in Re Bankvest Capital Corp. v. Stephen C. Gray, as Liquidating Supervisor for BANKVEST CAPITAL CORP.

United States Court of Appeals
For the First Circuit
No. 03-1613
IN RE BANKVEST CAPITAL CORP.,
Debtor.
FLEET NATIONAL BANK,
Appellee,
v.
STEPHEN C. GRAY, as Liquidating Supervisor for BANKVEST CAPITAL
CORP.; THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS FOR BANKVEST
CAPITAL CORP., a/k/a POST EFFECTIVE DATE COMMITTEE,
Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]
Before
Lipez, Circuit Judge,
Campbell, Senior Circuit Judge,
and Howard, Circuit Judge.
Charles R. Bennett, Jr. with whom Kathleen E. Cross,
David C. Kravitz and Hanify & King, P.C. were on brief for
appellants.
Sabin Willett with whom Julie Frost-Davies, Rheba Rutkowski
and Bingham McCutchen LLP were on brief for appellee.
July 12, 2004

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CAMPBELL, Senior Circuit Judge. This appeal from
diverging decisions of the bankruptcy and district courts involves
a cautionary tale about the dangers of ignoring the "automatic
stay" that takes effect upon the filing of a bankruptcy petition.
All would have been routine had Fleet National Bank ("Fleet")
declined to avail itself of certain postpetition payments tendered
to it by its bankrupt borrower Bankvest Capital Corp. ("Bankvest").
But having accepted those payments, Fleet, pursued by its
adversaries, found itself in something of a legal labyrinth. While
we have yet to receive the guidance of Ariadne's golden thread, we
seek in the following to chart a reasonable path.
I. Background
We base the following on undisputed facts as set forth in
the opinions of the bankruptcy and district courts and in the
record.
Debtor, Bankvest, was a lessor of commercial equipment
and a buyer and seller of portfolios of leases. Bankvest financed
its operations, in part, by borrowing from appellee, Fleet. An
involuntary Chapter 11 petition was filed against Bankvest on
December 17, 1999. On that date, Bankvest had three principal
credit arrangements with Fleet, consisting of a warehouse line
dated August 21, 1998 ("FBNA Warehouse Obligation"), a warehouse
line by Fleet's predecessor in interest, BankBoston, N.A., dated
June 3, 1999 ("BB Warehouse Obligation"), and a conduit facility

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1Section 362(a) states:
Except as provided in subsection (b) of this section, a
petition filed under section 301, 302, or 303 of this
title, or an application filed under section 5(a)(3) of
the Securities Investor Protection Act of 1970 [15 USCS
§ 78eee(a)(3)], operates as a stay, applicable to all
entities, of--
(1) the commencement or continuation, including the
issuance or employment of process, of a judicial,
administrative, or other action or proceeding
against the debtor that was or could have been
commenced before the commencement of the case under
this title, or to recover a claim against the
debtor that arose before the commencement of the
case under this title;
(2) the enforcement, against the debtor or against
property of the estate, of a judgment obtained
before the commencement of the case under this
title;
(3) any act to obtain possession of property of the
estate or of property from the estate or to
exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien
against property of the estate;
(5) any act to create, perfect, or enforce against
property of the debtor any lien to the extent that
such lien secures a claim that arose before the
commencement of the case under this title;
(6) any act to collect, assess, or recover a claim
against the debtor that arose before the
commencement of the case under this title;
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dated September 30, 1998. These credit arrangements were secured
by substantially all of Bankvest's assets. Fleet's secured
interest was perfected.
During the "gap period" between the filing of the
involuntary petition and the entry of the bankruptcy court's order
for relief on January 25, 2000, Fleet, aware of the bankruptcy
filing and in apparent violation of the automatic stay, 11 U.S.C.
§ 362(a),1 accepted the sum of $2,155,427 from assets or property

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(7) the setoff of any debt owing to the debtor that
arose before the commencement of the case under
this title against any claim against the debtor;
and
(8) the commencement or continuation of a
proceeding before the United States Tax Court
concerning the debtor.
While in its appellate brief Fleet denies without elucidation that
its acceptance of the gap payments violated the automatic stay, we
can find no meaningful argument to that effect. We proceed in this
opinion on the assumption, also held by the bankruptcy and district
courts, that a violation occurred and that the Liquidating
Supervisor's subsequent avoidance of Fleet's receipt of those
payments was in order except for reasons otherwise discussed
herein.
2Fleet filed this motion jointly with ARK. Thereafter,
Bankvest, the Committee, and ARK reached an agreement regarding the
treatment of ARK's claims, and ARK was dismissed as a party.
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of Bankvest's estate and applied these "gap payments" against the
BB Warehouse Obligation. On February 23, 2000, the Official
Committee of Unsecured Creditors ("the Committee") was formed.
Following discovery of the payments made to Fleet after the filing
of the bankruptcy petition, the Committee moved, inter alia, for
sanctions against Fleet for "violations of the automatic stay and
discovery obligations" pursuant to sections 105(a) and 362 of the
Bankruptcy Code. On January 30, 2001, Fleet filed an opposition to
the sanctions motion.2
In December of 2000, Fleet sold a $1.4 billion portfolio
of loans to ARK CLO 2000-1, LIMITED ("ARK"). The parties agree
that this portfolio included at least the then-existing balances of
the loans between Bankvest and Fleet. The Purchase and Sale
Agreement ("ARK Contract") purported to transfer to ARK, inter

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3Fleet did not transfer, however, its "Retained Interest,"
which included all interest payable under the related loan
documents in respect of any loans that were "Current Loans" that
accrued on or prior to the close of business on October 9, 2000,
together with other property paid or delivered in connection with
the related loan documents on or prior to the close of business on
October 9, 2000.
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alia, all of Fleet's claims and rights, including bankruptcy claims
"whether known or unknown," against Bankvest or any entity "arising
under or in connection with the related Loan Documents," as well as
all property received by Fleet under these loan documents after
October 9, 2000.3
On May 31, 2001, the bankruptcy court confirmed a joint
liquidating plan of reorganization ("Plan") for Bankvest. Neither
Fleet nor ARK -- which, as Fleet's successor, was negotiating the
Plan with Bankvest -- objected to the Plan.
Both the Committee and Fleet sought summary judgment on
the Emergency Motion for Sanctions, but the bankruptcy court denied
both motions. An evidentiary hearing was scheduled, but shortly
before the hearing, on November 12, 2001, the Committee's
Liquidating Supervisor, Stephen Gray, filed a complaint pursuant to
section 549 of the Bankruptcy Code requesting that the gap payments
made to Fleet be avoided. Fleet moved to dismiss the avoidance
proceeding and for judgment on the pleadings under Fed. R. Civ. P.
12(b)(6) and (c), asserting that Gray's avoidance claim was not
preserved under the confirmed plan, was barred by laches, and was
of no benefit to the estate. The Liquidating Supervisor and the

