification Agreement” provisions within the Asset Purchase Agreement).

After AE OpCo filed Chapter 11 and rejected the Procurement Contract, AAR asserted three bankruptcy claims under the Indemnification Agreement: (i) an indemnification claim for amounts AAR might owe Short Brothers under AAR’s guaranty (then being litigated in Northern Ireland); (ii) a defense-costs claim for attorneys’ fees already incurred defending that Northern Ireland litigation; and (iii) a bankruptcy-costs claim for attorneys’ fees incurred post-petition in the bankruptcy case itself.

The key legal issues were: (1) whether AAR’s indemnification demand was barred by 11 U.S.C. § 502(e)(1)(B) (contingent reimbursement claim by an entity “liable with the debtor”); (2) whether already-incurred defense fees remained “contingent” under the same statute; and (3) whether post-petition attorneys’ fees incurred by an unsecured creditor in bankruptcy are disallowable under § 502(b), § 506(b), or both.

Summary of the Opinion

  • Indemnification claim (disallowed—affirmed): The court held that AE OpCo’s settlement with Short Brothers did not release AE OpCo from liability; it was a covenant not to sue under Delaware law, which preserves liability. Therefore AAR remained “liable with the debtor,” and § 502(e)(1)(B) required disallowance.
  • Defense-costs claim (allowed—affirmed): Fees already incurred were not “contingent” at the time of allowance/disallowance; ongoing litigation did not itself render them contingent.
  • Bankruptcy-costs claim (disallowed—reversed): Neither § 502(b) nor § 506(b) authorizes disallowance—by negative implication—of an unsecured creditor’s contractual claim for post-petition bankruptcy attorneys’ fees. The Eleventh Circuit aligned with other circuits permitting such claims.

Analysis

Precedents Cited

1) Bankruptcy does not ordinarily create or destroy state-law rights (the Butner baseline)

The court framed its approach around Butner v. United States, 440 U.S. 48 (1979), reiterating that bankruptcy typically provides a federal forum and distribution mechanism, while substantive rights generally come from state law “unless some federal interest requires a different result.” This mattered twice: (i) Delaware law governed whether the Short Brothers settlement changed AE OpCo’s liability status; and (ii) absent express Code disallowance, state-law contractual fee rights should be respected.

2) Covenant not to sue vs. release under Delaware law

To decide whether AE OpCo remained “liable with” AAR to Short Brothers, the court relied on Delaware authority distinguishing a release from a covenant not to sue: New Enter. Assocs. 14 v. Rich, 295 A.3d 520 (Del. Ch. Ct. 2023), and Christiana Care Health Servs. v. Davis, 127 A.3d 391 (Del. 2015). Under Rich, a covenant not to sue is “forbearance of a right rather than a discharge of liability,” leaving the cause of action formally intact. Because the settlement text was explicitly a “covenant not to bring any action,” it did not cancel the claim or extinguish liability.

The panel rejected attempts to recharacterize the settlement based on litigation positions, invoking United States v. Holland, 117 F.4th 1352 (11th Cir. 2024) (no stipulation to governing law through conduct), and Delaware’s objective-meaning approach in Eagle Force Holdings, LLC v. Campbell, 187 A.3d 1209 (Del. 2018).

3) “Contingent” claims and the irrelevance of mere ongoing litigation

For the defense-costs claim, the court used the standard articulated in Ogle v. Fid. & Deposit Co. of Md., 586 F.3d 143 (2d Cir. 2009), and harmonized it with Eleventh Circuit authority United States v. Verdunn, 89 F.3d 799 (11th Cir. 1996) (discussing In re Knight, 55 F.3d 231 (7th Cir. 1995)). The panel emphasized Verdunn’s observation that an “overwhelming body of precedent” rejects the notion that a dispute’s unresolved status, by itself, makes a claim contingent.

The court also distinguished procedural enforcement mechanisms from substantive rights, analogizing to Viking River Cruises, Inc. v. Moriana, 596 U.S. 639 (2022) (arbitration changes the forum/process, not the underlying rights).

