PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FILED
FOR THE ELEVENTH CIRCUIT
U.S. COURT OF APPEALS
_______________ ELEVENTH CIRCUIT
07/01/99
No. 97-4436 THOMAS K. KAHN
CLERK
_______________
D. C. Docket No. 95-2045-CIV-FAM
In re: SOUTHEAST BANKING CORPORATION,
Debtor.
CHEMICAL BANK, as Indenture Trustee under the Indenture, stated as
of March 1, 1983, of Southeast Banking Corporation, and GABRIEL CAPITAL, L.P.,
Plaintiffs-Appellants,
versus
FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION, as Indenture
Trustee, THE BANK OF NEW YORK, as Indenture Trustee, and
SOUTHEAST BANKING CORPORATION, Debtor,
Defendants-Appellees.
______________________________
Appeal from the United States District Court
for the Southern District of Florida
______________________________
(July 1, 1999)
Before EDMONDSON and BIRCH, Circuit Judges and FAY, Senior Circuit Judge.
BIRCH, Circuit Judge:
We summarize briefly the facts surrounding this bankruptcy proceeding.1
Southeast Banking Corporation (“Southeast”) filed a voluntary bankruptcy petition
pursuant to Chapter 7 of the Bankruptcy Code on September 20, 1991. Appellant,
The Chase Manhattan Bank (“Chase”), formerly Chemical Bank, is the indenture
trustee (the “Senior Trustee”) under an indenture agreement, pursuant to which
Southeast issued $60 million in principal amount of unsecured notes (the “Senior
Notes”). Appellant, Gabriel Capital, L.P. (“Gabriel”) holds a substantial portion of
the Senior Notes. Appellees, First Trust of New York, N.A. and The Bank of New
York (collectively the “Junior Trustees”) are indenture trustees under five
indentures (the “Subordinated Indentures”) pursuant to which Southeast issued in
excess of $300 million in principal amount of subordinated notes (“the
Subordinated Notes”). Each of the Subordinated Indentures contains language that
subordinates collection of the Subordinated Notes to the prior payment in full on
the Senior Notes. The Subordinated Indentures make no specific mention of the
issue of post-petition interest or of the Senior Trustee's fees and costs for collecting
post-petition interest.
1
A more extensive discussion of the procedural and factual history of this case can be
found in our prior panel opinion, In re Southeast Banking Corp.,
156 F.3d 1114 (11th Cir. 1998)
(“Southeast I”).
2
The bankruptcy court, see In re Southeast,
188 B.R. 452 (Bankr. S.D. Fla.
1995), denied the Senior Creditors' (Chase and Gabriel) motion for summary
judgment for (1) post-petition interest, (2) reasonable costs and fees, including
attorneys' fees, incurred after the petition date, and (3) for compound interest
(interest upon the post-petition interest). Payment of all claims would have come
out of distributions otherwise payable to holders of the Subordinated Debt (the
“Junior Creditors”). The district court affirmed. See In re Southeast,
212 B.R. 682
(S.D. Fla. 1997). Both the bankruptcy court and the district court based their
holdings on the doctrine of the “Rule of Explicitness,” which, effectively, prevents
a senior creditor from recovering post-petition interest from junior creditors unless
the subordination agreement articulates the obligation in unusually express
language.
In reviewing the opinion of the district court, we determined that section
510(a) of the Bankruptcy Code, directing that subordination agreements should be
enforced according to applicable nonbankruptcy law, “required us to enforce and
interpret the subordination clause in the Subordinated Indentures under New York
law.” Southeast I, 156 F.3d at 1125. After ascertaining that New York courts had
not had the opportunity to determine what kind of language would be necessary to
put a junior creditor on notice regarding the risk of subordinating a debt to senior
3
creditors' claims for post-petition interest and post-petition fees and costs, we
certified the following question to the State of New York Court of Appeals.
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?
Id.
After reviewing the facts of the case and our prior panel opinion, the State of
New York Court of Appeals has answered the question as follows:
For the purposes of answering the particular question posed to
us, we are confined by key features of the Eleventh Circuit's ruling.
