HSBC Bank USA v. Bank of New England

United States Court of Appeals
For the First Circuit

No. 03-1321

IN RE BANK OF NEW ENGLAND CORP.,

Debtor.

____________

HSBC BANK USA AND JPMORGAN CHASE BANK,
AS INDENTURE TRUSTEES,

Appellants,

v.

DR. BEN S. BRANCH, TRUSTEE IN BANKRUPTCY, ET AL.,

Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Richard G. Stearns, U.S. District Judge]
[Hon. William C. Hillman, U.S. Bankruptcy Judge]

Before

Selya, Circuit Judge,

Coffin, Senior Circuit Judge,

and Smith,* District Judge.

Douglas B. Rosner, with whom Goulston & Storrs, Sarah L. Reid,
Joseph N. Froehlich, Kelley Drye & Warren LLP, David S. Rosner,

*
Of the District of Rhode Island, sitting by designation.
Daniel N. Zinman, and Kasowitz, Benson, Torres & Friedman LLP were
on brief, for appellants.

Robin Russell, with whom Hugh M. Ray and Andrews Kurth LLP
were on brief, for appellee Branch.
Patrick J. McLaughlin, with whom Katherine A. Constantine,
Monica L. Clark, Dorsey & Whitney LLP, Dianne F. Coffino, and Dewey
Ballantine LLP were on brief, for remaining appellees.

April 13, 2004
 SELYA, Circuit Judge. This is a case that straddles a

crossroads formed by the intersection of federal and state law. It

requires us to decide an issue of first impression in this circuit

regarding the enforceability in bankruptcy of agreements that allow

the subordination of certain indebtedness. Our decision partially

contradicts the decision of the only other court of appeals to have

grappled with this same set of questions, see Chem. Bank v. First

Trust of N.Y. (In re Southeast Banking Corp.), 156 F.3d 1114 (11th

Cir. 1998), and to that extent creates a circuit split.

The precise dispute between the parties focuses on the

priority (if any) that attaches to payment of post-petition

interest on indebtedness that benefits from the contractual

subordination of other indebtedness. As the question has been

framed by the litigants and the lower courts, the answer depends on

whether the subordination provisions at issue comply with the Rule

of Explicitness. So phrased, the question assumes the continued

vitality of that rule. Because we doubt the accuracy of that

assumption, we step back to the beginning and inquire into the

basis for believing that the Rule of Explicitness remains alive and

well.

That step places us at the head of a long and winding

path. After traveling it, we conclude that the enactment of

section 510(a) of the Bankruptcy Reform Act of 1978, Pub. L. No.

95-598, 92 Stat. 2549, 2586 (codified at 11 U.S.C. § 510(a)),

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extinguished the Rule of Explicitness in its classic form. We

further conclude that states are not free to adopt rules of

contract interpretation that apply only in bankruptcy. For

purposes of this case, then, the Rule of Explicitness is a dead

letter.

Faced with this reality, we proceed to analyze the effect

of the subordination provisions under New York's generally

applicable principles of contract law — principles that do not

embody any canon that operates in the same manner as the Rule of

Explicitness. That analysis reveals an ambiguity in the language

of the subordination provisions. The resolution of this ambiguity

requires an inquiry into the parties' intent. That inquiry is

fact-based and the bankruptcy court has not made the necessary

findings. Consequently, we vacate the judgment below and remand

for further proceedings.

I. BACKGROUND

The underlying facts are largely undisputed. In its

halcyon days, the Bank of New England (BONE) issued six separate

series of debt instruments.1 Clearly worded choice of law

provisions tie the construction and interpretation of these

instruments to the law of New York. Three of these offerings (the

Senior Debt) are entitled to the benefit of contractual

1
Two of these were actually issued by BONE's predecessors in
interest, but this technicality in no way affects our analysis.
Thus, we disregard it.

