In Re: LTC HOLDINGS, INC. v. ALFRED T. GIULIANO, Chapter 7 Trustee; BMO HARRIS BANK, N.A., Counterclaim

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________________
No. 20-3057
_______________________
In Re: LTC HOLDINGS, INC., et al.,
Debtors
ALFRED T. GIULIANO, Chapter 7 Trustee for the
Consolidated Estate
of LTC Holdings, Inc., et al.
v.
INSURANCE COMPANY OF THE STATE OF
PENNSYLVANIA,
Appellant
v.
ALFRED T. GIULIANO, Chapter 7 Trustee;
BMO HARRIS BANK, N.A., Counterclaim Defendants
_______________________
On Appeal from the United States District Court
for the District of Delaware

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District Court No. 1-19-cv-00327
District Judge: The Honorable Maryellen Noreika
__________________________
Argued June 23, 2021
Before: SMITH, Chief Judge, MATEY, and FISHER, Circuit
Judges
(Filed: August 18, 2021)
Andrew S. Kent [ARGUED]
Chiesa Shahinian & Giantomasi
One Boland Drive
West Orange, NJ 07052
Counsel for Appellant
David T.B. Audley
Michael T. Benz [ARGUED]
Chapman & Cutler
111 West Monroe Street
18th Floor
Chicago, IL 60603
Richard M. Beck
Glenn A. Wiener
Klehr Harrison Harvey Barnzburg
1835 Market Street

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Suite 1400
Philadelphia, PA 19103
Counsel for Appellee
__________________________
OPINION OF THE COURT
__________________________
SMITH, Chief Judge.
Lakeshore Toltest Company (“LTC”) and its affiliates
(collectively, the “Debtors”) entered into construction
contracts with the United States. The Appellant, Insurance
Company of the State of Pennsylvania (“ICSP”), provided
performance and payment bonds guaranteeing that the Debtors
would complete those contracts. When the Debtors defaulted
on the contract at issue here, ICSP stepped in to make sure that
the work was completed. As a result, ICSP claims that it is
subrogated to the United States’ rights to set off a tax refund
(owed to one or more of the Debtors) against the losses that
ICSP covered. However, to settle various claims in the
Debtors’ Chapter 7 bankruptcy proceedings, the United States
and the Trustee agreed that the United States would waive its
setoff rights.

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ICSP’s claim to set off the tax refund raises three issues
regarding a performance bond surety’s subrogation rights
under Section 509 of the Bankruptcy Code, 11 U.S.C. § 509.
We conclude, first, that the United States had not yet been
“paid in full,” within the meaning of Section 509(c), when the
Bankruptcy Court approved the settlement. So, pursuant to
Section 509(c), ICSP’s subrogation rights were subordinate to
the remaining and superior claims of the United States at the
time of the settlement. Second, the United States was entitled
to waive its setoff rights in order to settle its remaining and
superior claims. Third, the United States’ waiver of its setoff
rights extinguished ICSP’s ability to be subrogated to those
rights. Therefore, for the reasons discussed below, we will
affirm the order of the District Court affirming the Bankruptcy
Court’s ruling that ICSP is not entitled to the tax refund.
I. BACKGROUND FACTS AND PROCEDURAL HISTORY
A. The Parties
Before they filed for bankruptcy, the Debtors provided
general contracting services for large construction projects,
including many projects for departments of the United States
Government. To enter into contracts with the United States,
contractors are generally required to post both a performance
bond and a payment bond signed by the contractor and a
qualified surety (such as ICSP). See generally 40 U.S.C.
§ 3131 et seq. (the “Miller Act”). Performance and payment
bonds guarantee that the contractor will properly perform its
contract and pay its subcontractors. See Hartford Fire Ins. Co.
v. United States, 108 Fed. Cl. 525, 531 (2012) (“A surety bond

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is a three-party relationship, in which the surety becomes liable
for the principal’s debt or duty to the third party obligee.”). In
2009, LTC and its affiliates (as the principal obligors) began
obtaining surety bonds from ICSP (the surety) for a series of
construction contracts with United States Government entities
(the obligees), including the Department of Defense (“DoD”).
BMO Harris Bank N.A. (“BMO”), the Appellee here,
provided credit to LTC and its affiliates pursuant to a May
2013 agreement that granted BMO security interests in most of
the Debtors’ property. In September 2014, the Bankruptcy
Court entered an order approving a Memorandum of
Understanding (“MOU”) between BMO and the Trustee. The
MOU acknowledged that BMO has first-priority security
interests in certain federal tax refunds of the Debtors, including
the Tax Refund at issue in this appeal (as defined further
below).
B. The NPCC Contract, Breach, and Tender
Agreement
Just one of the ICSP-bonded contracts is relevant to this
appeal. In March 2012, LTC entered into a contract with the
United States to construct the National Police Command
Center in Afghanistan (the “NPCC Contract”). The contract
price was approximately $55 million. Shortly thereafter, LTC
executed a performance bond and payment bond, with ICSP as
surety, for the NPCC Contract.1
1 Another ICSP-bonded contract, for the construction of the Al
Dhafra Air Base in the United Arab Emirates, was also at issue