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Committee, following oral argument, also sought judgment on the
pleadings. The bankruptcy court denied the motions and
consolidated the avoidance claim with the Committee's emergency
motion for sanctions. All matters were tried together with the
consent of the parties in February of 2002.
During the trial, Fleet moved for judgment as a matter of
law, arguing that avoidance would be for naught. Fleet based the
latter point on its contention that if the court avoided the gap
payment transaction -- requiring Fleet to turn over to the estate
the gap payments it had received -- Fleet would simultaneously
acquire by virtue of section 502(h) of the Bankruptcy Code a valid
claim against the estate to recover those very same payments, as
Fleet's claims against the bankrupt had been fully secured prior to
the filing of the involuntary petition. The motion was denied.
On April 18, 2002, the bankruptcy court issued an opinion
finding for Gray against Fleet in the avoidance proceeding and
granting the Committee's Emergency Motion for Sanctions. Bankvest
Capital Corp. v. Fleet Boston (In re Bankvest Capital Corp.), 276
B.R. 12, 32 (Bankr. D. Mass. 2002). The bankruptcy court ordered
Fleet to pay over to the Liquidating Supervisor the amount of the
gap payments, $2,155,427, plus interest, for a total of
$2,445,924.65. In re Bankvest, 276 B.R. at 29-31. The court
further ordered the Liquidating Supervisor to hold this judgment in
escrow pending a determination of whether ARK had a claim to any

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4The Bankruptcy Code grants in a transferee who has returned
property pursuant to an avoidance action a claim in the property
transferred. Section 502(d) states, "the court shall disallow any
claim of any entity from which property is recoverable under
section . . . 550 . . . or that is a transferee of a transfer
avoidable under section . . . 549 . . . unless such entity or
transferee has paid the amount, or turned over any such property,
for which such entity or transferee is liable under section . . .
550 . . . ." It is implicit in this section that a transferee of
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part of the monies from Fleet. Id. The court ruled that Fleet's
transaction with ARK "divested [Fleet] of any claim upon return of
the Post-Petition [gap] Payments," and, therefore, found no "need
to conduct any further proceedings to determine whether Fleet's
behavior warrants subordination pursuant to section 501(c) [sic]."
Id. The court found this remedy, which caused Fleet to lose the
full amount of the gap payments, "harsh enough that it may defer
similar future behavior," so it did not rule on the contempt
contentions. Id. at 31.
Fleet appealed to the United States District Court for
the District of Massachusetts. The district court vacated the
portion of the bankruptcy court's judgment pertaining to the
avoidance claim. Contrary to the bankruptcy court, the district
court determined that Fleet had never sold to ARK its own claim to
the gap payments and was thus not divested of that claim. The
district court went on to rule that, because the postpetition
payments transferred to Fleet by Bankvest had been secured, Fleet,
as a secured creditor, could now recover them under its so-called
502(h) claim4, to which it had become entitled following

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an avoidable transfer has an allowable claim once it turns over
such property for which it is liable. See also Petitioning
Creditors of Melon Produce, Inc. v. Braunstein, 112 F.3d 1232, 1237
(1st Cir. 1997) (interpreting section 502(d) and stating, "[o]nce
the preference recipient complies with the payment or turnover
order of the bankruptcy court, it may file a proof of claim.").
Here, the appellant has brought this avoidance action pursuant to
section 549. Thus, if the avoidance action were successful, Fleet
would be required to return the gap payments pursuant to section
550 and having done so, would have, pursuant to section 502(d), a
claim to those payments. Id. Moreover, section 502(h) provides
that Fleet's claim would "be determined, and . . . allowed under
subsection (a), (b), or (c) of this section, or disallowed under
subsection (d) or (e) of this section, the same as if such claim
had arisen before the date of the filing of the petition."
Accordingly, claims of this nature are often referred to as "502(h)
claims." See, e.g., Official Comm. of Unsecured Creditors of Toy
King Distribs., Inc. v. Liberty Savings Bank, FSB (In re Toy King
Distribs., Inc.), 256 B.R. 1, 199 (Bankr. M.D. Fla. 2000).
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avoidance, thus rendering futile Gray's right to avoidance. The
district court remanded the matter to the bankruptcy court to
determine what sanction, if any, should be imposed upon Fleet to
punish its conduct in connection with its acceptance of the gap
payments. Fleet Nat'l Bank v. Gray (In re Bankvest Capital Corp.),
Nos. 02-40100-DPW and 02-40101-DPW, 2003 WL 1700978, at *8 (D.
Mass. 2003).
From the district court's judgment, Gray, as Liquidating
Supervisor for Bankvest, and the Committee (collectively,
"appellant"), now appeal.

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5The parties inform us that on February 19, 2004, the
bankruptcy court entered an order approving their settlement of the
sanctions issue. The approved settlement requires that Fleet pay
to the Liquidating Supervisor a settlement payment of $250,000,
reserves the Liquidating Supervisor's right to pursue the present
appeal, and requires, in the event that the Liquidating Supervisor
prevails in this appeal, that the settlement payment shall be
credited against any net obligation of Fleet.
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II. Discussion
A. Jurisdiction
While not earlier raised by either party, we have asked
for briefing of this court's appellate jurisdiction, noting that
the district court's appealed order might lack finality as required
by 28 U.S.C. § 158(d) and thus be non-appealable, given the remand
of the open sanctions issue to the bankruptcy court. See In re
Spillane, 884 F.2d 642, 644 (1st Cir. 1989); In re Recticel Foam
Corp., 859 F.2d 1000, 1002 (1st Cir. 1988) (stating, "a court has
an obligation to inquire sua sponte into its subject matter
jurisdiction"). The parties have responded, and, even more to the
point, they have notified us that they have settled the sole issue
left open upon remand, to wit, what sanction would be appropriate
against Fleet for its conduct in connection with its receipt and
retention of the gap payments in violation of the automatic stay.
The parties' settlement has since been approved by the bankruptcy
judge.5
Other than the issues determined by the district court
and presented on this appeal, there are now no issues remaining

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open in the case; we accordingly see no finality problem with the
appealed order. See, e.g. Estancias La Ponderosa Dev. Corp. v.
Harrington (In re Harrington), 992 F.2d 3, 5 (1st Cir. 1993). Even
if the open sanctions issue caused the order to lack finality when
first appealed, a matter we do not decide, the sanctions issue has
been finally resolved and is now moot, leaving no possibility that,
if we decide the appeal, more will be left to determine. Since the
fact of finality is clear enough now, and the parties are desirous
that the case be resolved, we see no impediment to the exercise of
our appellate jurisdiction.
B. Whether the Receiver Has The Right To Bring The Avoidance
Action
Reiterating its argument before the bankruptcy and
district courts, Fleet contends that the liquidating plan ("Plan")
did not preserve the right of Gray to bring this avoidance action.
We, like the bankruptcy and district courts, find this argument
lacking in merit.
Review is de novo. Brandt v. Repco Printers and
Lithographics, Inc. (In re Healthco Int'l, Inc.), 132 F.3d 104, 107
(1st Cir. 1997) (stating, "[w]hether such an appeal comes to us by
way of the district court or the [Bankruptcy Appellate Panel], our
regimen is the same: we focus on the bankruptcy court's decision,
scrutinize that court's findings of fact for clear error, and
afford de novo review to its conclusions of law."). Pursuant to
section 1141 of the Bankruptcy Code, the confirmation of a plan of

