HSBC Bank USA v. Bank of New York Mellon Trust, et al

Filing

OPINION issued by Juan R. Torruella, Appellate Judge; Norman H. Stahl, Appellate Judge and Jeffrey R. Howard, Appellate Judge. Published. [10-1456]

Case: 10-1456

Document: 00116224562

Page: 1

Date Filed: 06/23/2011

Entry ID: 5560398

United States Court of Appeals
For the First Circuit
No. 10-1456
IN RE:

BANK OF NEW ENGLAND CORPORATION, DEBTOR

HSBC BANK USA, National Association,
as Indenture Trustee and as Successor Indenture Trustee
to JP Morgan Chase Bank, f/k/a The Chase Manhattan Bank,
as Indenture Trustee,
Appellant,
v.
BANK OF NEW YORK MELLON TRUST COMPANY, National Association,
as Indenture Trustee; U.S. BANK, National Association,
as Indenture Trustee; DR. BEN S. BRANCH, Chapter 7 Trustee
for Bank of New England Corporation,
Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Torruella, Stahl and Howard,
Circuit Judges.

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Charles J. Cooper with whom Michael W. Kirk, Jesse Panuccio,
Sarah L. Reid, Alison L. MacGregor, Douglas B. Rosner, Cooper and
Kirk, PLLC, Kelley Drye & Warren LLP, and Goulston & Storrs, P.C.,
were on brief for appellant.
Dianne F. Coffino for Bank of New York and Patrick J.
McLaughlin for U.S. Bank with whom C. William Phillips, Robert M.
Hemm, Katherine A. Constantine, Todd Pearson, Pamela Foohey,
Covington & Burling LLP, and Dorsey & Whitney LLP were on brief for
appellees.

June 23, 2011

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STAHL, Circuit Judge.
the

second

time,

a

district

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Entry ID: 5560398

HSBC Bank USA, N.A. appeals, for
court

judgment

that

affirmed

a

bankruptcy court's authorization of a distribution of assets from
the estate of Bank of New England Corporation ("BNEC") to holders
of BNEC junior debt.

The parties agree that the holders of the

senior debt are entitled to priority payment of their principal
along with pre-petition interest – that is, interest that accrued
up until the filing of BNEC's bankruptcy petition – before the
holders of the junior debt may receive a distribution.

At issue is

whether this senior priority also includes payment of post-petition
interest earned on the principal up until the principal was paid in
full, as HSBC contends.

For the following reasons, we affirm.
I.

Background

During the 1970s and 1980s, BNEC issued six series of
unsecured debt instruments that totaled over $700 million in
principal amount.

Three of these offerings were issued in 1973,

1974, and 1986 and consist of senior, unsecured debt.

The other

three offerings were issued in 1984, 1987, and 1989 and consist of
subordinated, or junior, unsecured debt. The holders of the senior
debt ("Senior Noteholders") are represented by indenture trustee
HSBC

("Senior

Trustee"),

and

the

holders

of

the

junior

debt

("Junior Noteholders") are represented by indenture trustees U.S.
Bank,

N.A.

and

Bank

of

New

York

-3-

Mellon

Trust

Company,

N.A.

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(collectively "Junior Trustees"). Choice of law clauses within the
indentures state that New York law controls the debt instruments.
The three junior indentures that govern the junior debt
contain virtually identical subordination provisions, as follows:
The Company . . . covenants and agrees, and
each 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 [Subordinated Notes] shall be
subordinate and junior, to the extent and in
the manner hereinafter set forth, in right of
payment to the Company's obligations to the
holders
of
Senior
Indebtedness
of
the
Company . . . .
(emphasis added).

In turn, each junior indenture further details:

The Company agrees that upon . . . any payment
or distribution of assets of the Company of
any kind or character . . . 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 . . . before any
payment is made on account of the principal of
or interest on the indebtedness evidenced by
the [Subordinated Notes] due and owing at
the time . . . .
(emphasis added).
On January 7, 1991, BNEC filed a voluntary petition for
relief pursuant to Chapter 7 of the Bankruptcy Code.

