Southeast Banking Corp., In re

• Decision Date: 28 September 1998
• Citation: 156 F.3d 1114
• Parties: 40 Collier Bankr.Cas.2d 1238, 33 Bankr.Ct.Dec. 302, Bankr. L. Rep. P 77,809, 12 Fla. L. Weekly Fed. C 129 In Re: SOUTHEAST BANKING CORPORATION, Debtor. CHEMICAL BANK, as Indenture Trustee under the Indenture, dated as of
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1114

156 F.3d 1114

40 Collier Bankr.Cas.2d 1238, 33 Bankr.Ct.Dec. 302,

Bankr. L. Rep. P 77,809,

12 Fla. L. Weekly Fed. C 129

In Re: SOUTHEAST BANKING CORPORATION, Debtor CHEMICAL BANK, as Indenture Trustee under the Indenture dated as of March 1, 1983, of Southeast Banking Corporation, and Gabriel Capital, L.P. Plaintiffs-Appellants, v. FIRST TRUST OF NEW YORK, National Association, as Indenture Trustee, The Bank of New York, as Indenture Trustee, and Southeast Banking Corporation, Debtor Defendants-Appellees.

No. 97-4436.

United States Court of Appeals, Eleventh Circuit.

Sept. 28, 1998.

David C. Cimo, Sarah L. Reid, Kelley, Drye & Warren, LLP, Paul J. McMahon, Miami, FL, for Plaintiffs-Appellants.

David Friedman, David Rosner, Kasowitz, Benson, Torres & Friedman, LLP, New York City, for Gabriel Capital.

Mark David Bloom, Elliott H. Scherker, Greenberg, Traurig & Hoffman, Miami, FL, for Defendants-Appellees.

Daniel S. Pearson, Craig V. Rasile, Holland & Knight, LLP, Miami, FL, Kenneth N. Klee, James O. Johnston, Jr., Isaac M. Pachulski, Stutman, Treister & Glatt, P.C., Los Angeles, CA, for First Trust of New York, National Association, as indenture Trustee.

Appeal from the United States District Court for the Southern District of Florida.

Before EDMONDSON and BIRCH, Circuit Judges, and FAY, Senior Circuit Judge.

BIRCH, Circuit Judge:

This appeal requires us to decide whether Congress, by enacting section 510(a) of the 1978 Bankruptcy Code, intended to abrogate the "Rule of Explicitness," a judicially created doctrine that prevents a senior creditor from collecting post-petition interest from a junior creditor pursuant to a subordination agreement unless the agreement expressly provides for that result. The bankruptcy court and the district court both held that section 510(a) was not inconsistent with the Rule of Explicitness and that the legislative history accompanying section 510(a) revealed no intent to repeal the rule. As a result, the bankruptcy court and the district court declined to read section 510(a) as a radical departure from previous law governing the interpretation and enforcement of subordination agreements and held that, because the agreements in question did not satisfy the Rule of Explicitness, the Senior Creditors were not entitled to receive post-petition interest from the Junior Creditors. Accordingly, the district court entered summary

judgment against the Senior Creditors. We REVERSE in part and CERTIFY the substance of this dispute to the New York Court of Appeals.

BACKGROUND

On September 20, 1991, (the "petition date"), Southeast Banking Corporation ("Southeast") filed a voluntary bankruptcy petition pursuant to Chapter 7 of the Bankruptcy Code. ¹ On April 28, 1992, the bankruptcy court entered an order confirming William A. Brandt, Jr. ("Brandt") as the successor Chapter 7 trustee for Southeast's estate.

Appellant, The Chase Manhattan Bank ("Chase"), formerly Chemical Bank, is the indenture trustee (the "Senior Trustee") under an Indenture, dated March 1, 1983 (the "Senior-Indenture"), pursuant to which Southeast issued $60 million in principal amount of unsecured notes (the "Senior Notes"). Appellant, Gabriel Capital, L.P. ("Gabriel"), together with three of its affiliates, holds a substantial portion of the Senior Notes. The Senior Indenture ² provides that Southeast has a continuing obligation to repay principal and interest on the Senior Notes and that, upon the event of a default, Southeast will pay the entire amount of principal and interest due on the Senior Notes, including interest until the date of payment upon overdue principal, and to the extent enforceable, interest upon the overdue interest at the same rate specified in the Senior Notes. Finally the Senior Indenture provides that, in the event of a default, Southeast also shall be liable to the Senior Trustee for reasonable fees and costs of collection, including attorneys' fees. ³