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subordination provisions. They include (i) a series of debentures

bearing interest at 7.625% per annum, due in 1998, in the aggregate

principal amount of $25,000,000; (ii) a series of debentures

bearing interest at 8.85% per annum, due in 1999, in the aggregate

principal amount of $20,000,000; and (iii) a series of notes

bearing interest at a rate of 9.5% per annum, due in 1996, in the

aggregate principal amount of $150,000,000. HSBC Bank USA and

JPMorgan Chase Bank, appellants here, serve as Indenture Trustees

for the Senior Debt. The remaining three offerings (the Junior

Debt) are subordinated to the Senior Debt. They include (i) a

series of floating rate debentures, due in 1996, in the aggregate

principal amount of $75,000,000; (ii) a series of debentures

bearing interest at 8.75% per annum, due in 1999, in the aggregate

principal amount of $200,000,000; and (iii) a series of debentures

bearing interest at 9.875% per annum, due in 1999, in the aggregate

principal amount of $250,000,000. Each trust indenture referable

to Junior Debt contains a subordination provision that is

substantially similar to the following:

[E]ach Holder likewise covenants and agrees by
his acceptance thereof, that the obligations
of the Company to make any payment on account
of the principal of and interest on each and
all of the Notes shall be subordinate and
junior, to the extent and in the manner
hereinafter set forth, in right of payment to
the Company's obligations to the holders of
Senior indebtedness of the Company.

Each of these indentures also specifies that:

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 The Company agrees that upon . . . any payment
or distribution of assets of the Company of
any kind or character, whether in cash,
property or securities, to creditors upon any
dissolution or winding up or total or partial
liquidation or reorganization of the Company,
whether voluntary or involuntary or in
bankruptcy, insolvency, receivership,
conservatorship or other proceedings, all
principal (and premium, if any), sinking fund
payments and interest due or to become due
upon all Senior Indebtedness of the Company
shall first be paid in full, or payment
thereof provided for in money or money's worth
in accordance with its terms, before any
payment is made on account of the principal of
or interest on the indebtedness evidenced by
the [Junior] Notes due and owing at the time .
. . .

On January 7, 1991, BONE filed a voluntary petition for

bankruptcy. See 11 U.S.C. §§ 701-766. At that time, much of the

Senior and Junior Debt was still outstanding. Everyone agrees

that, in bankruptcy, the holders of the Senior Debt are

contractually entitled to priority. Withal, the parties fiercely

dispute whether that priority extends to the payment of post-

petition interest.

Since filing for bankruptcy, BONE, under the careful

stewardship of its Chapter 7 trustee, has made three distributions

to creditors. Through these distributions, the bankruptcy estate

has paid the holders of the Senior Debt the full amount of all

unpaid principal and pre-petition interest, together with all

approved fees and expenses incurred through the date of the last

distribution (October 26, 1999). The trustee then created an ample

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reserve for future fees and expenses and, at that point, concluded

that he had satisfied the obligations owed to the holders of the

Senior Debt. When, thereafter, the trustee determined that there

existed sufficient unencumbered funds, he sought permission to make

a distribution in the amount of $11,000,000 to the holders of the

Junior Debt. The appellants objected on the ground that the

trustee had not yet paid post-petition interest on the Senior Debt.

The bankruptcy court overruled this objection and

authorized the proposed distribution. In re Bank of New Engl.

Corp., 269 B.R. 82, 86 (Bankr. D. Mass. 2001). The court based its

decision on the Rule of Explicitness, holding that New York law

recognized the rule and that the language of the subordination

provisions failed to satisfy it. Id. at 85-86. The district court

affirmed. HSBC Bank USA v. Bank of New Engl. Corp. (In re Bank of

New Engl. Corp.), 295 B.R. 419, 424-25 (D. Mass. 2003). The

court's analysis differed somewhat from that of the bankruptcy

court, but it too deemed the Rule of Explicitness controlling. Id.

at 424. This appeal ensued.

II. DISCUSSION

We cede no special deference to the district court's

initial review of the bankruptcy court's decision. See Gannett v.