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In January 2014, the United States terminated LTC’s
right to proceed under the NPCC Contract due to default. The
United States then demanded that ICSP perform its suretyship
obligations pursuant to the bonds for the NPCC Contract. A
performance bond surety (like ICSP) generally may satisfy its
obligation to the government on a defaulted contract in a
number of ways, including “taking over and completing
performance” or “assuming liability for the government’s costs
in completing the contract which are in excess of the contract
price.” Ins. Co. of the W. v. United States, 243 F.3d 1367, 1370
(Fed. Cir. 2001).
To satisfy its obligations here, ICSP entered into an
August 2014 contract (the “Tender Agreement”) with the
United States and a new contractor, Macro Vantage Levant
JLT (“MVL”), to complete the unfinished work under the
NPCC Contract. MVL agreed to finish the construction work,
and ICSP agreed to pay any “excess costs” for that
performance — meaning any amount due beyond the funds
that the United States had set aside based on the original
contract price for the NPCC Contract. The Tender Agreement
expressly provided that the “Surety’s [ICSP’s] bonds shall
in the Bankruptcy Court and the District Court proceedings.
ICSP has forfeited any arguments that it might have regarding
the Al Dhafra contract, as ICSP’s briefs do not make any
reference to that contract, let alone any arguments regarding its
significance. See In re Wettach, 811 F.3d 99, 115 (3d Cir.
2016) (holding that arguments not developed in an appellant’s
opening brief are forfeited).

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remain in force and effect during the performance of Work by
[MVL] up to the complete expenditure of the penal sum of the
Performance Bond.” A364.
C. Timing of Payments and Construction under
the Tender Agreement
From October 2014 through September 2016, ICSP
paid over $12 million to MVL to complete the NPCC. On
December 26, 2015, the United States sent MVL a “Letter of
Substantial Completion” for the NPCC facility. The letter
explained that “construction progress is sufficiently complete
to allow the Government use and possession of the facility
effective December 26, 2015.” A382 (emphasis in original).
ICSP made the final three payments, of over $600,000 each, on
July 25, August 18, and September 7, 2016. After the
penultimate payment, on August 24, 2016, the United States
sent MVL a letter that stated: “As a result of the final inspection
conducted February 10, 2016, it has been determined that your
construction progress is sufficiently complete to allow the
Government use and occupancy of the facility effective
February 11, 2016.” A389 (emphasis in original). The letter
“release[d] the surety [ICSP] from all further liability and
responsibility.” Id.
D. The Bankruptcy Petition and the Tax
Refund
Separately, on May 2, 2014, the Debtors filed voluntary
Chapter 7 bankruptcy petitions. Shortly before doing so, in
April 2014, they filed a consolidated federal tax return for

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2013. The return showed net operating losses for 2013 and
sought a “carryback” refund of approximately $5.5 million in
federal income taxes that one or more of the Debtors had paid
in 2011 (the “Tax Refund”).2 Because the Debtors had
defaulted on many United States contracts, including the
NPCC Contract, the United States placed a hold on payment of
the Tax Refund, asserting the right to set off the $5.5 million
against losses caused by the Debtors.
E. The United States’ and the Debtors’
Bankruptcy Claims
On October 28, 2014, the United States filed, in the
Debtors’ bankruptcy proceedings, a summary proof of claim
against the Debtors for a total of approximately $222 million
(the “USPOC”). The USPOC included an $84 million “DoD
Surety Claim,” which consisted of contingent claims “related
to Debtors’ breach of contracts resulting in a surety . . .
attempting to complete numerous DoD contracts,” including
2 The parties dispute whether LTC or one of its affiliates is the
legal owner of the Tax Refund. We agree with the
determinations of both the Bankruptcy Court and the District
Court that there is a genuine dispute of material fact regarding
ownership of the Tax Refund, but that resolution of the dispute
is unnecessary here. It would be relevant only if ICSP held a
right to set off the Tax Refund. See generally In re Orexigen
Therapeutics, Inc., 990 F.3d 748, 752–54 (3d Cir. 2021)
(discussing the requirement of “mutuality” under federal
bankruptcy law’s setoff provision, 11 U.S.C. § 553).

