646 F.3d 90
1st Cir.2011Background
- BNEC issued six unsecured debt series totaling over $700 million; three senior (1973, 1974, 1986) and three junior (1984, 1987, 1989); NY law governs via indentures.
- Junior indentures subordinate to senior and require senior payments before any junior payments on dissolution, liquidation, or bankruptcy.
- BNEC filed Chapter 7 on Jan 7, 1991; Trustee Branch made three distributions satisfying senior principal and pre-petition interest through 1999, plus fees/reserves.
- May 23, 2001 Trustee sought a fourth distribution to junior noteholders; Senior Trustee objected, arguing post-petition interest belongs to seniors.
- Bankruptcy court granted distribution; appellate history revisited whether post-petition interest is included; remand led to fact-intensive inquiry on intent.
- Bankruptcy court on remand found the junior noteholders did not intend to subordinate to post-petition interest; district court affirmed; this circuit affirms.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether post-petition interest is covered by the subordination provisions | Senior Trustee argued for priority of post-petition interest | Junior Trustees contended explicit language required for post-petition interest priority | No; ambiguity resolved against post-petition priority unless explicit language shown |
| What law governs interpretation of the subordination provisions | Argues law-in-force and bankruptcy backdrop govern interpretation | Argues New York contract law without per se Rule of Explicitness governs | New York contract-law ambiguity approach applied; backdrop considered but not dispositive |
| Whether the bankruptcy court's finding of intent was clearly erroneous | Argues factual findings misinterpret evidence | Argues findings supported by expert and documentary evidence | Findings are not clearly erroneous; supported by substantial extrinsic evidence |
Key Cases Cited
- Continental Illinois Nat'l Bank & Trust Co. v. First Nat'l City Bank of N.Y. (In re King Res. Co.), 528 F.2d 789 (10th Cir. 1976) (classic Rule of Explicitness lineage cited by other circuits)
- Bankers Life Co. v. Mfrs. Hanover Trust Co. (In re Kingsboro Mortg. Corp.), 514 F.2d 400 (2d Cir. 1975) (early subordination precedence for explicitness rule)
- In re Time Sales Fin. Corp., 491 F.2d 841 (3d Cir. 1974) (Rule of Explicitness framework behind prior decisions)
- Chemical Bank v. First Trust of New York (In re Southeast Banking Corp.), 156 F.3d 1114 (11th Cir. 1998) (regards interpretation of subordination under New York law)
- Morgan Stanley Grp. Inc. v. New Eng. Ins. Co., 225 F.3d 270 (2d Cir. 2000) (extrinsic evidence in contract interpretation under NY law)