Bank of New England Corporation

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UNITED STATES BANKRUPTCY COURT
for the
DISTRICT OF MASSACHUSETTS

In re:

)

}

BANK OF NEW ENGLAND CORPORATION, )
Debtor )

)

PRELIMINARY DECISION ON REMAND REGARDING THE
TRUSTEE’S MOTION FOR ORDER
AUTHORIZING A FOURTH INTERIM DISTRIBUTION
Introduction

On May 23, 2001, Dr. Ben S. Branch, Chapter 7 Trustee (the “Trustee”) of Bank
of New England Corporation (“BNEC” or “the Company”) moved for authority to make a
fourth interim distribution in the amount of $11,000,000 to the creditors of the estate
(the “Motion”). As to the recipients of this distribution, the Trustee averred:

Pursuant to the contractual subordination provisions of BNEC’s

indentures, the Senior Bondholders have been paid in full. Accordingly,

on the date of the Fourth Interim Distribution, all payments to which the

holders of senior indebtedness would be entitled shall be: paid to the

Junior Indenture Trustees for distribution to the holders of BNEC’s

subordinated indebtedness.
Motion, 16.

HSBC Bank USA, as successor to Marine Midland Bank, N.A., and The Chase

Manhattan Bank, as successor to Manufacturers Hanover Trus: Company (collectively,

the “Senior Indenture Trustees”) filed an objection to the proposed distribution (the

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“Objection”). U.S. Bank Trust National Association and Chemical Bank Delaware
(collectively, the “Junior Indentures Trustees”) joined in support of the Motion. | took
the Motion under advisement and ultimately granted it.' The United States District
Court for the District of Massachusetts affirmed.” The First Circuit Court of Appeals
“vacated the decision of the district court and remanded with instructions that the district
court vacate the judgment of the bankruptcy court and remand “he matter to that
tribunal for further proceedings consistent with this opinion.”? The district court did just
that.*

The Trustee is prepared to make payment to whomever is ruled entitled thereto
by final court order; he has no substantive interest in the outcorne of the litigation.
Given the principles enunciated by the First Circuit, both the Senior Indenture Trustees
and the Junior Indenture Trustees expressed doubts as to where the burden of proof
lies in this litigation. | bifurcated the issue of the burden of proof, held a hearing and

received post-hearing memoranda on that preliminary matter.° | issue this decision to

‘ In re Bank of New England Corp., 269 B.R. 82 (Bankr. D. Mass. 2001).

2 HSBC Bank USA v. Bank of New England Corp. (/n re Bank of New England
Corp.), 295 B.R. 419 (D. Mass. 2003).

3 HSBC Bank USA v. Branch (/n re Bank of New England Corp.), 364 F.3d 355,
368 (1% Cir. 2004), cert. denied sub nom. U.S. Bank Nat'l Ass’n v. HSBC Bank USA,
543 U.S. 926 (2004).

* In re Bank of New England Corp., Case No. 91-10126-WCH, Docket No. 1614
(hereinafter all docket references will be to this case).

° There may never be a trial before me. On May 17, 20C6, a Senior Indenture
Trustee filed a motion to withdraw the reference. Docket No. 1864. The motion was
transmitted to the District Court the following day. Docket No. 1870. A hearing was
held in the District Court on November 27, 2006 but no decision has yet been rendered.

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set the stage for the ultimate factual hearing. | iterate here the background facts and
travel of the case, drawn from the prior decisions.

Facts

BNEC filed this Chapter 7 case over fifteen years ago. Prior to filing, BNEC had
issued six separate issues of indenture debt, aggregating $705,972,000 in principal
amount. Three issues are entitled to the benefit of contractual subordination provisions,
and will be described as the Senior Debt. The remaining three issues (the “Junior
Debt”) contractually subordinate payment in accordance with the terms of their
indentures (the “Junior Indentures”).

Through prior interim distributions, the Trustee has paid to the Senior Debt all
allowed claims for principal and pre-petition interest plus post-petition fees and
expenses incurred through the date of the last such distribution. The Trustee has
created a reserve to cover any future fees and legal expenses. He proposes to make
the next interim distribution on the Junior Debt. In the Objectior, the Senior Indenture
Trustees assert that the distribution should be first applied to post-petition interest due
on the Senior Debt.

Each of the Junior Indentures provides that it is governec by New York law and
contains a provision virtually identical to the following, which is cuoted from one such
indenture:

[E]Jach Holder likewise covenants and agrees by his acceptance thereof,

that the obligations of the Company to make payment on account of the

principal 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. (emphasis added).