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the NPCC Contract. A100. The NPCC Contract claim was
contingent on whether ICSP and MVL “fail to complete the
[NPCC] Contract via the Tender Agreement.” A156. The
United States “expressly reserv[ed] its rights, pursuant to 11
U.S.C. § 553, to offset any prepetition obligation of the [United
States] . . . against any portion of this claim.” A102. The
United States amended the USPOC on May 24, 2016, reducing
the total claim to $170 million. The amendment stated that $84
million of the total claim still stemmed from the DoD Surety
Claim, which remained “contingent upon the completion of
certain contracts by the Debtors’ sureties.” A636.
As for the Debtors, they were also engaged in the
litigation of various claims against the United States. Most of
those claims were for allegedly unpaid invoices on certain
contracts (the “Requests for Equitable Adjustments” or
“REAs”). The bankruptcy Trustee testified that the REAs had
a face value of over $50 million.
F. The Settlement Stipulation and ICSP’s
Objection
In January 2016, the Trustee and the United States
reached a comprehensive proposed settlement of all of the
claims between the United States and the Debtors (the
“Settlement Stipulation”). Among other things, the Settlement
Stipulation provided that: (1) the United States would release
the full amount of the Tax Refund to the Trustee, and the
United States would waive its setoff rights against the Debtors;
(2) the USPOC would be allowed as filed and the United States
would have a non-priority general unsecured claim of

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approximately $222 million (the claim was later reduced to
approximately $170 million per the amended USPOC); and
(3) the Debtors would dismiss, with prejudice, most of their
pending litigation against the United States, including the
litigation of the REAs. The Settlement Stipulation said nothing
about subrogation rights.
Paragraph 4 of the Settlement Stipulation contained the
United States’ waiver of its setoff rights, including any right to
set off the Tax Refund. The “Effective Date” of the waiver
was defined as the “first business day after the Bankruptcy
Court enters an order approving this Stipulation.” A289.
Paragraph 4 stated that the United States
shall be deemed to expressly waive any setoff
rights arising out of the [USPOC] that they may
have or ever had pursuant to 11 U.S.C. § 553,
and shall be estopped from claiming any such
setoff rights it may have or ever had pursuant to
11 U.S.C. § 553, against any of the Debtors in
and to the Tax Refund.
Id.
ICSP filed an objection to the Settlement Stipulation,
arguing that it should not “be construed to release or impair
rights or claims belonging to ICSP, based upon ICSP’s existing
rights as subrogee.” A529 (emphasis in original). ICSP
proposed “that the Stipulation be approved without prejudice
to ICSP’s subrogation rights, if any, and that any payment of
the Tax Refund be held” in escrow pending adjudication of

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ICSP’s rights. A538 (emphasis added). In March 2016, the
Bankruptcy Court held a hearing on the proposed settlement
and then referred all relevant parties, including the Trustee, the
United States, ICSP, and BMO (the first lien creditor), to
mediation.
G. The Settlement Order
On June 9, 2016, after mediation and negotiation,
counsel for the Trustee informed the Bankruptcy Court that the
parties had resolved ICSP’s objection and agreed to a proposed
order, which the Bankruptcy Court entered on June 28, 2016
(the “Settlement Order”). The Settlement Order attached and
approved the terms of the original Settlement Stipulation
“except as set forth” in the order. A277. The key provisions
of the Settlement Order provide:
3. Except as provided in paragraph 5,
nothing in this Order or the Stipulation shall
waive, estop, or otherwise limit the rights of any
party claiming an interest in the Tax Refund,
including but not limited to, the estate, the
Insurance Company of the State of Pennsylvania,
BMO Harris Bank N.A., or any other party
claiming an interest in the Tax Refund, and the
parties reserve any and all rights and arguments
they had regarding the ownership of, or their
interest in [the] Tax Refund prior to the entry of
this Order. . . .

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5. Upon receipt of the Tax Refund, the
Trustee shall hold the funds in escrow and shall
make no distribution pending further Order of
the Court [except to pay the Trustee’s fees and
pay the estates 10% of the Tax Refund, net of the
Trustee’s expenses].
A277–78.
H. The Adversary Proceedings
In July 2016, the Trustee commenced an adversary
proceeding against ICSP, seeking a declaratory judgment that
the Debtors’ estates were entitled to the entire $5.5 million Tax
Refund. ICSP filed an answer and counterclaims, joining
BMO as an additional counterclaim defendant and seeking a
declaratory judgment that ICSP was entitled to the Tax Refund.
BMO and ICSP both moved for summary judgment on the Tax
Refund claims.
The Bankruptcy Court granted summary judgment to
BMO and denied ICSP’s motion for summary judgment on the
Tax Refund claims. See In re LTC Holdings, Inc., 597 B.R.
565, 567 (Bankr. D. Del. 2019).3 The Bankruptcy Court
determined that, when the Settlement Order was entered in
3 The remaining claims in the consolidated adversary
proceeding, which were unrelated to the Tax Refund, were
later dismissed pursuant to a separate settlement approved by
the Bankruptcy Court.