Carp (In re Carp), 340 F.3d 15, 21 (1st Cir. 2003). Rather, we

look directly to the bankruptcy court's decision, examining that

court's findings of fact for clear error and its conclusions of law

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de novo. Id. Insofar as the bankruptcy court's decision hinges on

an interpretation of the Bankruptcy Code, it presents a question of

law (and, thus, engenders de novo review). United States v. Yellin

(In re Weinstein), 272 F.3d 39, 42 (1st Cir. 2001).

As the litigants and the lower courts have framed the

issue, the pivotal question is whether the language of the

subordination provisions satisfies the Rule of Explicitness. We do

not agree that this is the correct question. Thus, we retreat to

first principles.

Subordination agreements are essentially inter-creditor

arrangements. 4 Lawrence P. King et al., Collier on Bankruptcy ¶

510.03[2], at 510-7 (15th rev. ed. 2003). They are designed to

operate in a wide range of contingencies, one of which is

insolvency. As a hedge against the ravages of a future bankruptcy,

subordination agreements typically provide that one creditor will

subordinate its claim against the debtor (the putative bankrupt) in

favor of the claim of another creditor. This subordination alters

the normal priority of the junior creditor's claim so that it

becomes eligible to receive a distribution only after the claims of

the senior creditor have been satisfied. Id. at ¶ 510.01, at 510-

3.

Prior to 1978, the Bankruptcy Act contained no specific

mention of subordination agreements. See Alan N. Resnick & Brad

Eric Scheler, The Right of a Senior Creditor to Receive Post-

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Petition Interest from a Subordinated Creditor's Distributions:

Did the Rule of Explicitness Survive the Enactment of the

Bankruptcy Code?, 32 Uniform Comm. Code L.J. 466, 466 (2000).

Accordingly, subordination provisions were enforced in bankruptcy

through the bankruptcy court's equitable powers. See, e.g.,

Bankers Life Co. v. Mfrs. Hanover Trust Co. (In re Kingsboro Mortg.

Corp.), 514 F.2d 400, 401-02 (2d Cir. 1975) (per curiam); Matter of

Time Sales Fin. Corp., 491 F.2d 841, 844 (3d Cir. 1974); Bird &

Sons Sales Corp. v. Tobin, 78 F.2d 371, 373 (8th Cir. 1935).

Enforcing such agreements was necessary to prevent junior creditors

from receiving windfalls after having explicitly agreed to accept

less lucrative payment arrangements. See Matter of Credit Indus.

Corp., 366 F.2d 402, 410 (2d Cir. 1966); In re Hinderliter Indus.,

Inc., 228 B.R. 848, 853 (Bankr. E.D. Tex. 1999). Equity dictated

enforcement because "[e]quality among creditors who have lawfully

bargained for different treatment is not equity but its opposite."

Chem. Bank N.Y. Trust Co. v. Kheel, 369 F.2d 845, 848 (2d Cir.

1966).

Defining the outer limits of this equitable rule,

especially with respect to post-petition interest, posed a thorny

problem. Generally, the accrual of interest on an unsecured or

undersecured claim stops upon the debtor's filing of a bankruptcy

petition. See, e.g., Nicholas v. United States, 384 U.S. 678, 682

(1966); Sexton v. Dreyfus, 219 U.S. 339, 344 (1911); see also 11

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U.S.C. § 502(b)(2); Bankruptcy Act of 1898, § 63(a). Yet,

subordination agreements sometimes contain language that

prioritizes (or, at least, arguably prioritizes) the payment of

post-petition interest on senior indebtedness over any recovery on

junior indebtedness. From the outset, courts have been

uncomfortable with enforcing this type of prioritization for fear

that cases would arise "where a senior creditor may potentially

recover more under a subordination agreement than its allowable

claim against the estate." 4 Collier on Bankruptcy, supra ¶

510.03[3], at 510-8.

