Bank of New York Mellon Trust Co. v. Miller (In re Franklin Bank Corp.)
526 B.R. 527
D. Del.2014Background
- BNYM and HoldCo appeal Bankruptcy Court orders in Franklin Bank Corporation's Chapter 7 case.
- Trust structure: four capital trusts (Trusts I–IV) with junior subordinated debt; BNYM as Indenture Trustee for Trusts I–III and Wilmington Trust for Trust IV; Senior Notes have BNYM as Indenture Trustee.
- Subordination scheme ranks Senior Notes first, then Trust I–III debt, then Trust IV debt under nonbankruptcy law-supported subordination.
- Bar date was March 12, 2009; Wilmington Trust filed timely Trust IV claim and BNYM filed Senior Notes claim November 28, 2011; HoldCo filed FRP/FRP III claims June 11, 2013.
- Trustee’s Final Report (May 29, 2013) allowed Wilmington Trust’s claim; BNYM objected and asserted subordination under the Wilmington Trust Indenture; HoldCo objected.
- Bankruptcy Court ruled BNYM waived subordination rights and separately considered equitable subordination; FRP/FRP III were not creditors of FBC and lacked standing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether BNYM waived its subordination rights | BNYM did not knowingly abandon its contractual protections. | Bankruptcy Court found waiver by delay and prejudice to estate. | Waiver not established |
| Whether equitable subordination under 510(c) was supportable | Equitable subordination applies due to inequitable conduct by BNYM. | No inequitable conduct; delay was negligence, not fraud or overreaching. | Equitable subordination cannot be sustained |
| Whether FRP and FRP III have standing to assert against FBC | FRP entities possess direct standing under Trust provisions. | FRP/FRP III are not creditors of FBC and lack standing. | FRP/FRP III lack standing |
| Whether FRP entities can pursue direct actions under Trust 2.8(e) despite subordination | Trust 2.8(e) allows direct enforcement by holders of Capital Securities. | FRP/FRP III are not the registered holders; claims are on FBC debt, subordinated by the Trusts. | Direct action by FRP entities is not cognizable against FBC; subordinated status remains |
Key Cases Cited
- In re Best Prods. Co., 168 B.R. 35 (S.D.N.Y. 1994) (contractual subordination enforceable under New York law)
- Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgrnt, L.P., 850 N.E.2d 653 (N.Y. 2006) (clear manifestation of intent required for waiver)
- In re Winstar Commc’ns, Inc. (Schubert v. Lucent Techs. Inc.), 554 F.3d 382 (3d Cir. 2009) (requirements for equitable subordination; harm and inequitable conduct)
- Md. Nat’l Bank v. Vessel Madam Chapel, 46 F.3d 895 (9th Cir. 1995) (negligence not sufficient for inequitable subordination)
- Blaine-Hays Constr. Co. v. Union Planters Nat’l Bank (In re Edgewater Motel, Inc.), 121 B.R. 962 (Bankr. E.D. Tenn. 1988) (negligent conduct not enough for inequitable subordination)
- Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76 (3d Cir. 1999) (standard for reviewing bankruptcy court findings of law and fact)