Chemical Bank v. First Trust ( 1998 )

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
FILED
_______________
U.S. COURT OF APPEALS
No. 97-4436 ELEVENTH CIRCUIT
_______________ 09/28/98
THOMAS K. KAHN
D. C. Docket No. 95-2045-CIV-FAM CLERK
In Re: SOUTHEAST BANKING CORPORATION,
Debtor.
CHEMICAL BANK, as Indenture Trustee under the Indenture, dated 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
______________________________
(September 28, 1998)
Before EDMONDSON and BIRCH, Circuit Judges and FAY, Senior
Circuit Judge.
BIRCH, Circuit Judge:
This appeal requires us to decide whether Congress, by
enacting section 510(a) of the 1978 Bankruptcy Code, intended to
abrogate the “Rule of Explicitness,” a judicially created doctrine
that prevents a senior creditor from collecting post-petition interest
from a junior creditor pursuant to a subordination agreement
unless the agreement expressly provides for that result. The
bankruptcy court and the district court both held that section
510(a) was not inconsistent with the Rule of Explicitness and that
the legislative history accompanying section 510(a) revealed no
intent to repeal the rule. As a result, the bankruptcy court and the
district court declined to read section 510(a) as a radical
departure from previous law governing the interpretation and
enforcement of subordination agreements and held that, because
the agreements in question did not satisfy the Rule of
Explicitness, the Senior Creditors were not entitled to receive
post-petition interest from the Junior Creditors. Accordingly, the
district court entered summary judgment against the Senior
Creditors. We REVERSE in part and CERTIFY the substance of
this dispute to the New York Court of Appeals.
2
BACKGROUND
On September 20, 1991 (the “petition date”), Southeast
Banking Corporation (“Southeast”) filed a voluntary bankruptcy
petition pursuant to Chapter 7 of the Bankruptcy Code.1 On April
28, 1992, the bankruptcy court entered an order confirming
William A. Brandt, Jr. (“Brandt”) as the successor Chapter 7
trustee for Southeast's estate.
Appellant, The Chase Manhattan Bank (“Chase”), formerly
Chemical Bank, is the indenture trustee (the “Senior Trustee”)
under an Indenture, dated March 1, 1983 (the “Senior-Indenture”),
pursuant to which Southeast issued $60 million in principal
amount of unsecured notes (the “Senior Notes”). Appellant,
Gabriel Capital, L.P. (“Gabriel”), together with three of its affiliates,
holds a substantial portion of the Senior Notes. The Senior
1
The procedural and factual history of this case and the transactions on which it is based
are extensive and complex. We have attempted to limit our factual discussion to that which is
necessary to understand the issues on appeal. The published opinions of the bankruptcy court
and the district court provide greater detail. See Chemical Bank v. First Trust of New York,
N.A. (In re Southeast Banking Corp.), 188 B.R. 452 (Bankr. S.D. Fla. 1995), aff'd 212 B.R. 682(S.D. Fla. 1997).
3
Indenture2 provides that Southeast has a continuing obligation to
repay principal and interest on the Senior Notes and that, upon
the event of a default, Southeast will pay the entire amount of
principal and interest due on the Senior Notes, including interest
until the date of payment upon overdue principal, and to the
extent enforceable, interest upon the overdue interest at the same
rate specified in the Senior Notes. Finally the Senior Indenture
provides that, in the event of a default, Southeast also shall be
liable to the Senior Trustee for reasonable fees and costs of
collection, including attorneys' fees.3
2
Unfortunately, although the parties quoted the Senior Indenture and the relevant
subordination agreements in their briefs, they failed to make those agreements part of the record
on appeal. To the extent we quote those agreements, we have relied on the district court's
published opinion which reproduces the relevant portions of those agreements in the text and
appendix. We note that, although the parties have disagreed over the meaning and significance
of the language of these agreements, they have not contested the literal contents of the contracts.
3
The Senior Indenture provides that in the event of a default:
[Southeast] will pay to the [Senior] Trustee for the benefit of the Holders of the
[Senior Notes] of such series the whole amount that then shall have become due
and payable on all [Senior Notes] of such series for principal or interest, as the
case may be (with interest to the date of such payment upon the overdue principal
and, to the extent that payment of such interest is enforceable under applicable
law, on overdue installments of interest at the same rate as the rate of interest . . .
specified in the [Senior Notes] of such series); and in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of collection,
including reasonable compensation to the [Senior] Trustee and each predecessor
4
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 Indentures4 contains language
that subordinates collection on the Subordinated Notes to the
prior payment in full on the Senior Notes. The Subordinated
Indentures also provide that, upon Southeast's bankruptcy or
liquidation, the holders of the Senior Notes must be paid in full
before Southeast can make any payment on the Subordinated
Notes and that all payments otherwise allocable to the holders of
the Subordinated Notes must be paid to the holders of the Senior
trustee, their respective agents, attorneys and counsel, and all advances made, by
the [Senior] Trustee and each predecessor trustee except as a result of its
negligence or bad faith.
In re Southeast, 212 B.R. at 684 (S.D. Fla. 1997)(quoting Senior Indenture § 5.2).
4
Although the Subordinated Indentures are not identical in relevant part, the bankruptcy
court held that “the legal effect of the minor variations between the [Subordinated] Indentures is
immaterial” for the purposes of this case, In re Southeast, 188 B.R. at 460 (Bankr. S.D. Fla.
1995), and the district court affirmed that conclusion, see In re Southeast, 212 B.R. at 685 (S.D.
Fla. 1997). The parties have not contested this conclusion on appeal.