To ease this discomfiture, judges fashioned an equitable

doctrine to deal with (and, essentially, limit) the prioritization

of post-petition interest payments. See Resnick & Scheler, supra

at 467-68. In its simplest form, this equitable doctrine, called

the Rule of Explicitness, required that a subordination agreement

show clearly "that the general rule that interest stops on the date

of the filing of the petition is to be suspended." Time Sales, 491

F.2d at 844. Over time, this evolved into a requirement that only

unequivocal language could overcome the generic bar on recovery of

post-petition interest.

That was the state of the law when Congress enacted the

Bankruptcy Code in 1978. Pub. L. No. 95-958, 92 Stat. 2549.

Unlike the earlier Bankruptcy Act, the Code deals explicitly with

subordination agreements. Section 510(a) provides that a

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subordination agreement is enforceable in bankruptcy to the same

extent as under "applicable nonbankruptcy law." 11 U.S.C. §

510(a). This statutory provision supplants the judge-made doctrine

through which the courts previously had dealt with such agreements.

Because equitable powers possessed by 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 (1988), the

enactment of section 510(a) means that the enforcement of

subordination provisions is no longer a matter committed to the

bankruptcy courts' notions of what may (or may not) be equitable.

First Fid. Bank v. Midlantic Nat'l Bank (In re Ionosphere Clubs,

Inc.), 134 B.R. 528, 533 (Bankr. S.D.N.Y. 1991).

That Congress cabined the bankruptcy courts' equitable

powers while providing an alternate means for preserving the

viability of subordination agreements does not resolve the further

question of whether the Rule of Explicitness, through some other

medium, survived the enactment of section 510(a). To answer that

query, we begin, as always, with the text of the relevant statute.

See 229 Main St. Ltd. P'ship v. Mass. Dep't of Envtl. Prot. (In re

229 Main St. Ltd. P'ship), 262 F.3d 1, 5 (1st Cir. 2001). We are

mindful, of course, that the language of an unambiguous statute

normally determines its meaning. Id.

In terms, section 510(a) provides that a "subordination

agreement is enforceable in a [bankruptcy] case . . . to the same

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extent that such agreement is enforceable under applicable

nonbankruptcy law." 11 U.S.C. § 510(a). It is clear beyond

peradventure that the phrase "applicable nonbankruptcy law" can

refer to either federal or state law. See Patterson v. Shumate,

504 U.S. 753, 757-59 (1992). Since the construction of private

contracts is usually a matter committed to state law, Volt Info.

Scis., Inc. v. Bd. of Trs., 489 U.S. 468, 474 (1989), the

presumption is that state law will furnish the proper benchmark.

That presumption is especially robust here because we can find no

federal statute that might guide us in interpreting subordination

agreements. Accord Southeast Banking, 158 F.3d at 1121.

Of course, it might be possible to argue for the use of

federal common law in this context. But resort to a federal common

law of contract enforcement ordinarily is justified only when

required by a distinct national policy or interest. See Bartsch v.

Metro-Goldwyn-Mayer, Inc., 391 F.2d 150, 153 (2d Cir. 1968). The

interpretation and enforcement of financial arrangements between

private parties does not fill that bill. See Southeast Banking,

156 F.3d at 1121 n.8.

To be sure, there is an important federal interest in the

uniform application of the bankruptcy law — but that interest will

not suffice in this instance to justify resort to federal common

law. By requiring that the enforceability of subordination

agreements be subject to applicable nonbankruptcy law, Congress

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determined that such agreements should be interpreted using non-

uniform principles. It is not our province to second-guess this

determination. To cinch matters, the Supreme Court has instructed

us that in the absence of specific statutory provisions to the

contrary, property interests should not be analyzed differently as

a result of a party's involvement in a bankruptcy case. Butner v.

United States, 440 U.S. 48, 55 (1979). We take this to mean that

bankruptcy courts should only modify the usual state-law compendium

of rights and remedies if and to the extent that such modifications

are specifically authorized or directed by the Bankruptcy Code.

