Bank of New England Corporation

UNITED STATES BANKRUPTCY COURT
for the
DISTRICT OF MASSACHUSETTS
========================================
*
In Re: 	*
* Chapter 7
BANK OF NEW ENGLAND CORP., 	* No. 91-10126-WCH
*
Debtor 	*
*
========================================
DECISION ON REMAND REGARDING
THE TRUSTEE’S MOTION FOR ORDER
AUTHORIZING A FOURTH INTERIM DISTRIBUTION
Introduction
Dr. Ben S. Branch, the Chapter 7 Trustee of the Debtor (the “Trustee”)
has filed the present Motion for Order Authorizing a Fourth Interim Distribution
(the “Motion”), as more particularly described below.1
Although the Motion seeks to distribute not more than $11,000,000,1
the Trustee agrees that the final resolution of this matter will apply to the
entire balance in the estate, which is something in excess of $100,000,000.
Trial Trans.II, 192:10-18 (statement of Trustee’s counsel); Trial Trans. III
3:23-4:6 (agreement of parties’ counsel). (The transcripts for the hearing
held November 17, 2008, will be described as “Trial Trans. I” and “II”; those
1
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In 	summary, 	the 	issue 	before 	me 	concerns 	interpretation 	of
subordination provisions in public indentures governing three subordinated
note instruments issued during the 1980s. 	Specifically, the issue to be
determined is whether the parties to the subordinated indentures intended to
permit holders of senior debt issued by Bank of New England Corporation and
its predecessors (“BNEC”) to receive post-petition interest prior to payment
of BNEC subordinated debt. 	This is a contested matter within a core
proceeding. 2
In reaching my decision, I have considered the demeanor and credibility
of all of the witnesses who testified, as well as the admitted exhibits and the
submissions of counsel. 	Absence of mention of any of these does not
indicate a lack of consideration. For the reasons stated, I grant the motion.
of November 18, 2008, as “Trial Trans. III” and “IV”; those of November 19,
2008, as “Trial Trans. V”; and references to the closing arguments of
counsel, held January 29, 2009, as “Trial Trans. VI”).
28 U.S.C. § 157(b)(2)(A),(B),(O); Fed. R. Bank. P. 9014.2
2
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The Background 3
Bank of New England Corporation (“BNEC”) filed this Chapter 7 case
on January 7, 1991. 	The Trustee was elected by a vote of creditors on4
March 23, 1991. 	Prior to filing, BNEC and its predecessors had issued six5
separate issues of indenture debt. 	Three issues, described as the “Senior6
Debt,” and represented by the “Senior Indentures,” are entitled to the benefit7
of 	the 	contractual 	subordination 	provisions 	at 	issue 	here, 	and 	are
represented by the “Senior Indenture Trustee.” 	The remaining three issues8
Under the practice in this session, the parties have filed an3
Amended Joint Pre-Trial Statement, Docket No. 2247 (“APTS”). Under the
terms of the APTS, facts which are admitted require no proof. Further
references to the APTS are to Section II of that document where the
admitted facts appear.
APTS ¶ 2.4
APTS ¶ 3.5
APTS ¶ 7.6
7-5/8% Debentures, issued by CBT Corporation, a predecessor to7
BNEC, in 1973, supplemented in 1973 and 1985 (APTS ¶¶ 8,9); 8.85%
Debentures, issued by New England Merchants Company, Inc., a
predesessor to BNEC, in 1974 (APTS ¶ 10); and BNEC 9-1/2% Notes,
issued in 1986 (APTS ¶ 11).
HSBC Bank USA, as successor to the original trustees. APTS ¶ 4.8
The Senior Trustee is directed by Gabriel Capital LP and its affiliate, Ariel
Fund Ltd., which together hold a majority of the Senior Debt. APTS ¶ 13.
3
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(the “Junior Debt”) contractually subordinate payment in accordance with the9
terms of their indentures (the “Junior Indentures”), and are represented by the
“Junior Indenture Trustees.” 10
Through 	prior 	interim 	distributions, 	the 	Trustee 	paid 	the 	Senior
Indenture Trustee all allowed claims for principal and pre-petition interest plus
post-petition fees and expenses incurred to the date of the last distribution. 11
He created a reserve to cover any future fees and legal expenses 	and, in the12
Motion, proposes to make the next interim distribution to the Junior Indenture
Trustees. 	The Senior Indenture Trustee objected, asserting its prior claim13
to the distribution. 14
BNEC Floating Rate Subordinated Notes, issued in 1984; BNEC 8-9
3/4% Subordinated Capital Notes, issued in 1987; and BNEC 9-7/8%
Subordinated Notes, issued in 1989. APTS ¶¶15-17.
U.S. Bank Trust National Association, successor to Morgan10
Guaranty Trust Company and Bank of New York Trust Company,
successor to Chemical Bank Delaware. APTS ¶¶ 5, 6.
APTS ¶¶ 23, 25-27.11
APTS ¶ 28.12
APTS ¶ 32.13
APTS ¶ 33.14
4
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I took the Motion under advisement and ultimately granted it. 	The15
Senior Indenture Trustee appealed to the United States District Court for the
District of Massachusetts, which affirmed. 16
Upon further appeal, the United States Court of Appeals for the First
Circuit 	“vacated 	the 	decision 	of 	the 	district 	court 	and 	remanded 	with
instructions that the district court vacate the judgment of the bankruptcy court
and remand the matter to that tribunal for further proceedings consistent with
[their] opinion.” 	The district court acted as directed and returned the case17
to me. 18
Both the Senior and Junior Indenture Trustees were in doubt as to the
manner in which the First Circuit’s mandate (described in detail below) was
to be applied and requested my guidance. I issued a preliminary decision in
In re Bank of New Eng. Corp., 269 B.R. 82 (Bankr. D. Mass. 2001)15
(“BNEC1").
HSBC Bank USA v. Bank of New Eng. Corp. (In re Bank of New16
Eng. Corp.), 295 B.R. 419 (D. Mass. 2003) (“BNEC2").
HSBC Bank USA v. Branch (In re Bank of New Eng. Corp.), 36417
F.3d 355, 368 (1st Cir. 2004), cert. denied sub nom 	U.S. Bank Nat’l Ass’n
v. HSBC Bank USA, 543 U.S. 926 (2004) (“BNEC3").
Docket No. 1614.18
5
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which I described my views as to the burdens of the opposing camps. 19
The controlling indenture provisions
Each of the Junior Indentures provides that it is governed by New York
law and contains 	provisions virtually identical to the following, which all
parties have agreed may be considered applicable to all of the Junior
Indentures. 20
[E]ach Holder likewise covenants and agrees by his acceptance
thereof, that the obligations of the Company to make any payment
on account of the principal of 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. . . . 21
The "extent and manner" includes the following provision:
The Company agrees that upon . . . any payment or distribution
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 or to become due upon all Senior Indebtedness of
the Company 	shall first be paid in full, or payment thereof
In re Bank of New Eng. Corp., 359 B.R. 384 (Bankr. D. Mass.19
2007) (“BNEC4")
APTS ¶¶ 41-44.20
Ex. 1 at § 1201, 78 (emphasis added).21
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provided in money or money’s worth in accordance with its terms,
before any payment is made on account of the principal of or
interest on the indebtedness evidenced by the [Junior] Notes due
and owing at the time . . . . 22
The Junior Indentures define "Senior Indebtedness" of BNEC to mean:
[T]he 	principal 	of, 	premium, 	if 	any, 	and 	interest 	on 	(a) 	all
indebtedness for money borrowed, whether outstanding on the
date of execution of this Indenture or thereafter created, assumed
or incurred, except (i) the Company's Floating Rate Subordinated
Notes due 1996, (ii) 	such indebtedness as is by its terms
expressly stated to be not superior in right of payment to the
[Subordinated Notes] and (iii) such indebtedness as is by its
terms expressly stated to rank pari passu in right of payment with
the [Subordinated Notes], and (b) any deferrals, renewals or
extensions of any such Senior Indebtedness. 23
The genesis of the Rule of Explicitness
Because it frames the present decision, it is useful to reiterate the
manner in which the issues presently before me were shaped. In my original
decision granting of the Motion, I stated that:
The issue before me resolves itself into the meaning of the
emphasized phrase “shall first be paid in full.” 	If that language
does not encompass post-petition interest, the Trustee’s position
is well taken and the present motion should be granted as
presented. 	If it does have the added breadth, then the interim
distribution should be authorized (no one disputes this) but
payment would go to the Senior Indenture Trustees to the extent
of post-petition interest, which appears to far exceed the amount
Id. at § 1203, 78-79 (emphasis added).22
APTS ¶ 44.23
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proposed for distribution. 24
I began my examination from the generally accepted genesis of what is
commonly called the Rule of Explicitness in In re Time Sales Finance Corp.: 25
[I]f a 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. 26
Next in line is the Kingsboro Mortgage case, 	where the United States Court27
of Appeals for the Second Circuit held that language identical to that before
me “is insufficiently express to relate to post-bankruptcy interest.” 28
Finally, in its 1976 decision in King Resources, the United States Court
of Appeals for the Tenth Circuit adopted the holdings of Kingsboro Mortgage
BNEC1 at 84-85.24
491 F.2d 841, 844 (3d Cir. 1974).25
Id.26
Bankers Life Co. v. Manufacturers Hanover Trust Co. (In re27
Kingsboro Mortg. Corp.), 514 F.2d 400 (2d Cir. 1975).