Dr. Ben S.

Branch was elected to serve as BNEC's Chapter 7 Trustee, and over
time, he made three distributions that satisfied in full the Senior
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Noteholders' principal and pre-petition interest due under the
senior notes, along with approved fees and expenses incurred
through the date of the third distribution.

He also created a

reserve to cover future fees and legal expenses.
After the third distribution, made in 1999, the Chapter
7 Trustee concluded that the estate had satisfied the claims of the
Senior

Noteholders,

and

so

on

May

23,

2001,

he

moved

for

authorization to make a fourth distribution, of $11 million, which
would represent the first recovery by the Junior Noteholders.1

The

Senior Trustee objected, arguing that the Junior Noteholders were
not entitled to receive any payment until the Senior Noteholders
were paid post-petition interest.
The bankruptcy court granted the Chapter 7 Trustee's
motion over the Senior Trustee's objection and authorized the
distribution.

In re Bank of New Eng. Corp., 269 B.R. 82 (Bankr. D.

Mass. 2001) ("BNEC I").

It held that, in accordance with the Rule

of Explicitness, as articulated in three court of appeals cases

1

The parties agree that although the motion concerns a
distribution of $11 million, the resolution of this dispute will
apply to the entire balance of the estate, which approximates $100
million.
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during the 1970s2 and as adhered to under New York law,3 senior
creditors

can

distribution

to

recover
junior

post-petition
creditors

interest

only

prior

when

subordination

the

to

a

agreement explicitly states the junior creditors' assumption of the
risk for such payment.

Id. at 85-86.

It then found that the

language within the junior indentures was not sufficiently explicit
to meet this standard.

The district court affirmed.

HSBC Bank USA

v. Bank of New Eng. Corp. (In re Bank of New Eng. Corp.), 295 B.R.
419 (D. Mass. 2003) ("BNEC II").
On appeal, we reversed.

HSBC Bank USA v. Branch (In re

Bank of New Eng. Corp.), 364 F.3d 355 (1st Cir. 2004) ("BNEC III").
We explained that the accrual of interest on an unsecured claim
stops when a debtor files a bankruptcy petition, such that postpetition interest "is generally not recoverable at all (at least,
not recoverable from the debtor)."
U.S.C. § 502(b)(2).

Id. at 362, 367; see also 11

We also acknowledged that subordination

agreements may sometimes prioritize the payment of post-petition
interest

to

senior

creditors

over

any

recovery

on

junior

indebtedness, entitling senior creditors to amounts that would

2

See Cont'l Ill. Nat'l Bank & Trust Co. of Chi. v. First Nat'l
City Bank of N.Y. (In re King Res. Co.), 528 F.2d 789 (10th Cir.
1976); Bankers Life Co. v. Mfrs. Hanover Trust Co. (In re Kingsboro
Mortg. Corp.), 514 F.2d 400 (2d Cir. 1975); In re Time Sales Fin.
Corp., 491 F.2d 841 (3d Cir. 1974).
3

The court relied on Chemical Bank v. First Trust of New York
(In re Southeast Banking Corp.), 156 F.3d 1114 (11th Cir. 1998), in
reaching this conclusion.
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otherwise be payable to junior creditors.
362.
1978,

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BNEC III, 364 F.3d at

We noted that before the adoption of the Bankruptcy Code in
the

recovery

of

post-petition

interest

prior

to

any

distribution to junior creditors was controlled by the Rule of
Explicitness, an equitable doctrine fashioned by the courts that
prohibited senior creditors from recovering post-petition interest
absent unequivocal language in subordination agreements to the
contrary.
the

Id.

Bankruptcy

We concluded, however, that the 1978 enactment of
Code,

and

specifically

§

510(a)

therein,

"extinguished the Rule of Explicitness in its classic form."

Id.

at 359.
In reaching our holding, we interpreted § 510(a), which
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).

We

explained that this section requires courts to reference general
principles of state contract law when enforcing subordination
agreements, and it prohibits states from creating bankruptcyspecific rules of contract interpretation.