Appellees, First Trust of New York, N.A. and The Bank of New York (collectively the "Junior Trustees") are indenture trustees under five indentures (the "Subordinated Indentures") pursuant to which Southeast issued in excess of $300 million in principal amount of subordinated notes ("the Subordinated Notes"). Each of the Subordinated Indentures ⁴ contains language that subordinates collection on the Subordinated Notes to the prior payment in full on the Senior Notes. The Subordinated Indentures also provide that, upon Southeast's bankruptcy or liquidation, the holders of the Senior Notes must be paid in full before Southeast can Both the Senior Trustee and the Junior Trustees have filed proofs of claim as unsecured nonpriority claims on behalf of their holders in Southeast's Chapter 7 proceedings. Pursuant to the orders of the bankruptcy court, Southeast has distributed or will distribute amounts sufficient to satisfy the principal on the Senior Notes and all interest that accrued on the Senior Notes prior to the petition date. Chase, however, has not received any interest that accrued on the Senior Notes after the petition date ("post-petition interest") because, as we discuss in more detail below, the Bankruptcy Code does not provide for the recovery of post-petition interest from an insolvent debtor, such as Southeast.

                make any payment on the Subordinated Notes and that all payments otherwise allocable to the holders of the Subordinated Notes must be paid to the holders of the Senior Notes, or their trustees, until such Senior Notes have been paid in full. 5  Significantly, however, the Subordinated Indentures make no specific mention of the issue of post-petition interest or of the Senior Trustee's fees and costs for collecting post-petition interest.  Finally, each of the Subordinated Indentures includes a clause noting that New York law governs the enforcement and interpretation of the agreements
                

Chase and Gabriel (collectively, the "Senior Creditors") commenced the above-captioned proceeding on September 23, 1994 and sought to compel the payment of post-petition interest until the date of payment on the Senior Notes (including interest upon that interest), as well as the reimbursement of Chase's fees and costs associated with this action, from the distributions otherwise payable to holders of the Subordinated Debt (the "Junior Creditors"). Chase and Gabriel relied on contractual language in the Subordinated Indentures that subordinated the Junior Creditors' right to repayment to the Senior Creditors' right to receive payment in full, as well as section 510(a) of the Bankruptcy Code, which provides for the enforcement of subordination agreements. All parties moved for summary judgment. In addition, Brandt, Southeast's Chapter 7 trustee, filed a cross-motion for partial summary judgment and asked the bankruptcy court to declare that regardless of the disposition of the dispute between the creditors, the claims against Southeast would not increase. Since Chase and Gabriel sought to recover post-petition interest from the distributions otherwise due the Junior Creditors, they did not contest Brandt's motion and have not done so on this appeal.

On August 8, 1995, the bankruptcy court denied Chase and Gabriel's motion for summary

                judgment in part, granted the Junior Trustees' cross-motion for summary judgment in part, and declared Brandt's motion for partial summary judgment moot. 6  See In re Southeast, 188 B.R. 452 (Bankr.S.D.Fla.1995).  Chase and Gabriel appealed to the district court for the Southern District of Florida, and on February 28, 1997, the district court affirmed the judgment of the bankruptcy court.  See In re Southeast, 212 B.R. 682 (S.D.Fla.1997).  Both the bankruptcy court and the district court based their holdings on the judicially created, and heretofore uniformly applied, doctrine of the "Rule of Explicitness," which, effectively, prevents a senior creditor from recovering post-petition interest from junior creditors unless the subordination agreement articulates the obligation in unusually express language.  Applying the same logic, the bankruptcy and district courts denied Chase's claim for reasonable costs and fees, including attorneys' fees, incurred after the petition date.  Chase and Gabriel argue that section 510(a) of the Bankruptcy Code abrogated the Rule of Explicitness and that the bankruptcy and district courts, therefore, committed legal error in applying the rule to this case.  Relying on New York law that made a contract for compound interest unenforceable, prevailing at the time the parties entered the relevant contracts, the bankruptcy and district courts also rejected Chase and Gabriel's claims for compound interest (interest upon the post-petition interest).  Citing recent revisions to New York law, Chase and Gabriel also urge us to reverse the district court's conclusions on the issue of compound interest.
                

DISCUSSION

The parties do not contest the material facts and agree that the resolution of their dispute turns on the interpretation and application of the Bankruptcy Code and New York state law. Consequently, the issues on appeal present purely legal questions, subject to our de novo review. See Epstein v. Official Comm. of Unsecured Creditors of Estate of Piper Aircraft Corp. (In re Piper Aircraft Corp.), 58 F.3d 1573, 1576 (11th Cir.1995); First Bank of Linden v. Sloma (In re Sloma), 43 F.3d 637, 639 (11th Cir.1995).

I. The Development of the Rule of Explicitness

The overriding theme of bankruptcy law, both past and present, has been the equitable distribution of the debtor's remaining assets among creditors. See Union Bank v. Wolas, 502 U.S. 151, 161, 112 S.Ct. 527, 533, 116 L.Ed.2d 514 (1991) (quoting H.R.Rep. No. 95-595, at 177-78 (1977), reprinted in 1978 U.S.C.C.A.N. 6137-38); Begier v. Internal Revenue Serv., 496 U.S. 53, 58, 110 S.Ct. 2258, 2262-63, 110 L.Ed.2d 46 (1990); Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 219, 61 S.Ct. 904, 907, ...