Id. at 401. The Second Circuit relied on In re Time Sales Finance28
Corp. It also asserted that its own decision in In re Credit Industrial Corp.,
366 F.2d 402, 408 (2d Cir. 1966) contained language “broad enough to
permit any such provision despite Bankruptcy Act policies via-a-vis the
bankrupt estate.” 514 F.2d at 401, n.2. No one seems to have accepted
the language found in that case, and I have my doubts whether it really
would satisfy the Rule of Explicitness.
8
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and Time Sales.29
When the Bankruptcy Code replaced the Bankruptcy Act, it continued
the former law’s rule that creditors would be denied post-petition interest. 30
The Code, however, has a new provision in § 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.
In the first Southeast Banking Corp. decision in 1995, almost twenty
years after the Bankruptcy Code became effective, and after the Junior
Indentures were issued, the question of the continued vitality of the Rule of
Explicitness was raised before Bankruptcy Judge Hyman. He analyzed the
background and concluded that the Rule of Explicitness was alive and well:
528 F.2d 789 (10th Cir. 1976). 	King Resources, Kingsboro29
Mortgage, and Time Sales are so often treated together by counsel and
witnesses that they have acquired their own shorthand description as “the
three cases,” which I shall also adopt.
Compare 11 U.S.C. § 63a (repealed) (“Debts of the bankrupt may30
be proved and allowed against his estate which are founded upon (1) a
fixed liability, as evidenced 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. . . .”) with 11 U.S.C. § 502(b)(2) (“[I]f such
objection to a claim is made, the court . . . shall determine the amount of
such claim . . . 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. . . .”).
9
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As 	previously 	established, 	the 	senior 	debentureholders, 	as
unsecured creditors, do not have a claim against the Debtor’s
insolvent 	estate 	for 	payment 	of 	post-petition 	interest 	or 	for
attorney fees and casts pursuant to § 502 and § 506 of the
Bankruptcy Code. However, senior debentureholders may have
a contractual right to payment of post-petition interest from
monies otherwise payable to the junior debentureholders, if the
language 	of 	the 	Indentures 	specifically 	provide 	for 	such 	a
contractual right. 	The issue presented to the Court is one of
contract interpretation, namely, whether the Indentures contain
language sufficient in clarity to support an interpretation that the
junior debentureholders intended and agreed to pay from their
own distributions, sums to the senior debentureholders that are
not otherwise due and owing from the obligor, the Debtor’s estate.
Courts interpreting the rights and obligations between senior and
junior debentureholders under indentures with similar, if not
identical, 	language 	have 	unanimously 	required 	express
contractual 	language 	to 	clearly, 	explicitly, 	precisely, 	and
unambiguously provide for payment of post-petition interest to
unsecured senior debentureholders when such amounts were not
otherwise due and owing from the obligor. This requirement . . .
has become known as the Rule of Explicitness, which requires
notice 	of 	precisely 	to 	what 	obligations 	one 	is 	agreeing 	to
subordinate before that particular subordination will be enforced.
The Rule of Explicitness, is not a “rule of judicial reallocative
equity” as posited by the Plaintiffs. Instead it is a rule of contract
construction that requires a junior creditor to receive clear and
unambiguous 	notice 	before 	a 	Court 	will 	imply 	an 	intent 	to
subordinate to amounts not otherwise due and owing under
applicable law.
* * *
The 	Plaintiffs 	argue, 	in 	an 	attempt 	to 	avoid 	the 	Rule 	of
Explicitness, that Congress overruled the Rule of Explicitness in
enacting § 510 of the Bankruptcy Code. The Plaintiffs have cited
no authority, however, to support this argument. To the contrary,
applicable case law and respected treatises agree with this Court
10
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that § 510 of the Bankruptcy Code codified pre-Code case law in
which 	courts 	uniformly 	enforced 	subordination 	agreements
according to their terms. There is no legislative history to support
the notion that Congress intended to overrule either the pre-Code
case law or the Rule of Explicitness. 31
On appeal, the United States Court of Appeals for the Eleventh Circuit
acknowledged that the Rule of Explicitness was the pre-Code rule of law. 32
It disagreed with the courts below as to the origin and vitality of the Rule:
The Junior Creditors argue that section 510(a) and its direction to
enforce subordination agreements according to nonbankruptcy
law is irrelevant to this dispute because the Rule of Explicitness
is a rule of contract interpretation—not enforcement. Regardless
of 	whether 	we 	characterize 	the 	Rule 	of 	Explicitness 	as
interpretation 	or 	enforcement, 	however, 	section 	510(a)’s
instruction to enforce subordination agreements on par with other
contracts under nonbankruptcy law constitutes a plain departure
from 	the 	prior 	practice 	of 	enforcing 	and 	interpreting 	those
agreements pursuant to the bankruptcy court’s equitable powers.
Although the Junior Creditors have argued to the contrary, the
Rule of Explicitness developed as a tool for the exercise of those
equitable 	powers. 	Section 	510(a)’s 	instruction 	to 	enforce
subordination 	agreements 	according 	to 	nonbankruptcy 	law,
therefore, appears to cut away the equitable mantle under which
Chemical Bank v. First Trust of N.Y., Nat’l Ass’n (In re Southeast31
Banking Corp.), 188 B.R. 452, 464-65 (Bankr. S.D. Fla. 1995) (footnotes
omitted) (“Southeast 1"). In addition to the three cases, the Court relied
upon First Fidelity Bank, Nat’l Ass’n v. Midlantic Nat’l Bank (In re
Ionosphere Clubs, Inc.), 134 B.R. 528 (Bankr. S.D.N.Y. 1991) and 3 Collier
on Bankruptcy § 510.1.
Chemical Bank v. First Trust of N.Y., Nat’l Ass’n (In re Southeast32
Banking Corp.), 156 F.3d 1114, 1120 (11th Cir. 1998)( “Southeast 3").