5
Notes, or their trustees, until such Senior Notes have been paid in
full.5 Significantly, however, 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. Finally, each of the Subordinated Indentures includes a
5
The Subordinated Indentures entered into in 1984, 1985, 1987, and 1989, which are
substantively identical in this respect, contain the following subordination clauses:
[Southeast] . . . covenants and agrees, and each holder of a [Subordinated] Note
likewise covenants and agrees by his acceptance thereof, that the obligation of
[Southeast] to make any payment on account of the principal of and interest on
each and all of the [Subordinated] Notes shall be subordinate and junior in right
of the payment to [Southeast's] obligations to the holders of Senior Indebtedness
of [Southeast], to the extent provided herein, and that in the cases of . . . any
liquidation or winding-up of or relating to [Southeast] as a whole, . . . all
obligations of [Southeast] to holders of Senior Indebtedness of [Southeast] shall
be entitled to be paid in full before any payment shall be made on account of the
principal of or interest on the [Subordinated] Notes. . . . In addition, in the event
of any such proceeding, if any payment or distribution of assets of [Southeast] of
any kind or character . . . shall be received by the [Subordinated] Trustee or the
holders of the [Subordinated] Notes before all Senior Indebtedness of [Southeast]
is paid in full, such payment or distribution shall be held in trust for the benefit of
and shall be paid over to the holders of such Senior Indebtedness . . . until all such
Senior Indebtedness shall have been paid in full.
In re Southeast, 212 B.R. at 690-91 (quoting 1984 Subordinated Indenture § 11.01 and 1985
Subordinated Indenture § 11.01) (second ellipsis added); see also id. at 691 (quoting 1987
Subordinated Indenture § 1301 and 1989 Subordinated Indenture § 1301).
The Subordinated Indenture entered into in 1972 provides in relevant part:
Upon . . . any payment or distribution of assets of [Southeast] . . . in bankruptcy,
all principal, premium, if any, and interest due or to become due upon all Senior
Indebtedness shall first be paid in full . . . before any payment is made on account
of the principal or, premium, if any, or interest on the Debentures . . . .
Id. at 690 (quoting 1972 Subordinated Indenture § 4.03) (second ellipsis added).
6
clause noting that New York law governs the enforcement and
interpretation of the agreements.
Both the Senior Trustee and the Junior Trustees have filed
proofs of claim as unsecured nonpriority claims on behalf of their
holders in Southeast's Chapter 7 proceedings. Pursuant to the
orders of the bankruptcy court, Southeast has distributed or will
distribute amounts sufficient to satisfy the principal on the Senior
Notes and all interest that accrued on the Senior Notes prior to
the petition date. Chase, however, has not received any interest
that accrued on the Senior Notes after the petition date (“post-
petition interest”) because, as we discuss in more detail below,
the Bankruptcy Code does not provide for the recovery of post-
petition interest from an insolvent debtor, such as Southeast.
Chase and Gabriel (collectively, the “Senior Creditors”)
commenced the above-captioned proceeding on September 23,
1994 and sought to compel the payment of post-petition interest
until the date of payment on the Senior Notes (including interest
7
upon that interest), as well as the reimbursement of Chase's fees
and costs associated with this action, from the distributions
otherwise payable to holders of the Subordinated Debt (the
“Junior Creditors”). Chase and Gabriel relied on contractual
language in the Subordinated Indentures that subordinated the
Junior Creditors' right to repayment to the Senior Creditors' right
to receive payment in full, as well as section 510(a) of the
Bankruptcy Code, which provides for the enforcement of
subordination agreements. All parties moved for summary
judgment. In addition, Brandt, Southeast's Chapter 7 trustee, filed
a cross-motion for partial summary judgment and asked the
bankruptcy court to declare that regardless of the disposition of
the dispute between the creditors, the claims against Southeast
would not increase. Since Chase and Gabriel sought to recover
post-petition interest from the distributions otherwise due the
Junior Creditors, they did not contest Brandt's motion and have
not done so on this appeal.
8
On August 8, 1995, the bankruptcy court denied Chase and
Gabriel's motion for summary judgment in part, granted the Junior
Trustees' cross-motion for summary judgment in part, and
declared Brandt's motion for partial summary judgment moot.6
See In re Southeast, 188 B.R. 452 (Bankr. S.D. Fla. 1995). Chase
and Gabriel appealed to the district court for the Southern District
of Florida, and on February 28, 1997, the district court affirmed
the judgment of the bankruptcy court. 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 judicially created, and
heretofore uniformly applied, 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. Applying the same logic, the bankruptcy and district
6
The bankruptcy court also granted Chase and Gabriel's motion in part and denied the
Junior-Trustees' motion in part, but the parties have not challenged those aspects of the court's
judgment on appeal.
9
courts denied Chase's claim for reasonable costs and fees,
including attorneys' fees, incurred after the petition date. Chase
and Gabriel argue that section 510(a) of the Bankruptcy Code
abrogated the Rule of Explicitness and that the bankruptcy and
district courts, therefore, committed legal error in applying the rule
to this case. Relying on New York law that made a contract for
compound interest unenforceable, prevailing at the time the
parties entered the relevant contracts, the bankruptcy and district
courts also rejected Chase and Gabriel's claims for compound
interest (interest upon the post-petition interest). Citing recent
revisions to New York law, Chase and Gabriel also urge us to
reverse the district court's conclusions on the issue of compound
interest.
DISCUSSION
10
The parties do not contest the material facts and agree that
the resolution of their dispute turns on the interpretation and
application of the Bankruptcy Code and New York state law.
Consequently, the issues on appeal present purely legal
questions, subject to our de novo review. See Epstein v. Official
Comm. of Unsecured Creditors of Estate of Piper Aircraft Corp.
(In re Piper Aircraft Corp.), 58 F.3d 1573, 1576 (11th Cir. 1995);
First Bank of Linden v. Sloma (In re Sloma), 43 F.3d 637, 639
(11th Cir. 1995).