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6The bankruptcy court treated Gray as a trustee, stating,
"[s]ection 549 permits a trustee to avoid postpetition payments in
all but the most narrow of circumstances. The trustee, in this
case the Liquidating Supervisor, . . . ." In re Bankvest, 276 B.R.
at 30. Fleet has raised no issue as to Gray's capacity.
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reorganization binds the debtor and any entity issuing securities
or acquiring property under the plan to the provisions of the plan
and, except as otherwise provided in the plan, precludes parties
from raising claims or issues that could have or should have been
raised before confirmation but were not. See 11 U.S.C. §§ 1141(a)
and (b); 8 Lawrence P. King et al., Collier on Bankruptcy ¶ 1141.02
(15th rev. ed. 2003). Moreover, section 1123(b)(3)(B) of the
Bankruptcy Code states that a plan may provide for "the retention
and enforcement by the debtor, by the trustee, or by a
representative of the estate appointed for such purpose of any
claim or interest."6 Several circuits have concluded that,
pursuant to sections 1123 and 1141, confirmation of a plan is given
res judicata effect, which bars a debtor or trustee from bringing
avoidance actions not expressly reserved in the plan. See, e.g.,
P.A. Bergner & Co. v. Bank One, Milwaukee, N.A. (In re P.A. Bergner
& Co.), 140 F.3d 1111, 1117-18 (7th Cir. 1998); McFarland v. Leyh
(In re Texas Gen. Petroleum Corp.), 52 F.3d 1330, 1335 n.4 (5th
Cir. 1995); Harstad v. First American Bank (In re Harstad), 39 F.3d
898, 903 (8th Cir. 1994); In re Mako, 985 F.2d 1052, 1056 (10th
Cir. 1993). "The requirement that retention of the avoidance
powers be clear serves to protect the unsecured creditors and to

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ensure that post-confirmation avoidance proceedings are for their
benefit." In re Mako, 985 F.2d at 1056 (10th Cir. 1993).
Assuming, without deciding, that we follow the reasoning
of these decisions, Fleet's argument fails because the Plan
expressly provides that Gray has the right to pursue avoidance
actions:
The Liquidating Supervisor, under the
supervision of the Post-Effective Date
Committee . . . is authorized to investigate,
prosecute and, if necessary, litigate, any
Cause of Action [the definition of which
expressly includes avoidance actions] . . . on
behalf of the Debtor and shall have standing
as an Estate representative to pursue any
Causes of Action and Claim objections, whether
initially filed by the Debtor or the
Liquidating Supervisor . . . .
Fleet contends that this language does not preserve the right to
pursue claims as it fails specifically to mention the claim against
Fleet. Compare D&K Props. Crystal Lake v. Mut. Life Ins. Co. of
N.Y., 112 F.3d 257, 260-61 (7th Cir. 1997) (stating, "[a] blanket
reservation that seeks to reserve all causes of action reserves
nothing."). We disagree. See Bergner, 140 F.3d at 1117 (stating,
"[t]he courts that have spoken of the need for 'specific' and
'unequivocal' language have focused on the requirement that plans
unequivocally retain claims of a given type, not on any rule that
individual claims must be listed specifically.") (citations
omitted); Harstad, 39 F.3d at 903 (ruling that debtors "should have
specifically reserved the right to pursue claims of this sort post-

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7As the Committee's success on appeal is contingent upon
proving that Fleet is divested of a claim to the amounts returned
upon avoidance of the gap payments, Fleet's judicial estoppel
argument is potentially dispositive. While the fact that Fleet
prevails in this appeal on a different ground might relieve us from
consideration of that defense, its character as a preliminary and
potentially complete bar to appellant's case makes it advisable
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confirmation."); Cohen v. Tic Fin. Sys. (In re Ampace Corp.), 279
B.R. 145, 160 (Bankr. D. Del. 2002) (stating, "the Bankruptcy Code
contemplates that debtors may seek confirmation of their plans
prior to litigating all avoidance actions . . . [t]herefore, in my
opinion, a general reservation in a plan of reorganization
indicating the type or category of claims to be preserved should be
sufficiently specific to provide creditors with notice that their
claims may be challenged post-confirmation.") (citations omitted).
The cases upon which Fleet primarily relies involve provisions of
a far more general nature. See D&K Properties Crystal Lake, 112
F.3d at 259 (plan purported to reserve "all causes of action
existing in favor of the Debtor."); Harstad, 39 F.3d at 902 (plan
purported to reserve "any right of Debtors to recover assets
pursuant to the provisions of the Bankruptcy Code."). The Plan, we
believe, adequately preserves Gray's right to bring avoidance
actions.
C. Judicial Estoppel and Laches
Fleet argues that the doctrine of judicial estoppel bars
appellant from arguing that Fleet is divested of its claim to the
avoided gap payments.7 Fleet argues that appellant has taken a

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that we address it.
8As we find that the doctrine of judicial estoppel does not
apply here, we need not address whether Fleet waived the judicial
estoppel argument.
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position here that contradicts its position in a prior adversary
proceeding against ARK, in which Gray argued that ARK did not have
an interest in the avoided gap payments. Fleet contends that
appellant now takes the position that Fleet is divested of its
claim to these proceeds because it transferred the claim to ARK.
Even assuming that appellant's current position contradicts its
position in the ARK adversary proceeding, Fleet's argument fails.8
The doctrine of judicial estoppel takes effect when the
proponent has shown that the party to be estopped "succeeded
previously with a position directly inconsistent with the one [it]
currently espouses." Lydon v. Boston Sand & Gravel Co., 175 F.3d
6, 13 (1st Cir. 1999); see also New Hampshire v. Maine, 532 U.S.
742, 749 (2001) (stating, "[t]his rule, known as judicial estoppel,
'generally prevents a party from prevailing in one phase of a case
on an argument and then relying on a contradictory argument to
prevail in another phase.'") (quoting Pegram v. Hedrich, 530 U.S.
211, 227 n.8 (2000)). In determining whether the party "succeeded"
in a prior proceeding, we look to whether the prior forum "accepted
the legal or factual assertion alleged to be at odds with the
position advanced in the current forum . . . ." Gens v. Resolution
Trust Corp. (In re Gens), 112 F.3d 569, 572-73 (1st Cir. 1997).

