SDNY Denies Payment of Administrative Expense Claim by Relying on the Operative Document as a Whole and Rejecting a Statutory Rule of Construction

by Cadwalader, Wickersham & Taft LLP
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On December 13, 2012, Judge Vincent L. Briccetti from the United States District Court of the Southern District of New York denied the appellant Notes Trustee’s request to compel payment of an administrative expense claim. Upholding the bankruptcy court’s decision, Judge Briccetti ruled that rules of construction, such as the last antecedent rule, should not be applied because to do so would undermine the intent of the plan, and noted that such rules of construction “are less an ironclad rule than a guide to interpreting the [Plan], as are other interpretation guides and [are] subservient to the clearer meaning of the provision in the context of the entire agreement.” The case is Wilmington Trust Company v. The Great Atlantic & Pacific Tea Company, Inc., Case No. 12-CV-5969 (VB) (S.D.N.Y. Dec. 13, 2012).

Background

The Debtors, the Great Atlantic & Pacific Tea Company and its affiliates, filed for bankruptcy in December of 2010. The Notes Trustee, Wilmington Trust Company, was the trustee for certain unsecured notes issued by the Debtors. On December 19, 2011, the Debtors filed a Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code. In February of 2012 the initial plan was amended to address a “liquidity gap” resulting from the Debtors’ inability to secure financing in the amount required by the December 2011 plan.

The amended plan eliminated the proposed $40 million cash recovery pool for unsecured creditors; replacing it with an “Unsecured Creditor Contingent Recovery Pool” that provided for distributions to unsecured creditors, including note holders, only if certain contingencies were met. In particular, the amended plan provided that note holders would only recover if they voted to accept the amended plan. The bankruptcy court entered an order confirming the plan on March 13, 2012, over the objection of the Notes Trustee and without the note holders having voted to accept the plan. On March 8, 2012, the Notes Trustee served the Debtors with an administrative expense claim for approximately $1 million, and in April the Notes Trustee filed a motion to compel payment of that claim. The Notes Trustee contended that the conditional language in the amended plan requiring the Note Holders to vote in favor of the amended plan in order to receive payment, applied only to their recoveries and did not apply to payment of the Notes Trustee’s administrative expense claim.

The Bankruptcy Court orally denied the motion and entered a formal order denying the Notes Trustee’s motion on June 21, 2012. The Notes Trustee subsequently appealed, claiming that the bankruptcy court “erred by failing to apply the ‘last antecedent rule,’ whereby ‘relative or qualifying words or clauses in a [contract] ordinarily are to be applied to words or phrases immediately preceding, and are not to be construed as extending to others more remote, unless the intent clearly indicates otherwise.’”

Bankruptcy Rules of Construction

Section 102 of the Bankruptcy Code deals with rules of construction. Among other things, these rules of construction help interpret terms that are frequently used in the Bankruptcy Code. In addition to the specific rules outlined in section 102, general rules of statutory construction, which encompass far more than the limited situations covered by section 102, remain applicable in bankruptcy cases. The last antecedent rule is a statutory rule of construction used to govern statutes and operative doctrines. “The last antecedent rule of statutory construction provides that a modifying or restrictive word or clause contained in a statute is confined solely to the immediately preceding clause or last antecedent, unless something in the statute requires a different interpretation.” Stanton v City of Battle Creek, 647 NW2d 508 (2002).

Decision

Judge Briccetti upheld the ruling of the Bankruptcy Court, noting “the last antecedent rule should not be applied if to do so would undermine the intent or purpose of the operative document.” According to the court, the overall structure of the plan makes clear that the parties intended to place a condition on the Note Trustee’s entitlement to the recovery pool.

The Notes Trustee argued that the last antecedent rule renders the contingencies place on the Noteholders in the amended plan irrelevant to whether the Notes Trustee is entitled to an Allowed Administrative Claim.” The argument of the Notes Trustee hinged on the lack of a comma in the amended plan and relying on case law argued that “a corollary of [the last antecedent rule] is that when a modifier is not set off from prior items by a comma, that modifier applies only to the immediately preceding antecedent.” See In re Enron Credtors Recovery Corp., 651 F.3d 329, 335-36 (2d Cir. 2011). The court rejected this argument however and concluded that “the overall structure of the Plan makes clear that the parties intended… to place a condition on the Notes Trustee’s entitlement to an Allowed Administrative Claim.”

Conclusion

In denying the Note Trustee’s request to compel payment, the Court relied heavily on the intent or purpose of the operative document. By focusing more on the context of the entire agreement, the Court refused to apply a statutory rule of construction seemingly reducing its precedential value in future cases. This case, if used as precedent in the future may reduce a courts reliance on statutory rules of construction and instead focus issues of interpretation on the meaning intended by the parties or apparent through the operative document as a whole.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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