AE OpCo’s reliance on D&O-style indemnification cases—In re Touch Am. Holdings, Inc., 409 B.R. 712 (Bankr. D. Del. 2009) and In re Drexel Burnham Lambert Grp., Inc., 146 B.R. 92 (S.D.N.Y. 1992)—failed because those cases involved indemnity entitlement turning on the merits (e.g., whether officers/directors acted wrongfully). Here, entitlement to defense fees depended on contractual language and past conduct (including any mitigation/good-faith carveouts), not the outcome of the Northern Ireland case.

4) Post-petition attorneys’ fees for unsecured creditors: Travelers and the circuit consensus

The centerpiece of the decision is the court’s rejection of disallowance-by-negative-implication theories under § 502(b) and § 506(b), guided by Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443 (2007). Travelers stressed that claims enforceable under state law are presumed allowable unless “expressly disallowed.”

Building from Travelers, the Eleventh Circuit aligned with: SummitBridge National Investments III, LLC v. Faison, 915 F.3d 288 (4th Cir. 2019), and Ogle v. Fidelity & Deposit Co. of Maryland, 586 F.3d 143 (2d Cir. 2009), both of which refused to treat either § 502(b)’s petition-date valuation language or § 506(b)’s express allowance for oversecured claims as implied disallowance of unsecured post-petition fee claims. The court also noted supportive outcomes in In re Sokolik, 635 F.3d 261 (7th Cir. 2011), and In re SNTL Corp., 571 F.3d 826 (9th Cir. 2009).

5) The Eleventh Circuit’s own foundation: secured-status vs allowance

The panel leaned heavily on its en banc precedent In re Welzel, 275 F.3d 1308 (11th Cir. 2001), which separated: (i) allowance/disallowance under § 502, from (ii) secured vs unsecured treatment under § 506. That structure supported the conclusion that § 506(b) does not silently disallow claims outside its oversecured carve-in; rather, it determines secured status where it applies.

6) Timbers: why post-petition interest is different from post-petition fees

AE OpCo invoked United Savings Ass'n of Texas v. Timbers of Inwood Forest Associates, 484 U.S. 365 (1988), arguing that § 506(b) implies disallowance for undersecured/unsecured fee claims. The court distinguished Timbers because post-petition interest is expressly barred by § 502(b)(2) (unmatured interest), making § 506(b) an express exception for oversecured creditors. Attorneys’ fees lack a parallel categorical disallowance in § 502(b), so the Timbers reasoning does not transfer.

7) Bankruptcy-court split noted but not resolved

On whether the “liable with the debtor” requirement must be satisfied claim-by-claim for defense costs, the court noted a split between In re RNI Wind Down Corp., 369 B.R. 174 (Bankr. D. Del. 2007) and In re Fuel Barons, Inc., 488 B.R. 783 (Bankr. N.D. Ga. 2013), but declined to decide because the defense-costs claim failed § 502(e)(1)(B) on contingency grounds anyway.

Legal Reasoning

1) Indemnification claim: co-liability persists because the settlement was not a release

The indemnification claim was a classic § 502(e)(1)(B) target: a contingent reimbursement claim by an entity (AAR) potentially “liable with the debtor” (AE OpCo) to the same underlying creditor (Short Brothers). AAR attempted to avoid the “liable with” requirement by arguing that AE OpCo’s settlement with Short Brothers eliminated AE OpCo’s liability.

The court avoided the “temporal reach” fight (whether “is liable” is measured at petition date or allowance date) by holding that, under Delaware law, the settlement’s “Covenant Not to Sue” did not extinguish AE OpCo’s liability at any time. Therefore, AAR remained co-liable regardless of timing, and the indemnification claim remained disallowable.

The opinion is notable for treating contract formality as dispositive: even if a covenant not to sue may reduce practical litigation risk, it does not equal a release unless the contract says so, and Delaware law enforces that distinction.

2) Defense-costs claim: already-incurred fees are fixed, not contingent

The court treated “contingent” as turning on whether some future event must occur to create the right to payment. Because AAR sought only defense fees already incurred, the “future event” requirement was not met. AE OpCo’s mitigation and “do-no-harm” carveouts were framed as potential merits defenses affecting liability or amount, not as conditions precedent that render the claim contingent.

Importantly, the panel rejected the idea that pending litigation over related issues (including liability to Short Brothers) automatically makes defense-fee reimbursement contingent, distinguishing cases where the underlying action determines whether any indemnification right exists at all.