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Gray and the Committee did not succeed in the adversary
proceeding against ARK. On June 3, 2002, Gray filed a complaint
containing the factual allegations that Fleet believes contradict
appellant's position here. On July 3, 2002, ARK answered, denying
those allegations. On October 10, 2002, before any substantive
proceedings were scheduled to begin, the action was settled. On
November 13, 2002, the bankruptcy court approved the settlement.
At no time did the bankruptcy court accept the legal or factual
assertions of the complaint. See also Bates v. Long Island R.R.
Co., 997 F.2d 1028, 1038 (2d Cir. 1993) (stating, "'settlement
neither requires nor implies any judicial endorsement of either
party's claims or theories, and thus a settlement does not provide
the prior success necessary for judicial estoppel.'") (quotations
omitted); Water Technologies Corp. v. Calco Ltd., 850 F.2d 660,
665-66 (Fed. Cir. 1988); Edwards v. Aetna Life Ins. Co., 690 F.2d
595, 599 (6th Cir. 1982) (stating, "[i]f the initial proceeding
results in settlement, the position cannot be viewed as having been
successfully asserted.") (citations omitted). Accordingly, the
doctrine of judicial estoppel does not bar appellant from arguing
that Fleet is divested of its claim to the gap payments.
Further, Fleet argues that because Bankvest did not seek
avoidance of the gap period payments before Fleet's sale to ARK,
the avoidance action came too late. This laches-type argument
fails. Rejecting a similar contention below, the bankruptcy court

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said, "Fleet's argument that it was lulled into believing that no
adversary proceeding would be commenced and therefore it was
somehow duped into withdrawing its objection to confirmation is
simply wrong." The court did not abuse its discretion. See Ansin
v. River Oaks Furniture, Inc., 105 F.3d 745, 757 (1st Cir. 1997)
(stating, "[w]e review the district court's determination as to
laches for abuse of discretion.").
In determining whether laches applies, we ask whether the
plaintiff's delay in bringing suit was unreasonable and whether the
defendant was prejudiced by the delay. Puerto-Rican American Ins.
Co. v. Benjamin Shipping Co., Ltd., 829 F.2d 281, 283 (1st Cir.
1987). The analogous statute of limitations determines where the
burden of proof falls; if a plaintiff files a complaint within the
analogous statutory period, the burden of proving unreasonable
delay and prejudice falls on the defendant. Id. Here, Gray
brought the avoidance action well within the two-year statute of
limitations. 11 U.S.C. § 549(d) (stating, "[a]n action or
proceeding under this section may not be commenced after the
earlier of -- (1) two years after the date of the transfer sought
to be avoided; or (2) the time the case is closed or dismissed.").
Accordingly, the burden is on Fleet to prove unreasonable delay and
prejudice. Puerto-Rican American Ins. Co., 829 F.2d at 283. It
has not met this burden.

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Gray was not appointed until months after the sale to
ARK. Thereafter, Gray brought this action only ten months after
Fleet's disclosure of the gap payments and little more than five
months after he was appointed. Any delay was not unreasonable.
Lastly, Fleet argues that the Committee's silence in the
face of its "consensual offer to reverse the transaction" bars the
avoidance action. Fleet relies, however, entirely on cases that
are distinguishable and largely immaterial here. See Patriot
Cinemas, Inc. v. General Cinemas Corp., 834 F.2d 208, 212 (1st Cir.
1987) (party represented that it would not pursue an antitrust
count and subsequently repudiated this intention); Lydon, 175 F.3d
at 13 (defendant argued to First Circuit that federal law was
plaintiff's exclusive remedy where, at underlying arbitration
proceeding, defendant had succeeded with precisely the opposite
argument); Hurd v. DiMento & Sullivan, 440 F.2d 1322, 1323 (1st
Cir. 1971) (plaintiff who wrote to district court in a motion for
continuance that defendant was unable to represent plaintiff was
estopped from claiming in front of First Circuit that defendant had
agreed to represent her). We therefore reject this argument.
D. The Avoidance Action
1. Whether Fleet Divested Itself of the 502(h) Claim
We next consider whether Fleet would have a valid

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9As we have noted in footnote 1, supra, Fleet suggests,
without elucidation, that the two lower courts may both have erred
in determining that Fleet violated the automatic stay. Were Fleet
to establish that its retention of the gap payments was authorized
by the Bankruptcy Code, an avoidance action pursuant to section 549
of the Bankruptcy Code might indeed be unavailing. 11 U.S.C. §§
549 (a)(2)(A)-(B) (trustee may avoid postpetition transfer of
property that is not authorized under this title or by the court or
is authorized only under section 202(f) or 542(c) of this title
except as provided by subsections (b) and (c)). But as said, Fleet
has provided no coherent grounds for us to conclude that its
retention of the gap payments was permissible and therefore that
avoidance would be improper. Accordingly, we shall assume that the
decisions below were correct insofar as they found that the
avoidance would otherwise be in order, leaving open only issues
pertaining to whether under section 502(h) of the Bankruptcy Code,
Fleet having been a secured creditor, has now a right to retain the
avoided sums rather than a duty to return them permanently to Gray,
the Liquidating Supervisor.
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502(h)claim upon avoidance of the gap payments.9 See footnote 4,
supra.
Gray brought this avoidance action pursuant to section
549 of the Bankruptcy Code, which provides that a trustee may avoid
certain post-petition transfers of property. 11 U.S.C. § 549.
"Except as otherwise provided in this section, to the extent that
a transfer is avoided under section . . . 549 . . . the trustee may
recover, for the benefit of the estate, the property
transferred . . . from -- (1) the initial transferee of such
transfer or the entity for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such initial
transferee." 11 U.S.C. § 550(a).
Here, the transaction at issue is Bankvest's postpetition
transfer of $2,155,427 in assets or property to Fleet and Fleet's

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application of this sum to Bankvest's BB Warehouse Obligation. If
avoidance were in order, Gray would ordinarily be entitled to
recover the $2,155,427 from Fleet and to return it to Bankvest's
estate. Id. See also, Max Sugarman Funeral Home, Inc. v. A.D.B.
Investors, 926 F.2d 1248, 1253-58 (1st Cir. 1991).
When grounds for avoidance are found, however, a creditor
in Fleet's shoes becomes entitled to pursue whatever claim it may
have had in the avoided sum against the debtor, here Bankvest,
unless, of course, (as the bankruptcy court, in fact, found in
Fleet's case) the creditor has somehow relinquished its claim to
the avoided interest. 11 U.S.C. § 502(h) (stating, that the claim
that arises from "the recovery of property under
section . . . 550 . . . shall be determined, and shall be
allowed . . . the same as if such claim had arisen before the date
of the filing of the petition."); Ralar Distribs., Inc. v.
Rubbermaid, Inc. (In re Ralar Distribs., Inc.), 4 F.3d 62, 66 n.2
(1st Cir. 1993) (stating, "[f]inally, arguably no 'unjust'
enrichment would result were [transferor-debtor] to recover from
[transferee]. If [transferee] were required to disgorge, it could
file a proof of claim for the amount of the avoided transfer . . .
which would be entitled to a pro rata distribution from the
[transferor-debtor] estate."); Verco Indus. v. Spartan Plastics (In
re Verco Indus.), 704 F.2d 1134, 1138 (9th Cir. 1983) (stating,
"[a]lthough we acknowledge that [transferor-debtor] has a valid