For these reasons, we conclude that the applicable

nonbankruptcy law referred to in section 510(a) is state law (and,

particularly, state contract law). Accord In re Best Prods. Co.,

168 B.R. 35, 69 (Bankr. S.D.N.Y. 1994); 9E Am. Jur. 2d Bankr. §

3113 (2000). It follows inexorably that if the Rule of

Explicitness retains any vitality, it does so only as part and

parcel of state law. See 4 Collier on Bankruptcy, supra ¶

510.03[3], at 510-9, 10 ("[T]he Rule of Explicitness cannot be

found in the Code, but resort must be had to the state law

governing the contractual subordination agreement."); see also

Southeast Banking, 156 F.3d at 1124.

This brings us to the parameters of the authority

delegated by section 510(a). One thing seems very clear: in

keeping with the principle that bankruptcy is an area of distinct

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federal competence, Congress has conferred on the federal courts

the power to apply any and all generally applicable state rules of

contract interpretation in construing subordination agreements.

But section 510(a) does not vest in the states any power to make

bankruptcy-specific rules: the statute's clear directive for the

use of applicable nonbankruptcy law leaves no room for state

legislatures or state courts to create special rules pertaining

strictly and solely to bankruptcy matters. See In re Cross, 255

B.R. 25, 34 n.5 (Bankr. N.D. Ind. 2000); cf. Int'l Shoe Co. v.

Pinkus, 278 U.S. 261, 265 (1929) (clarifying that states are not

free to enact laws that interfere with federal bankruptcy law or

that provide additional or auxiliary regulation with respect to

bankruptcy matters).

Formulation of the bankruptcy law requires Congress

carefully to balance competing considerations. That effort is

manifest here. On the one hand, bankruptcy highly values equitable

distribution that is in line with the priorities embodied in the

Code itself. On the other hand, equity typically operates to

enforce voluntarily bargained-for positions (some of which may

contradict the Code's normal priorities). Section 510(a)

encapsulates Congress's reconciliation of this conflict. A state's

creation of a bankruptcy-only rule of enforcement would outstrip

the authority that Congress conferred (and, thus, upset the

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equilibrium that section 510(a) was designed to achieve). We

conclude, therefore, that such a course is not open to the states.

If the Rule of Explicitness is an interpretive principle

unique to bankruptcy, it offends this principle. See Ionosphere

Clubs, 134 B.R. at 533 (suggesting that the old Rule of

Explicitness cases may "be inconsistent with the Code's new mandate

that subordination provisions be enforceable in bankruptcy to the

same extent that they are enforceable under nonbankruptcy law").

A contrary holding — one that allowed a state to adopt a

bankruptcy-only Rule of Explicitness — would require certain

contractual provisions (those arguably entitling senior noteholders

to the payment of interest becoming due at future dates) to achieve

a heightened degree of clarity only if the effort to enforce them

arose in bankruptcy rather than in some other context. Such a

holding would go well beyond the intended reach of section 510(a).

The short of it is that the enforceability of

subordination agreements in bankruptcy must be judged by reference

to generally applicable state contract law. As it pertains here,

this holding limits our consideration to the general principles of

New York contract law. If — and only if — the Rule of Explicitness

is such a general principle can it be given effect in this case.

The New York courts do not appear to have developed any

rules of interpretation that apply specifically to subordination

agreements. See Best Prods., 168 B.R. at 69-70; see also Finest

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Invs. v. Sec. Trust Co., 468 N.Y.S.2d 256, 258 (N.Y. Sup. Ct. 1983)

(applying generic rules of construction to subordination clause);

cf. N.Y.U.C.C. § 1-209 off'l cmt. 4 (stating that the "enforcement

of subordination agreements is largely left to supplementary

principles under Section 1-103," which codifies the application of

the general law of contracts). Moreover, reported decisions from

the New York state courts reveal only a single mention of the Rule

of Explicitness. See Chem. Bank v. First Trust of N.Y. (In re

Southeast Banking Corp.), 710 N.E.2d 1083, 1084-88 (N.Y. 1999) (a

case which, for reasons that we shortly shall explain, does not

help our inquiry). Although we are in something of an

epistemological quandary — it is always difficult to prove a

negative — the near-total absence of authority is compelling proof

that the Rule of Explicitness is not part of New York's general

contract law.

