In re Bank of New England Corp., CIV.A.01-12229-RGS.

• Decision Date: 03 February 2003
• Docket Number: No. CIV.A.01-12229-RGS.,CIV.A.01-12229-RGS.
• Citation: 295 B.R. 419
• Parties: In re BANK OF NEW ENGLAND CORPORATION, Debtor. HSBC Bank USA, as Indenture Trustee, and JP Morgan Chase Bank f/k/a the Chase Manhattan Bank, as Indenture Trustee, Appellants, v. Bank of New England Corporation, Appellee.
• Court: U.S. District Court — District of Massachusetts

295 B.R. 419

In re BANK OF NEW ENGLAND CORPORATION, Debtor HSBC Bank USA, as Indenture Trustee, and JP Morgan Chase Bank f/k/a the Chase Manhattan Bank, as Indenture Trustee, Appellants, v. Bank of New England Corporation, Appellee.

No. CIV.A.01-12229-RGS.

United States District Court, D. Massachusetts.

February 3, 2003.

Douglas B. Rosner, Goulston & Storrs, PC, Boston, MA, Joseph N. Froelich, Robert C. Shenfeld, Sarah L. Reid, Kelley, Drye & Warren, New York City, for HSBC Bank USA and JP Morgan Chase Bank.

Robin Russell, Andrews & Kurth, LLP, Houston, TX, for Bank of New England Corp.

Dianne F. Coffino, Dewey Ballantine, New York City, for Chemical Bank Delaware.

Katherine Constantine, Monica L. Clark, Dorsey & Whitney, LLP, Minneapolis, MN, for US Bank Trust National Association.

Christopher E. Palmer, William F. Sheehan, Shea & Gardner, Washington, DC, David T. Anderson, Boston, MA, Dennis J. Kelly, Burns & Levinson, Boston, MA, Hugh M. Ray, James Donnell, Van Oliver, Andrews & Kurth, Dallas, TX, Jeanne P. Darcey, Palmer & Dodge, LLP, Boston, MA, Susan Smith, Santos, Peck & Smith, Hartford, CT, for Ben S. Branch.

STEARNS, District Judge.

On December 17, 2001, the Senior Debt holders of the bankrupt Bank of New England Corporation (BNEC), appealed a November 1, 2001 order of the Bankruptcy Court authorizing a distribution of assets from BNEC's estate to the Junior Debt holders. Appellants maintain that no such distribution can be made before they are paid post-petition interest.

Prior to BNEC's spectacular collapse, it obligated itself to six separate issues of Indenture debt, totaling $705,972,000. Under the terms of the Indentures, the first three issues (the Senior Debt) were to have priority over the remaining three issues (the Junior Debt). Each of the Junior Debt Indentures contains an "Agreement to Subordinate." The Agreement states:

each Holder likewise covenants and agrees by his acceptance thereof, that the obligations of the Company to make any payment on account of the principal of and interest on each and all of the Notes shall be subordinate and junior, to the extent and in the manner hereinafter set forth, in right of payment to the Company's obligations to the holders of Senior indebtedness of the Company.¹

The Indentures also specifically acknowledge the priority rights of the Senior Debt holders in the event of bankruptcy.

The Company agrees that upon . . . any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding up or total or partial liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership. conservatorship or other proceedings, all principal (and premium, if any) sinking fund payments and interest due or to become due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money or money's worth in accordance with its terms, before any payment is made on account of the principal of or interest on the indebtedness evidence by the Junior Notes due and owing at the time. . . .

(Emphasis added). The parties agree that the Senior Debt holders are first in line for the payment of principal and pre-petition interest. The only dispute is over post-petition interest.

BNEC declared bankruptcy in 1991. The Trustee of BNEC's estate, Dr. Ben Branch, having done a truly remarkable job of marshaling BNEC's assets, has paid the principal of the Senior Debt in full, together with all pre-petition interest, post-petition fees, and the Senior Debt holders' expenses.² On May 23, 2001, the Trustee sought permission from the Bankruptcy Court to distribute $11,000,000 from BNEC's estate to the Junior Debt holders. The Senior Debt holders objected, claiming priority entitlement to post-petition interest. On November 1, 2001, Chief Bankruptcy Judge William Hillman authorized the distribution. In a written opinion, Judge Hillman held that the language of the Junior Debt Indentures guaranteeing the Senior Debt holders "payment in full" of "interest . . . due and owing" did not include post-petition interest. This appeal ensued.