11
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the bankruptcy courts fashioned the Rule of Explicitness. 33
It found, however, that
section 510(a)’s command to enforce subordination agreements
on par with other contracts under the applicable nonbankruptcy
law [is] a sufficient indication that Congress intended to depart
from the previous regime of enforcing and construing these
private contracts in federal equity. . . . Accordingly, we conclude
that Congress, by enacting section 510(a) of the Bankruptcy
Code, 	abrogated 	the 	pre-Code 	rule 	of 	explicitness. 	As 	a
necessary consequence of this change in bankruptcy law, the
Rule of Explicitness can no longer survive as the progeny of the
bankruptcy courts’ equity powers or as a federal canon of contract
construction. 34
It continued in a footnote:
Regardless of whether the Rule of Explicitness was a creation of
law or equity, the source of the rule of undeniably federal and not
state law. Our conclusion that Congress, by designating state law
as the appropriate vehicle by which to enforce subordination
contracts, removed the rule’s authoritative foundation, therefore,
applies regardless of whether pre-Code practice depended upon
equity or federal law.35
While the court believed that New York law would not “disturb the
heretofore uniform treatment of this question, particularly given the evidence
Id. at 1121-22.33
Id. at 1124. (citations omitted).34
Id. at 1122 n.10 (emphasis in original).35
12
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that the capital markets appear to have adjusted to the Rule of Explicitness” 36
it concluded that it would certify the issue to the New York Court of Appeals
phrased as follows:
What, 	if 	any 	language 	does 	New 	York 	law 	require 	in 	a
subordination 	agreement 	to 	alert 	a 	junior 	creditor 	to 	its
assumption of the risk and burden of the senior creditor’s post-
petition interest? 37
The New York Court of Appeals recognized the federal equity origin of
the Rule of Explicitness, but adopted it as a principle of general state contract
law:
...we recognize that [the subordination agreements at issue] and
many others were drafted and entered into before the Rule of
Explicitness was called into question by the ruling of the Eleventh
Circuit in the instant case.
* * *
Parties to subordination agreements undoubtedly relied on the
Rule-–their lawyers would have been quite remiss had they
not—since 	recent 	case 	law 	and 	many 	commentators 	have
consistently recognized the continued vitality of the Rule. 38
Id. at 1124.36
Id. at 1125.37
In re Southeast Banking Corp., 93 N.Y.2d 178, 184, 710 N.E.2d38
1083 (1999) (“Southeast 4"), citing First Fidelity Bank v. Midlantic Nat’l
Bank (In re Ionosphere Clubs, Inc.), 134 B.R. 528 (S.D.N.Y. 1991); 4
COLLIER , B ANKRUPTCY § 510.03[3] (15 	ed. rev.); Landers and Coleman,th
Claims Issues, 767 PLI/Comm 819, 846 (1998) introduced into evidence as
13
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Responding to the certified question, the New York Court of Appeals stated:
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. 39
I adopted the New York Court of Appeals’ response as controlling and granted
the Motion, 	which action was affirmed by the District Court.40 	41
The death of Explicitness
The First Circuit recognizing a conflict with the Eleventh Circuit, 	took42
a different approach:
As the litigants and the lower courts have framed the issue, the
Ex. 232; Comm. On Bankruptcy and Corporate Reorganization of the Ass’n
of the Bar of the City of N.Y., Structured Financing Techniques, 50 Bus.
Law. 527, 555 n.80 (1995), introduced into evidence as Ex. 230; Zinman,
Under the Spreading Bankruptcy: Subordinations and the Codes, 2 ABI L.
Rev. 293, 294 n. 10 (1994), introduced into evidence as Ex. 229; Goldstein
and Mckenna, Intercreditor and Suborination Issues, 793 PLI/Corp 679,
700 (1992), introduced into evidence as Ex. 228; Sheneman, Classification
and Allowance of Claims, 429 PLI/Comm 931, 974 (1987), introduced into
evidence as Ex. 223; Phelan, Conner and Kinsella, Word Wars: Structuring
and Documenting Secured Loan Terms Under the Bankruptcy Code, 427
PLI/Comm 127, 274 (1987), introduced into evidence as Ex. 224.
Id. at 186.39
BNEC1 at 86.40
BNEC2.41
BNEC3 at 359.42
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pivotal question is whether the language of the subordination
provisions satisfies the Rule of Explicitness. 	We do not agree
that this is the correct question. 43
The First Circuit characterized the Rule of Explicitness as an “equitable
doctrine . . . [that] evolved into a requirement that only unequivocal language
could overcome the generic bar on recovery of post-petition interest.” 44
Recognizing that § 510(a) specifically addresses subordination agreements,
it concluded that its enactment supplanted “the judge-made equitable doctrine
through which courts previously had dealt with such agreements.” 	Its45
conclusion, consistent with the Eleventh Circuit decision, was:
The 	short 	of 	it 	is 	that 	the 	enforceability 	of 	subordination
agreements 	in 	bankruptcy 	must 	be 	judged 	by 	reference 	to
generally applicable state contract law. As it pertains here, this
holding limits our consideration to the general principles of New
York contract law. 	If—and only if—the Rule of Explicitness is
such a general principle can it be given effect in this case. 46
Having posed the question of whether the Rule of Explicitness survived
the enactment of § 510(a) as part and parcel of state law, the First Circuit,
breaking with the Eleventh Circuit, answered in the negative:
Id. at 361.43
Id. at 362 (citations omitted).44
Id.45
Id. at 364.46
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Although we are in something of an epistemological quandary—it
is always difficult to prove a negative—the near-total absence of
authority is compelling proof that the Rule of Explicitness is not
part of New York’s general contract law.47
It concluded that the question, as framed by the Eleventh Circuit, was beyond
the competence of the New York Court of Appeals to answer because it
impermissibly invited the enunciation of a bankruptcy-specific rule as part of
state jurisprudence, as evidenced by reference to “‘post-petition interest’- a
term of art applicable only in bankruptcy.” 	Noting the absence of any state48
law rules of interpretation applied specifically to subordination agreements,
the First Circuit held that “there is simply no reason to believe that the New
York courts would apply the Rule of Explicitness outside the bankruptcy
context.” 49
Applying New York’s general contract law, the First Circuit held that the
phrase “due or to become due” was lacking in certitude, “to be resolved
through a contextual examination of the parties’ intent, taking full account of
the surrounding facts and circumstances.” 	It remanded the matter for50
Id. at 365.47
Id.48
Id.49
Id. at 367.50
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“differential factfinding” with respect to “the parties’ intent vis-á-vis post-
petition interest,” but offered some parting guidance:
To 	be 	sure, 	the 	backdrop 	of 	bankruptcy 	may 	inform 	the
examination into the parties' intent. See Dolman v. U.S. Trust Co.,
2 N.Y.2d 110, 157 N.Y.S.2d 537, 541-42, 138 N.E.2d 784
(N.Y.Sup.Ct.1956) (noting the presumption “that the parties had
[the law in force at the time of agreement] in contemplation when
the contract was made,” and that the contract generally will be
“construed in light of such law”). Here, however, the effect of that
tenet is uncertain absent further factfinding. 51
As will be explained in greater detail below, this tenet will direct the course of
my analysis.
“Differential factfinding”
The First Circuit’s mandate on remand was to determine the intent of
the parties by “differential factfinding.” 	On remand I found unanimous52
confusion among the parties as to how to proceed. I bifurcated the issue of
burden of proof, held a hearing and received post-hearing memoranda. 	I53
concluded that “the New York courts would treat the issue [as] one of
Id. at 368 n. 5.51
BNEC3 at 368. “[I]f a contract provision is reasonably susceptible52
of more than one interpretation, facts and circumstances extrinsic to the
agreement can be considered to determine the intention of the parties.”
Winston v. Mezzanine Invs., L.P., 170 Misc. 2d 241, 249, 648 N.Y.S.2d
493, 499 (Supr. Ct. 1996).
For the arguments of the parties, see BNEC4 at 388.53
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interpleader.” Relying on a basic resource, I stated that:
Each 	claimant 	in 	an 	interpleader 	action 	has 	the 	burden 	of
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. 54
As a result, I held an evidentiary hearing on November 17-19, 2008, at which
witnesses were heard by deposition excerpts or in person, and just under two
hundred exhibits 	were introduced. 	Closing arguments were heard on55
January 29, 2009, and post-trial memoranda were filed. I then took the matter
under advisement.
Positions of the Parties
Having held that each claimant must establish its own claim by a
preponderance of the evidence, 	the parties staked out their positions. In the56
case of the Senior Trustee, it was necessary for it to demonstrate that, in the
BNEC4 at 389 (quoting 48 C.J.S. Interpleader § 36 (2006)54
(footnotes omitted)). See also Conn. Car Rental, Inc. v. Prime One Capital
Co., LLC, 247 F.Supp. 2d 158, 165 (D. Conn. 2003) (citing Midland Ins.