The decision in Chemical Bank does not alter this

conclusion. The opinion in that case was a response to a question

certified by the United States Court of Appeals for the Eleventh

Circuit. Faced with the issue we confront today, that is, whether

a subordination provision permitted the payment of post-petition

interest ahead of junior indebtedness, the Eleventh Circuit

certified the following question to the 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

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assumption of the risk and burden of the senior creditor's post-

petition interest?" Southeast Banking, 156 F.3d at 1125. In so

doing, the Eleventh Circuit invited the state court to fashion a

bankruptcy-specific rule — and it did so without any evidence that

New York had incorporated anything resembling the Rule of

Explicitness into its general law of contracts.

Having received the invitation, the New York Court of

Appeals responded in kind. The court recognized that it was being

asked to determine if New York should adopt the Rule of

Explicitness as a "guiding interpretive principle of State contract

dispute resolution" in bankruptcy cases. Chem. Bank, 710 N.E.2d at

1086. The court proceeded to embrace the rule as a rule of

construction applicable only in bankruptcy. See id. at 1088 ("In

accordance with the Rule of Explicitness, New York law would

require specific language in a subordination agreement to alert a

junior creditor to its assumption of the risk and burden of

allowing the payment of a senior creditor's post-petition interest

demand."). The specificity of the court's holding is apparent from

its use of the term "post-petition interest" — a term of art

applicable only in bankruptcy. We recognize that the Chemical Bank

court was constrained by the Eleventh Circuit's statement of the

certified question. But this constraint does not alter the fact

that, in its holding, Chemical Bank announced a bankruptcy-only

principle. Nothing in that decision persuades us that the Rule of

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Explicitness is otherwise a part of the armamentarium of

interpretive principles generally available to the courts under New

York law.

This illustrates our area of disagreement with the

Eleventh Circuit. As framed, the question that it put to the New

York court was beyond that court's competence to answer. While a

federal court must defer when the highest court of a state

interprets the state's general contract law, see, e.g., Daigle v.

Me. Med. Ctr., Inc., 14 F.3d 684, 689 (1st Cir. 1994), no such

deference is due to a state court's importation of a bankruptcy-

specific rule into its own jurisprudence.2

That ends this aspect of our inquiry. There is simply no

reason to believe that the New York courts would apply the Rule of

Explicitness outside the bankruptcy context. Accordingly, the Rule

of Explicitness cannot hold sway. To find otherwise would do

violence to the language of section 510(a) and set state and

federal law on a collision course.

Let us be perfectly clear. If a state, as part of its

general contract law, enunciates an interpretive principle that

applies to subordination agreements generally (e.g., "construe all

subordination provisions strictly and enforce them only if the

2
Although state courts do have the power to interpret federal
law, that is not what the New York Court of Appeals was asked to
do. The Eleventh Circuit requested the New York court to enunciate
a bankruptcy-specific principle of state law. See Southeast
Banking, 156 F.3d at 1125-26.

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intent to subordinate is, on a particular set of facts, super-

clear"), that principle would be enforceable under section 510(a).3

In that event, rejecting the prioritization of post-petition

interest in the absence of explicit language would be consistent

with the general law of the state. Such a situation would not pose

the same problem as does a state rule that applies only in

bankruptcy.

We acknowledge that this conclusion compels us to part

ways with the Eleventh Circuit. We are always reluctant to foment

a circuit split, but we have no principled alternative here. The

Southeast Banking court invited the New York Court of Appeals to

craft a special bankruptcy-only canon of contract interpretation.

See 156 F.3d at 1125. In our view, that course of action

misapprehends the reach and breadth of section 510(a).

