BANKRUPTCY CORNER
BANKRUPTCY CORNER
Covenant Not to Sue and“ Co-liability” Under 11 U. S. C. § 502( e)( 1)( B)
JASON S. RIGOLI
Section 502 of the Bankruptcy Code( 11 U. S. C. §§ 101, et seq.) provides many of the rules governing the allowance or disallowance of claims in a bankruptcy case. Section 502( e)( 1)( B) reads, in pertinent part:
Notwithstanding subsections( a) [ and ]( b)... the court shall disallow any claim for reimbursement or contribution of an entity that is liable with the debtor on or has secured the claim of a creditor, to the extent that...( B) such claim for reimbursement or contribution is contingent as of the time of allowance or disallowance of such claim for reimbursement or contribution....
11 U. S. C. § 502( e)( 1)( B).“ Accordingly, under § 502( e)( 1)( B), a creditor ' s claim shall be disallowed if three conditions are met:( 1) The claim is one for‘ reimbursement or contribution’;( 2) it is made by or on behalf of an entity that‘ is liable with " the debtor on a claim of another creditor; and( 3) it is " contingent as of the time of allowance or disallowance.’” Ae Opco III LLC v. AAR Corp.( In re Ae Opco III LLC), Case No. 25-11348, __ F. 4th __, 2026 U. S. App. LEXIS 10754 at * 10- 11, 2026 WL 1020708( 11th Cir. Apr. 15, 2026).
In the Ae Opco case, the Eleventh Circuit was confronted with a couple of issues related to co-liability:( i) whether co-liability was extinguished through the covenant not to sue; and( ii) whether the measure of co-liability is determined as of the petition date or the time of allowance / disallowance of the claim. 2026 U. S. App. LEXIS 10754 at * 12-13. For the question of whether coliability is measured as of the petition date, the Eleventh Circuit avoided that question because of its answer to the first question.
Id. at * 14-15.
The post-petition settlement contained a covenant not to sue, not a release, and was governed by Delaware law. Id. at 6. Under
Delaware law, [ a ] covenant not to sue and a release are different things. A release results in the“ cancellation of the claim” and“ discharge of the released party” while a covenant not to sue, by contrast, formally preserves the cause of action, even as the covenanting party agrees to a( potentially temporary) stand-down. Ae Opco, 2026 U. S. App. LEXIS 10754 at * 15( internal citations and quotation marks omitted). With Delaware law making such a distinction, the debtor remained liable to the creditor, and therefore co-liable with the indemnitor, ultimately rendering the indemnification claim disallowed. Id. at * 19.
Similarly, Florida recognizes the same distinction between a covenant not to sue and a release. See Rosen v. Fla. Ins. Guar. Ass’ n., 802 So. 2d 291, 295( Fla. 2001)( quoting Atlantic Coast Line R. R. v. Boone, 85 So. 2d 834, 843( Fla. 1956)(“ A release is an outright cancellation or discharge of the entire obligation as to one or all of the alleged joint wrongdoers. A covenant not to sue recognizes that the obligation or liability continues but the injured party agrees not to assert any rights grounded thereon against a particular covenantee.”)). Accordingly, under Florida law the result would have been the same in Ae Opco.
Conclusion
Ultimately, the determination is governed by state law and whether there is a recognized distinction between a covenant not to sue and a release. Where there is, could have a meaningful impact on the allowance of such claims in a bankruptcy estate.
This article was submitted by Jason S. Rigoli, Esq., Furr and Cohen, P. A., 2255 Glades Road, Suite 419A, Boca Raton, FL 33431, jrigoli @ furrcohen. com
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