I. The Development of the Rule of Explicitness
The overriding theme of bankruptcy law, both past and
present, has been the equitable distribution of the debtor's
remaining assets among creditors. See Union Bank v. Wolas,
502 U.S. 151, 161, 112 S. Ct. 527, 533, 116 L. Ed. 2d 514 (1991)
(quoting H.R. Rep. No. 95-595, at 177-78 (1977), reprinted in
11
1978 U.S.C.C.A.N. 6137-38)); Begier v. Internal Revenue Serv.,
496 U.S. 53, 58, 110 S. Ct. 2258, 2262-63, 110 L. Ed. 2d 46(1990); Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215,
219, 61 S. Ct. 904, 907, 85 L. Ed. 1293 (1941). Congress
evidenced its continued commitment to this policy in sections 547
and 726 of 1978 Bankruptcy Code. See 11 U.S.C. § 726(establishing equitable distribution among creditors); id. § 547
(permitting the bankruptcy trustee to recover certain pre-petition
transfers to creditors); see also 1 David G. Epstein et al.,
Bankruptcy § 1-2, at 3, § 1-7, at 12 (West 1992) (describing these
provisions as manifestations of the policy of equitable distribution
in bankruptcy). The courts, however, have permitted creditors to
contract out of this system of pro-rata distribution by enforcing
subordination agreements, whereby one creditor (the junior
creditor) agrees that, in the event of a default or bankruptcy,
another creditor (the senior creditor) will receive repayment in full
before the junior creditor receives payment on its loans. See Dee
12
Martin Calligar, Subordination Agreements, 70 Yale L.J. 376, 376-
83 (1961) (describing types of subordination agreements). Before
Congress enacted the 1978 Bankruptcy Code, which includes a
statutory provision regarding the enforcement of subordination
agreements, the courts enforced these agreements pursuant to
their equitable powers:
[E]quitable considerations, however, require that the
concept of equal distribution be applied only to creditors
of equal rank, i.e., creditors who are similarly situated.
Creditors who expressly agree to subordinate their
claims against a debtor and the creditors for whose
benefit the agreement to subordinate is executed are
not similarly situated.
In re Credit Indus. Corp., 366 F.2d 402, 408 (2d Cir. 1966); see
also Calligar, Subordination Agreements, 70 Yale L.J. at 389
(“[S]ubordination agreements . . . will be given effect by the
bankruptcy court through the exercise of its equity power.”). In
enforcing subordination agreements, however, the courts have
emphasized that the junior creditor's agreement to subordinate
13
must be express. See In re Credit Industrial Corp., 366 F.2d at
408.
The issue of post-petition interest has led to a wrinkle in the
enforcement and interpretation of subordination agreements.
Given the often lengthy delay between the debtor's petition for
bankruptcy and the date upon which a creditor can expect to
receive any payment on the underlying obligation, post-petition
interest can represent a significant amount of money. Under both
pre-Code practice and the 1978 Bankruptcy Code, unsecured and
undersecured creditors7 could not expect to receive interest on an
bankrupt debtor's obligation that accrued after the date of the
7
An undersecured creditor is simply a secured creditor whose collateral is worth less
than the debtor's obligation. Cf. Orix Credit Alliance v. Delta Resources, Inc. (In re Delta
Resources, Inc.), 54 F.3d 722, 724 n.1 (11th Cir. 1995) (per curiam). By contrast, section 506(b)
of the Bankruptcy Code, permits an oversecured creditor to receive post-petition interest from
the debtor to the extent the creditor's security exceeds the value of the debtor's obligation. Id. at
729. Only in the event that the debtor turns out to be solvent (i.e., the debtor's property at fair
valuation is sufficient to pay all debts, cf. 11 U.S.C. § 101(32)) can an unsecured or
undersecured creditor expect to receive post-petition interest. See e.g., United States v. Ron Pair
Enters., 489 U.S. 235, 246, 109 S. Ct. 1026, 1033, 103 L. Ed. 2d 290 (1989) (describing pre-
Code practice); Equitable Life Assurance Soc. v. Sublett (In re Sublett), 895 F.2d 1381, 1386 &
n.10 (11th Cir. 1990) (applying section 506(b) of the Bankruptcy Code and describing pre-Code
practice). On the petition date, Southeast was, and has since remained, insolvent.
14
bankruptcy petition—at least not from an insolvent debtor. See 11
U.S.C. § 502(b)(2) (instructing courts to determine the amount of
a creditor's claim on the date of the petition and disallowing claims
for “unmatured interest”); United Sav. Ass'n v. Timbers of Inwood
Forest Assocs., 484 U.S. 365, 372-73, 108 S. Ct. 626, 631, 98 L.
Ed. 2d 740 (1988) (citing section 506(b) for the general
proposition that an undersecured creditor will not receive post-
petition interest from the debtor); Vanston Bondholders Protective
Comm. v. Green, 329 U.S. 156, 163, 67 S. Ct. 237, 240, 91 L. Ed.
162 (1946) (“The general rule in [pre-Code] bankruptcy . . . has
been that interest on the debtors' obligations ceases to accrue at
the beginning of proceedings.”). The rule takes account of the
fact that the debtor's delay in repayment after the petition date
results by operation of law and prevents creditors from profiting or
suffering a loss in relation to each other because of the delay.
See Vanston, 329 U.S. at 163-64, 67 S. Ct. at 240.
15
In a number of cases, senior creditors sought to avoid this
result and recover post-petition interest—not from the debtor, but
from the distributions made to junior creditors subject to
subordination agreements. Citing the junior creditors' agreement
to subordinate their right to repayment until the senior debt had
been paid in full, senior creditors argued that even though
bankruptcy law prevented their recovery of post-petition interest
from the debtor, their loans had not been paid in full, and,
therefore, that they could demand payment from whatever
distribution the junior creditors received from the debtor. In 1974,
before Congress adopted the Bankruptcy Code, the Court of
Appeals for the Third Circuit addressed this argument and
concluded that a junior creditor could agree to subordinate its
claim to a senior creditor's demands for post-petition interest, if
the subordination agreement explicitly provided for such a result:
If 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
16
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.
In re Time Sales Fin. Corp., 491 F.2d 841, 844 (3d Cir. 1974).
Significantly, however, the Time Sales court held that
general language in the subordination agreement, establishing
that the senior debt must be “paid in full” before payment on the
junior debt, was insufficient to alert the junior creditor that it had
agreed to subordinate its claims to the senior creditor's claims for
post-petition interest. Id. at 842, 844. Specifically, the Third
Circuit held that the district court had not abused its discretion by
exercising its equitable power to find that the subordination
agreement was insufficiently explicit to permit the senior creditor's
claim for post-petition interest. Id. at 844. A number of courts,
when confronted with similar claims and subordination
agreements, adopted the Third Circuit's approach and dubbed it
the “Rule of Explicitness.” See In re King Resources Co., 385 F.
Supp. 1269 (D. Co. 1974), aff'd 528 F.2d 789 (10th Cir. 1976); In
17
re Kingsboro Mortgage Corp., 379 F. Supp. 227, 231 (S.D.N.Y.
1974) (coining the rule of explicitness moniker), aff'd 514 F.2d 400(2d Cir. 1975) (per curiam).