We now proceed to apply New York's general principles of

contract enforcement to the facts at hand. This exercise will

allow us to ascertain the effect of the provisions at issue upon

the post-petition interest priority claimed by the appellants.

Typically, the first step is to determine whether the challenged

3
We recognize that the source of such an interpretive
principle may be a state statute, a canon of construction
enunciated by the state courts, or a rule of equity consistently
applied. A bankruptcy court's adoption and enforcement of a state
equitable principle is not the exercise of the bankruptcy court's
own equitable powers, but, rather, an application of state law
(and, thus, is a proper exercise of the authority conferred by
section 510(a)).

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provisions are subordination agreements within the meaning of

section 510(a). 4 Collier on Bankruptcy, supra ¶ 510.03[2], at

510-7. That step is a formality here: these are subordination

clauses, pure and simple.

We next must determine the meaning and effect of the

subordination provisions. Initially, we ask whether the provisions

are ambiguous with respect to the relative priority of the payment

of post-petition interest on the Senior Debt. This is a question

of New York law. See W.W.W. Assocs., Inc. v. Giancontieri, 566

N.E.2d 639, 642 (N.Y. 1990). The New York Court of Appeals has

provided us with clear, if conventional, guidelines:

Contracts are not to be interpreted by giving
a strict and rigid meaning to general words or
expressions without regard to the surrounding
circumstances or the apparent purpose which
the parties sought to accomplish. The court
should examine the entire contract and
consider the relation of the parties and the
circumstances under which it was executed.
Particular words should be considered, not as
if isolated from the context, but in the light
of the obligation as a whole and the intention
of the parties as manifested thereby. Form
should not prevail over substance, and a
sensible meaning of words should be sought.

William C. Atwater & Co. v. Panama R. Co., 159 N.E. 418, 419 (N.Y.

1927) (citations and internal quotation marks omitted).

We take it as a given that a contract is ambiguous when

its provisions are susceptible of two or more reasonable

interpretations. See Breed v. Ins. Co. of N. Am., 385 N.E.2d 1280,

1282 (N.Y. 1978); Yanuck v. Simon Paston & Sons Agency, Inc., 618

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N.Y.S.2d 295, 296 (N.Y. Sup. Ct. 1994). That is the case here.

Although each word, taken in isolation, may have a reasonably

definite meaning, we must examine these words collectively. See

Atwater, 159 N.E. at 419. When we do, ambiguity surfaces.

The pertinent language requires full payment of "interest

due or to become due" upon the occurrence of a number of events

(including bankruptcy, insolvency, receivership, conservatorship,

or "other proceedings"). The meaning of "interest due or to become

due" seems obvious in the context of, say, a municipal bond: upon

the occurrence of a triggering event, interest that has been earned

but is not yet due to be paid becomes entitled to a priority.4

Thus, the application of this group of words in the context of most

triggering events is fairly straightforward. But bankruptcy — an

event specifically referenced in the subordination provisions —

alters the equation. Bankruptcy provides a special system of legal

rules that occupies the field upon the filing of a petition. One

byproduct of this special set of rules is that all interest is

considered due as of the filing date. See 11 U.S.C. §§ 101(5)(a),

502(b). Conversely, interest that normally would accrue after that

date is generally not recoverable at all (at least, not recoverable

from the debtor). See id. § 502(b)(2).

4
We provide an example. If interest accruing on a bond is
paid every six months (e.g., February 1 and August 1) and a
triggering event occurs on May 1, the contractual language provides
that all interest earned from February 1 through May 1 is entitled
to prioritization (even though that interest is not yet due).

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 These special rules cloud the meaning of the phrase

"interest due or to become due." On the one hand, those words

reasonably can be interpreted to apply only to triggering events

outside of the bankruptcy context (where they have an unambiguous

meaning). On the other hand, those words reasonably can be

interpreted — as the appellants exhort — to apply to all triggering

events, including bankruptcy. In that context, however, the words

have no clear meaning and a court faces further ambiguity in trying

to determine their contours. After all, in most cases the phrase

"due or to become due" simply refers to unmatured interest. At the

time of a bankruptcy filing, however, there is no unmatured

interest, so the clause may be interpreted either to carry the same

"nonbankruptcy" meaning throughout or to take on a bankruptcy-

specific meaning (which would cover post-petition interest).

