Again, I find it easier to liberally quote from the opinion rather than to attempt to summarize.
Fibreboard Corp. v. Celotex Corp. (In re Celotex Corp.), No. 05-16039 (11th Cir. December 20, 2006).
The basic facts are as follows –
In 1989, Celotex and Fibreboard were found jointly and severally liable for several asbestos personal injury cases. In 1990, Celotex filed a petition for Chapter 11 bankruptcy. To protect its assets in order to satisfy the judgments, Celotex filed supercedeas bonds on the appeals of the adverse judgments. Ultimately, Fibreboard paid the entire amount of the joint and several liability judgments and the judgment creditors released their claims against Fibreboard and assigned their claims against Celotex to Fibreboard.
Fibreboard asserted a subrogation claim in the bankruptcy court to recover Celotex’s share of the joint and several liability judgments payments from the supersedeas bonds. The bankruptcy court granted summary judgment to Celotex after finding that under both the Bankruptcy Code and state law, Fibreboard was not entitled to subrogation because it was primarily liable for the judgments. The district court affirmed the grant of summary judgment for Celotex, and Fibreboard appealed.
Fibreboard asserted a subrogation claim under 11 U.S.C. § 509 for Celotex’s share of the judgments on which both were jointly and severally liable and which of a joint and several liability judgment is excluded from seeking subrogation by § 509(b).
Section 509 states:
(a) Except as provided in subsection (b) or (c) of this section, an entity that is liable with the debtor on, or that has secured, a claim of a creditor against the debtor, and that pays such claim, is subrogated to the rights of such creditor to the extent of such payment.
(b) Such entity is not subrogated to the rights of such creditor to the extent that –
(2) as between the debtor and such entity, such entity received the consideration for the claim held by such creditor.
Fibreboard’s argument that it is entitled to a claim for subrogation is as follows –
Fibreboard argues that § 509 allows subrogation claims even where the party asserting the claim is primarily liable with the debtor for the claim it asserts. Fibreboard contends this statutory right of subrogation is separate and distinct from the doctrine of equitable subrogation under the common law and the statute does not preclude parties that are primarily liable on the debt from seeking subrogation….Fibreboard asserts it may bring this subrogation claim even though it was jointly and severally liable on the judgments it paid as a result of the personal injury judgments against it and Celotex.
The Eleventh Circuit disagreed —
Every court that has expressly applied § 509(b)(2) has held it excludes those who are primarily liable for the debt from subrogation because they received consideration for paying the debt. See Cornmesser v. Swope (In re Cornmesser’s), 264 B.R. 159, 163 (Bankr. W.D. Pa. 2001) ; In re Valley Vue Joint Venture, 123 B.R. 199, 205 (Bankr. E.D. Va. 1991; Patterson v. Yeargin (In re Yeargin), 116 B.R. 621, 622 (Bankr. M.D. Tenn. 1990); In re Russell, 101 B.R. 62, 65 (Bankr. D. Ark. 1989). Courts that have allowed subrogation claims by parties jointly and severally liable on the debt have done so where a separate agreement transfers the obligation to pay the claim to the debtor. In those cases, the party seeking subrogation was not excluded by § 509(b)(2) because the debtor, rather than the party seeking subrogation, received consideration for release from his obligation.
The bankruptcy court in the Southern District of New York explained the statute from a slightly different perspective. “[T]he relevant question in the subrogation context is not simply whether the party was directly liable, but rather whether its payment was used to satisfy another’s obligation. The question is sometimes conceived as one of ‘ultimate’ liability-a question that can be answered by determining which of the liable parties received the consideration.” Pandora Indus. Inc. v. Paramount Comm. Inc. (In re Wingspread Corp.), 145 B.R. 784, 790
The Court held –
We conclude that § 509(b)(2) precludes subrogation claims under the Bankruptcy Code by those who receive consideration for payment on the claim. “The statute looks to the relationship between the debtor and the codebtor in terms of which one received the consideration giving rise to the joint obligation.” … In other words, those who are primarily liable for the entire debt and therefore receive the consideration for payment of the whole amount of the claim, may not bring subrogation claims to recover the payment.
Even if the Code does not codify the common law right of subrogation but remains entirely independent and distinct, Fibreboard fails to show why its subrogation claim is not excluded by § 509(b). It offers no proof to refute its receipt of consideration for its payment to the judgment creditors to remove it from the § 509(b) exclusion. On the contrary, Fibreboard did receive consideration for its payment of the joint and several judgments. Fibreboard was primarily liable for the entire amount of the judgments; its release from the judgments constituted consideration and excludes Fibreboard’s subrogation claim under § 509(b).
Finally, the Court held that it did not have a subrogation claim under Florida law, for similar reasons.