Chase and Gabriel, as the Senior Creditors, have advanced
precisely the same argument in its quest to recover post-petition
interest from the Junior Creditors in this case. We have not had
occasion, either before or since Congress passed the 1978
Bankruptcy Code, to consider the argument and, therefore, we
have never decided whether to adopt the Rule of Explicitness in
this circuit. Although Chase argues to the contrary, 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. Kingsboro, 379 F.
Supp. at 231; see also Time Sales, 491 at 842, 844 (“paid in full”
insufficiently explicit to alert the junior creditors); King Resources,
18
528 F.2d at 791-92 (same); Kingsboro, 514 F.2d at 401 (same);
accord First Fidelity Bank, Nat'l Ass'n v. Midlantic Nat'l Bank (In re
Ionosphere Clubs, Inc.), 134 B.R. 528, 535 n.14 (Bankr. S.D.N.Y.
1991) (providing an example of much more specific subordination
language that would satisfy the rule). If the Rule of Explicitness
applies, therefore, Chase's claims for post-petition interest arising
out of the subordination agreements must fail.
II. The Impact of Section 510(a)
As part of its comprehensive 1978 revision of the bankruptcy
laws, Congress enacted a Code provision that provides for the
legal enforcement of subordination agreements in bankruptcy
courts:
A subordination agreement is enforceable in a
case under this title to the same extent that such
agreement is enforceable under applicable
nonbankruptcy law.
19
11 U.S.C. § 510(a). Chase argues that the language of this
provision contradicts the Rule of Explicitness and that section
510(a), therefore, overrules pre-Code practice. Chase contends
that section 510(a) requires courts to enforce subordination
agreements according to their terms without indulging the
equitable considerations present in much of the pre-Code case
law. Furthermore, Chase argues that, because the statutory
language is plain and unambiguous, the legislative history of the
section (particularly the fact that it contains no mention of an
intent to depart from prior practice by overruling the Rule of
Explicitness) is irrelevant to our inquiry. The Junior Creditors, on
the other hand, argue that the Rule of Explicitness has survived
the 1978 revision of the bankruptcy laws because Congress has
evidenced no intent to depart from it.
We begin our analysis of this problem by examining the
language of the statute itself, which we presume to be conclusive.
We will not stray from that principle of construction unless the
20
literal application of the statute would “'produce a result
demonstrably at odds with the intentions of its drafters.'” Varsity
Carpet Servs., Inc. v. Richardson (In re Colortex Indus.), 19 F.3d
1371, 1375 (11th Cir. 1994) (quoting Ron Pair Enters., 489 U.S. at
242, 109 S. Ct. at 1031).
The language of section 510(a) provides no such challenge;
it directs courts to enforce subordination agreements to the extent
that the agreements are enforceable under “applicable
nonbankruptcy law.” 11 U.S.C. § 510(a). In another context, the
Supreme Court has held that Congress's use of the phrase
“applicable nonbankruptcy law” in the Bankruptcy Code refers to
any relevant federal or state law. See Patterson v. Shumate, 504
U.S. 753, 757-759, 112 S. Ct. 2242, 2246-47, 119 L. Ed. 2d 519(1992) (noting that nonbankruptcy law is broader than state law, a
term Congress also used in the Bankruptcy Code). Unlike the
Patterson case, which involved a relevant provision of federal
legislation, however, the parties before us have identified no
21
independent federal statute that might guide the interpretation of
subordination agreements; nor have they argued that federal
common law should govern the outcome of this case.8 This
absence of relevant federal authority should not be surprising
because the enforcement and “interpretation of private contracts
is ordinarily a question of state law.” Mastrobuono v. Shearson
Lehman Hutton, Inc., 514 U.S. 52, 60 n.4, 115 S. Ct. 1212, 1217
n.4, 131 L. Ed. 2d 76 (1995) (quoting Volt Info. Sciences, Inc. v.
Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468,
474, 109 S. Ct. 1248, 1253, 103 L. Ed. 2d 488 (1989)); see also
Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918, 59 L.
Ed. 2d 136 (1979) (“Property interests are created and defined by
state law. Unless some federal interest requires a different result,
8
Although a number of courts have read Patterson's declaration that “applicable
nonbankruptcy law” includes federal law to refer to relevant federal common law as well as
statutes, see e.g., Resolution Trust Corp. v. Gibson, 829 F. Supp. 1110, 1117-19 (W.D. Mo.
1993), a “federal common law of contracts is justified only when required by a distinctive
national policy,” Fantastic Fakes, Inc. v. Pickwick Int'l, Inc., 661 F.2d 479, 483 n.2 (5th Cir. Unit
B 1981) (quoting Bartsch v. Metro-Goldwyn-Mayer, Inc., 391 F.2d 150, 153 (2d Cir. 1968)
(internal quotation marks omitted)). The interpretation and enforcement of a contract between
private parties presents no such distinctive federal interest.
22
there is no reason why such interests should be analyzed
differently simply because an interested party is involved in a
bankruptcy proceeding.”).
The subordination agreements in this case each contain a
choice of law clause that provides that New York law governs the
enforcement and interpretation of the contracts. The relevant
nonbankruptcy law for the enforcement of subordination
agreements in this case, therefore, appears to be New York law.
See e.g., Plastino v. Eureka Fed. Sav. and Loan Ass'n (In re
Sunset Bay Assocs.), 944 F.2d 1503, 1508 (9th Cir. 1991)
(applying California law to interpret a subordination agreement as
the applicable nonbankruptcy law pursuant to section 510(a)); In
re Best Prods. Co., 168 B.R. 35, 69 (Bankr. S.D.N.Y. 1994)
(applying New York law pursuant to section 510(a) and a choice
of law provision in the subordination agreement); In re Envirodyne
Indus. Inc., 161 B.R. 440, 445 (Bankr. N.D. Ill. 1993) (citing
23
section 510(a) and construing a provision in a subordination
contract under New York law), aff'd 29 F.3d 301 (7th Cir. 1994 ).9
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 courts' equitable
powers. Although the Junior Creditors have argued to the
9
Section 510(a)'s instruction to enforce subordination agreements is roughly analogous
to section 2 of the Federal Arbitration Act, which makes agreements to arbitrate “enforceable,
save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C.