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June 2016, the United States had not yet been “paid in full”
under 11 U.S.C. § 509(c). ICSP’s subrogation rights therefore
remained subordinate, and the United States was entitled to
waive its right to set off the Tax Refund in order to settle its
remaining and superior claim. The Bankruptcy Court then
concluded that the United States’ waiver extinguished ICSP’s
ability to be subrogated to the setoff rights.
ICSP appealed to the District Court, which affirmed on
essentially the same grounds set forth by the Bankruptcy Court
in its ruling. See In re LTC Holdings, Inc., No. 1-19-cv-00327,
2020 WL 5576850, at *1 (D. Del. Sept. 17, 2020). This timely
appeal ensued.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Court had jurisdiction pursuant to 28
U.S.C. §§ 157 and 1334. The District Court had jurisdiction
pursuant to 28 U.S.C. § 158(a)(1). This Court has appellate
jurisdiction under 28 U.S.C. §§ 158(d)(1) and 1291. See In re
Prof’l Ins. Mgmt., 285 F.3d 268, 278–81 (3d Cir. 2002).
“In this appeal, we stand in the shoes of the District
Court and review the Bankruptcy Court’s decision.” In re
Glob. Indus. Techs., Inc., 645 F.3d 201, 209 (3d Cir. 2011)
(quotation marks and citations omitted). Thus, “we review the
Bankruptcy Court’s orders applying the standard it was
appropriate for the District Court to apply.” In re Schaefer Salt
Recovery, Inc., 542 F.3d 90, 97 (3d Cir. 2008). A bankruptcy
court’s order granting summary judgment is reviewed de novo.
See In re SemCrude L.P., 864 F.3d 280, 290 (3d Cir. 2017).

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Summary judgment “is proper when, viewing the evidence in
the light most favorable to the opposing party, there is no
genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Id. (cleaned up).
When a bankruptcy court has analyzed one of its own
orders, “an appellate court must distinguish between the review
of a bankruptcy court’s application of legal principles and the
review of a bankruptcy court’s actual interpretation of an
ambiguous provision in its own order.” In re Shenango Grp.
Inc., 501 F.3d 338, 346 (3d Cir. 2007). The application of legal
principles to an unambiguous provision is reviewed de novo,
whereas the interpretation of an ambiguous provision is
reviewed for abuse of discretion. Id. The initial determination
of whether a provision is ambiguous is reviewed de novo. Id.
Here, we agree with the parties that the relevant provisions of
the Settlement Order are “unambiguous.” Appellant’s Br. 30–
31; Appellee’s Br. 23. Thus, we exercise plenary review over
the application of legal principles to those unambiguous
provisions. See Shenango, 501 F.3d at 346.
III. EQUITABLE SUBROGATION AND 11 U.S.C. § 509
A. Subrogation at Common Law
Under the equitable common-law doctrine “generally
known as the right of subrogation,” a “surety who pays the debt
of another is entitled to all the rights of the person he paid to
enforce his right to be reimbursed.” Pearlman v. Reliance Ins.
Co., 371 U.S. 132, 137 (1962). The right of equitable
“[s]ubrogation is often called an equitable assignment or an

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assignment by operation of law,” as “[s]ubrogation does not
spring from contract although it may be confirmed or qualified
by contract.” Restatement (Third) of Suretyship & Guaranty
§ 27 cmt. a (1996). Here, none of the relevant contracts speaks
to the parties’ subrogation rights, other than to broadly reserve
those rights.
The common-law right of subrogation generally has two
limitations that are relevant here. First, a subrogee takes no
more rights than the subrogor had. United States v. California,
507 U.S. 746, 756 (1993). Thus, a subrogee “usually ‘cannot
acquire by subrogation’” rights that the subrogor did not have.
Id. (citation omitted). Second, payment in full is typically
required before rights are subrogated. See generally LTC
Holdings, 597 B.R. at 574 n.47 (collecting cases).
A surety fulfilling an obligation under a performance
bond for a government contract is subrogated “to the
contractual rights of both the defaulted contractor and the
government.” Hartford, 108 Fed. Cl. at 532; see also
Universal Bonding Ins. Co. v. Gittens & Sprinkle Enters., Inc.,
960 F.2d 366, 376 (3d Cir. 1992) (citing Pearlman, 371 U.S.
at 132). Thus, the performing surety “is entitled to the funds
in the hands of the government . . . as a subrogee having the
same right to the funds as the government.” Hartford, 108 Fed.
Cl. at 532 (cleaned up). And “[t]he government has the same
right which belongs to every creditor, to apply the
unappropriated moneys of his debtor, in his hands, in
extinguishment of the debts due to him.” United States v.
Munsey Trust Co. of Wash., D.C., 332 U.S. 234, 239 (1947)
(quotation marks and citation omitted). The Bankruptcy Code