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claim for the unpaid amount of the note from Spartan, we also
believe that [transferee] would have a claim against
[transferor-debtor] for the loss it suffered when the transfer was
set aside. [We have] stated that even where the transferee is
responsible for the transfer being invalidated as fraudulent, that
factor does not prevent the transferee from asserting a claim
against the transferor . . . [a]ccordingly, [transferee] has a
claim against the estate which may be set-off against
[transferor-debtor's] recovery on the note . . . . [transferee]
concedes that [transferor-debtor] is entitled to invalidate the
transfer and retain the property for the benefit of its
creditors.") (citations omitted); Irving v. Eiler (In re Cohen),
305 B.R. 886, 898 (B.A.P. 9th Cir. 2004) (stating, "[n]or does
recovery from a transferee under avoiding powers unfairly deprive
the transferee of rights against the estate. Upon recovery, the
transferee has a claim that is treated as a prepetition claim. 11
U.S.C. § 502(h). It is timely to file such a proof of claim within
30 days after the judgment becomes final . . . . The debt will not
be discharged unless it is 'provided for by the plan.'") (quoting
11 U.S.C. § 1328(a)) (citations omitted); In re Dunes Hotel
Associates, No. C/A 94-75715, 1997 WL 33344253, at *12-*13 (Bankr.
D.S.C. Sept. 26, 1997) (stating, "the Bankruptcy Code and Rules set
out a specific procedure for the filing and allowance of a claim by
the transferee of an avoided transfer . . . Congress intended that

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such creditors should have a claim against the estate by reason of
the avoidance. See 4 Collier on Bankruptcy ¶ 502.LH[10] at
502-113-15 (1997) (discussing expansion by Congress of the reach of
Section 502(h) bringing it more in line with prior law); . . . [i]t
is clear to the Court that even upon avoidance, an event which has
not yet occurred and which in fact is contrary to the present law
of the case, [the creditor from whom the avoidance would recover
property] would have a claim which would provide it standing to
seek dismissal of the case.") (citations omitted); In re Toronto,
165 B.R. 746, 753 (Bankr. D. Conn. 1994).
In the instant case, the bankruptcy court held that
Fleet, by reason of its transaction with ARK, had divested itself
of its 502(h) claim to the avoided sums. In the court's view, that
claim, although contingent at the time of the sale, was included
within the assets Fleet sold to ARK along with its loan portfolio.
Under this analysis, Fleet was left without any 502(h) claim to
invoke after avoidance. It was thus bereft of any avenue of relief
as a creditor of Bankvest. As ARK appears to have released all of
its own claims against Bankvest and its representatives, the
bankruptcy court's decision resulted in the gap sums becoming
property of the estate.
The district court disagreed with the bankruptcy court's
analysis. Instead, it read the ARK Contract as not having resulted
in the sale to ARK of Fleet's then inchoate 502(h) claim. That

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claim, the court held, now entitles Fleet -- as an original secured
creditor of Bankvest -- to prevail over Gray's avoidable right.
Appellant asks us to endorse the bankruptcy court's result and to
reject that of the district court.
To resolve the question of whether in the ARK transaction
Fleet divested itself of its 502(h) claim, we must interpret
Fleet's contract with ARK. In so doing, we apply New York law,
following a stipulation written into the ARK Contract providing
that the law of the state of New York governs its interpretation.
See McCarthy v. Azure, 22 F.3d 351, 356 n.5 (1st Cir. 1994)
(concluding court should generally honor reasonable choice-of-law
provision in a contract); Matter of Stoecker, 5 F.3d 1022, 1028
(7th Cir. 1993) (stating, "[c]ontractual stipulations concerning
choice of law ordinarily are honored . . . .").
According to New York law, construction of an agreement
presents a question of law. Non-Linear Trading Co., Inc. v.
Braddis Assocs., Inc., 675 N.Y.S.2d 5, 10 (N.Y. App. Div. 1998).
Accordingly, we review the issue of contract interpretation de
novo. See Sormani v. Orange County Comm. College, 659 N.Y.S.2d
507, 507 (N.Y. App. Div. 1997).
We do so notwithstanding Fleet's contention that these
proceedings are not the appropriate place to consider the meaning
of a contract between ARK and Fleet, ARK not being a party, no
extrinsic evidence concerning the contract having been presented,

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10"Participated Loans" are any loans listed in the contract
other than the "Nonparticipated Loan Agreements" listed in Annex D
of the contract. The Bankvest Loans are "Participated Loans."
-23-
and appellant being a stranger to the contract. We reject Fleet's
contention. The terms of the ARK Contract -- a sophisticated,
detailed legal document drawn up to guide a business transaction --
seem to us sufficiently unambiguous to allow interpretation without
extrinsic evidence and in ARK's absence. See Bethlehem Steel Co.
v. Turner Constr. Co., 141 N.E.2d 590, 593 (N.Y. 1957); see also,
Ronnen v. Ajax Elec. Corp., 671 N.E.2d 534, 536-37 (N.Y. 1996);
Lui v. Park Ridge at Terryville Ass'n, Inc., 601 N.Y.S.2d 496, 498
(N.Y. App. Div. 1993) (stating, "[i]t is settled that the
responsibility to interpret a contract falls upon the court, 'which
must ascertain the intention of the parties from the language which
they have employed.' The 'interpretation of an unambiguous
contract provision is a function for the court, and matters
extrinsic to the agreement may not be considered when the intent of
the parties can be gleaned from the face of the instrument.'")
(citations omitted).
The ARK Contract governed Fleet's sale to ARK of a $1.4
billion portfolio of loans, including the loans to Bankvest. It
is, in effect, two contracts in one. First, it is an agreement
between Fleet and JJDD LLC, an intermediary, through which Fleet
sold to JJDD LLC a "100% undivided participation interest in the
Participated Loans10 . . . and the Transferred Rights related

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11Gray does not contend that the 502(h) claim was included in
the "Nonparticipated Transferred Rights", so we need only address
the participation interest and, in particular, the "Transferred
Rights" related thereto.
-24-
thereto and . . . the Nonparticipated Transferred Rights." Second,
it is an agreement between JJDD LLC and ARK, through which JJDD LLC
sold to ARK -- in exchange for the purchase price and assumption of
the "Assumed Obligations" -- the 100% undivided participation
interest in the Participated Loans, the Nonparticipated Transferred
Rights11, and all of JJDD LLC's "rights remedies, interests, powers
and privileges" under its agreement with Fleet. Since JJDD
transferred to ARK everything transferred to it from Fleet, the
contract, for present purposes, operates essentially as an
agreement between Fleet and ARK.
The ARK Contract defines "Transferred Rights" as, inter
alia, any and all of Fleet's and JJDD LLC's right, title and
interest in the "related Loans and Commitments," but excluding the
"Retained Interest, if any related thereto." The definition of
"Transferred Rights" further includes, inter alia, "to the extent
related" to the aforementioned right, title and interests, the
following:
all claims (including 'claims' as defined in
Bankruptcy Code § 101(5)), suits, causes of
action, and any other right of [Fleet] . . .
whether known or unknown, against the related
[borrower under each loan transferred], the
related [entity other than the borrower and
lender that is obligated under each loan
transferred], if any, or any of their