Nevertheless, we face up to whether New York should adopt its
version of the Rule of Explicitness as a guiding interpretive principle
of State contract dispute resolution in cases such as this. In doing so,
we are acutely cognizant of the practical effect that our answer to the
certified question will have on a vast sea of subordination agreements
not before us now in live cases or controversies, nor even within the
framework of this Eleventh Circuit litigation, involving enormous
sums of outstanding public debt. Indeed, while it is not our forum's
role to rule ultimately on the subordination agreements at issue in this
case, we recognize that they 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.
This practical policy consequence is a matter of legitimate
concern in the common law developmental process, especially with
respect to commercial matters where reliance, definiteness and
predictability are such important goals of the law itself, designed so
that parties may intelligently negotiate and order their rights and
duties. Parties to subordination agreements undoubtedly relied on the
Rule – their lawyers would have been quite remiss had they not –
since recent case law, as well as a leading authority and many
commentators have consistently recognized the continued vitality of
the Rule [citations omitted].
4
In addition to practical realities, however, we are persuaded that
the commercial and legal policies underlying the Rule of Explicitness
remain sound and relevant. The general rule in bankruptcy is that
interest stops accruing against a debtor upon the date of filing of a
petition (see, Vanston Bondholders Protective Comm. v Green,
329
US 156, 163;
11 USC § 502[b][2]). This rule recognizes that post-
petition delay in distribution by a debtor “results by operation of law
and prevents creditors from profiting or suffering a loss in relation to
each other because of the delay” (Chemical Bank v First Trust, N.A.
[In re Southeast Banking Corp.], 156 F3d 1114, 1119, citing Vanston
Bondholders Protective Comm. v Green,
329 US 156, supra).
The Rule of Explicitness evolved as an equitable principle of
contract construction in Federal common law to rectify the perceived
inequity that results when, pursuant to a subordination agreement, a
junior creditor's potential distributions go first to satisfy post-petition
interest of a senior creditor (Chemical Bank v First Trust, N.A. [In re
Southeast Banking Corp.], 212 Bankr 682 [S.D.Fla. 1995]). If a
senior creditor is allowed to recover post-petition interest from a
subordinated creditor, a senior creditor could end up receiving more
recovery than it would have been entitled to against the debtor, while
the subordinated creditor's recovery is proportionately diminished (4
Collier on Bankruptcy § 510.03[3], supra). Because this consequence
violates the general rule against entitlement to post-petition interest,
courts until now have consistently required that the language of the
instrument make absolutely clear that a subordinated creditor intended
also to subordinate post-petition interest entitlements (see, In re King
Resources Co., 528 F2d 789, supra; In re Kingsboro Mtge. Corp., 514
F2d 400, supra; In re Times Sales Fin. Corp., 491 F2d 841, supra; In
re Ionosphere Clubs, 134 Bankr 528, supra).
The 1978 revisions to the Bankruptcy Code did not change the
general rule that creditors are not entitled to post-petition interest.
Thus, considerations underlying the Rule of Explicitness survive.
Indeed, they echo the policies underlying Matter of Pavone Textile
Corp. v Bloom (302 NY 206, affd
342 US 912).
Pavone provides an analytical counterpart and precedential
building block for our recognition of the applicability of the Rule of
Explicitness to the instant controversy. In Pavone, the assignor made
a general assignment for the benefit of creditors pursuant to article 2
5
of the Debtor and Creditor Law. This Court noted the general rule
that creditors are not entitled to post-assignment interest because the
“149 US 95, 116-117). Construing the general rule as
applying to Social Security, withholding and unemployment insurance
tax claims, the Court disallowed claims by the United States and the
State of New York for post-assignment interest. The State of New
York, one of the preferred creditors, sought to trump the general rule
by relying on Labor Law § 574, which provides that the State's
priority as to unemployment insurance contributions includes “any
interest . . . thereon” (id., at 212). The Court held that this language
did not supersede the general rule: “the general rule as to post-
assignment interest prevails in the absence of any statute expressly
providing for such interest” (id., at 213 [emphasis supplied]). The
parallel construction and application are reasonable to carry over to
the instant certified question concerning New York contract law
insofar as it controls or impacts upon the underlying dispute in the
Federal courts.