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generally preserves the right of a creditor to use funds in its
possession to set off “a mutual debt ow[ed] by such creditor to
the debtor . . . against a claim of such creditor against the
debtor.” 11 U.S.C. § 553(a).
B. Subrogation under the Bankruptcy Code, 11
U.S.C. § 509
Section 509 of the Bankruptcy Code “is the statutory
enactment of the long-standing doctrine of equitable
subrogation.” In re Chateaugay Corp., 89 F.3d 942, 947 (2d
Cir. 1996) (“Chateaugay I”). The parties do not dispute the
Bankruptcy Court’s conclusion that application of Section 509
controls this case. See LTC Holdings, 597 B.R. at 573–74; see
also 4 Collier on Bankruptcy ¶ 509.02 (16th ed. 2021) (noting
that many courts “still apply common law standards in one
form or another when conducting a section 509 analysis”). In
relevant part, Section 509 provides:
(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. . . .
(c) The court shall subordinate to the claim of a
creditor and for the benefit of such creditor an
allowed claim, by way of subrogation under this
section, or for reimbursement or contribution, of
an entity that is liable with the debtor on, or that

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has secured, such creditor’s claim, until such
creditor’s claim is paid in full, either through
payments under this title or otherwise.
11 U.S.C. § 509.
In a departure from the general common-law rule,
Section 509(a) provides that a surety is partially subrogated to
the rights of a creditor to the extent that the surety has made
any payments (i.e., short of payment in full). However, Section
509(c) provides that those subrogation rights are subordinated
to the remainder of the creditor’s claim until the creditor has
been paid in full. Although resort to legislative history is
unnecessary here to render any more plain Congress’s intent in
ordering how Section 509(c) should operate, portions of that
history do explain congressional concern for preventing a
surety from “compet[ing] with the creditor he has assured until
the assured party’s claim has [been] paid in full.” 124 Cong.
Rec. H. 11,094 (Sept. 28, 1978), S. 17,410–11 (Oct. 6, 1978);
see also Pa. Nat’l Mut. Cas. Ins. Co. v. City of Pine Bluff, 354
F.3d 945, 951 (8th Cir. 2004) (explaining that the full
performance requirement also encourages a surety to pay
claims in full, rather than paying only to the extent that the
surety anticipates a “dividend in the assets of the debtor”).

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IV. ANALYSIS
A. The United States was not “paid in full” when
the Settlement Order was entered, so ICSP’s
rights were subordinate under Section 509(c).
We agree with the Bankruptcy Court’s assessment that,
under Section 509(c), the term “paid in full” is susceptible to
either a “broad” or a “narrow” construction. See LTC
Holdings, 597 B.R. at 574–75. And, like the Bankruptcy
Court, we see no need to decide which of these constructions
applies, as ICSP did not make payment “in full” under either
construction.
1. The broad construction of “paid in full”
Under the broad construction of “paid in full,” a surety’s
full payment of the obligee’s claims against the debtor under a
single secured contract, standing alone, does not constitute
payment “in full.” Instead, to be “paid in full,” the obligee
must have received full payment for all its claims against the
debtor, including claims stemming from other contracts. See
generally Hartford, 108 Fed. Cl. at 532 (explaining that “[t]he
set-off right applies to government claims both under other
contracts and under the same contract”).
Here, the USPOC asserted that the Debtors had caused
the United States to suffer losses not only on the NPCC
Contract, but also on many other contracts (some of which
were bonded by ICSP, while others were not). The undisputed
facts establish that the United States was not paid in full on

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those other contract claims before the Settlement Order was
entered. Thus, under the broad construction, regardless of
whether ICSP had made payment in full on its suretyship
obligations for the NPCC Contract, the United States was not
“paid in full” before the Settlement Order was entered.
2. The narrow construction of “paid in full”
The narrow construction of “paid in full” is that a surety
makes payment “in full” once it “pays in full the portion of the
creditor’s claim to which it stood as surety.” 4 Collier on
Bankruptcy ¶ 509.04 (citing In re Tri-Union Dev. Corp., 314
B.R. 611 (Bankr. S.D. Tx. 2004)). “[T]he surety’s subrogated
claim is not subordinated to the remaining portion of the
creditor’s claim.” Id. Here, under the narrow construction, the
issue is whether ICSP had made payment in full on its
suretyship obligations for the NPCC Contract before the
Settlement Order was entered on June 28, 2016.
a. ICSP had not yet paid its NPCC
obligations “in full”
While there is limited authority on what constitutes
payment in full, the “secondary authorities agree that to
subrogate a claim, payment in the technical sense is not
required.” Feldhahn v. Feldhahn, 929 F.2d 1351, 1354 (8th
Cir. 1991). Rather, “[w]hatever discharges the liability and is
accepted as payment is sufficient.” Id. (quoting 73 Am. Jur. 2d
Subrogation § 29 (1974)); see also Chateaugay I, 89 F.3d at
948 (citing Feldhahn, 929 F.2d at 1354). And 11 U.S.C.
§ 509(c) provides that payment in full may be made “either

