Liquidating trust agreement and indemnification

of Maryland (Fidelity) entered into several agreements (agreements) with the company that required it to indemnify Fidelity for attorneys’ fees that it might incur to enforce its agreements with Agway.

According to the agreements, Fidelity was to provide surety bonds to Agway’s insurers under which it was to be indemnified.

Moreover, although §502(b)(1) makes any defense to a claim available to a bankruptcy trustee unless applicable state law or one of the exceptions in §502(b) applies, “courts must ‘presume’ that the claim ‘will be allowed in bankruptcy unless [it is] expressly disallowed.’” The court reasoned that since the contract was valid as a matter of state substantive law and none of exceptions under §502(b) applied, they would allow Fidelity’s claim.

Next, the court rejected the trustee’s reliance on §506(b), which purportedly only allows interest on a secured creditor’s claim.

, The United States Court of Appeals for the Second Circuit held on November 2009 that a creditor was entitled to its post-petition legal fees incurred on a pre-petition indemnity agreement.

In affirming the lower courts, the Second Circuit explained that the Bankruptcy Code (Code) “interposes no bar to recovery.” Before Agway filed for Chapter 11, Fidelity & Deposit Co.

Essentially, the court agreed with the Ninth Circuit’s interpretation on the issue whereby the Code does not bar an unsecured claim for post-petition attorneys’ fees authorized by a prepetition contract valid under state law.

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The issue presented to the Second Circuit was: “[u]nder the Bankruptcy Code, is an unsecured creditor entitled to recover post-petition attorneys’ fees that were authorized by a prepetition contract but were contingent on post-petition events?

Liquidating a trustee company gives rise to an added layer of complexity in liquidations, with the liquidator obliged to follow not only the statutory regime, but to also comply with the equitable principles of trusts and potentially the trust deed itself.

Trustee companies are the ‘square peg’ in the round hole of the .

Most trust deeds provide that the corporate trustee is automatically disqualified as trustee upon the appointment of a liquidator.

Even if this is not the case, courts are readily prepared to use their discretionary powers to appoint a new trustee in place of the insolvent corporate trustee.

If the company has ceased to be trustee, this leads us to another frequently overlooked principle.

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