Id. at 359, 362, 364.

In view of § 510(a), we examined New York's general
principles of contract law and found that they "do not embody any
canon

that

operates

Explicitness."

in

Id. at 360.

the

same

manner

as

the

Rule

of

Rather, we found that "New York courts

do not appear to have developed any rules of interpretation that

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apply specifically to subordination agreements," and that "the Rule
of Explicitness is not part of New York's general contract law."
Id. at 364-65.
We then applied New York contract law to determine the
meaning

of

the

subordination

provisions

within

the

junior

indentures. Specifically, we examined whether the phrase "interest
due or to become due," owed first to the Senior Noteholders, was
meant to include post-petition interest.

Id. at 366.

Finding the

phrase ambiguous, we remanded to the bankruptcy court to conduct a
"contextual examination of the parties' intent, taking full account
of the surrounding facts and circumstances."

Id. at 366-68.

We

acknowledged that "the backdrop of bankruptcy may inform [this]
examination," id. at 368 n.5, as we noted that New York law
recognizes a "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," id. (internal marks omitted) (citing Dolman v. U.S. Trust
Co., 138 N.E.2d 784, 787 (N.Y. 1956)). We stated further, however,
that

"the

effect

factfinding."
On

of

that

remand,

the

tenet

is

uncertain

absent

further

Id.
bankruptcy

court

bifurcated

the

proceedings and decided first that each party had the burden to
establish its claim of entitlement to the disputed funds by a
preponderance

of

the

evidence,

a

-8-

holding

that

neither

party

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In re Bank of New Eng. Corp., 359 B.R. 384 (Bankr. D.

Mass. 2007) ("BNEC IV"). It then conducted a three-day evidentiary
hearing

involving

the

testimony

of

several

witnesses and approximately 200 exhibits.

fact

and

expert

In re Bank of New Eng.

Corp., 404 B.R. 17, 26 (Bankr. D. Mass. 2009) ("BNEC V").

Upon

evaluation of the witnesses, exhibits, and submissions of counsel,
along with the backdrop of bankruptcy, the court concluded that the
parties to the junior indentures did not intend to permit the
holders of senior debt to receive post-petition interest prior to
payment on the junior debt.
affirmed.

Id. at 18-19, 39.

The district court

In re Bank of New Eng. Corp., 426 B.R. 1 (D. Mass. 2010)

("BNEC VI").
On appeal, the Senior Trustee argues that the bankruptcy
court must again be reversed.

It asserts that the court looked to

the incorrect law when analyzing the "backdrop of bankruptcy," and
that it essentially found that New York law does include the Rule
of Explicitness despite this court's opposite conclusion.

It also

argues that the court improperly analyzed the factual evidence
presented in holding that the parties to the junior indentures did
not intend to include post-petition interest.

It claims, lastly,

that because there was no competent extrinsic evidence to discern
the parties' intent, the bankruptcy court should have construed the
subordination agreements as a matter of law.

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II.

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Analysis

We review directly a bankruptcy court decision and give
"no special deference to the district court's determinations."
Paging Network, Inc. v. Arch Wireless, Inc. (In re Arch Wireless,
Inc.), 534 F.3d 76, 80 (1st Cir. 2008) (internal marks omitted)
(quoting Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st
Cir.

1994)).

The

bankruptcy

court's

conclusions

of

law

are

accorded de novo review, and its findings of fact are reviewed for
clear error.

Id.; see also BNEC III, 364 F.3d at 361.

Findings of

fact "are not to be disturbed if 'supportable on any reasonable
view of the record,' viz., 'unless, on the whole of the record, we
form a strong, unyielding belief that a mistake has been made.'"
McMullen v. Sevigny (In re McMullen), 386 F.3d 320, 329 (1st Cir.
2004) (quoting Gannett v. Carp (In re Carp), 340 F.3d 15, 22 (1st
Cir. 2003)).
As we explained in BNEC III, general principles of New
York contract law must be applied to determine the meaning of the
phrase "interest due or to become due" found within the junior
indentures.

