Section 502(e)(1)(B) of the Bankruptcy Code allows debtors to seek disallowance of certain types of contingent claims to avoid being twice liable on a single obligation. It has the added benefits of facilitating debtors’ efficient exit from bankruptcy and ensuring that unsecured creditors are paid in a timely fashion. Debtors commonly seek Section 502(e)(1)(B) relief for claims involving environmental remediations or tort lawsuits, for example personal injury actions. They might also seek such relief in instances where they are guarantors on a debt or where contractual arrangements render them co-liable on an obligation.
Specifically, Section 502(e)(1)(B) provides that a 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 . . . 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). While the Bankruptcy Code does not define many of these terms, In re Lyondell Chem. Co., 442 B.R. 236, 243 (Bankr. S.D.N.Y. 2011), courts interpreting the section consider:
- Whether the claim in question is for reimbursement, contribution, or indemnification;
- Whether the claimant is co-liable with the debtor on the claim of a third party, for example by way of a guaranty; and
- Whether the claim remains contingent at the time that claims are allowed or disallowed.
Id.; In re Chemtura Corp., 436 B.R. 286, 292-93 (Bankr. S.D.N.Y. 2010); In re Caribbean Petroleum Corp., Case No. 10-12553 (KG), 2012 WL 1899322, at *3 (Bankr. D. Del. May 24, 2012) (finding that a claim for indemnification is “functionally the same as [a] claim[] for reimbursement or contribution”); Denke v. PNC Bank, N.A. (In re Denke), 524 B.R. 644, 655 (Bankr. E.D. Va. 2015) (citing 4 Collier on Bankruptcy ¶ 502.06[2][d] (16th ed. 2014) for the proposition that Section 502(e)(1)(B) “is applicable to a debt owed by the debtor to a creditor which has been guaranteed by a third party”).
The goal of Section 502(e)(1)(B) is to prevent “redundant recoveries on identical claims against insolvent estates in violation of the fundamental [Bankruptcy] Code policy fostering equitable distribution among all creditors of the same class.” In re Caribbean Petroleum Corp., 2012 WL 1899322, at *2. Section 502(e)(1)(B) also enables debtors to move forward with distributions to unsecured creditors without forcing them to establish a reserve for contingent claims which might take years to litigate or settle. Id. (citing In re Wedtech Corp., 85 B.R. 285, 290 (Bankr. S.D.N.Y. 1988)).
Courts interpret co-liability under Section 502(e)(1)(B) broadly. The inquiry involves whether a debtor could be co-liable with a third...
