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Bankruptcy Court Overrules Plan Administrator's Objection to Advancement and Indemnification Claim of Former Officer of RNI Debtors

In re RNI Wind Down Corp., 369 B.R. 174 (Bankr. D. Del. 2007) (Judge Christopher S. Sontchi)

Andrew D. Feldman, a former officer of RNI, a debtor with a Chapter 11 case pending in the United States Bankruptcy Court for the District of Delaware, filed a proof of claim for advancement and indemnification of legal fees and expenses incurred in connection with an SEC investigation of the RNI debtors and certain of their officers and directors. The Plan Administrator objected to the claim, arguing that it was a claim for reimbursement subject to disallowance under 11 U.S.C. § 502(e)(1)(B).  While the Court agreed advancement and indemnification claims are claims for reimbursement, the Court held that Feldman’s claim was not a contingent claim, and was not a claim for which the debtors were co-liable, and therefore was not subject to disallowance under that section. The Court also declined the Plan Administrator’s alternative argument that the Court should estimate Feldman’s claim. In so doing, the Court rejected the argument that estimation was required to prevent undue delay of the administration of the bankruptcy estate.

Andrew D. Feldman was a former officer of debtor RNI. Feldman filed a claim for indemnification and advancement of legal defense costs and fees that were already incurred and that would be incurred in the future. The Plan Administrator objected to the Feldman claim under 11 U.S.C. § 502(e)(1)(B), asserting that the claim was a contingent claim for reimbursement of a debt for which the Debtor was co-liable, and further argued that it was yet unknown whether Feldman would be entitled to indemnification. The Plan Administrator also argued that, in fact, Feldman was seeking reimbursement, rather than indemnification and advancement.

While the United States Bankruptcy Court for the District of Delaware agreed that the claim was one for reimbursement, the Court found that the claim was not contingent, but, instead, was unliquidated. In so finding, the Court rejected the idea that there was a distinction to be made between either indemnification or advancement, on the one hand, and reimbursement, on the other hand. Instead, the Court held that Feldman’s claim, whether it be characterized as a claim for advancement or indemnification, was a claim for reimbursement that is potentially subject to disallowance under 11 U.S.C. § 502(e)(1)(B). However, to be disallowed under that section, a claim must be contingent. The Court held, however, that, even if the Plan Administrator might later have a claim against Feldman if it is determined that he had no right to indemnification, that fact was insufficient to render the claim contingent. In support of this finding, the Court noted that it was undisputed that Feldman had a right under Delaware law and RNI’s certification of incorporation and by-laws to advancement of certain legal costs, subject to his obligation to repay advanced costs if its later turns out that he has no right to indemnification. This right to advancement, however, was absolute, making the right to payment anything but contingent.

In the alternative, if the Court declined to grant the claim objection, the Plan Administrator asked for estimation of Feldman’s claim under 11 U.S.C. § 502(c)(1), arguing that the fixing or liquidation of the claim would cause undue delay of the administration of the bankruptcy case. The Court rejected this argument also, finding there was no evidence in support of this contention. The Court noted also that, even if this matter were then sole remaining issue in the bankruptcy, the Court would not undermine Feldman’s indemnification and advancement rights simply to make the administration of the bankruptcy estate more efficient. Moreover, the Court found that the Plan Administrator’s purpose in seeking estimation was to lower the amount of the reserve of funds that had been set aside for Feldman’s legal fees and expenses.

Because the Court declined to exercise its discretion to estimate the claim, the Court dismissed as moot the Plan Administrator’s motion in Limine to exclude opinion testimony by a lay witness.

The Plan Administrator has filed a notice of appeal from this decision.