At the hearing before the district court, the parties agreed that de novo review of Judge Hillman's Order is called for as there are no disputes of fact and the operative language of the Indentures is (at least in the eye of the beholder) unambiguous. See In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72, 73 (1st Cir.1995) (a district court is to review de novo a Bankruptcy Court's conclusions of law). If the court were, however, to conclude that Judge Hillman's decision was based on ambiguities in the language of the subordination agreement, the Junior Debt holders maintain that the "clearly erroneous" standard should be applied instead. While

"the interpretation of a contract is generally a question of law and subject to . . . de novo review," Network Pub. Corp. v. Shapiro, 895 F.2d 97, 99 (2d Cir.1990), this general proposition applies only when the language of the contracts is unambiguous. Rothenberg v. Lincoln Farm Camp, Inc., 755 F.2d 1017, 1019 (2d Cir.1985). When the language of the contract is susceptible to more than one reasonable interpretation, the interpretation of the contract is an issue of fact.

In re The Brunswick Hosp. Ctr., Inc., 156 B.R. 896, 899 (E.D.N.Y.1993). Because I do not interpret Judge Hillman's decision to be based on any perceived ambiguity in the language of the Indentures, but rather on his legal conclusion that the language used failed to satisfy the Rule of Explicitness, the de novo standard of review applies.³

The genesis of the dispute on appeal arises from the interplay between two seemingly contradictory provisions of the Bankruptcy Code. Under 11 U.S.C. § 502(b)(2), a creditor in a bankruptcy proceeding is not entitled to post-petition interest.

(b) Except as provided . . . the court, after notice and a hearing, shall determine the amount of a bankruptcy claim in lawful currency of the United States as of the date of the filing of the petition, . . . except to the extent that — . . .

(2) such claim is for unmatured interest.

Under 11 U.S.C. § 510(a), which was inserted into the Bankruptcy Code by Congress in 1978, "a subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law."

The enactment of section 510(a) precipitated a debate over whether Congress had intended to abrogate the equitable foundation on which the Bankruptcy Court had erected the Rule of Explicitness. The origins of the Rule are ably explained in Southeast Banking I.

The overriding theme of bankruptcy law, both past and present, has been the equitable distribution of the debtor's remaining assets among creditors. . . . The courts, however, have permitted creditors to contract out of this system of pro-rata distribution by enforcing subordination agreements, whereby one creditor (the junior creditor) agrees that, in the event of a default or bankruptcy, another creditor (the senior creditor) will receive repayment in full before the junior creditor receives payment on its loans. . . . In enforcing subordination agreements, however, the courts have emphasized that the junior creditor's agreement to subordinate must be express. See In re Credit Industrial Corp., 366 F.2d at 408.

The issue of post-petition interest has led to a wrinkle in the enforcement and interpretation of subordination agreements. Given the often lengthy delay between the debtor's petition for bankruptcy and the date upon which a creditor can expect to receive any payment on the underlying obligation, post-petition interest can represent a significant amount of money. Under both pre-Code practice and the 1978 Bankruptcy Code, unsecured and undersecured creditors could not expect to receive interest on a bankrupt debtor's obligation that accrued after the date of the bankruptcy petition — at least not from an insolvent debtor. See 11 U.S.C. § 502(b)(2) (instructing courts to determine the amount of a creditor's claim on the date of the petition and disallowing claims for "unmatured interest").

. . . . .

In a number of cases, senior creditors sought to avoid this result and recover post-petition interest — not from the debtor, but from the distributions made to junior creditors subject to subordination agreements. Citing the junior creditors' agreement to subordinate their right to repayment until the senior debt had been paid in full, senior creditors argued that even though bankruptcy law prevented their recovery of post-petition interest from the debtor, their loans had not been paid in full and, therefore, that they could demand payment from whatever distribution the junior creditors received from the debtor. In 1974, before Congress adopted the Bankruptcy Code, the Court of Appeals for the Third Circuit addressed this argument and concluded that a junior creditor could agree to subordinate its claim to a senior creditor's demands for post-petition interest, if the subordination agreement explicitly provided for such a result:

"If a creditor desires to establish a right to post-petition interest and a concomitant reduction in the dividends due to subordinated creditors, the agreement should clearly show that the general rule that interest stops on the date of the filing of the petition is to be suspended, at least vis-a-vis these parties."

In re Time Sales Fin. Corp., 491 F.2d 841, 844 (3d Cir.1974).

Significantly, however, the Time Sales court held that general language in the subordination agreement, establishing that the senior debt must be "paid in full" before payment on the junior debt, was insufficient to alert the junior creditor that it had agreed to subordinate its claims to the senior creditor's claims for post-petition interest. . . . A number of courts, when

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