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through payments under this title or otherwise.” Again, in the
context of defaulted government contracts, a surety generally
meets its obligation by “taking over and completing
performance,” or “assuming liability for the government’s
costs in completing the contract which are in excess of the
contract price.” Ins. Co. of the W., 243 F.3d at 1370. As
discussed above, to satisfy its suretyship obligations here,
ICSP arranged for MVL to complete the work on the NPCC
facility, and ICSP agreed to cover the payment of the excess
costs.
A reasonable factfinder could conclude that the United
States was “paid in full” either when ICSP made the final
payment to MVL on September 7, 2016, or when the United
States sent the August 24, 2016 letter releasing ICSP from its
suretyship obligations. But, as discussed below, there is no
evidence in the record that would permit a reasonable
factfinder to conclude that the United States was paid in full at
any time before the June 28, 2016 Settlement Order was
entered.4 So ICSP had not made payment in full at that time,
and its rights were subordinate to the United States’ rights
under Section 509(c).
4 The Bankruptcy Court determined that “[f]urther discovery
would not help ICSP” on this issue. LTC Holdings, 597 B.R.
at 577. ICSP has forfeited any challenge to that ruling by
failing to raise the issue in its briefing. See Wettach, 811 F.3d
at 115.

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b. ICSP’s arguments that it had “paid
in full” are unavailing
ICSP primarily argues that it completed its NPCC
suretyship obligations on or about February 11, 2016, “when
the physical work of the NPCC contract was completed.”
Appellant’s Br. 42. ICSP correctly notes that the United
States’ August 24, 2016 letter released ICSP from its
suretyship obligations and stated that, following an inspection
conducted February 10, 2016, the “construction progress [was]
sufficiently complete to allow the Government use and
occupancy of the facility effective February 11, 2016.” A389
(italic emphasis added). But, on its face, that statement does
not indicate that the United States deemed ICSP’s suretyship
obligations “actually complete” in February 2016, especially
when the statement is viewed in the context of the record here.
As the Bankruptcy Court emphasized, the uncompleted
and unpaid work on the NPCC facility was the basis for the
United States’ contingent DoD Surety Claim. See LTC
Holdings, 597 B.R. at 578. When the United States filed its
amended USPOC on May 24, 2016, the United States declared
that the DoD Surety Claim was still “contingent upon the
completion” of the NPCC Contract pursuant to the Tender
Agreement. A636. That is not surprising, as ICSP later made
three payments to MVL on July 25, August 18, and September
7, 2016, each for over $600,000. Those payments, in
conjunction with the fact that the United States did not
explicitly release ICSP from its suretyship obligations until
August 2016, preclude a reasonable factfinder from concluding
that ICSP had made payment in full in February 2016.

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ICSP further argues, in the alternative, that it
“discharged its obligations to the United States under the
NPCC Performance Bond by entering into the NPCC Tender
Agreement” in August 2014. Appellant’s Br. 40. It is true that,
in some cases, a promise may “effectively discharge” a debt.
See Chateaugay I, 89 F.3d at 948 (collecting cases). As the
Bankruptcy Court explained, in those cases, the
“understanding and behavior of both parties” indicate that the
promise satisfies the debt. LTC Holdings, 597 B.R. at 577; see
also id. (discussing Feldhahn, 929 F.2d at 1352, in which “the
court treated the obligation as discharged because the bank
cancelled the note it held for a divorced couple’s debt after the
non-debtor wife assigned it the proceeds from a contemplated
real estate sale”).
But here, based on the record and the text of the Tender
Agreement, the agreement itself did not satisfy ICSP’s
suretyship obligations. The Tender Agreement provided that
“[t]he Surety’s bonds shall remain in force and effect during
the performance of Work by [MVL] up to the complete
expenditure of the penal sum of the Performance Bond.”
A364. Thus, the Tender Agreement merely set forth agreed-
upon actions that, once taken, would satisfy ICSP’s
obligations. Again, the United States expressly indicated in its
May 2016 amended USPOC that ICSP’s suretyship obligations
were not yet satisfied.
Relying on In re Chateaugay Corp., 94 F.3d 772, 780
(2d Cir. 1996) (“Chateaugay II”), which is discussed in detail
below, ICSP alternatively argues that the United States was

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paid in full through its settlement with the Debtors. But even
assuming that the provisions of the Settlement Stipulation
could have paid the United States in full here, the Settlement
Stipulation did not take effect until after the entry of the
Settlement Order. And the Settlement Order reserved ICSP’s
rights as they existed “prior to the entry of this Order.” A277.
Thus, any “payment” to the United States in the Settlement
Stipulation cannot be used to determine the status of ICSP’s
performance, and attendant subrogation rights, “prior to the
entry” of the Settlement Order.
In its reply brief, ICSP further argues that, as of June
2016, it was merely withholding the final payment until the
United States sent a letter accepting MVL’s work.
Specifically, ICSP argues that “it is neither unusual nor a
contractual breach for a surety to withhold final payment to a
completion contractor . . . until after a construction project’s
owner formally confirms its acceptance of the work in
writing.” Appellant’s Reply Br. 9. We do not need to evaluate
the legal merit of that argument, as it rests on a factual premise
that is not supported by the record here. No evidence supports
ICSP’s view that, in June 2016, it was withholding only a final
payment pending a letter from the United States accepting
MVL’s work. After the Settlement Order was entered in June
2016, ICSP made three aforementioned payments (each over
$600,000) on July 25, August 18, and September 7, 2016. Only
the September 7 payment was made after the United States sent
the August 24, 2016 letter releasing ICSP from its suretyship
obligations. Thus, no reasonable factfinder could conclude
that either the July 25 or the August 18 payment was a “final

