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Third Circuit Holds That Bankruptcy Code Section 502(e)(1)(B) Can Be Applied to Disallow Claims Against a Post-Confirmation Liquidation Trust

In re Caribbean Petroleum Corp., No. 13-2326, 2014 WL 1778050 (3d Cir. May 6, 2014)

On May 6, 2014, the Third Circuit affirmed the decision of the Bankruptcy Court in In re Caribbean Petroleum Corp. to grant a liquidating trustee’s motion to disallow a proof of claim pursuant to 11 U.S.C. § 502(e)(1)(B).  In doing so, the Court disregarded a challenge to the applicability of section 502(e)(1)(B) in the post-confirmation context.

Interek USA, Inc. (“Interek”) sought contribution from the Caribbean Petroleum debtors in the event that Interek was found liable in ongoing litigation related to a large explosion at the debtors’ facilities that resulted in the cessation of the debtors’ normal business operations.  Following the explosion, the debtors filed for bankruptcy and sought approval of a plan of liquidation.  Pursuant to the terms of the confirmed liquidating plan, a trust was established to distribute the debtors’ remaining assets to beneficiaries of allowed claims.

Bankruptcy Code section 502(e)(1)(B) provides for the disallowance of claims for reimbursement or contribution for which a debtor and a claimant are potentially co-liable where the claims asserted are “contingent as of the time of allowance or disallowance.”  Without offering any authority in support, Interek asserted that section 502(e)(1)(B) was inapplicable in the context of a post-confirmation liquidation trust.  The Court disagreed and cited In re Pinnacle Brands, Inc. for the premise that the application of section 502(e)(1)(B) is unaffected by the filing of a liquidating plan.  See 259 B.R. 46, 55-56 (Bankr. D. Del. 2001).  Moreover, the Court highlighted Interek’s opportunity and failure to object to the confirmed plan and claims administration procedures, both of which reserved the right of the post-confirmation trustee to file claims objections.

After concluding that section 502(e)(1)(B) applied in the post-confirmation context, the Third Circuit analyzed whether the requisite criteria were met in order to disallow Interek’s claim.  More specifically, disallowance under section 502(e)(1)(B) requires that: (1) the claim is contingent; (2) the claim is for reimbursement or contribution; and (3) the debtor and claimant are co-liable for the claim.  See In re Touch Am. Holdings, 409 B.R. 712, 715-16 (Bankr. D. Del. 2009).  According to the Court, these three criteria were easily met in the instant case and thus, the Bankruptcy Court did not err in disallowing Interek’s claims.