§ 2. In this context, the Supreme Court has explained that, although federal law establishes the
enforceability of arbitration agreements, a court must construe that agreement according to
generally applicable principles of state law. See Perry v. Thomas, 482 U.S. 483, 492 n.9, 107 S.
Ct. 2520, 2527 n.9, 96 L. Ed. 2d 426 (1987); see also First Options of Chicago, Inc. v. Kaplan,
514 U.S. 938, 944, 115 S. Ct. 1920, 1924, 131 L. Ed. 2d 985 (1995) (applying “ordinary state-
law principles that govern the formation of contracts” in interpreting an arbitration agreement).
24
contrary, the Rule of Explicitness developed as a tool for the
exercise of those equitable powers. See e.g., Time Sales, 491
F.2d at 844 & n.10 (holding that the district court had not abused
its discretion in the exercise of its 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 the bankruptcy courts fashioned
the Rule of Explicitness.10
Indeed, under prior bankruptcy law, the bankruptcy courts
enjoyed extensive equitable powers and exercised those powers
10
Regardless of whether the Rule of Explicitness was a creation of law or equity, the
source of the rule was 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.
We note that one of the major treatises on bankruptcy law disagrees with our reading of
Time Sales and its progeny on this point; it assumes that those cases rely on state law. See 4
Marcia L. Goldstein et al., Collier on Bankruptcy ¶ 510.03[3] at 510-8 & n.11 (Lawrence P.
King ed., 15th ed. rev., Matthew Bender 1998). Our own reading of the cases, which contain no
reference to state authority, however, is sharply at odds with the treatise on this point.
Nevertheless, regardless of our academic disagreement with the treatise over the rule's pedigree,
the treatise's view of the Rule of Explicitness is consistent with our ultimate conclusion that the
rule must now find its source of authority in state, not federal, law or equity.
25
broadly.11 The Supreme Court, however, has read the 1978
Bankruptcy Code to curtail those powers in significant ways and
has explained that “whatever equitable powers remain in the
bankruptcy courts must and can only be exercised within the
confines of the Bankruptcy Code.” Norwest Bank Worthington, v.
Ahlers, 485 U.S. 197, 206, 108 S. Ct. 963, 969, 99 L. Ed. 2d 169(1988).12 In certain contexts, the Code includes express
provisions for the continued exercise of equitable power in the
bankruptcy courts. On the topic of subordination, for example,
section 510(c) authorizes the bankruptcy courts to continue the
11
As one commentator has explained:
Under the Bankruptcy Act, courts used their equitable powers quite broadly. This
tradition of equitable interpretation of the Act grew out of bankruptcy judges'
efforts to address many important issues the Act left unresolved . . . and out of
their attempts to make the bankruptcy laws function in spite of Congress' failure
to update the Act . . . .
Adam J. Wiensch, Note, The Supreme Court, Textualism, and the Treatment of Pre-Bankruptcy
Code Law, 79 Geo. L.J. 1831, 1860 (1991).
12
See generally, Wiensch, The Supreme Court, 79 Geo. L. J. at 1860-61 (explaining that
the lack of uniform results, attributable to the bankruptcy courts' exercise of their equitable
powers under the Bankruptcy Act, was a driving force behind the enaction of the Bankruptcy
Code, and that the Supreme Court has taken a much narrower view of the bankruptcy courts'
powers to do equity under the Code).
26
practice of equitable subordination.13 The language of section
510(c) expressly invokes the bankruptcy courts' historical exercise
of their equitable powers to subordinate the claims of creditors
who engaged in inequitable conduct in favor of the claims of those
creditors who came to court with clean hands.14 Section 510(c),
therefore, powerfully demonstrates that Congress was aware of
the bankruptcy courts' exercise of their equitable powers in the
context of subordination, and that Congress knew how to
13
Section 510(c) provides:
Notwithstanding subsections (a) and (b) of this section, after notice and a hearing,
the court may—
(1) under the principles of equitable subordination, subordinate for
purposes of distribution all or part of an allowed claim to all or
part of another allowed claim or all or part of an allowed interest to
all or part of another allowed interest; or
(2) order that any lien securing such a subordinated claim be
transferred to the estate.
11 U.S.C. § 510(c) (emphasis added).
14
The legislative statement accompanying section 510(c) states in pertinent part:
It is intended that the term “principles of equitable subordination” follow existing
case law and leave to the courts development of this principle. To date, under
existing law, a claim is generally subordinated only if [the] holder of such claim is
guilty of inequitable conduct, or the claim itself is of a status susceptible to
subordination, such as a penalty or a claim for damages arising from the purchase
or sale of a security of the debtor.
11 U.S.C. § 510 Legislative Statement; see also H.R. Rep. 95-595 at 359, reprinted in 1978
U.S.C.A.A.N. 5963, 6315 (noting the legislative intent to codify prior case law concerning the
courts' power of equitable subordination and explaining that this Code provision “is not intended
to limit the court's power in any way. The bankruptcy court will remain a court of equity . . . .”)
27
preserve those powers to the extent it chose to do so. In sharp
contrast to section 510(c), however, section 510(a) includes no
such express grant of authority that would permit the bankruptcy
courts to continue enforcing and interpreting subordination
agreements in equity. When compared with Congress's decision
to permit the bankruptcy courts to retain their powers of equitable
subordination in section 510(c), section 510(a)'s command to
enforce subordination agreements according to the applicable
nonbankruptcy law can only be read as a clear and contemplated
break with prior practice.15 Accordingly, the plain language of the
text, as well as the provision's structure, supports our conclusion
that Congress, by designating state law to govern the
interpretation and enforcement of subordination agreements,
15
Congress's decision to permit the bankruptcy courts to exercise their equitable powers
in the context of equitable subordination could be read with a view toward the classic maxim of
statutory construction: expressio unius est exclusio alterius. See Black's Law Dictionary 581
(6th ed. 1990) (“the expression of one thing is the exclusion of another.”). In the context of
section 510, however, Congress has gone further than simply expressing one command in
section 510(c) and making another by silent implication. Section 510(a) directly instructs courts
to enforce subordination contracts according to the relevant (in this case, New York) law rather
than equity.