364

F.3d

at

366-67.

Under

New

York

law,

a

straightforward and unambiguous contract is to be interpreted as a
matter of law, but "when the meaning of the contract is ambiguous,"
as we found the provisions to be, "the intent of the parties
becomes

a

presented."

matter

of

inquiry,

[and]

a

question

of

fact

is

Eden Music Corp. v. Times Square Music Publ'ns Co.,

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514

Document: 00116224562

N.Y.S.2d

3,

5

(N.Y.

Page: 11

App.

Date Filed: 06/23/2011

Div.

1987).

In

Entry ID: 5560398

addition,

courts may determine the meaning of ambiguous terms based on the
law in force at the time the agreements are made, as "the law in
force . . . becomes . . . part of the agreement . . . and the
contract will be construed in the light of such law."

Dolman, 138

N.E.2d at 787 (interpreting the term "condemnation" found within a
lease agreement based on the New York City Administrative Code);
see also Mayo v. Royal Ins. Co. of Am., 662 N.Y.S.2d 654 (N.Y. App.
Div. 1997) (construing settlement stipulation not to allow recovery
over $50,000 in view of state statutory limit).
The bankruptcy court sought to apply New York's law-inforce doctrine to the junior indenture agreements. It first stated
that it considered this court's prior account of New York law,
which we explained did not include a state-specific version of the
Rule of Explicitness, to be dicta.

BNEC V, 404 B.R. at 27.

It

then looked to determine the substantive law in effect at the time
the agreements were executed, analyzing the common law of England,
which New York adopted as its own common law, as related to
insolvency proceedings.

Id. at 28-29.

The court concluded:

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.
Id. at 29.

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The Senior Trustee argues that the bankruptcy court erred
by dismissing as dicta this court's previous conclusion that New
York law does not include an analog to the Rule of Explicitness.
It also claims that the bankruptcy court applied bankruptcyspecific New York (and English) law, rather than general principles
of New York contract law.

Lastly, it argues that, in reality, the

bankruptcy court's holding did little to resolve the controversy
because it simply concerned the obligations of the debtor in
bankruptcy – namely, that a debtor is not responsible for paying
post-petition interest (a principle of law neither side disputes)
– and not the subordination rights of senior creditors as compared
to junior creditors.
Although the bankruptcy court's law-in-force analysis
appears somewhat contradictory at times, nonetheless we need not
credit it, as, in the end, the discussion was unnecessary to the
holding.

As we explain below, the bankruptcy court's factual

findings as to the intent of the parties were sufficient in
themselves to support the conclusion that the parties did not
intend to subordinate the Junior Noteholders to post-petition
interest.
In accordance with New York law, the parties' intended
meaning of an ambiguous term found in an agreement is to be
"ascertained

in

the

light

of

the

surrounding

facts

and

circumstances," Tobin v. Union News Co., 239 N.Y.S.2d 22, 25 (N.Y.

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App. Div. 1963), based upon the "credibility of the extrinsic
evidence or on a choice among reasonable inferences to be drawn
from it,"

Williams v. Brosnahan, 746 N.Y.S.2d 219, 222 (N.Y. App.

Div. 2002) (internal marks and citation omitted).

A "'court may

accept any available extrinsic evidence to ascertain the meaning
intended by the parties during the formation of the contract.'"
Morgan Stanley Grp. Inc. v. New Eng. Ins. Co., 225 F.3d 270, 275-76
(2d Cir. 2000) (quoting Alexander & Alexander Servs. Inc. v. These
Certain Underwriters at Lloyd's, London, 136 F.3d 82, 86 (2d Cir.
1998)).

"The varieties of extrinsic evidence that may demonstrate

circumstances

surrounding

formation

of

the

contract

are

as

limitless as are the types of circumstances." Margaret N. Kniffin,
5 Corbin on Contracts § 24.10 (Joseph M. Perillo, ed., rev. ed.
1998).

Indeed, "dictionaries, treatises, articles, and other

published materials created by strangers to the dispute . . . are
.