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12The ARK Contract defines "Retained Interest" as follows:
'Retained Interest' means, with respect to each Loan
Agreement, (i) all interest and commitment, facility,
letter of credit and other similar ordinary course fees
. . . payable under the related Loan Documents in respect
of any Loan or Loans that are Current Loans and the
Commitments related thereto, if any, that accrue during
the period on or prior to the close of business on
[October 9, 2000], together with any other property paid
or delivered in connection with the related Loan
Documents . . . prior to the close of business on
[October 9, 2000]; provided, however, that unless such
payment by the applicable Borrower is made (A) within 30
days of the due date thereof . . . and (B) before a
failure by the applicable Borrower to pay any other
amount under the Loan Documents within 30 days of the due
date thereof after . . . and any other accrued amounts
due thereafter shall be part of the Transferred Rights,
and Seller shall not be entitled to any part thereof . .
. .
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r e s p e c t i v e A f f i l i a t e s , a g e n t s ,
representatives, contractors, advisors, or any
other Entity that in any way is based upon,
arises out of or is related to any of the
foregoing . . . .
The bankruptcy court concluded that Fleet's then unknown and
inchoate 502(h) claim fell within the broad definition of
"Transferred Rights," but the district court disagreed, being of
the opinion that the 502(h) claim fit within the definition of
"Retained Interest."12 Fleet Nat'l Bank, 2003 WL 1700978 at *7-*8.
As discussed below, we think the bankruptcy court erred in
determining that Fleet's 502(h) claim fell within the "Transferred
Rights" definition. We also question the district court's view
that the 502(h) claim fell expressly within the "Retained Interest"

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13The definition of "Retained Interest" may be divided into two
essential parts -- namely, "ordinary course fees ... payable under
the related Loan Documents in respect of any Loan or Loans that are
Current Loans and the Commitments related thereto" and "any other
property paid or delivered in connection with the related Loan
Documents on or prior to the close of business on [October 9,
2000]." The 502(h) claim does not seem specifically to fall within
either section.
The former is unequivocally limited to loans that are "Current
Loans and the Commitments related thereto." T h e A R K C o n t r a c t
defines "Current Loans" as "the Loans set forth on Annex B." While
that definition, alone, would indicate that all of the loans on
Annex B are Current Loans, Annex B contains language which further
limits Current Loans to those listed as "CURR." In particular,
Annex B contains a spreadsheet with five columns, one of which is
entitled, "Current Loans ("CURR")." Under that column, the
Bankvest loans are listed as "NON-CURR." Accordingly, they do not
appear to fall within the definition of "Current Loans" and,
therefore, do not appear to be covered by this section of the
"Retained Interest" definition.
As to the latter, the result is the same. To be sure, Fleet
received the gap payments prior to January 25, 2000, so the gap
payments themselves certainly constitute property paid or delivered
prior to October 9, 2000. The problem is that Fleet's 502(h) claim
does not appear to have arisen prior to October 9, 2000. Fleet,
itself, does not dispute that the 502(h) claim arose after October
9, 2000. In its brief, it stated, "Fleet believes a 502(h) Claim,
which 'aris[es] from the recovery of property under Section . . .
550,' has not arisen and will not arise until the Debtor actually
recovers the avoided transfer." Accordingly, while Fleet's current
502(h) claim relates to the pre-October 9th payments that were not
sold to ARK, the claim itself does not appear to be property paid
or delivered prior to that date.
Thus, any conclusion that the 502(h) claim falls within the
definition of "Retained Interest" would seem doubtful.
-26-
clause.13 But since Fleet, in any event, neither sold to ARK the
gap payments themselves, nor, as discussed below, its 502(h) claim
relating to them, we conclude that it never divested itself of the
latter. That being so, Fleet is entitled, as the district court
ruled, to retain and pursue its 502(h) remedy now.

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In support of its contention that the 502(h) claim fit
within the "Transferred Rights" definition, appellant argues that
the 502(h) claim is a claim of right of Fleet, either known or
unknown at the time of the agreement, against a borrower, Bankvest,
of a loan transferred in the ARK Contract and, therefore, fell
squarely within the definition of "Transferred Rights."
The clause defining "Transferred Rights", however, must
be read in light of the ARK Contract's definitions of other terms
contained within or related to that clause. Thus, while it may
well be that claims "known or unknown" encompass future-arising
claims such as a subsequent 502(h) claim, the loans transferred
under the ARK Contract, as defined, did not include the portions
thereof that were not outstanding under Schedule 1, nor did they
include claims unrelated to Schedule 1 loans. Neither the gap
payments nor claims relating to them formed part of the scheduled
loans.
Under the ARK Contract, ARK received Fleet's "right,
title, and interest in, to and under the related Loans and
Commitments, if any, and to the extent related thereto . . . all
claims (including 'claims as defined in Bankruptcy Code § 101(5)),
suits, causes of action, and any other right . . . whether known or
unknown . . . ." (emphasis added). "Loans" are defined as, "with
respect to each Loan Agreement, the loan(s) outstanding under such
Loan Agreement in the amount(s) specified in Schedule 1, and

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14As they refer to the same amounts, there is no reason to
believe that there is a meaningful distinction between the "Loans"
and "Commitments" in this case.
-28-
includes the note(s) (if any) evidencing such loan(s) issued under
such Loan Agreement . . . .’" (emphasis added). "Loan Agreement"
is defined as any document identified as such on Annex A of the
contract. The Bankvest loans are listed as loan agreements on
Annex A. Schedule 1 incorporates the amounts of the loans as
listed in Annex B.
Thus, in selling to ARK "the related Loans and
Commitments," Fleet sold only the "loan(s) outstanding under such
Loan Agreement in the amount(s) specified in Schedule 1," and in
selling "claims" it did so only to the extent related thereto (i.e.
related to the outstanding loans specified in Schedule 1).
Under this same provision in Schedule 1 is provided a
definition of "Commitments." Similar to "Loans", "Commitments"
are, with respect to each Loan Agreement that provides for a
commitment by Fleet to make a Loan or Loans, "the principal balance
of the commitments . . . set forth . . . on Annex B."14 (emphasis
added).
It is undisputed that Fleet sold to ARK the amount
outstanding on the BB Warehouse Obligation after deduction of the
gap payments from that amount. The amount listed in Annex B as
outstanding on the BB Warehouse Obligation reflects the deduction
of $2,155,427 caused by the application of the gap payments. From

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the definition of "Transferred Rights" together with the
definitions of "Loans" and "Commitments", it is apparent that
"Transferred Rights" includes only those claims and rights under
the Bankvest loan relating to the aforementioned outstanding
amount, which does not include the gap payments. A fortiori, any
intangible rights, like Fleet's later-established 502(h) claim
relating to the gap payments, were not transferred to ARK by the
"Transferred Rights" provision. We interpret the ARK Contract,
therefore, as not resulting in a transfer by Fleet to ARK of
Fleet's later-arising 502(h) claim relative to the gap payments.
We conclude, therefore, that Fleet has not divested itself of the
502(h) claim. We reach the same result on this point as the
district court, albeit by a slightly different path.
2. Whether Fleet's 502(h) Claim Is Secured
We next ask whether Fleet's 502(h) claim is secured or
unsecured. The district court concluded that, by operation of
section 502(h), Fleet would receive a secured claim upon avoidance
-- the same secured status that it had prior to the date the
petition was filed here. The district court stated, "[s]ection
502(h) in turn provides that a claim arising from the recovery of
property under such circumstances is to be addressed 'the same as
if such claims had arisen before the date of filing,' i.e., prior
to October 9, 2002." In re Bankvest Capital Corp., 2003 WL 1700978
at *7.