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The “extent and manner hereinafter set forth” includes the following provision:

The Company agrees that upon. . . any payment or distr bution 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 on 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 or interest on the
indebtedness evidenced by the [Junior] Notes due and owning at the
time.... (emphasis added).

Issue

In my earlier decision, | opined that the issue resolved itself into the meaning of
the emphasized phrase “shall first be paid in full.” | ruled that the outcome would
depend upon the application of the so-called Rule of Explicitness to the language used
in the Junior Indentures. That principle is generally traced to Bankers Life Co. v.
Manufacturers Hanover Trust Co. (In re Kingsboro Mortgage Corp.).© The language
before the court in that case was strikingly similar to that quoted above:

In the event of any insolvency, bankruptcy liquidation, reorganization or

other similar proceedings ... then all principal and interest on all Senior

Debt shall first be paid in full ... before any payment on account of
principal or interest is made upon the Notes (junior indebtedness).’

The Court of Appeals held that the quoted language “is insufficiently express to

° 514 F.2d 400 (2d Cir. 1975).
"514 F.2d at 401 (emphasis added).

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relate to post-bankruptcy interest.”®

At that time, of course, the operative law was the Bankruptcy Act, but its
§ 63(a)(1),° like the present law’s § 502(b)(2),"° denied creditors post-petition interest.
Missing from the Act, however, was a provision comparable to the Bankruptcy Code’s
§ 510(a): “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 addition of § 510(a) led to a debate as to whether the Rule of Explicitness
had been overruled. A scholarly examination of that issue can be found in Chemical
Bank v. First Trust of New York (In re Southeast Banking Corp.}.'' Finding itself in

doubt, the Eleventh Circuit certified the following question to the New York Court of

Appeals:

8 id. See also In re Time Sales Fin. Corp., 491 F.2d 841, 844 (3d Cir. 1974) (“Ifa
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.”)

° “Debts of the bankrupt may be proved and allowed against his estate which are
founded upon (1) a fixed liability, as evidence by a judgment or an instrument in writing,
absolutely owing at the time of the filing of the petition by or against him, whether then
payable or not, with any interest thereon which would have been recoverable at that
date....” 11 U.S.C. § 63a (Repealed).

'°“(b) Except as provided in subsections (e)(2), (f), (g), (n) and (i) of this section,
if such objection to a claim is made, the court, after notice and a hearing, shall
determine the amount of such claim in lawful currency of the United States as of the
date of the filing of the petition, and shall allow such claim in such amount, except to the
extent that... (2) such claim is for unmatured interest... .” 11 U.S.C. § 502(b)(2).

"456 F.3d 1114 (11th Cir. 1998).

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What, if any, language does New York law require in a subordination
agreement to alert a junior creditor to its assumption of trie risk and
burden of the senior creditor's post-petition interest?”

The New York Court of Appeals responded that:

In accordance with the Rule of Explicitness, New York law would require

specific language in a subordination agreement to alert a junior creditor to

its assumption of the risk and burden of allowing the payment of a senior
creditor's post-petition interest demand.'*

Based upon these precedents | held that “the imposition of bankruptcy truncates
the power of the contractual ‘due or to become due’ phrase. Interest will no longer
become due.”

The opinion of the Court of Appeals can be briefed as fo lows:

1. The issue framed by the litigants — whether the language of the

subordination provisions satisfies the Rule of Explicitness — is not the

correct question."

2. Prior to the adoption of the Bankruptcy Code, there was no specific

provision of law mentioning subordination agreements. They were

enforced through the bankruptcy court’s equitable powers.'® The Rule of

Explicitness “evolved into a requirement that only unequivocal language

could overcome the generic bar on recovery of post-petition interest.”””

3. The adoption of § 510(a), providing that a subordination agreement is

"2 Id. at 1125.

'3 Chemical Bank v. First Trust of New York (In re Southeast Banking Corp.), 93
N.Y.2d 178, 186, 710 N.E.2d 1083, 1088 (1999).

4 269 B.R. at 86.

© 364 F.3d at 361.

'e Id. at 362.

" Ibid.

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enforceable to the same extent as under applicable nontankruptcy law,
supercedes for former equitable powers of the bankruptcy court and
“means that the enforcement of subordination provisions is no longer a
matter committed to the bankruptcy courts’ notions of what may (or may
not) be equitable.”