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payment” that ICSP was withholding until the United States
accepted MVL’s work.
Therefore, we conclude both that the United States was
not yet “paid in full,” within the meaning of 11 U.S.C. § 509(c),
prior to the entry of the Settlement Order on June 28, 2016, and
that ICSP’s subrogation rights were subordinate to the United
States’ remaining and superior claim at that time.
B. The United States was entitled to waive its
right to set off the Tax Refund in order to
settle its remaining and superior claim.
We now turn to whether the United States was entitled
to waive its setoff rights to settle its superior claim. We agree
with the Bankruptcy Court’s thorough analysis of this issue.
See LTC Holdings, 597 B.R. at 575–78. The text and structure
of Section 509, which subordinates a surety’s partially
subrogated claim “for the benefit of” the obligee, 11 U.S.C.
§ 509(c), make clear that the obligee may use its setoff rights
to vindicate its own remaining interests.5 Moreover, we agree
5 Our holding is limited to cases where, as here, the surety has
not “paid in full” the portion of the obligee’s claim to which it
stood as surety. Because we resolve this issue under that
“narrow” construction of Section 509(c), we do not address the
broader issue of how an obligee may use its setoff rights to
vindicate its own remaining interests on other claims against
the debtor once a surety has made payment in full on the
portion of the obligee’s claim to which it stood as surety.

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with the Second Circuit’s conclusion in Chateaugay II that an
obligee may waive its setoff rights even after a surety has made
payments that would confer subrogation rights under Section
509. See 94 F.3d at 776 (concluding that a surety was
subrogated to the government’s right to set off a tax refund
because the government had not waived the right, but
explaining that “if the [government had] waived its right of
setoff then [the surety] would have no interest in the refund”).
On appeal, as in the Bankruptcy Court proceedings,
“ICSP has not cited anything that bars the United States from
releasing its setoff rights” under the circumstances here. LTC
Holdings, 597 B.R. at 575. Thus, we agree with the
Bankruptcy Court’s conclusion that Section 509(c) “places the
surety in line behind the obligee, who may exhaust the funds
to satisfy his own claim.” Id. Instead of contesting this point,
ICSP has primarily argued that the United States’ waiver did
not extinguish the rights that ICSP reserved in the Settlement
Order. We will now address whether the waiver extinguished
ICSP’s ability to be subrogated to the setoff rights.
C. The United States’ waiver extinguished
ICSP’s ability to be subrogated to the setoff
rights.
As a subrogee, ICSP can assume no more rights than
those that belonged to its subrogor. See California, 507 U.S.
at 756. Thus, ICSP “‘cannot acquire by subrogation’” the
setoff rights that the United States has waived. Id. (citation
omitted); see also Chateaugay II, 94 F.3d at 776. ICSP raises
two arguments to the contrary, but neither is persuasive. First,
ICSP argues that the reservation of rights in the Settlement

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Order limited the effect of the United States’ waiver here.
Second, ICSP argues that the Second Circuit’s reasoning in
Chateaugay II supports ICSP’s claim to the setoff rights.
1. Effect of the Settlement Order
Again, the relevant provision of the Settlement Order
provides:
. . . nothing in this Order or the Stipulation shall
waive, estop, or otherwise limit the rights of any
party claiming an interest in the Tax Refund,
including but not limited to, the estate, the
Insurance Company of the State of Pennsylvania,
BMO Harris Bank N.A., or any other party
claiming an interest in the Tax Refund, and the
parties reserve any and all rights and arguments
they had regarding the ownership of, or their
interest in [the] Tax Refund prior to the entry of
this Order.
A277. ICSP argues that it was subrogated to the United States’
setoff rights to the extent that ICSP had made payments, that
the above-quoted language reserved those rights, and that
absolutely “nothing” the United States did in the Settlement
Stipulation (i.e., the waiver) could alter those rights.
Appellant’s Br. 31.
However, the Settlement Order does not define the
nature of the rights that ICSP reserved. Rather, ICSP reserved
“any and all rights and arguments,” if any, “regarding the