Co. v. Friedgood, 577 F. Supp. 1407, 1411 (S.D.N.Y. 1984)).
Joint exhibits were numbered 1 -24, Senior Trustee’s exhibits55
between 25 and 185, and Junior Trustees’ exhibits between 201-288.
Further references to exhibits will be by number only.
BNEC4 at 389.56
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absence of specific language to the contrary, “paid in full” meant just that, and
included post-petition interest. The Junior Trustees, on the other hand, had
the burden of establishing that, lacking the specific language, the senior debt
had no right to post-petition interest, from the debtor or from funds otherwise
payable on the Junior Indentures.
Findings of Fact and Conclusions of Law57
The empty chair
It should be noted at the outset that no party actually involved in the
drafting of the Junior Indentures was located. 	In an effort to deal with this
“empty chair,” the Senior Trustee attempted to demonstrate that it was the
market’s expectation that post-petition interest would be included, while the
Junior Trustees 	sought 	to establish that 	the Rule of 	Explicitness was
consistent with the custom and practice in the 1980s. 	As a result, the parties
offered the testimony of persons active in the field in the 1980s, but none that
had any direct knowledge of the intent of the unknown scrivener.
The underlying ambiguity
All of the decisions relevant to the issues before me are based upon
Fed. R. Civ. P. 52, made applicable here by Fed. R. Bankr. P.57
9014 via Fed. R. Bankr. P. 7052.
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agreement that the phrases “due or to become due” and “paid in full” are
ambiguous. Although not stated in so many words, the concept universally
accepted is that there is an underlying issue of “due from whom” or “paid in
full by whom.” Taking a general look at the language at issue, there are two
possible readings: either the subordination is satisfied because the senior has
received all that it will ever receive from the debtor, and hence there is no
obligation to which the subordination applies, or, the junior having agreed to
subordinate until the senior has received full payment (it matters not from
whom), the junior’s subordination remains in force and sums otherwise
payable to the junior must be turned over to the senior. 	The language
contains this ambiguity, there is no plain meaning, and principles of contract
interpretation must be applied. 	It is clarification of those points that will58
guide the determination of the issue before me.
Applicable rules of construction
While directing me to perform a “contextual examination of the parties’
intent,” 	the First Circuit noted that under New York law it is presumed that59
“‘the 	parties 	had 	[the 	law 	in 	force 	at 	the 	time 	of 	the 	agreement] 	in
See Edwin W. Patterson, The Interpretation and Construction of58
Contracts, 64 Colum. L. Rev. 833, 839 (1964).
BNEC4 at 367.59
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contemplation when the contract is made,’ and that the contract generally will
be ‘construed in light 	of such 	a law.’” 	Therefore, “unless 	a contract60
specifically provides otherwise, the law in force at the time an agreement is
entered into becomes as much a part of the agreement as though it was
expressed or referred to therein. . . .” 	Although the First Circuit did not61
recognize it as such, this rule of contract construction appears to function as
a “principle of explicitness” (I deliberately avoid capitalization) under the
general contract law of New York. Because the First Circuit concluded that
“the near-total absence of authority is compelling proof that the Rule of
Explicitness is not part of New York’s general contract law,” I find myself in a
bit of a quandary: Is this language a square holding that there is no principle
of explicitness in the general contract law of New York, so that this negative
statement forms the law of the case and, to borrow a favorite phrase from the
First Circuit decisions, I need go no further? Or is it dicta, by which I am not
constrained?
The First Circuit has outlined the holding/dicta distinction:
BNEC4 at 368 n. 2 (citing 	Dolman v. U.S. Trust Co., 2 N.Y.2d 110,60
157 N.Y.S.2d 537, 541-42, 138 N.E.2d 784 (N.Y.Sup.Ct.1956)).
Dinerman v. Nat’l Bank of N. Am., 89 Misc. 2d 164, 390 N.Y.S.2d61
1002 (N.Y. Sup. Ct. 1977); Dolman, 2 N.Y.2d at 116.
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We have held that "when a statement in a judicial decision is
essential to the result reached in the case, it becomes part of the
court's holding." 	Rossiter v. Potter, 357 F.3d 26, 31 (1st Cir.
2004). 	The result, along with those portions of the opinion
necessary to the result, are binding, whereas dicta is not. 	Id.
"Dictum constitutes neither the law of the case nor the stuff of
binding precedent," Dedham Water Co. v. Cumberland Farms
Dairy, Inc., 972 F.2d 453, 459 (1st Cir. 1992); rather, it "comprises
observations in a judicial opinion or order that are ‘not essential'
to the determination of the legal questions then before the court."
Municipality of San Juan v. Rullán, 318 F.3d 26, 29 n.3 (1st Cir.
2003) (quoting Dedham...); see also Pierre N. Leval, Judging
Under the Constitution: Dicta About Dicta, 81 N.Y.U. L. Rev.
1249, 1256 (2006) (Dictum is superfluous content—"an assertion
in a court's opinion of a proposition of law which does not explain
why the court's judgment goes in favor of the winner"). 62
Here, the First Circuit held that “[f]or purposes of this case . . . the Rule of
Explicitness is a dead letter,” and I am bound by that holding. If, however, the
cause of death was § 510(a) of the Bankruptcy Code, I must make clear that
the obituary is, to quote the First Circuit, for “the Rule of Explicitness in its
classic 	form.” 	In 	my 	opinion, 	determination 	of 	the 	existence 	or63
non-existence of a principle of explicitness in New York state law goes
beyond the necessary holding of the First Circuit's decision—that the classic,
federal law-originating, Rule of Explicitness, has not been the law since 1978
and that an analogous rule does not exist under New York law.
Arcam Pharm. Corp. v. Faría, 513 F.3d 1, 3 (1st Cir. 2007).62
BNEC3 at 359.63
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Having so found, I may proceed consistent with rulings of the Supreme
Court of the United States, both ancient and current:
If 	[general expressions] go beyond the case, they may be
respected, but ought not to control the judgment in a subsequent
suit when the very point is presented for decision. 64
To apply the presumption acknowledged by the First Circuit, I must first
identify a substantive law in effect at the time the subordination agreements
were executed, one for which the agreements do not explicitly provide
otherwise, so that I may then presume the parties intended that it be
incorporated. The classic federal Rule of Explicitness cannot form the basis
of the presumption because the First Circuit held that it was abrogated in
1978 by the enactment of § 510(a), and was therefore no longer the law in
effect in the 1980s. 	As the First Circuit did not address what presumption65
might arise from the substance of New York law, the issue remains to be
investigated.
Seeking a general principle of New York law
Fortunately, it is not necessary to search the entire body of New York
Cent. Va. Cmty. College v. Katz, 546 U.S. 356, 363 (2006) (quoting64
Cohens v. Virginia, 6 Wheat. 264, 5 L.Ed. 257 (1821)).
I note, however, that the drafters’ subjective understanding of the65
state of the law informs the parties’ intent and therefore remains relevant to
the application of the presumption.
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law 	for 	an 	answer. 	For 	the 	presumption 	to 	be 	at 	all 	helpful 	to 	my
determination of intent, the substantive legal concept must contain two
elements. 	First, it must involve a debtor with a contractual obligation to pay
a lender in full, including all principal, interest, and other charges. Second,
there 	must be a supervening principle of New York law that says that the
obligation to pay interest, though stated in absolute terms, will be cut off if a
particular event occurs. And, of course, any instances which involve federal
law, including bankruptcy law, must be disregarded.
New York adopted the common law of England as its common law in its
Constitution of 1777. As quoted by the Supreme Court of the United States,
it provided that:
“[S]uch parts of the common law of England as did form the law
of [New York on April 19, 1775] shall be and continue the law of
this state, subject to such alterations and provisions as the
legislature of this State shall, from time to time, make concerning
the same. 66
The idea that insolvency proceedings terminated the payment of interest
Wilson v. Arkansas, 514 U.S. 927, 933 (1995). For a more66
detailed history of the adoption of English law in New York, see Findley v.
