<PAGE>

                                                                 Exhibit 10.37

July 17, 1997


Mr. Barton L. Bailey
373 Broadview Lane
Annapolis, MD 21401


Dear Bart,

CONSULTING RELATIONSHIP

Following your separation from the Company, AAF-McQuay Inc. may be able to 
utilize your services in the role of a specialized consultant.

On the basis that a minimum base requirement will be for 40 hours of service 
during the month of August 1997, payment for that period will be $4,000.   
Any additional requirements during August 1997, above the 40 hours, will be 
compensated for at the rate of $100 per hour.

Requirements beyond the month of August 1997 will be identified, mutually 
agreed in writing and compensated for at a rate of $100 per hour.

We trust that you will find the above proposal satisfactory and look forward 
to a new relationship on the proposed terms.

Sincerely,




Joseph B. Hunter


<PAGE>

                   SEPARATION OF EMPLOYMENT AGREEMENT,
                 GENERAL RELEASE AND CONSULTING AGREEMENT


This Separation of Employment Agreement, General Release and Consulting 
Agreement (herein "Agreement") is hereby entered into as of this 17th day of 
July 1997 between AAF-McQuay Inc., its parents, subsidiaries, affiliates, 
divisions, predecessors, purchasers, assigns, representatives and successors 
(hereinafter collectively referred to as "the Company") and Barton L. Bailey 
(hereinafter "Mr. Bailey"), who are collectively referred herein as the 
"Parties."

WHEREAS, the Parties now desire and agree to forever sever their employment 
relationship and to fully and finally resolve any and all existing or 
potential issues, claims, causes of action, grievances and disputes that do, 
or could relate thereto or arise out of that relationship or severance 
thereof, without any admission of liability or finding or admission that any 
of Mr. Bailey's rights, under any statute, claim or otherwise, were in any 
way violated.   In consideration of the mutual promises contained herein, and 
other good and valuable consideration as hereinafter recited, the receipt and 
adequacy of which is hereby acknowledged, the Parties, intending to be 
legally bound, agree as follows:

Separation and Severance

    a.   The Company and Mr. Bailey agree that Mr. Bailey's employment with 
         the Company will terminate effective July 31, 1997.   The Company
         agrees that it will pay Mr. Bailey $169,110 as severance pay, in
         twelve monthly payments of $14,092.50, less all lawful deductions for
         FICA, Medicare, and Federal State and local taxes, the adequacy of
         which is hereby acknowledged, commencing on September 1, 1997 and on
         the 1st day of each consecutive month thereafter until August 1, 1998.
         This Agreement terminates and supersedes the terms of the "Senior
         Executive Severance Agreement" executed by Mr. Bailey and the Company
         on April 26, 1994 including, but not limited to, the provision in
         Paragraph 1(a)(i) of that Agreement requiring Mr. Bailey to seek
         comparable employment opportunities over the twelve month period after
         his termination of employment from the Company.   The Company agrees
         that in the even of the death of Mr. Bailey all remaining payments
         under this paragraph will be paid to his beneficiaries.  The Company's
         obligation to pay these amounts is absolute and unconditional and shall
         not be affected by any circumstances, including, without limitation,
         any set-off, counterclaim, recoupment, defense or other right that the
         Company may have against him or anyone else.

    b.   The Company agrees to provide Mr. Bailey his current level of health 
         care benefits, group life insurance and long term disability until
         July 31, 1998 under the terms and conditions that applied to Mr. Bailey
         
<PAGE>

         immediately prior to his separation of employment from the Company.
         Mr. Bailey recognizes and agrees that for the purposes of the
         continuation coverage requirements of group health plans under the
         Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), as
         amended, and the group health provisions of any state law, a
         "qualifying event" and "applicable change in status" occurs on July 31,
         1998.   The Company further agrees to provide Mr. Bailey with
         continuation coverage under its group health plan at Mr. Bailey's
         expense until February 1, 1999, at which time he will commence
         participation in the Company's Retiree Medical Group Benefits Plan.
         The benefits under the Company's Retiree Medical Group Benefits Plan
         will be offered to Mr. Bailey on the same basis as is offered to other
         retirees.

    c.   The Company will provide an outplacement service for a three month 
         period and will compensate Mr. Bailey for the cost of real estate
         commissions on the sale of his principal residence.

    d.   The Company further agrees to retain Mr. Bailey as a consultant for
         specific projects as may be identified from time to time and as
         mutually agreed upon.

    e.   It is expressly understood that all benefits due Mr. Bailey under the
         terms of the Executive Salary Continuation Agreement are fully vested
         and nonforfeitable; that for the purposes of that Agreement, he will
         be treated as though he had been "terminated, involuntarily without
         good cause" and had remained in the employ of the Company through an
         Early Retirement date of February 1, 2003.

    f.   Mr. Bailey agrees that portions of the above-described consideration
         and payments from the Company are over and above that to which he is
         otherwise entitled and constitutes good and valid consideration.




________________________________               _________________________
Joseph B. Hunter                                Barton L. Bailey
President and Chief Executive Officer,
AAF-McQuay Inc.

                                           
                                       2.