3) Bankruptcy-costs claim: no implicit disallowance of unsecured post-petition fees

The court’s most consequential holding is that the Bankruptcy Code does not implicitly disallow an unsecured creditor’s contractual claim for post-petition attorneys’ fees incurred in bankruptcy. The panel read Travelers as setting a strong interpretive presumption: state-law-enforceable claims are allowed unless the Code “expressly disallows” them.

It then rejected two negative-implication theories:

  • § 502(b) petition-date valuation: The court agreed with SummitBridge and Ogle that Travelers’ methodology—moving from § 502(b)’s allowance rule to its enumerated exceptions— would be unnecessary if § 502(b) already categorically barred claims whose amounts are not fixed at filing.
  • § 506(b) oversecured-fee allowance: The court held that § 506(b) governs secured status and adds secured components for oversecured creditors; it does not say (and thus does not “clearly” imply) that unsecured creditors’ contractual fee claims are disallowed. Welzel’s sequencing (allowance first, secured status second) provided the Eleventh Circuit’s internal logic for that conclusion.

Impact

1) A clear Eleventh Circuit rule on unsecured post-petition bankruptcy fee claims

This decision squarely places the Eleventh Circuit with the Second and Fourth Circuits (and consistent with the Seventh and Ninth Circuits’ outcomes): contractual attorneys’ fee claims are not disallowed merely because they are incurred post-petition by an unsecured creditor, including fees incurred litigating within bankruptcy itself. Practically, unsecured creditors holding fee-shifting contracts can more confidently assert (and negotiate around) bankruptcy litigation fees as part of their allowed claims.

2) Drafting and settlement practice: “covenant not to sue” may not eliminate “liability with the debtor” for § 502(e)(1)(B)

The indemnification holding signals a transactional lesson: if parties intend to extinguish liability (and potentially alter § 502(e)(1)(B) dynamics), they must draft a release—not merely a covenant not to sue— and must do so with careful attention to governing state law formalities. In multi-party restructurings involving guaranties and indemnities, the label and operative text of settlement instruments can control bankruptcy claim treatment.

3) Litigation strategy: defense costs can be noncontingent even while the merits remain pending

Creditors seeking reimbursement of already-incurred defense fees may rely on this decision to argue that such claims are fixed and allowable notwithstanding ongoing related litigation, limiting the reach of § 502(e)(1)(B)’s contingency requirement.

Complex Concepts Simplified

  • “Rejection” of a contract in bankruptcy: A debtor can reject certain contracts, treating the rejection as a breach and converting the counterparty’s rights into a claim.
  • “Allowed” vs “disallowed” claims (§ 502): Filed claims are generally allowed unless an objection is sustained under specific statutory exceptions.
  • § 502(e)(1)(B) (co-debtor reimbursement bar): Prevents a party who is jointly liable with the debtor (like a guarantor) from asserting a contingent reimbursement claim, to avoid duplication and administrative complexity while the underlying liability remains unresolved.
  • “Contingent” claim: A claim is contingent when some future event must occur to create the right to payment—not merely because a dispute exists.
  • Covenant not to sue vs release: A release extinguishes liability; a covenant not to sue is a promise not to file suit, often leaving liability formally intact.
  • § 506(b) and “oversecured” creditors: If collateral value exceeds the debt, § 506(b) allows the secured claim to include interest and contractually provided fees. This decision emphasizes that § 506(b) is about secured status, not an implied prohibition on other fee claims.
  • Negative implication (expressio unius): The argument that because a statute expressly allows X in one place, it implicitly forbids X elsewhere. The court held that this inference is too weak to overcome Travelers’ requirement of clear textual disallowance.

Conclusion

AE OPCO III, LLC v. AAR CORP. delivers three takeaways with real doctrinal and practical consequences: (1) under Delaware law, a settlement labeled and drafted as a covenant not to sue does not function as a release, so “co-liability” may persist for § 502(e)(1)(B) purposes; (2) already-incurred defense fees are generally not “contingent” merely because related litigation remains unresolved; and (3) most significantly, the Eleventh Circuit held that unsecured creditors are not categorically barred from asserting contractual claims for post-petition attorneys’ fees incurred in the bankruptcy case, because neither § 502(b) nor § 506(b) supplies the clear, express textual command required to disallow such state-law rights.