Falise (In re Joint Eastern and Southern Districts Asbestos Litigation), 878
F. Supp. 473, 522ff. (S.D.N.Y. 1995), aff’d in part, vacated in part, 78 F.3d
764 (2d Cir. 1996).
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can be traced back at least to Blackstone. 	A decision in 1743, citing even67
earlier cases, proclaimed to the then equivalent of bankruptcy trustees:
Commissioners, after a man becomes a bankrupt, compute
interest upon debts no lower than the date of the commission,
because it is a dead fund, and in such a shipwreck, if there is a
salvage of part to each person, in this general loss, it is as such
as can be expected. 68
These authorities were cited by the New York Court of Appeals as
recently as 1951, evidencing that the principle had survived legislative
“...judgments and recognizances, (both which are debts of record,67
and therefore at other times have a priority) and also bonds and obligations
by deed or special instrument (which are called debts by specialty, and are
usually the next in order) these are all put on a level with debts by mere
simple contract, and all paid pari passu. Nay, so far is this matter carried,
that, by the express provision of the statutes, debts not due at the time of
the dividend made, as bonds or notes of hand payable at a future day,
shall be paid equally with the rest, allowing a discount or drawback in
proportion.” 2 Blackstone, Commentaries 487-88.
Ex Parte Bennet, 2 Atk. 527, 528 (1743). See Sexton v. Dreyfus,68
219 U.S. 339, 345 (1911) (“For more than a century and a half the theory
of the English bankrupt system has been that everything stops at a certain
date. Interest was not computed beyond the date of the commission.”);
City of New York v. Saper, 336 U.S. 328, 330 (1949) (“More than forty
years ago Mr. Justice Holmes wrote for this Court that the rule stopping
interest at bankruptcy had then been followed for more than a century and
a half. He said the rule was not a matter of legislative command or
statutory construction but, rather, a fundamental principle of the English
bankruptcy system which we copied.”).
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overruling in New York at least until that date. 	In that case, involving interest69
claimed after an assignment for the benefit of creditors under the New York
statute, the court had no doubt, citing a number of decisions:
The general rule is well settled that creditors are not entitled to
post-assignment interest where the proceeds are insufficient to
pay all creditors in full, because the “delay in distribution is the act
of the law; it is a necessary incident to the settlement of the
estate”; this general rule applies as between preferred and
unpreferred creditors. 70
Based upon this authority, I am convinced and hold that, under the law
of New York, interest on an obligation ceases upon the filing of an insolvency
proceeding of whatever nature by the obligor. This appears to have been the
law of New York for so long that the memory of man runneth not to the
contrary.71
Framing the presumption under New York law
If, under New York law interest on an obligation ceases upon the filing
Pavone Textile Corp., 302 N.Y. 206, 97 N.E.2d 755 (1951), aff’d69
sub nom. United States v. Bloom, 342 U.S. 912 (1952). The summary
affirmance is based on Saper, supra.
Id. at 210 (citations omitted).70
It also appears to have been the federal common law prior to the71
enactment of the Bankruptcy Act. 	Thomas v. Western Car Co., 149 U.S.
95, 116-17 (1893) (“As a general rule, after property of an insolvent passes
into the hands of a receiver or of an assignee in insolvency, interest is not
allowed on the claims against the funds.”).
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of an insolvency proceeding unless the subordination agreements specifically
provide otherwise, I may presume that the parties drafted them with the
understanding that this was the law and that the agreements would be so
construed. 	Here, the First Circuit previously held that “the words ‘due or to
become due’ [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.” 	I conclude that under the applicable New York72
rules of contract interpretation, the subordination agreements do not provide
otherwise, forming a presumption that drafters did not intend for the payment
of interest accruing after the commencement of an insolvency proceeding.
To be clear, this presumption only sets the stage for further inquiry and
by 	no 	means 	relieves 	me 	of 	my 	obligation 	to 	conduct 	“a 	contextual
examination of the parties’ intent, taking full account of the surrounding facts
and circumstances.” 	This investigation involves a truly convoluted study of
the law and facts, as the facts depend in large part on what the parties
considered to be the prevailing law. I turn to an examination of the context in
which the issues arose.
The surrounding facts and circumstances
BNEC4 at 367.72
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To put the transactions in context, the issuance of indentures such as
those here involved requires a large cast of parties. First, there is the issuer,
in this case BNEC. 	Next is the managing underwriter, whose function is to
work with the issuer to structure the transaction, prepare a prospectus and
obtain necessary regulatory approvals, and offer the securities for sale in
connection with a syndicate of other underwriters who are marketing the
securities. There is also a trustee for the issue, generally a bank, which acts
on behalf of the holders of the securities. Each party has a different function.
All of these parties are generally represented by counsel. 73
The functions of the parties vary. For example, the witnesses agreed
that the drafting of the indenture is generally undertaken by counsel for the
issuer or the underwriter. 	Two attorneys peripherally involved in the drafting74
process were called as witnesses.
Alan Dean (“Dean”) testified by way of his deposition. 	He was the
designated representative of Davis Polk & Wardwell (“Davis Polk”) under Rule
30(b)(6). 	As such he is required to testify “about information known or
These facts so permeate the transcript that no particular citation73
would be helpful.
Deposition of John J. Cashin, October 27, 2008 (“Cashin Depo”)74
17:18-23; Trial Trans. II, 156:4-13.
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reasonably available to the organization.” 	The subpoena issued to Davis75
Polk sought:
all 	knowledge 	Davis 	Polk 	has 	regarding 	the 	subordination
provisions of the Bank of New England 1987 junior indenture and
the Bank of New England 1989 junior indenture. And in particular
Davis Polk’s understanding of the parties’ intent vis-a-vis post
petition interest, including but not limited to the terms “payment in
full” and “interest due or to be [sic] due” found therein or any and
all knowledge of the parties’ intent with respect to these matters. 76
In preparation for his testimony, Dean inquired of Fritz Link (“Link”), the
(now retired) 	partner who was in charge of the 1987 transaction, although77
Link had no recollection of it. 	Dean himself was in charge of the 198978
transaction. 	He did not have any specific recollection of drafting the 198779
indenture, but believed that “we did have a role in [the] drafting,” 	and that it80
was prepared on Davis Polk word processing equipment. 	It was his belief81
Fed R. Civ. P. 30(b)(6).75
Deposition of Alan Dean, December 20, 2006 (“Dean Depo”), 8:12-76
25. (Quotation marks have been added for clarity).
Id. at 10:16-20.77
Id. at 13:6-7.78
Id. at 9:23-25.79
Id. at 12:16-20.80
Id. at 14:7-10.81
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that the 1989 indenture was drafted by Wachtell, Lipton, Rosen & Katz
(“Wachtell”). 	Wachtell represented Bank of New England in both the 198782
and 1989 offerings, and Davis Polk represented the underwriters in both.
Jay A. Levenson (“Levenson”) was an associate in the corporate
department of Wachtell from 1981 to 1988, 	and was counsel to BNEC in the83
drafting 	of 	the 	1987 	indenture. 	The 	Senior 	Trustee 	attempted 	to84
demonstrate that Levenson promised the SEC to include Rule of Explicitness
language in the prospectus for that issue, but I find otherwise. The evidence
played out as follows.
In the course of preparing for SEC registration of the 1987 indenture,
Levenson received comments from SEC staff which included a statement that
Disclosure should be provided of the relative rank of other
subordinated debt and general creditors in the event of insolvency
prior to and at maturity. 85
He assumes that he prepared the response letter to the SEC which he
Id. at 20:1-4; 37:18-24.82
Deposition of Jay A. Levenson, January 29, 2008 (“Levenson83
Depo”) 8:17-23, 9:2-5.