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Appellant argues that section 502(h) merely provides that
a claim thereunder shall be allowed as if it had arisen prepetition
and does not relate to whether the claim is secured or unsecured.
Section 502(h) provides as follows:
A claim arising from the recovery of property
under section 522, 550, or 553 of this title
shall be determined, and shall be allowed
under subsection (a), (b), or (c) of this
section, or disallowed under subsection (d) or
(e) of this section, the same as if such claim
had arisen before the date of the filing of
the petition.
Contrary to appellant, we believe the natural import of this
language -- especially the words, "shall be determined, and shall
be allowed . . . the same as if such claim had arisen before the
date of the filing of the petition" -- is that the 502(h) claim
takes on the characteristics of the original claim, including, in
this case, its secured status. While "allowed" would seem to refer
mainly to claimant's right to participate in any dividend from the
bankruptcy estate, "determine" is used variously in the Bankruptcy
Code, with one usage being the "determination" of secured status.
11 U.S.C. § 506. We think the statute can be fairly read to imply
that the secured or unsecured nature of the claim will be
determined "the same as if such claim had arisen before the date of
the filing of the petition." Certainly, we can see no reason, nor
any indication of legislative intent in § 502(h), to strip a
secured creditor of its secured claim in these circumstances.
Indeed, to do so would seem manifestly unfair. Infra.

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Such case law as there is provides general support to our
interpretation. In In re Verco, the Ninth Circuit stated, "502(h)
serves to reinstate existing claims where property is recovered by
the trustee," thereby suggesting that the 502(h) claim would have
the same secured status as the transferee's prepetition claim.
704 F.2d at 1139 (9th Cir. 1983). The Verco court went on to say
"'the modern view is that a transferee guilty of fraudulent
behavior may nevertheless prove a claim against a bankrupt
estate . . . [a] rule to the contrary would allow the estate to
recover the voidable conveyance and to retain whatever
consideration it had paid therefor. Such a result would clearly be
inequitable.'" Id. at 1138 (quoting Misty Management Corp. v.
Lockwood, 539 F.2d 1205, 1214 (9th Cir. 1976)). A similarly
inequitable result would occur here if Fleet's prepetition secured
claim became an unsecured 502(h) claim after avoidance; for the gap
payments would then presumably be distributed among other
creditors, thus providing a windfall to the estate and depriving
Fleet of the amount to which it was entitled. Fleet, it is true,
acted improperly, but that impropriety can be remedied, and under
the recent settlement will be remedied, by an appropriate sanction.
See footnote 5, supra.
In County of Sacremento v. Hackney (In re Hackney), the
bankruptcy court, applying section 502(h) to a prepetition
nondishargeable claim, expressed the opinion that the language of

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15While some of these articles discuss preferences (which are
governed by section 547) rather than postpetition payments such as
those at issue here (which are governed by section 549), both
preferences and postpetition payments are avoidable under section
550 and are, therefore, governed by section 502(h). Adams v.
Hartconn Assocs., Inc. (In re Adams), 212 B.R. 703, 713-14 (Bankr.
D. Mass. 1997) ("A similar flaw [to the Debtor's reliance on § 547]
is present in the Debtor's reliance on 11 U.S.C. § 549. . . . But,
as with § 547, nothing would be achieved by recovering payment to
a secured creditor who in any event is entitled to the payment
ahead of other creditors.").
-32-
section 502(h) was less than clear on whether the claim given a
transferee was the same claim as existed earlier. 93 B.R. 213, 216
(Bankr. N.D. Cal. 1988). Nonetheless, the court concluded that the
policies of bankruptcy "are best satisfied if a nondischargeable
claim is reinstated under 11 U.S.C. § 502(h)." Id. at 218. The
court noted that, "[w]hile it is difficult to anticipate what
policy arguments might be made in connection with other types of
transfers and claims, the court can see no obvious injustice that
would result from such a rule in other contexts." Id. at 219; see
also, In re Moody, 131 F. 525, 530 (N.D. Iowa 1904) (stating that
the trustee is not entitled to avoid transfer while retaining the
consideration received).
Scholars likewise appear to support this interpretation.15
See Rafael I. Pardo, On Proof of Preferential Effect, 55 Ala. L.
Rev. 281, 281 (2004) ("[P]referred creditor is granted the same
legal rights it had before the transfer . . . ."); David Gray
Carlson, Security Interests in the Crucible of Voidable Preference
Law, 1995 U. Ill. L. Rev. 211, 356 (1995) ("Payments received by a

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secured party are analytically different. Prior to bankruptcy, the
'payment' extinguished the antecedent debt. Once the payment is
returned, it ought to be the case that the old debt, once dead, is
now revived. This is universally assumed to be true, and § 502(h)
more or less supports this conclusion . . . ."); Harry M.
Flechtner, Preferences, Post-petition Transfers, and Transactions
Involving a Debtor's Downstream Affiliate, 5 Bankr. Dev. J. 1, 20
(1987) ("To the extent a transfer satisfied a claim against the
debtor, recovery of the transfer as a preference or voidable
post-petition transfer restores the claim."); Michael F. Jones,
Structuring the Deed in Lieu of Foreclosure Transaction, 19 Real
Prop. Prob. & Tr. J. 58, 64-65 (1984) ("Should the deed-in-lieu
transaction ultimately be avoided under sections 544, 547 or 548,
then the [lender] will be returned substantially to the status quo
ante with its status being that of a holder of a prepetition claim
existing at the time of the filing of the debtor's petition.").
The foregoing seems to us sensible. We hold that upon
avoidance of the gap payments, Fleet would become entitled to a
secured claim to the gap payments pursuant to section 502(h).
Appellant argues, however, that this is no ordinary
section 502(h) case since Fleet, postpetition, sold to ARK "any and
all of . . . [its] right, title, and interest in" the Bankvest
loans and "all Lender Collateral and security of any kind in
respect" of those loans. Fleet, appellants insists, relinquished

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the very same property that had made it a secured creditor.
Appellant notes that to be a secured creditor Fleet must be the
owner of a "lien," which is defined in the Code as a "charge
against or interest in property to secure payment of a debt or
performance of an obligation." 11 U.S.C. §§ 101(37) & 101(51).
We see little merit to this contention. As already
noted, Fleet's entitlement to be treated as a secured creditor
relative to its 502(h) claim rests on section 502(h)'s proviso that
its claim shall be determined and allowed "the same as if such
claim had arisen before the date of the filing of the petition."
At such time, Fleet's claim to what were to become the gap payments
was fully secured. It is Fleet's status as a secured creditor at
that time, not later, that determines the nature of its present
502(h) claim. As the case law and commentators cited above
indicate, the trustee's recovery of the transfer restores the
original claim, with the transferee's status becoming that of the
holder of a prepetition claim existing at the time of the filing of
the debtor's petition. At that time, Fleet's interest in the
Bankvest loans was fully secured. What happened to Fleet's
security after it received the gap payments is essentially
irrelevant.
By the time the ARK Contract was consummated, Fleet was
in possession of the gap payments themselves which, under its loan
arrangements with Bankvest, had, of course, been owed to it by