Because each of these interpretations seems plausible, we believe

that the subordination provisions — as they apply in bankruptcy —

are ambiguous. Cf. Southeast Banking, 156 F.3d at 1124 (finding

the phrase "paid in full" ambiguous in the context of bankruptcy

proceedings).

In fine, we find the words "due or to become due" lacking

in certitude as to whether they actually provide for the payment of

post-petition interest on the Senior Debt prior to any payment

referable to the Junior Debt. New York law requires that this

amphiboly be resolved through a contextual examination of the

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parties' intent, taking full account of the surrounding facts and

circumstances. Ruttenberg v. Davidge Data Sys. Corp., 626 N.Y.S.2d

174, 178 (N.Y. Sup. Ct. 1995); Yanuck, 618 N.Y.S.2d at 296; Tobin

v. Union News Co., 239 N.Y.S.2d 22, 25 (N.Y. Sup. Ct. 1963).

Discerning this intent ordinarily requires the adjudication of

factual questions. See Ruttenberg, 626 N.Y.S.2d at 175; Yanuck,

618 N.Y.S.2d at 296; see also Time Warner Entm't Co. v. Brustowsky,

634 N.Y.S.2d 82, 82 (N.Y. Sup. Ct. 1995) (noting that factfinding

generally will be necessary if the contract term at issue is

"susceptible to varying reasonable interpretations"). A trial can

be avoided only if the parties' intent is made manifest within the

four corners of the contract itself. Ruttenberg, 626 N.Y.S.2d at

175-76.

In the case at bar, it is impossible to glean the

parties' intent from the language and structure of the instruments

alone. These documents evidence complex commercial transactions,

and the matter is further complicated because the beneficiaries of

the subordination provisions — the holders of the Senior Debt — are

not parties to the agreements containing the subordination

provisions (those agreements are directly appurtenant to the Junior

Debt). Given these realities, we are persuaded that resolution of

the intent question cannot be accomplished by the simple expedient

of examining the relevant paperwork, but, rather, requires

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differential factfinding.5 Because the bankruptcy court has not

yet developed a record with this inquiry in mind, we remand for

factfinding on the parties' intent vis-à-vis post-petition

interest.

III. CONCLUSION

We need go no further. We hold that the Rule of

Explicitness has no application in the context of bankruptcy where,

as here, the state has not adopted the rule as one of general

applicability. Consequently, we turn to generic principles of

state law to interpret the contractual provisions at issue.

Applying those principles, we find the subordination provisions

ambiguous as to whether they provide for the priority payment of

post-petition interest. This finding necessitates an examination

into the intent of the parties — an inquiry which, in the

circumstances of this case, entails questions of fact that must in

the first instance be addressed by the bankruptcy court. We

therefore vacate the decision of the district court and remand with

instructions that the district court vacate the judgment of the

5
To be sure, the backdrop of bankruptcy may inform the
examination into the parties' intent. See Dolman v. U.S. Trust
Co., 157 N.Y.S.2d 537, 541-42 (N.Y. Sup. Ct. 1956) (noting the
presumption "that the parties had [the law in force at the time of
agreement] in contemplation when the contract was made," and that
the contract generally will be "construed in light of such law").
Here, however, the effect of that tenet is uncertain absent further
factfinding. Cf. Time Warner Entm't, 634 N.Y.S.2d at 83 (finding
a regulatory definition of a term not determinative of its meaning
in a contract where proof was adduced indicating that the parties
intended an independent meaning).

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bankruptcy court and remand the matter to that tribunal for further

proceedings consistent with this opinion.

Vacated and remanded. All parties shall bear their own

costs.

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