Id. at 12:2-7.84
Ex. 9.85
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signed, although he does not recall writing it. 	That letter, which was86
introduced into evidence, 	responds to the SEC comment as follows:87
Disclosure has been added to page 7 of the Prospectus, based
upon disclosure found on page S-3 of the Prospectus Supplement
of First Interstate Bankcorp dated March 25, 1987 relating to
$200,000,000 . . . Subordinated Capital Notes . . . a copy of which
page is attached to this letter. 88
The attached photocopy has certain language manually bracketed, and
Levenson assumed that the language from First Interstate to which his letter
refers is the bracketed text 	and only the bracketed text. 	The bracketed text89 	90
reads:
The following subordination provisions do not apply to creditors of
the Corporation who do not hold Senior Indebtedness. 	In the
event of the bankruptcy or insolvency of the Corporation before or
after maturity, such other creditors would rank pari passu with
Holders of the Subordinated Debt Securities, subject, however, to
the broad equity powers of a federal bankruptcy court pursuant to
which such court may, among other things, reclassify such other
creditors into a different class of creditors which could be senior
to the Holders of Subordinated Debt Securities. 91
Levenson Depo, 16:17-22.86
Ex. 207.87
Id. at 3.88
Levenson Depo, 22:3-11.89
Id. at 22:18-22.90
Ex. 207 at 8-9.91
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If one reads further down the copied page, other language is found
which could be relevant to the issues before me, hence this protracted
discussion of a minor point. It reads:
No payment of principal of, or premium, if any, or interest on the
Subordinated Debt Securities may be made and no Holder of the
Subordinated Debt Securities shall be entitled to demand or
receive such payment (I) unless all amounts then due for principal
of and interest (including interest accruing subsequent to the
commencement 	of 	any 	proceeding 	for 	the 	bankruptcy 	or
reorganization 	of 	the 	Corporation 	under 	any 	applicable
bankruptcy, insolvency, or similar law now or hereafter in effect)
on all Senior Indebtedness of the Corporation have been paid in
full or duly provided for. . . . 92
Levenson states the language only referred to general and subordinated
creditors; not senior creditors. 	“The parenthetical that starts “including93
interest accruing” does not appear in [the BNEC prospectus].” 	On this point,94
based upon the wording of the SEC letter and Levenson’s specific response,
I accept and find as a fact his view as to the extent of the First Interstate
language intended to be conveyed to the SEC.
This is as close to the drafters of the indentures as the evidence
permits, 	and 	it 	is 	hardly 	helpful. 	The 	Junior 	Trustees 	offered 	other
Id. at 9 (emphasis added).92
Levenson Depo, 31:3-8.93
Id., 34:9-19.94
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inconclusive evidence in the form of the Davis Polk & Wardwell Manual for
Lawyers Reviewing Trust Indentures for Morgan Guaranty Trust Company of
New York (the “Davis Polk Manual”). 	The Davis Polk Manual was prepared95
in 1977, for use by Davis Polk lawyers in advising Morgan Guaranty’s
Corporate Trust Department. 	It contains a section titled “Subordinated
Issues” in which the three cases are discussed. 	The Davis Polk Manual
further provides that:
Following 	these 	instructions 	of 	the 	court, 	then, 	lawyers
representing senior debt may wish to add . . . INCLUDING
WITHOUT LIMITATION, EXCEPT TO THE EXTENT, IF ANY,
PROHIBITED BY MANDATORY PROVISIONS OF LAW, POST-
PETITION INTEREST IN ANY BANKRUPTCY, ARRANGEMENT,
REORGANIZATION OR SIMILAR PROCEEDING) before the
holders of the [junior debt] are entitled to receive any payment .
. . . 96
By its own terms, the Davis Polk Manual contemplates periodic supplements
or revisions, but there is no evidence before me that any were produced. 97
Patrick J. Crowley (“Crowley”), a vice-president and senior corporate
trust officer at Morgan Guaranty during the 1980s, testified that he was
personally involved in the training of Davis Polk associates and used the
Ex. 214.95
Id. at 85-86.96
Id. at 6.97
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Davis Polk Manual as a general reference. 	Crowley, however, was not98
involved in the drafting or negotiating of subordination provisions, and never
used the subordination section of the Davis Polk Manual. 	Ultimately, there99
is 	no 	evidence 	that 	anyone 	involved 	with 	the 	drafting 	of 	the 	relevant
subordination provisions ever had or referred to the Davis Polk Manual. 	At
best, it suggests the existence of an institutional knowledge at Davis Polk with
respect to the Rule of Explicitness, but that is hardly conclusive. I must cast
my net wider.
The indenture trustee is a principal player in the process. As noted, the
trustee is generally a bank which performs its duties through a department
dealing with trust administration. 	A number of witnesses with substantial
experience in that field testified.
John I. Landau (“Landau”) was called as an expert witness by the
Senior Trustee. His career in corporate trust administration and management
spans 47 years. 	Landau 	is the author of Corporate Trust Administration100
Trial Trans. III, 88:3-22, 95:11-15.98
Id. at 90:1-91:19, 97:24-98:10.99
Trial Trans. II, 127:25-128:4.100
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and Management, now in its sixth edition. 	He also taught corporate trust101
for 	many 	years, 	primarily 	to 	bankers 	but 	also 	to 	some 	lawyers 	and
regulators. 	Like all of the other witnesses who were trust administrators,102
he did not know about the Rule of Explicitness — “nobody ever heard of it.” 103
He first heard of the Rule when he was retained as an expert. 	He testified104
that 	an 	indenture 	trustee 	would 	have 	no 	pre-existing 	view 	of 	how
subordination provisions would work — “Absolutely not.” 	“Corporate105
Trustees did not get involved in negotiating the so-called business part of the
transaction of which subordination’s a part.” 	Changing the business deal106
is “not within the purview of Corporate Trustees.” 107
Similar testimony was provided by John J. Cashin (“Cashin”), the Rule
30(b)(6) representative of Chase Bank USA. He had been involved in trust
Id. at 146:3-16. Portions of the third edition were introduced into101
evidence as Ex. 263.
Id. at 141:5-142:11.102
Id. at 143:9-11.103
Id. at 144:16-22.104
Id. at 150:1-5.105
Id. at 154:2-4.106
Id. at 140:15-19.107
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administration for 33 years. 	Cashin specifically remembers getting the108
1989 indenture draft. 	When he reviewed it he focused on “the obligations109
of the trustee or the potential obligations and duties of the trustee.” 	His110
function was to comment only on the duties of the trustee. 	However, based111
upon his experience on creditors’ committees in bankruptcy case and
throughout his career, 	it was the position of the bank that “it would be the112
interest and principal due to the senior holders up to and including the
petition, but not postpetition interest” to which the seniors would be entitled. 113
The investment banker is a prime mover in the issuance of debentures.
William 	H. 	Purcell 	(“Purcell”), 	an 	investment 	banker 	with 	forty 	years
experience, was called as an expert by the Senior Trustee. His testimony is
best considered as covering two points, (1) the meaning of the phrase “paid
in full” and (2) the language used in a variety of debt instruments issued in the
same years as the Junior Indentures.
Cashin Depo 12:10-13.108
Id. at 24:5-8.109
Id. at 26:16-21, 29:21-25.110
Id. at 27:3-10.111
Id. at 54:10-55:10, 56:21-57:19, 59:4-24.112
Id. at 53:1-9.113
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As to the former, and unlike the First Circuit and others who have been
faced with the issue, the meaning of “paid in full” is obvious and elementary
to Purcell:
Q. 	And when you use the term there, “paid in full,” can you just
tell us what your understanding as an investment banker
working at the time in the 1980s, what does that mean,
what does that concept of “paid in full” mean in terms of the
relationship between senior debt and subordinated debt?
A. 	Well, “paid in full” is just a very standard economic in
investment banking term that means basically what it says,
you lend money to somebody and you want to get back all
that money that you lent . . . and that as long as your
principal is outstanding, the amount of interest that would
be due on the principal amount that was still outstanding,
you would be paid your principal, you would also be paid
the full amount of interest that was due on that principal
prior to it being repaid.