28
withdrew the foundation of equitable authority under which the
bankruptcy courts had developed the Rule of Explicitness.
Finally, the Junior Creditors argue that Congress could not
have intended such a radical departure from pre-Code practice
because the Bankruptcy Code's legislative history is devoid of any
reference to the Rule of Explicitness and indicates no intent to
change the law as it had developed on this point. As Judge Fay's
dissent points out, the Junior Creditors' analytical approach
receives considerable support in the Supreme Court's cases,
which observe that Congress generally did not depart from well-
developed pre-Code practice without making its intent to do so
clear either in the text of the new Code or by discussing the point
in the legislative history. See e.g., Dewsnup v. Timm, 502 U.S.
410, 419, 112 S. Ct. 773, 779, 116 L. Ed. 2d (1992) (“[T]his Court
has been reluctant to accept arguments that would interpret the
Code, however vague the particular language under consideration
might be, to effect a major change in pre-Code practice that is not
29
the subject of at least some discussion in the legislative
history.”).16 The applicable legislative history reflects that
Congress was aware of then current practice with regard to the
enforcement of subordination provisions, see H. R. Rep. No. 95-
595 at 396, reprinted in 1978 U.S.C.C.A.N. 5963, 6352,17 but the
parties agree that the legislative history does not mention the Rule
of Explicitness nor does it speak to the issues before us.
Although both the Code and the legislative history are silent on
these particular topics, we find section 510(a)'s command to
16
As a dissenter noted in Dewsnup, the Court's emphasis on silence in the legislative
history in that case appeared to be at odds with the Court's prior efforts to interpret the
Bankruptcy Code. Dewsnup, 502 U.S. at 435, 112 S. Ct. at 787 (Scalia J., dissenting) (“I have
the greatest sympathy for the Courts of Appeals who must predict which manner of statutory
construction we shall use for the next Bankruptcy Code case.”)(citing Wolas, 502 U.S. 151, 112
S. Ct. 527 and Ron Pair Enters., 489 U.S. 235, 109 S. Ct. 1026).
17
The parties vigorously disagree over whether we may presume that Congress was even
aware of prior practice under the Rule of Explicitness. The only honest answer to that question,
of course, is that we cannot know what (if anything) Congress thought about these issues when it
passed section 510(a) of the Bankruptcy Code. We note, however, that a rule adopted by three
of the federal circuits and adhered to without exception appears to be at least as well recognized
as prior practices that the Supreme Court has held to be within Congress's presumptive
cognizance. See Midlantic Nat'l Bank v. New Jersey Dep't of Envtl. Protection, 474 U.S. 494,
500-01, 106 S. Ct. 755, 759, 88 L. Ed. 2d 859 (1986) (describing three cases as sufficient
evidence of “well-recognized” restrictions on a trustee's abandonment powers). But see Ron Pair
Enters., 489 U.S. at 248, 109 S. Ct. at 1034 (“[T]here is no reason to think that Congress, in
enacting a contrary standard, would have felt the need expressly to repudiate [a doctrine that
guided the bankruptcy courts in the exercise of their equitable powers].”)
30
enforce subordination agreements on par with other contracts
under the applicable nonbankruptcy law a sufficient indication that
Congress intended to depart from the previous regime of
enforcing and construing these private contracts in federal equity.
As even the Dewsnup court observed, “where the language [of
the Code] is unambiguous, silence in the legislative history cannot
be controlling.” Dewsnup, 502 U.S. at 419-20, 112 S. Ct. at 779.
Section 510(a) is not ambiguous in requiring that subordination
agreements be enforced the same as nonbankruptcy agreements.
By requiring post-petition interest provisions to be more explicit
than other nonbankruptcy provisions, the rule of explicitness is
contrary to section 510(a). 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
31
bankruptcy courts' equity powers or as a federal canon of contract
construction.18
III. Enforcement and Interpretation of the Subordination
Agreements Pursuant to New York Law
We now turn to New York law to determine whether the
subordination agreements before us require the holders of the
Subordinated Notes to subordinate their claims to Chase and
Gabriel's demand for post-petition interest. We note, however,
that since claims for post-petition interest arise almost exclusively
in bankruptcy proceedings, the New York courts previously have
not had occasion to consider what language in a subordination
agreement would be sufficient to require a junior creditor to bear
the risk and burden of paying post-petition interest to the senior
creditor out of the junior creditor's distributions under the
18
The only other court to consider this question after Congress passed section 510(a) of
the Bankruptcy Code assumed the continued validity of the Rule of Explicitness. See In re
Ionosphere, 134 B.R. at 533-34. Although we find such a conclusion untenable for the reasons
stated above, we note that the parties in that case appear not to have disputed the issue and the
bankruptcy court, while noting its doubts, see id. at 534 n.11, appeared reluctant to contradict
otherwise settled precedent in the Second Circuit.
32
Bankruptcy Code. The parties have cited a good deal of New
York case law that stands for the uncontroversial and irrelevant
propositions that New York enforces contracts as written, that a
senior creditor is entitled to priority to the extent contracted for,
and that a senior creditor cannot rely on a legally unenforceable
obligation to subordinate a junior creditor's claim. These
authorities provide us with little guidance as to how a New York
court might interpret the language at issue in these subordination
agreements.
We note that although the “paid in full” language present in
the subordination agreements sounds in absolute terms, in the
context of bankruptcy proceedings (which the parties to a
subordination agreement obviously contemplate to some extent),
the phrase is ambiguous. In one sense, Chase's characterization
of the phrase as requiring the payment of interest until the final
repayment of the underlying obligation is a straightforward one.
See e.g., Richardson v. Providence Washington Ins. Co., 237
33
N.Y.S.2d 893, 905-06 (N.Y. Sup. Ct. 1963) (payment in full
requires interest until the date of settlement). In the bankruptcy
context, however, the law has long been clear that even a senior
creditor often has no claim for post-petition interest from the
debtor and, therefore, a junior creditor may reasonably expect to
recover some repayment from the debtor without being held
hostage to an often sizable claim for the senior creditor's post-
petition interest. See e.g., In re Ionosphere, 134 B.R. at 535(discussing this ambiguity while construing a contract governed by
New York law).