4. State law will determine the meaning of the phrase “applicable
nonbankruptcy law.”'?

5. The Rule of Explicitness can have vitality only if it can be found as part
of the state law governing contractual subordination.” “Ilf—and only if—
the Rule of Explicitness is such a general principle can it be given effect in
this case”’' and “the near-total absence of authority is compelling proof
that the Rule of Explicitness is not part of New York’s general contract
law.”??

6. The phrase at issue is ambiguous.”* The words are “lacking in certitude
as to whether they actually provide for the payment of post-petition
interest on the Senior Debt prior to any payment referable to the Junior
Debt. New York law requires that this amphiboly be resolved through a
contextual examination of the parties’ intent, taking full account of the
surrounding facts and circumstances.”

7. We remand for factfinding for the parties’ intent vis-a-vis post-petition
interest.”

"8 Ibid.

'° Id. at 363.

°° Id. at 363-364.

"Id. at 364.

*2 Id. at 365.

*3 Id. at 367.

24 Ibid. An amphiboly occurs when the construction of a sentence allows it to
have two different meanings. IRVING M. CoP! AND CARL COHEN, INTRODUCTION TO LOGIC

(8 ed. 1990), pg 114.
°° Id. at 368.

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Positions of the Parties

The Senior Indenture Trustees argue that they do not have the burden of proof
as they are not parties to the Junior Indentures, but, as third party beneficiaries of those
indentures, the terms must be construed in their favor. Further they assert that as the
Junior Indenture Trustees seek to limit the plain language of the Junior Indentures, they
carry the burden of proof as to that issue.*° The Junior Indenture Trustees counter
each of these arguments.’ The parties also disagree as to the impact of the First
Circuit's statement that the Rule of Explicitness is a “dead letter”?
upon the further deliberations in this case.”°

Discussion

To repeat, this decision relates only to the question of burden of proof in the
evidentiary hearing on the Motion. The Rule of Explicitness having been at least prima
facie eliminated from consideration by the decision of the First Circuit, | must determine
what rule of general application the New York courts would apply to the facts of the
current controversy. | conclude that those courts would treat the issue of one of
interpleader. Turning to my traditional practical guide to matters of equity, | find:

One in possession of property by which he makes no claim as a beneficial

owner, but which is or may be claimed by more than one whose
assertions conflict, one who is in substances a stakeholder, or who is

26 Docket No. 1921.
2” Docket No. 1935.
28 364 F.3d at 359.

2° Docket No. 1935 (Junior Indenture Trustees); Docket No. 1937 (Response of
Senior Indenture Trustees).

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indebted, but is uncertain to whom the obligation is legally or equitably
due, may find himself exposed to a consequential hazarcl against which
there is no adequate legal protection: (1) because he must decide
between the conflicting claims at his peril, with consequent possibility of a
double liability for a single debt; (2) because he may be subjected to the
annoyance and expense of a plurality of suits. These two hazards,
usually both present, entitle one so situated to equitable relief, through the
remedy of interpleader, based upon a recognition of the injustice of
requiring one not responsible for the predicament in which he finds
himself to choose between conflicting claims.°°

Having concluded that the issue should be treated as one akin to an interpleader
action, | can then proceed directly to the preliminary issue upon which direction is
sought. Once again, a basic resource provides the guide:

Each claimant in an interpleader action has the burden cf establishing his
or her own claim or right to any part of the impleaded money, and relative
priority as to all other claimants. Each claimant must show his or her
entitlement to the disputed funds by a preponderance of the evidence. All
claimants must recover on the strength of their own title, rather than on
the weakness of that of the adversary.”

8° 2 FRED F. LAWRENCE, EQUITY JURISPRUDENCE 1016-17 (1929)

3148 C.J.S. Interpleader § 36 (2006) (footnotes omitted). See also Conn. Car
Rental, Inc. v. Prime One Capital Co., LLC, 247 F.Supp.2d 15&, 165 (D. Conn. 2003),
citing Midland Ins. Co. v. Friedgood, 577 F.Supp. 1407, 1411 (5.D. N.Y. 1984).

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Conclusion
These rules should provide the guidance sought by the parties. While not strictly
within the question asked of me, | will volunteer that the Senior Indenture Trustees,
having objected to the Trustee’s proposed disposition, will present their case first.

As this decision is preliminary to consideration of the Motion on its merits, no

order will issue.

My ptt FEES .

William C. Hillman
United States Bankruptcy Judge

Dated: January 9, 2007

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