.

.

entirely

appropriate

for

use

in

contract

cases

as

interpretive aids." In re Envirodyne Indus. Inc., 29 F.3d 301, 305
(7th Cir. 1994) quoted in Corbin on Contracts § 24.10.

Only if the

extrinsic evidence supplied is conclusory or unable to resolve the
ambiguity will the meaning of the term remain a question of law for
the court.

New York v. Home Indem. Co., 66 N.Y.2d 669, 671 (1985).
As stated above, we review a court's factual findings

under the deferential clearly erroneous standard.
Bessemer City, 470 U.S. 564, 566 (1985).

-13-

See Anderson v.

In deciding whether

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factual findings are clearly erroneous, we "'must give due regard
to

the

trial

court's

opportunity

to

judge

the

witnesses'

credibility.'"

Monahan v. Romney, 625 F.3d 42, 46 (1st Cir. 2010)

(quoting

R.

Fed.

permissible

views

Civ.
of

P.
the

52(a)(6)).
evidence,'

"Where
the

there

are

'factfinder's

'two

choice

between those competing views cannot be clearly erroneous.'"

Id.

(quoting Fed. Refinance Co. v. Klock, 352 F.3d 16, 26-27 (1st Cir.
2003)).
Here, the bankruptcy court engaged in substantial factfinding and determined that the parties to the subordination
agreements did not intend to subordinate the junior debt to postpetition

interest

accrued

on

the

senior

debt.

Although

the

bankruptcy court acknowledged that no party actually involved in
the drafting of the junior indentures was located to testify, the
court relied on several other pieces of evidence to support its
conclusion.

See BNEC V, 404 B.R. at 26.

The court heard direct

testimonial evidence from John Cashin, the senior trust officer who
headed the trust department at Chemical Bank Delaware, the original
indenture trustee under the 1989 junior indenture, and who executed
the 1989 junior indenture.

See id. at 33.

Although his function

was only to comment on the duties of the trustee, he testified that
it

was

the

bank's

position

that

Senior

Noteholders

would

be

entitled to "'interest and principal due to the senior holders up

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to and including the petition, but not post-petition interest.'"
Id. (quoting Cashin testimony).
The court also heard from the Junior Trustees' corporate
trust expert, James Gadsden, a practicing attorney with thirty-four
years

of

experience

in

the

debt

securities

market

and

whose

testimony "added substantially to the picture of what was going on
in this field in the 1980 period."

Id. at 37.

Mr. Gadsden

testified that participants in the debt securities market during
the 1980s understood that a debtor's obligation to pay interest on
unsecured debt ceased upon the filing of a bankruptcy petition, and
that a junior creditor's subordination obligations were coextensive
with that of the debtor's unless the subordination agreements
explicitly stated otherwise.

Id. at 37-38.

He explained "'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.'"

Id. at 38 (quoting Gadsden testimony).
Gadsden also stated that, as an active participant in the

American Bar Association's Business Bankruptcy Committee and Trust
Indenture Subcommittee during the 1980s, he had been and was still
familiar with the three court of appeals decisions from the 1970s
that

articulated

Notwithstanding

the
this

Rule

of

court's

Explicitness.
conclusion

that

Id.
the

at

37-38.

Rule

of

Explicitness did not survive the 1978 enactment of the Bankruptcy

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Code, Mr. Gadsden testified that, as a factual matter, those three
cases were the only cases on point as to the construction of
subordination articles at the time that the junior indentures were
executed.

As such, lawyers drafting indentures during the mid-

1980s knew the cases and would take them into account when drafting
subordination provisions.
cases

"'form[ed]

the

Id. at 38.

background

indentures in the '80s.

He explained that those

against

which

people

drafted

So 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.'"

Id. (quoting Gadsden testimony (emphasis in original)).
Additionally, Gilbert E. Matthews, an expert with forty

years of experience in the investment banking industry and who was
involved in the issuance of subordinated debt issues during the
1980s, testified to his opinion "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."

Id. at 36.