Moreover, we wonder whether the New York courts would
disturb the heretofore uniform treatment of this question,
particularly given the evidence that the capital markets appear to
have adjusted to the Rule of Explicitness. The American Bar
Association's model forms, for example, now include a “Model
Simplified Indenture” that includes subordination language that
specifically and unmistakably alerts the junior creditor to its liability
34
for the senior creditor's post-petition interest. See American Bar
Association, Model Simplified Indenture, 38 Bus. Law. 741, 769
(1983); see also In re Ionosphere, 134 B.R. at 535 n.14 (quoting
an indenture with similarly explicit language). Similarly, one of the
most authoritative bankruptcy treatises warns that an indenture
agreement must include explicit and specific language to put the
junior creditor on notice regarding post-petition interest in
deference to the Rule of Explicitness. See Collier on Bankruptcy
¶ 510.03[3]. Given New York's role as the nation's financial
capital and our intuition that a sizeable proportion of outstanding
indenture agreements include clauses that invoke New York law,
as well as the importance of standardization in indenture
agreements generally, we suspect that the courts of New York, as
a practical matter, would be loath to depart from prior practice and
thus radically reduce the current value of debt held subject to the
condition of subordination until the senior creditor receives
35
“payment in full.”19 See generally, Sharon Steel Corp. v. Chase
Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982)
(“[U]niformity in interpretation is important to the efficiency of
capital markets. . . . Whereas participants in the capital market
can adjust their affairs according to a uniform interpretation,
whether it be correct or not as an initial proposition, the creation of
enduring uncertainties as to the meaning of boilerplate provisions
would decrease the value of all debenture issues and greatly
impair the efficient working of capital markets.”); Broad v.
Rockwell Int'l Corp., 642 F.2d 929, 943 (5th Cir. Apr. 1981) (en
banc) (construing an indenture agreement governed by New York
law and noting that “[a] large degree of uniformity in the language
of debenture indentures is essential to the functioning of the
financial markets . . . .”); accord Leverso v. Southtrust Bank of Al.,
N.A., 18 F.3d 1527, 1534 (11th Cir. 1994) (same).
19
Or, conversely, dramatically increase the current value of senior-debt held subject to a
condition that all junior-claims are subordinate to the senior creditor's right to be paid in full.
36
Nevertheless, since this is an important question of first
impression for the New York courts, and one that Congress has
specifically directed to state law, we are reluctant to predict its
resolution under New York law. Accordingly, we have decided to
certify the following question to the New York Court of Appeals
pursuant to N.Y. Rules of Court § 500.17(a):20
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?
Since the remaining questions, whether Chase may recover
reasonable costs and fees for prosecuting this action and whether
recent changes in New York law regarding the enforcability of
contracts for compound interest permit Chase to collect interest
upon interest pursuant to section 5.2 of the Senior Indenture,
20
Section 500.17 provides:
(a) Whenever it appears to the Supreme Court of the United States, any United
States Court of Appeals, or a court of last resort of any other state that
determinative questions of New York law are involved in a cause pending before
it for which there is no controlling precedent of the Court of Appeals, such court
may certify the dispositive questions of law to the Court of Appeals.
N.Y. R. App. Ct. § 500.17(a) (McKinney 1997).
37
necessarily depend upon whether Chase and Gabriel are entitled
to post-petition interest at all, we defer our decision on these
matters until the New York Court of Appeals has had an
opportunity to consider the question.
CONCLUSION
Chase and Gabriel sought to collect post-petition interest,
interest upon that interest, as well as post-petition fees and costs,
from the Junior Creditors by arguing that section 510(a) of the
Bankruptcy Code had abrogated the judicially created “Rule of
Explicitness.” We concluded that section 510(a)'s direction to
enforce subordination agreements according to applicable
nonbankruptcy law required us to enforce and interpret the
subordination clause in the Subordinated Indentures under New
York law. Since our review of New York law revealed no
intimation of what specific language (if any) the New York courts
would require to put a junior creditor on notice regarding the
38
significant risk of subordinating a debt to a senior creditors claims
for post-petition interest and post-petition fees and costs, we
CERTIFIED this important question to the New York Court of
Appeals. Accordingly, it is hereby ORDERED that the Clerk of the
United States Court of Appeals for the Eleventh Circuit transmit to
the Clerk of the New York Court of Appeals a Certificate, in the
form set forth above, together with a complete set of briefs,
appendices, and record filed by the parties with this Court. This
panel retains jurisdiction so that, after we receive a response from
the New York Court of Appeals, we may dispose of the appeal.
The parties are hereby ordered to bear equally such fees and
costs, if any, as may be requested by the New York Court of
Appeals.
REVERSED in part and question CERTIFIED to the New
York Court of Appeals.
FAY, Senior Circuit Judge, dissenting:
39
Most respectfully, I dissent. The majority opinion abolishes
the well established Rule of Explicitness in bankruptcy
proceedings. It does so by relying on “silence” in the legislative
history of the 1978 Bankruptcy Code and by a strained
interpretation of the language of 11 U.S.C. § 510(a). In my
opinion this is both unfounded and unwise.
As the majority correctly points out, the examination of the
statue begins with the language itself. However, it is also true that
when Congress amends the bankruptcy laws, it does not “write on
a clean slate,” but rather, is guided by the established practices of
the bankruptcy courts. Dewsnup v. Timm, 502 U.S. 410, 419, 112
S. Ct. 773, 779, 116 L. Ed. 2d 903 (1992). Further, as the
majority observes, we must assume that Congress was fully
aware of the Rule of Explicitness when enacting § 510(a). See
Midlantic Nat’l Bank v. New Jersey Dep’t of Environmental
Protection, 474 U.S. 494, 500-501, 106 S. Ct. 755, 759, 88 L. Ed.
2d 859 (1986); In re Charter Co., 876 F.2d 866, 870 n.6 (11th Cir.
40
1989), cert. dismissed, 496 U.S. 944, 110 S. Ct. 3232, 110 L. Ed.
2d 678 (1990).