In Pavone, this Court refused to undercut reliance by parties on
the general rule that creditors are not entitled to post-assignment
interest in the absence of express statutory language. In like fashion,
the Rule of Explicitness safeguards reliance by parties on the
analogous general rule that creditors are not entitled to post-petition
interest in bankruptcy proceedings absent express language to that
effect in subordination agreements ordering priorities among the
contracting parties.
This court is, therefore, satisfied for purposes of answering this
question – in the spirit of comity but also within the usual certification
constraints, as well as within the confines of interrelated threshold
rulings already made by the Eleventh Circuit – that, in our “common-
law interstitial developmental process” (Rooney v Tyson, 91 NY2d
685, 694), this Court can and should recognize the Rule of
Explicitness.
Accordingly, the certified question should be answered as
follows: In accordance with the Rule of Explicitness, New York law
would require specific language in a subordination agreement to alert
6
a junior creditor to its assumption of the risk and burden of allowing
the payment of a senior creditor's post-petition interest demand.
In the Matter of Southeast Banking Corp., (emphasis added).
Based on the New York Court of Appeals' opinion in this case, New York
law applies the Rule of Explicitness to subordination agreements. We return,
therefore, to our prior panel's determination that
we find it beyond question that the subordination language in the
indenture agreements in this case, which requires “payment in full”
without any specific reference to post-petition interest, is
insufficiently “precise, explicit and unambiguous” on the topic of
post-petition interest to satisfy the Rule of Explicitness.
Southeast I, 156 F.3d at 1120
As a result, we conclude that the district court was correct in the portion of
its opinion affirming the bankruptcy court's holding that Chase and Gabriel may
not claim post-petition interest or reasonable costs or fees for prosecuting this
action because the right to post-petition interest, fees, or costs is not “clearly,
explicitly, precisely, and unambiguously provided for in the indentures.”
212 B.R.
at 689.2 Because appellants have not succeeded in their claim for post-petition
2
To further clarify our decision, we note that the district court opinion was incorrect in
concluding that under bankruptcy law, the Rule of Explicitness survives the enactment of section
510(a) of the Bankruptcy Code. Rather, we must look to the “applicable nonbankruptcy” law to
determine the extent to which a subordination agreement is enforceable. In this case, we
determined that the applicable nonbankruptcy law is the law of New York. See Southeast I, 156
F.3d at 1121. We apply the Rule of Explicitness here because New York law, not the
Bankruptcy Code, requires us to do so. We affirm, therefore, the final result reached by the
7
interest, we need not address whether the recent changes in New York law would
require enforcement of contracts for compound interest.
AFFIRMED.
district court, but we maintain our previous rejection of the reasoning of the district court to
reach that result.
8
FAY, Senior Circuit Judge, concurring specially:
I concur in the result finally reached in this matter, which is an affirmance of the rulings
made by the bankruptcy court and the district court. I continue to dissent from the abolishment of
the "Rule of Explicitness" announced by the majority in Southeast I,
156 F.3d 1114 (11th Cir.
1998) for the reasons stated. My dissent is reinforced by the opinion of the State of New York
Court of Appeals, which states:
The 1978 revisions to the Bankruptcy Code did not change the general rule that
creditors are not entitled to post-petition interest. Thus, considerations underlying
the Rule of Explicitness survive. Indeed, they echo the policies underlying Matter
of Pavone Textile Corp. v. Bloom (
302 N.Y. 206, affd
342 U.S. 912).
In re Matter of Southeast Banking Corp., (N.Y. 1999).
The Rule of Explicitness is a sound, long-established rule and Congress has not explicitly
eliminated it. The Rule has been relied upon by those in the financial world. It's abolishment can
have enormous consequences. I, therefore, most respectfully, urge the en banc court to consider
this issue when appropriate.1
1
Since the Appellees-Trustees have prevailed in this matter, I recognize the difficulty of a
prevailing party petitioning for en banc consideration.
9