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Bankvest and, but for the bankruptcy, were properly received by it
in extinction of Bankvest's debt. Fleet, having ostensibly been
paid off as to the gap indebtedness by the debtor, had no further
interest in the security relative to those payments. Indeed, Fleet
did not purport to transfer any security relating to the gap
payments themselves to ARK. As discussed earlier, the gap payments
and claims pertaining thereto were not included in the transferred
assets.
In any event, what is crucial under section 502(h) is
Fleet's undoubted status as a fully secured creditor relative to
the gap payments as of the time of the filing of the petition. It
is this which validates Fleet's current claim. The present issue
is not a claim against security existing at the time of avoidance
but a claim as to the gap payments themselves. See Adams v.
Hartconn Assocs., Inc. (In re Adams), 212 B.R. 703, 713-14 (Bankr.
D. Mass. 1997) (Secured creditor received postpetition rent
payments. Subsequently, property was sold in foreclosure sale
presumably extinguishing creditor's secured interest. In action to
avoid those transfers, the court concluded, despite possible
intervening loss of security interest, that because the transferee
would simply receive the payments back upon disbursement "nothing
would be achieved by recovering payment to a secured creditor who
in any event is entitled to the payment ahead of other creditors."
The court did not discuss whether creditor had security interest at

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time of avoidance, thereby supporting the notion that such an
inquiry is not germane.).
Lastly, appellant argues that even if Fleet would
otherwise receive a secured claim, it is barred from litigating
this issue because the confirmed Plan rendered Bankvest's assets
free and clear of liens and the confirmation of a plan of
reorganization is given res judicata effect. The Plan provides
that, upon confirmation, all of Bankvest's assets (including causes
of action and "proceeds and recoveries on Causes of Action"),
"wherever situated," vest in the debtor free and clear of all
liens, claims, and encumbrances, other than those specifically
reserved in the Plan. Fleet did not object to the Plan. Appellant
argues that since the term "proceeds and recoveries" clearly
encompasses the amounts received under the avoidance action, these
amounts return to the estate free and clear of all liens save those
specified in the plan. Accordingly, it argues, Fleet's failure to
preserve the possibility of asserting a security interest after
being forced to return the gap payments bars it from asserting that
interest here. The district court did not address this argument,
but even if it had, our review would be de novo. Jamo v. Katahdin
Fed. Credit Union (In re Jamo), 283 F.3d 392, 399 (1st Cir. 2002).
Even assuming that appellant's construction of the Plan is correct,
its argument fails.

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The term "res judicata" is frequently used to refer to
either claim preclusion or issue preclusion, but appellant does not
specify the theory upon which it relies. It does, however, rely
solely on a case in which we applied the issue preclusion standard
-- namely, Monarch Life Ins. Co. v. Ropes & Gray, 65 F.3d 973, 978
(1st Cir. 1995). Accordingly, we analyze this issue under the
issue preclusion standard. In order to invoke issue preclusion,
appellant "must demonstrate that: (1) both the [current
proceedings] and the confirmation proceedings involved the same
issue of law or fact; (2) the parties actually litigated the issue
in the confirmation proceedings; (3) the bankruptcy court actually
resolved the issue in a final and binding judgment (viz., its
confirmation order); and (4) its resolution of that issue of law or
fact was essential to its judgment (i.e., necessary to its
holding)." Id. (citing Grella v. Salem Five Cent Sav. Bank, 42 F.3d
26, 30 (1st Cir. 1994); Piccicuto v. Dwyer, 39 F.3d 37, 40 (1st
Cir. 1994); Restatement (Second) of Judgments § 27 (1982)).
Here, the parties did not actually litigate the issue of
whether the gap payments should be avoided during confirmation, let
alone whether the 502(h) claim was secured or unsecured, so issue
preclusion does not apply. At the time of confirmation, Fleet had
already sold the balance of its outstanding Bankvest loans to ARK
and was therefore not a creditor. Accordingly, ARK -- rather than
Fleet -- participated in the negotiation of the Plan. Moreover, at

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-38-
that time, it was unclear that an avoidance action would be filed
against Fleet; only a motion for sanctions had been filed. Indeed,
at no time prior to the confirmation of the Plan did Bankvest or
appellant advise Fleet that they would pursue this avoidance
action. Nor could the issue of avoidance have been litigated at
the confirmation proceeding. The confirmation process constitutes
a contested matter under the Bankruptcy Rules; whereas an avoidance
action such as this one must be commenced as a separate adversary
proceeding under Federal Rule of Bankruptcy 7001. See Peltz v.
WorldNet, Corp. (In re USN Communications, Inc.), 280 B.R. 573, 587
(Bankr. D. Del. 2002) (discussing same with preference action);
Sunrise Energy Co. v. Maxus Gas Mktg. (In re Sunpacific Energy
Mgmt., Inc.), 216 B.R. 776, 779 (Bankr. N.D. Tex. 1997); see also
Grella v. Five Cent Sav. Bank, 42 F.3d 26, 33 (1st Cir. 1994).
Accordingly, Fleet did not have a full and fair opportunity to
litigate the issue of whether the 502(h) claim was secured or
unsecured until, at the earliest, appellant successfully avoided
the gap payments in an adversary proceeding. See Blonder-Tongue
Lab. v. Univ. of Illinois Found., 402 U.S. 313, 328 (1971) (in
order to further interests of finality and judicial economy, issue
preclusion doctrine requires that litigant be afforded "one full
and fair opportunity for judicial resolution" of issue). Clearly,
then, Fleet and appellant did not actually litigate this issue at
confirmation.

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Furthermore, appellant's argument is flawed at a more
fundamental level. As mentioned, the trustee successfully reserved
the right to bring avoidance actions in the Plan. "Res judicata
does not apply where a claim is expressly reserved by the litigant
in the earlier bankruptcy proceeding." Browning v. Levy, 283 F.3d
761, 774 (6th Cir. 2002) (citing D & K Props. Crystal Lake, 112
F.3d at 260). As res judicata does not apply to appellant's
ability to bring this avoidance action, it likewise does not apply
to claims that might arise from this avoidance action.
Accordingly, we, like the district court, conclude that
Fleet's 502(h) claim would have the status of a prepetition secured
claim, entitling it to full recovery of the gap proceeds were we to
undertake the exercise of avoiding the gap payments. Fleet Nat'l
Bank, 2003 WL 1700978 at *7-*8 (stating, "[c]onsequently, returning
any payment to BankVest would be futile because Fleet would be
returned to its status as a secured creditor, the status it was in
when the gap period payments were made . . . [i]f, as I hold, Fleet
is not divested of the claim, avoidance under § 549 does not appear
to change Fleet's priority. Its claim was merely reduced by the
debtor's gap period payments, something that would have happened in
any event.") (citing In re Adams, 212 B.R. at 714 ("Nothing would
be achieved by recovering payment to a secured creditor who in any
event is entitled to the payment ahead of other creditors.")). The

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fact that Fleet would be entitled to receive exactly what it would
be forced to return through avoidance renders avoidance pointless.
Affirmed.

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