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ownership of, or [its] interest in [the] Tax Refund prior to the
entry of this Order.” A277. As discussed above, prior to the
entry of the Settlement Order, ICSP had not made payment in
full to the United States. Thus, at the time that ICSP reserved
its subrogation rights, those rights were subordinate to the
United States’ ability to use the setoff rights to settle its
remaining and superior claim. The Settlement Order did not
transform or redefine the nature of ICSP’s subordinate rights.
Again, those subordinate rights were extinguished once the
United States waived them, which ICSP consented to rather
than pressing its objection.
ICSP argues that this interpretation of the Settlement
Order renders it “meaningless” or worthless for ICSP.
Appellant’s Br. 35. Yet BMO would have at least an equally
strong argument that the Settlement Order and Settlement
Stipulation would be worthless for the Trustee (and BMO) if
we were to determine that the United States’ waiver did not
extinguish ICSP’s rights. As BMO argues, “the Settlement
Stipulation was built around the setoff release,” and the
“Trustee would not have released the estates’ REA claims
against the United States, or agreed to the allowance of the
DOD Claim, in the absence of the setoff release.” Appellee’s
Br. 25. In point of fact, the Settlement Order was not worthless
for ICSP, as ICSP obtained at least two clear benefits. First,
ICSP effectively preserved its subrogation arguments
(including the argument that ICSP had made payment in full).
BMO has not attempted to preclude ICSP from arguing its
ownership of the Tax Refund on the basis of waiver or
estoppel. Second, the Settlement Order ensured that the United
States would relinquish the $5.5 million Tax Refund into

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escrow (rather than attempting to set off the Tax Refund
against the United States’ own losses acknowledged in the
Settlement Stipulation). This at least guaranteed that ICSP
would get a bite at the $5.5 million apple.
2. Relevance of Chateaugay II
ICSP argues that a ruling against its claim to the Tax
Refund is inconsistent with Chateaugay II. See 94 F.3d at 773–
80. Of course, that authority from the Second Circuit is not
binding on this Court. It is also distinguishable in several key
ways.
The procedural history of Chateaugay II was tangled.
A mining company (LTV Steel, the debtor) had obtained surety
bonds from Aetna (the surety) in favor of the United States
Department of Labor (DOL, the obligee) for certain black lung
benefits owed to the company’s employees. Id. at 773–74.
When the debtor filed for Chapter 11 bankruptcy and stopped
paying the black lung benefits, the surety paid out the full $5.5
million owed under its bond. Id. at 774. The DOL then paid
the remainder of the benefits due. Id.
In an earlier proceeding, the debtor and the DOL had
reached a settlement wherein the debtor agreed to pay back a
portion of the black lung benefits that the DOL had been forced
to cover. The surety pressed an objection that the DOL
settlement risked extinguishing the surety’s right to be repaid
as a subrogee to the DOL. Id. The Second Circuit explained
that it had affirmed the DOL settlement “but expressly noted

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that the settlement could have no adverse effect on [the
surety’s] rights or claims.” Id.
Chateaugay II stemmed from the IRS’s proposed
settlement with the debtor regarding certain tax payments.
That settlement indicated that the federal government owed a
tax refund to the debtor; the IRS planned to set off the refund
against certain excise taxes that were owed by the debtor. Id.
at 775. Apparently, that tax refund was not mentioned in the
earlier DOL settlement, as the surety first learned of the tax
refund when it received the application to approve the IRS
settlement. Id. The surety sought to prohibit the IRS from
using the refund and/or to obtain adequate protection for its
interest in the refund as a subrogee to the DOL. Id. The
Second Circuit held, among other things, that the DOL had
been “paid in full” and that the surety had an interest in the tax
refund because it was subrogated to the DOL’s setoff rights.
Id. at 780, 782.
In summary, the surety in Chateaugay II: (i) had made
payment in full; (ii) pressed an objection to a settlement that
apparently had no mention, let alone an express waiver, of the
government-obligee’s right to set off a tax refund; and
(iii) obtained a court order that the settlement could “have no
adverse effect” on the surety’s subrogation rights.
In contrast, here, ICSP: (i) had not made payment in
full; (ii) dropped its objection to a settlement that had an
express waiver of the government-obligee’s setoff rights,
including the right to set off the Tax Refund; and (iii) obtained
a court order reserving only the undefined “rights and

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arguments” that ICSP had, if any, to set off the Tax Refund
prior to the entry of the Settlement Order. Again, because
ICSP had not made payment in full, the subrogation rights that
ICSP held at the time of the Settlement Order were subordinate
to the United States’ rights. Thus, the United States was
entitled to, and did, waive its setoff rights to settle its own
remaining and superior claim. That waiver extinguished
ICSP’s derivative subrogation rights to set off the Tax Refund.
V. CONCLUSION
For the foregoing reasons, we conclude that the United
States was not yet paid “in full” when the Bankruptcy Court
approved the Settlement Order. Thus, pursuant to Section
509(c), ICSP’s subrogation rights were subordinate to the
United States’ remaining and superior claim at the time of the
settlement. The United States was therefore entitled to waive
its setoff rights to satisfy its own claim, and the waiver
extinguished ICSP’s ability to be subrogated to those rights.
Accordingly, we will affirm the order of the District Court
affirming the Bankruptcy Court’s ruling that ICSP is not
entitled to the Tax Refund.

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