The Supreme Court has provided a guideline for interpreting
this section by holding that amendments to existing bankruptcy
laws are not to be read to revoke judicially established principles
absent an express statement or a clear indication that such a
result was intended. Cohen v. De La Cruz, 118 S. Ct. 1212,
1218, 140 L. Ed. 2d 341 (1998); Pennsylvania Dep’t of Public
Welfare v. Davenport, 495 U.S. 522, 563, 110 S. Ct. 2126, 2133,
109 L. Ed. 2d 588 (1990); Midlantic Nat’l Bank 474 U.S. at 501(“The normal rule of statutory construction is that if Congress
intends for legislation to change the interpretation of a judicially
created concept, it makes that intent specific.”); Davis v. Michigan
Dep’t of Treasury, 489 U.S. 803, 813, 109 S. Ct. 1500, 1506, 74
L. Ed. 2d 562 (1983). We have repeated this standard in In re
Colortex Industries, Inc., 19 F.3d 1371, 1374 (11th Cir. 1994)
41
(“Silent abrogation of judicially created concepts is particularly
disfavored when construing the Bankruptcy Code.”).
The section which the appellant contends overrules the Rule
of Explicitness states:
A subordination agreement is enforceable
in a case under this title to the same extent that
such agreement is enforceable under
applicable nonbankruptcy law.
11 U.S.C. § 510(a).
There is simply nothing in the language of this section
declaring the Rule of Explicitness abolished. The statute is
completely silent. Furthermore, the legislative history provides no
indication that the intention of § 510(a) was to eliminate the Rule
of Explicitness. To display such an intention, one would expect at
least a marginal amount of debate on the rule. To the contrary,
the Rule of Explicitness was never mentioned in the legislative
history. See H.R. REP. No. 595, 95th Cong., 1st Sess. 359 (1977), reprinted in
1978 U.S.C.C.A.N. 5963; S. REP. No. 989, 95th Cong., 2d Sess. 74 (1978), reprinted in
1978 U.S.C.C.A.N. 5787.
42
Moreover, the policy of denying claims for postpetition interest to creditors has
long been established. This general rule was promulgated by the English bankruptcy
system nearly two centuries ago and was subsequently adopted by our legal system.
See Sexton v. Dreyfus, 219 U.S. 339, 344, 31 S.C.t. 256, 257, 55 L.Ed. 244 (1911).
Ultimately, Congress codified this policy in the Bankruptcy Code under 11 U.S.C. §§
502 and 506. Section 502(b)(2) states the general rule that a claim for interest is
suspended once the petition for bankruptcy is filed. See 11 U.S.C. 502(b)(2). Section
506 carves out a narrow exception to the general rule by allowing claims for postpetition
interest for oversecured creditors. 11 U.S.C. 506(b). Although §§ 502 and 506 concern
postpetition interest claims against the estate and not between creditors, the Rule of
Explicitness works in harmony with those sections by disallowing claims for postpetition
interest between creditors unless the agreement is unequivocal. In light of those
sections, one would expect that if Congress intended to eliminate the Rule of
Explicitness they would have made that intention unmistakably clear. I do not think it is
correct to find a clear intention to abandon an established rule of bankruptcy law
through the silence of Congress. In short, it is my opinion that Congress did not intend
to abrogate the Rule of Explicitness.
The holding of the majority also runs counter to a number of respected
commentaries, written after Congress amended § 510(a), which cite the Rule of
Explicitness as a governing principle when considering the award of postpetition
interest. See Jonathon M. Landers, Kathryn A. Coleman, Claims Issues, 767
PLI/Comm 819, 846 (1998) (“Several decisions hold that, given the general bankruptcy
rule against post-petition interest, the subordination will not enable senior lenders to
43
obtain post-petition interest at the expense of junior lenders unless the indenture
specifically so provides.”); Marcia L Goldstein, Sean L. McKenna Intercreditor and
Subordination Issues, 793 PLI/Corp 679, 684 (1992) (“subordination to postpetition
interest must be carefully crafted in order to be enforceable in a bankruptcy case.”); Carl
D. Lobell, Sharon B. Applegate, Lending to Troubled Companies - Special
Considerations: Fraudulent Transfers, Substantive Consolidation, Subordinated Debt
Treatment; Developing Theories of Lender Liability and Equitable Subordination, 733
PLI/Corp 175, 253 (1991); Margaret Sheneman, Classification and Allowance of Claims,
429 PLI/Comm 931, 974 (1987). See also In re Southeast Banking Corp., 212 B.R.
682, 688 (S.D. Fla. 1997) (citing other articles). The position of the majority is also
refuted by the leading treatise in the area which cites the Rule of Explicitness to limit
recovery of postpetition interest.21 4 L. King Collier on Bankruptcy ¶ 510.03[3] at 510-8
(15th ed. rev. 1998). The commentaries and the rulings being reviewed convince me
that the language of § 510(a) has not abolished the Rule of Explicitness.
The Rule of Explicitness was created more than twenty years ago by the
bankruptcy courts based on equitable considerations. It was upheld as good law by
21
Collier states, “[c]ourts have uniformly relied on state law to prevent . . . [senior
creditors from recovering from junior creditors], invoking the rule of contract construction know
as the Rule of Explicitness to deny postpetition interest to undersecured senior creditors even in
the face of valid and enforceable subordination agreements.” 4 L. King Collier on Bankruptcy ¶
510.03[3] at 510-8 (15th ed. rev. 1998). In fairness, it is important to note the decision of the
Bankruptcy Court in this case was one of several cases cited to support this position.
Nonetheless, the possibility of an inconsistency with the Rule of Explicitness and § 510(a) is not
mentioned.
44
three different appellate courts22, is of sound policy, and completely consistent with the
goals of bankruptcy law. It is well known and accepted by those in the financial world. I
do not believe the rules of statutory interpretation set forth by the United States
Supreme Court allow us to void such a rule without a more definite mandate from
Congress. I would affirm the opinion of the District Court, which affirms the ruling of the
Bankruptcy Court, for the reasons set forth in the opinions of those courts.23
22
In re Matter of King Resources Co., 528 F.2d 789 (10th Cir. 1976); In re Kingsboro
Mortgage Co., 514 F.2d 400 (1975); In re Time Sales Fin. Corp., 491 F.2d 841 (3rd Cir. 1974).
23
In re Southeast Banking Corp., 212 B.R. 682 (S.D. Fla. 1997); In re Southeast Banking
Corp., 188 B.R. 452 (Bankr. S.D. Fla. 1995).
45