Q. 	And in your opinion as somebody working in investment
banking in the 1980s on these transactions, what you’ve
just described, was that also the understanding of the
investment banking community on these transactions?
A. 	Absolutely. 	I mean that’s, if you will, Corporate Finance
101.
Q. 	And in your opinion, working on transactions involving
senior debt and subordinated debt, does the concept of
“paid in full” that your just described change in any way with
the filing of the bankruptcy of the issuer as the “paid in full”
relates between senior and subordinated debt?
A. 	Absolutely not. It does not change at all. . .
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* * *
But if there’s subordinated debt outstanding, then that is the
basic premise of subordination that, if the senior debt is not
paid in full, the terms of subordination are that the — the —
the junior people are giving up their money to the senior to
the extent that the senior has not been paid in full. 	As a
matter of fact, I mean, as I say, that also Investment
Banking 101. . . . 114
Purcell’s attention was directed to the so-called “1983 Model Simplified
Indenture” issued by an American Bar Association committee (the “Model
Form). 	To put his testimony into context, it is necessary to examine an115
earlier product.
In 	1971, the American 	Bar 	Foundation issued a volume entitled
“American 	Bar 	Foundation, 	COMMENTARIES 	ON 	I NDENTURES .” 	Article116
Fourteen provided a form which dealt with subordination of debentures. 	In
particular § 14-2 provided in part:
Upon any distribution of assets of the Company upon any
dissolution, 	winding 	up, 	liquidation 	or 	reorganization 	of 	the
Company, whether in bankruptcy, insolvency, reorganization or
receivership proceedings or upon an assignment for the benefit
of creditors or any other marshalling of the assets and liabilities
of the Company or otherwise,
Trial Trans. I, 33:23-35:14. (emphasis added).114
Ex. 248.115
Ex. 247.116
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(a) the holders of all Senior Debt shall first be entitled
to receive payment in full of the principal thereof (and
premium, 	if 	any) 	and 	interest 	due 	thereon, 	or
provision shall be made for such payment in cash
before the Holders of the Debentures or coupons are
entitled to receive any payment on account of the
principal of (or premium, if any) or interest on the
indebtedness evidenced by the Debentures. 117
There is no reference to explicitness or any related concept in this language.
In 1983, an American Bar Association committee issued the Model
Form. 	Article 11 contains the following provisions relevant to the issues
before me:
Section 11.01. 	Agreement to Subordinate. 	The Company
agrees, and each Securityholder by accepting a Security agrees,
that the indebtedness evidenced by the Securities is subordinated
in right of payment, to the extent and in the manner provided in
this Article, to the prior payment in full of all Senior Debt, and that
the subordination is for the benefit of the holders of Senior Debt.
* * *
Section 11.03. 	Liquidation; Dissolution; Bankruptcy. 	Upon
any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to the
Company or its property:
(1) holders of Senior Debt shall be entitled to receive
payment in full in cash of the principal and interest
(including interest accruing after the commencement
Id. at 561 (footnote omitted).117
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of any such proceeding) to the date of payment on
the 	Senior 	Debt 	before 	Securityholders 	shall 	be
entitled to receive any payment of principal of or
interest on Securities. . . . 118
In the commentary which accompanies the Model Form it is stated:
The Model Simplified Indenture specifies that priority in right of
payment will extend to interest accruing on Senior Debt even after
the commencement of a bankruptcy proceeding. 119
+-
Purcell testified that while he was aware of the Model Form, he did not
read it “until this case.” 	However, he does not believe that the addition of120
the 	parenthetical 	phrase 	— 	“including 	interest 	accruing 	after 	the
commencement of any such proceeding” — added anything beyond what was
understood before; that the additional language is merely repeating.
On cross-examination he made his position even more clear:
Q. 	Now do you believe that the words “interest due or to
become due” add anything to the effect of a subordination
clause?
A. 	. . . In terms of the general concept of “paid in full” being
sometimes just said, paid in full, and sometimes having ex
— expansionary language, it does not add to that basic
principle. But it, in terms of expansion of clarity, if you will,
per the ‘83 Model Indenture recommendations, et cetera, it
Ex. 248 at 769 (emphasis added).118
Id. at 809.119
Trial Trans. I, 40:1-8.120
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add the, if you will, including phrase, “more clear”, if you
will, than just paid in full. . . it’s a clarification expansion, if
you will. 121
Purcell had heard of the Rule of Explicitness only once in his life prior
to this case, 	and was familiar with the three cases only as a result of his122
work on this case. 	And, as he testified:123
Q. 	. . . your expectation is that in every subordination clause,
regardless if it has language A, B, C, or D, post-petition
interest goes to the seniors before the junior get anything,
correct?
A. 	That is correct. 124
As an equal and opposite expert the Junior Trustees called Gilbert E.
Matthews (“Matthews”), who had a similar number of years experience as an
Id. at 68:24-69:14.121
Id. at 74:9-10.122
Id. at 74:14-19; 75:3-5.123
Id. at 82:23-84:2. He purports to find support for his position in a124
law review article footnote which criticizes the three cases. David Gray
Carlson, A Theory of Contractual Debt Subordination and Lien Priority, 38
Vand. L. Rev. 975, 988 n.41 (1985), introduced into evidence as Ex. 71. I
find the footnote’s argument less than persuasive. Professor Carlson
relies in part on the fact that the Model Form adds the parenthetical
language as reflecting “typical market expectations.” However, he provides
no support for this conclusion, which could as readily represent an intent to
change the law from that reflected in those cases, and we have the
testimony of Mr. Gasden, infra, indicating that such was the case.
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investment banker. 	His experience was primarily with subordinated or125
convertible issues, because that was the nature of his employer’s business. 126
Matthews’ 	expert 	opinion 	was 	that 	the 	investment 	banking 	community
understood that senior debt was paid in full when it had received the amount
owed as of the petition date. 	While he had not read the three decisions at127
that time, “in that time frame, those would have been part of the knowledge
base that the investment community had.” 	He regarded Purcell’s opinion128
as an assumption contrary to the facts known or knowable in the 1980s, 129
which assumed that “post-petition interest was not payable, absent a specific
provision that — that permitted it. . . .” 130
I find Purcell’s testimony as to this point not credible. He tries to prove
too much. 	I understand that he is not a lawyer, but his view that the senior
debt is entitled to payment in full under all circumstances and without regard
of the wording of any subordinating instrument is inconsistent with the law, the
Trial Trans. III, 36:5-13.125
Id. at 37:22-38:12.126
Id. at 41:7-18.127
Id. at 42:18-23.128
Id. at 47:8-14.129
Id. at 51:7-17.130
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common law, the Bankruptcy Act and Bankruptcy Code, as well as common
sense. As Dr. Suess might have said,
I meant what I said
And I said what I meant,
The Seniors get interest,
One Hundred Percent!
But, 	as 	the 	Junior 	Trustees 	stated 	in 	closing 	argument, 	“words 	have
meaning.” 	I agree.131
I find that investment bankers in the 1980s understood that a creditor’s
right to interest ceased on the filing of bankruptcy (or, as I have shown, upon
the implementation of other liquidating schemes). When our unknown drafter
undertook to prepare the Junior Indentures, he or she must be presumed to
have understood that, if BNEC became the subject of a bankruptcy or other
insolvency proceeding, the Senior Debt’s right to interest would cease. 	It
would have been entirely reasonable for the drafter to assume that the debt
to which the Junior Indentures were to be subordinated was the debt to which
the Senior Indenture holders would be entitled to as a matter of law, the
common 	law 	of 	New 	York 	or 	federal 	law 	if 	the 	proceedings 	were 	in
bankruptcy. This finding is reinforced by what was going on in the law at the
Trial Trans. VI, 69:15.131
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time. I will reiterate, briefly, material which appears earlier in this decision. 132
Time Sales Finance was decided by the Third Circuit in 1974. requiring
that the subordination agreement “clearly show” the change from the general
rule if such was intended. 	It was followed in 1975 by Kingsboro Mortgage
from the Second Circuit which held language identical to that now before me
“insufficiently express” to create a subordination to post-petition interest. 	A
third circuit, the Tenth, joined in the next year adopting the rulings of the prior
two cases.