Further, he stated that the market did not believe that typical
subordination clauses like those in the junior indentures included
post-petition

interest,

and

"'post-petition

interest

was

not

payable, absent a specific provision that . . . permitted it.'"
Id. (quoting Matthews testimony). With respect to the interests of
the parties to a subordination agreement, Mr. Matthews noted that
such

parties,

which

typically

include

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the

issuer

and

the

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underwriters and not a senior debt representative, generally have
aligned interests because the issuing company has an incentive to
make the terms favorable to junior debt so that the debt is more
easily marketed and sold.
Beyond testimonial evidence, the bankruptcy court also
considered documentary evidence supporting the Junior Trustees'
position

that

specific

language

providing

for

post-petition

interest was required in order to prioritize its recovery.

For

example, the court considered the 1983 American Bar Association
Model

Simplified

predecessor.

Indenture,

which

was

an

update

to

its

1971

The 1971 model was created before the three court of

appeals decisions articulating the Rule of Explicitness, and it
only entitled senior debt holders to "payment in full"; it did not
include express language allowing for post-petition interest.
id. at 34.

See

In 1983, however, the ABA published a new model

indenture, put forward after the three court of appeals cases and
the enactment of the Bankruptcy Code and around the time of the
junior indentures.

This model offered practitioners an example of

the type of explicit language that would prioritize post-petition
interest.

Id. at 34-36.
The 1983 Model Simplified Indenture stated that in the

event of bankruptcy or a similar proceeding, "holders of Senior
Debt shall be entitled to receive payment in full in cash of the
principal of and interest (including interest accruing after the

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commencement of any such proceeding)" before other creditors are
entitled to receive any payment.

Id. at 35 (emphasis in original)

(quoting Model Simplified Indenture § 11.03 (1983)).

The notes

accompanying the provision clarified further that the language used
"specifies

that

priority

in

right

of

payment

will

extent

to

interest accruing on Senior Debt even after the commencement of a
bankruptcy proceeding."

Id. (emphasis added) (quoting

Model

Simplified Indenture § 11.03 cmt. 3). Mr. Gadsden, who studied the
1983 Model Simplified Indenture and then-market conditions when
drafting the 1999 Revised Model Simplified Indenture, explained
that at the time of the junior indentures, the market wanted senior
noteholders to recover post-petition interest, and the 1983 model
provided the type of express language required to permit its
recovery.

Id. at 38.
The bankruptcy court also reviewed a manual prepared in

1977 by attorneys at the law firm Davis Polk & Wardwell, LLP, which
was counsel to the original indenture trustee under the 1984 and
1987 junior indentures and to the underwriters for the 1987 and
1989 junior indentures.

See id. at 32.

unaltered

1980s

through

the

even

The manual, which remained

after

the

enactment

of

the

Bankruptcy Code, demonstrated the law firm's understanding that
explicit language was required in order to prioritize post-petition
interest.

The model contained a section entitled "Subordinated

Issues" and discussed the three Rule of Explicitness circuit court

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Case: 10-1456

cases.

Document: 00116224562

Id.

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Date Filed: 06/23/2011

Entry ID: 5560398

It explained that, in view of the circuit precedent,

lawyers representing senior debt may wish to include specific
language providing for post-petition interest recovery in order to
"eliminate[] one obstacle to the senior creditor's right to postpetition interest."

Id.; Davis Polk & Wardwell, LLP, Manual

Regarding Matters to be Examined in Representing Morgan Guar. Trust
Co. of N.Y. as Corporate Tr. of New Indentures 84-86 (1977).

The

bankruptcy court acknowledged that there was no evidence that
anyone who drafted the junior indentures' subordination provisions
relied upon the manual, but the manual did "suggest[] the existence
of an institutional knowledge at Davis Polk with respect to the
Rule of Explicitness."

BNEC V, 404 B.R. at 32.

