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 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 2 Suite 1400 Philadelphia, PA 19103 Counsel for Appellee

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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.

3 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