Of course these were all cases under the Bankruptcy Act, and we now
know that the Bankruptcy Code changed the underlying federal law. 	To say
that an attorney at a major firm, drafting documents in a multi-million dollar
transaction, would ignore three circuit court decisions which (to the best of
then knowledge) had a direct impact on an issue involved in the drafting,
defies belief. This is not how talented lawyers practice commercial law. As
one commentator has noted in a parallel area of investment banking:
Looking once again at the large amounts of money at stake and
the eminence of the drafting counsel in each bond transaction, it
safely can be assumed that any judicial allocation of risk seriously
at variance with expectations of issuers and informed traders
promptly and explicitly would be overridden in subsequent bond
Text at notes 23-36 supra.132
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contracts. 133
That 	override 	is 	exactly 	what 	the 	Model 	Form 	language 	proposed 	to
accomplish.
The testimony of James Gadsden (“Gadsden”) added substantially to
the picture of what was going on in this field in the 1980 period. 	Gadsden,
has been practicing for 34 years and services to corporate trust service
providers has been an important part of his practice from the beginning. 	In134
the mid-1980s he was active in the American Bar Association Trust Indenture
Subcommittee of the Business Bankruptcy committee. 	The membership135
of the committee encompassed “the entire spectrum” of lawyers involved in
these transactions. 	He made reports to the subcommittee on current136
developments, 	and was familiar with the three cases and the Rule of137
Explicitness, 	and “construction of subordination articles was an important138
William W. Bratton, Jr., The Economics and Jurisprudence of133
Convertible Bonds, 1984 Wis. L. Rev. 667, 718.
Trial Trans. IV, 103:22-104:20.134
Id. at 108:6-20.135
Id. at 109:1-19.136
Id. at 109:20-110:4.137
Id. at 110:5-13.138
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topic that we dealt with in this group.” 	Gadsden testified as follows:139
Q. 	So in — in forming your opinion did you review the history
of interaction between indenture subordination provisions
and the judicial interprettion of those provisions in the ‘70s
and ‘80s?
A. 	Yes, I did.
Q. 	And describe the process.
A. 	Well, the — the three Court of Appeals decisions were
uniform and quite — quite — might I say explicit on what
had to be done. They — they started from the notion, as I
— as I mentioned before, that the seniors’ entitlement is —
is their bankruptcy entitlement. That’s — that’s what you’re
going to — that’s the background and actually the words of
the document, and that you needed to convey to the person
who was going to acquire the subordinated debt that the
rule that interest on the senior indebtedness would cease
on the bankruptcy case was not going to apply.140
When challenged on cross-examination, Gadsden went almost as far
as I have gone in keeping the idea of explicitness alive as a matter of state
law:
Q. 	Well, 	in 	the 	First 	Circuit 	those 	cases 	— 	the 	Rule 	of
Explicitness doesn’t exist for purposes of the analysis,
correct?
A. 	But it — it — it’s my opinion that because of — these —
these cases cases form the background against which
Id. at 110:19-21.139
Id. at 116:18-117:2.140
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people drafted indentures in the ‘80s. So they are — they
are still part of what you have to analyze in understanding
what people thought they would accomplish and would
accomplish by a choice of words in the 1980s. 141
It was his opinion that the rule of explicitness was part of New York law
after the adoption of section 510(a) of the Bankruptcy Code. 	If senior142
creditors wanted to obtain post-petition interest, explicit provision would have
to be made, and the quoted language of the Model Form satisfied the need
for that result in the market:
the market wanted seniors to get post-petition interest. . . and so
to deliver that, the [Model Form] . . . gave the express language
to deliver the post-petition interest to the senior indebtedness if
that form of language was adopted. 143
The second portion of 	Purcell’s testimony actually supports the view
Id. at 141:22-143:5 (emphasis in original). A contract “is to be141
interpreted in accordance with existing judicial decisions as to the law and
not in accord with subsequent judicial decisions.” 	Brown v. Utica Mut. Ins.
Co., 184 Misc. 693, 703, 53 N.Y.S.2d 760, 768-69 (Supr. Ct. 1945).
Id. at 151:16-23. One could conclude that the New York Court of142
Appeals acknowledged the Rule as part of its common law when it said
that “parties to subordination agreements undoubtedly relied on the
Rule—their lawyers would have been quite remiss had they not. . . .”
Southeast 4 at 184. Respected commentators have done exactly that.
Alan N. Resnick and Brad Eric Scheler, The Right of a Senior Creditor to
Receive Post-Petition Interest from a Subordinated Creditor’s Distributions:
Did the Rule of Explicitness Survive the Enactment of the Bankruptcy
Code?, 32 U.C.C. L. J. 466, 472 (Spring 2000).
Id. at 123:1-5.143
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that counsel in the 1980s were struggling with the issue. It involved a survey
which he had caused to be made of other subordinated debt issues of 1984,
1987, and 1989, parallel to the issue dates of the Junior Debt.
A total of 62 issues were identified but copies of only 46 could be
obtained from the SEC. 	The documents were introduced into evidence144 	145
as was a summary of the applicable language from those documents. 146
Purcell described the findings, which were that about three different forms of
subordination clauses were in use, some of which utilized explicit language
and some of which did not. Purcell’s conclusion was that the various versions
are “all synonyms described differently for the basic concept that senior debt
had to be paid in full.” 	I disagree with his conclusion that language is147
meaningless. Mr. Matthews stated the point well:
Q: 	And how was — did you consider whether Mr. Purcell’s
opinion was consistent with the language of the Junior
Indentures?
A. 	Well, I think that it — that basically it ignored the language
of the Junior Indentures. 	To say that all language means
Trial Trans. I, 52:17-53:1.144
Ex. 79, 80, 82-125.145
Ex. 185.146
Trial Trans. I, 58:20-22.147
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the same thing, regardless of what it says, I think is
inconsistent with anyone’s understand[ing] of — of — of
what language means. 148
Conclusion
I hold that the drafter of the Junior Indentures, had he or she wished to
expand the subordination to include post-petition interest, would have added
explicit language to accomplish that end. That being so, the Senior Trustee
has not satisfied me that it is entitled to a dividend from the estate otherwise
payable to the Junior Indenture holders. 	The Junior Trustees, on the other
hand, have convinced me that the language used did not entitle the Senior
Trustee to receive the dividend otherwise payable from the estate to the
Juniors. 	The result is that the Trustee’s motion is well taken and an order149
Trial Trans. III, 47:22-48:4.148
That being said, I note that the Junior Trustees failed to149
demonstrate that including language which satisfies the Rule of
Explicitness was part of the custom and practice in the investment banking
industry in the 1980s. To the contrary, all evidence indicates a lack of
consistency or uniformity in the drafting of these instruments.
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will 	enter 	granting 	the 	Motion 	for 	Order 	Authorizing 	a 	Fourth 	Interim
Distribution.
_______________________
William C. Hillman
United States Bankruptcy Judge
Dated: April 10, 2009
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Counsel Appearing
For the Trustee:
Hugh Ray
Robin Russell
Andrews & Kurth L.L.P.
Houston, Texas
For HSBC Bank USA:
Douglas B. Rosner
Goulston & Storrs, P.C.
Boston, Massachusetts
and
Sarah L. Reid
William A. Escobar
Alison L. MacGregor
Kelley, Drye & Warren, LLP
New York, New York
For Gabriel Capital, L.P. and Ariel Fund, Ltd.:
Daniel Zinman
Kasowitz, Benson, Torres & Freedman, LLP
New York, New York
For Bank of New York Trust Company, N.A.:
Dianne F. Coffino
C. William Phillips
Jennifer O. Farina
Robert Hemm
Covington & Burling, LLP
New York, New York
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For U.S. Bank, N.A.:
Patrick J. McLaughlin
Katherine Constantine
Todd Pearson
Dorsey & Whitney, LLP
Minneapolis, Minnesota
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