Also presented to

the bankruptcy court were scholarly articles published during the
1980s that corroborated the Junior Trustees' position regarding the
need for explicit language to prioritize the recovery of postpetition interest.
To challenge this evidence, the Senior Trustee presented
the testimony of only one expert, William H. Purcell, with forty
years of experience in investment banking.

Mr. Purcell analyzed

forty-six indentures culled from 1984, 1987, and 1989, the years
that the junior indentures were executed, and found three versions
of subordination provisions: one utilizing express language like
that in 1983 Model Simplified Indenture, one comparable to the
junior indentures at issue in this case, and one comparable to the

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Case: 10-1456

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Date Filed: 06/23/2011

Entry ID: 5560398

1971 model that was silent on post-petition interest and simply
required that senior debt be "paid in full" before any payment on
the junior debt. He testified that, despite the different language
used in these sample indentures, each guaranteed that senior
noteholders were entitled to collect post-petition interest before
junior noteholders received any payment.

Id. at 35, 38-39.

The

bankruptcy court found this testimony "not credible" because it
required the illogical conclusion that variances in language within
indenture agreements were meaningless.

Id. at 36, 39.4

In the end, the court relied on the testimony of several
witnesses, both fact and expert, documentary evidence such as the
1983 Model Simplified Indenture and the Davis Polk manual, and
contemporaneous scholarly articles in reaching the conclusion that
the Junior Trustees proved by a preponderance of the evidence that
the parties to the junior indentures did not intend to subordinate
the junior notes to post-petition interest on the senior notes. In
view of this evidence, which supports that bankruptcy court's
conclusion,

we

find

this

holding

reasonable

and

not

clearly

erroneous.
The Senior Trustee advances that the bankruptcy court
committed legal error because it effectively applied the Rule of
Explicitness by finding that explicit language was required to

4

Mr. Purcell also identified one indenture out of the fortysix that explicitly restricted the payment of post-petition
interest.
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Case: 10-1456

Document: 00116224562

prioritize

post-petition

Page: 21

interest.

Date Filed: 06/23/2011

It

also

argues

Entry ID: 5560398

that

the

evidence presented was insufficient under New York's custom and
practice doctrine to demonstrate a custom and practice of including
explicit

language

within

indenture

agreements.

We

disagree.

First, the bankruptcy court's factual analysis was not a backdoor
application of the Rule of Explicitness.

The court engaged in a

comprehensive, fact-intensive inquiry into the parties' intent at
the time of the agreements, not an application of a per se rule of
construction.

Second, we acknowledge that the bankruptcy court

stated in a footnote at the very end of its opinion that "the
Junior Trustees failed to 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." BNEC V,
404 B.R. at 39 n.149.

We, however, do not take this to mean that

the Junior Trustees failed to prove custom and practice.

Rather,

we understand this to simply recognize that not all subordination
agreements

during

the

1980s

included

explicit

language

that

provided for post-petition interest, such that not all of the
agreements prioritized its recovery.
Third, in any event, even if the evidence presented did
not satisfy the doctrine of custom and practice, a court evaluates
a wide range of evidence when considering the surrounding facts and
circumstances of an agreement to determine the parties' intent as
to an ambiguous term, and it is not limited solely to the custom

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and practice doctrine.

Page: 22

Date Filed: 06/23/2011

Entry ID: 5560398

See Morgan Stanley, 225 F.3d at 275-76; 5

Corbin on Contracts § 24.10; see also E.R. Squibb & Sons, Inc. v.
Lloyd's & Co., 241 F.3d 154, 174-75 (2d Cir. 2001) (finding no
clear error in district court's interpretation of an ambiguous
contract provision that relied on expert testimony regarding a
widely recognized industry standard despite some evidence arguably
to the contrary);

Evans v. Famous Music Corp., 807 N.E.2d 869, 873

(2004) (using multiple types of extrinsic evidence to interpret an
ambiguous contract provision). Here, the court engaged in a multiday

trial

full

of

fact

and

expert

witness

testimony

and

approximately 200 exhibits, and it used this array of evidence to
reach its conclusion.
III. Conclusion
For the following reasons, we affirm the district court's
decision.
So ordered.

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