Opinion ID: 201116
Heading Depth: 3
Heading Rank: 1

Heading: Whether Fleet Divested Itself of the 502(h) Claim

Text: 28 We next consider whether Fleet would have a valid 502(h)claim upon avoidance of the gap payments. 9 See footnote 4, supra. Gray brought this avoidance action pursuant to section 549 of the Bankruptcy Code, which provides that a trustee may avoid certain post-petition transfers of property. 11 U.S.C. § 549. Except as otherwise provided in this section, to the extent that a transfer is avoided under section ... 549 ... the trustee may recover, for the benefit of the estate, the property transferred ... from — (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee. 11 U.S.C. § 550(a). 29 Here, the transaction at issue is Bankvest's postpetition transfer of $2,155,427 in assets or property to Fleet and Fleet's application of this sum to Bankvest's BB Warehouse Obligation. If avoidance were in order, Gray would ordinarily be entitled to recover the $2,155,427 from Fleet and to return it to Bankvest's estate. Id. See also, Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1253-58 (1st Cir.1991). 30 When grounds for avoidance are found, however, a creditor in Fleet's shoes becomes entitled to pursue whatever claim it may have had in the avoided sum against the debtor, here Bankvest, unless, of course, (as the bankruptcy court, in fact, found in Fleet's case) the creditor has somehow relinquished its claim to the avoided interest. 11 U.S.C. § 502(h) (stating, that the claim that arises from the recovery of property under section ... 550 ... shall be determined, and shall be allowed ... the same as if such claim had arisen before the date of the filing of the petition.); Ralar Distribs., Inc. v. Rubbermaid, Inc. (In re Ralar Distribs., Inc.), 4 F.3d 62, 66 n. 2 (1st Cir.1993) (stating, [f]inally, arguably no `unjust' enrichment would result were [transferor-debtor] to recover from [transferee]. If [transferee] were required to disgorge, it could file a proof of claim for the amount of the avoided transfer ... which would be entitled to a pro rata distribution from the [transferor-debtor] estate.); Verco Indus. v. Spartan Plastics (In re Verco Indus.), 704 F.2d 1134, 1138 (9th Cir.1983) (stating, [a]lthough we acknowledge that [transferor-debtor] has a valid claim for the unpaid amount of the note from Spartan, we also believe that [transferee] would have a claim against [transferor-debtor] for the loss it suffered when the transfer was set aside. [We have] stated that even where the transferee is responsible for the transfer being invalidated as fraudulent, that factor does not prevent the transferee from asserting a claim against the transferor ... [a]ccordingly, [transferee] has a claim against the estate which may be set-off against [transferor-debtor's] recovery on the note .... [transferee] concedes that [transferor-debtor] is entitled to invalidate the transfer and retain the property for the benefit of its creditors.) (citations omitted); Cohen v. Eiler (In re Cohen), 305 B.R. 886, 898 (9th Cir. BAP 2004) (stating, [n]or does recovery from a transferee under avoiding powers unfairly deprive the transferee of rights against the estate. Upon recovery, the transferee has a claim that is treated as a prepetition claim. 11 U.S.C. § 502(h). It is timely to file such a proof of claim within 30 days after the judgment becomes final.... The debt will not be discharged unless it is `provided for by the plan.') (quoting 11 U.S.C. § 1328(a)) (citations omitted); In re Dunes Hotel Associates, No. C/A 94-75715, 1997 WL 33344253, at - (Bankr.D.S.C. Sept.26, 1997) (stating, the Bankruptcy Code and Rules set out a specific procedure for the filing and allowance of a claim by the transferee of an avoided transfer ... Congress intended that such creditors should have a claim against the estate by reason of the avoidance. See 4 Collier on Bankruptcy ¶ 502.LH[10] at 502-113-15 (1997) (discussing expansion by Congress of the reach of Section 502(h) bringing it more in line with prior law); ... [i]t is clear to the Court that even upon avoidance, an event which has not yet occurred and which in fact is contrary to the present law of the case, [the creditor from whom the avoidance would recover property] would have a claim which would provide it standing to seek dismissal of the case.) (citations omitted); In re Toronto, 165 B.R. 746, 753 (Bankr.D. Conn. 1994). 31 In the instant case, the bankruptcy court held that Fleet, by reason of its transaction with ARK, had divested itself of its 502(h) claim to the avoided sums. In the court's view, that claim, although contingent at the time of the sale, was included within the assets Fleet sold to ARK along with its loan portfolio. Under this analysis, Fleet was left without any 502(h) claim to invoke after avoidance. It was thus bereft of any avenue of relief as a creditor of Bankvest. As ARK appears to have released all of its own claims against Bankvest and its representatives, the bankruptcy court's decision resulted in the gap sums becoming property of the estate. 32 The district court disagreed with the bankruptcy court's analysis. Instead, it read the ARK Contract as not having resulted in the sale to ARK of Fleet's then inchoate 502(h) claim. That claim, the court held, now entitles Fleet — as an original secured creditor of Bankvest — to prevail over Gray's avoidable right. Appellant asks us to endorse the bankruptcy court's result and to reject that of the district court. 33 To resolve the question of whether in the ARK transaction Fleet divested itself of its 502(h) claim, we must interpret Fleet's contract with ARK. In so doing, we apply New York law, following a stipulation written into the ARK Contract providing that the law of the state of New York governs its interpretation. See McCarthy v. Azure, 22 F.3d 351, 356 n. 5 (1st Cir. 1994) (concluding court should generally honor reasonable choice-of-law provision in a contract); Matter of Stoecker, 5 F.3d 1022, 1028 (7th Cir.1993) (stating, [c]ontractual stipulations concerning choice of law ordinarily are honored....). 34 According to New York law, construction of an agreement presents a question of law. Non-Linear Trading Co., Inc. v. Braddis Assocs., Inc., 243 A.D.2d 107, 675 N.Y.S.2d 5, 10 (N.Y.App.Div. 1998). Accordingly, we review the issue of contract interpretation de novo. See Sormani v. Orange County Comm. College, 240 A.D.2d 724, 659 N.Y.S.2d 507, 507 (N.Y.App.Div.1997). 35 We do so notwithstanding Fleet's contention that these proceedings are not the appropriate place to consider the meaning of a contract between ARK and Fleet, ARK not being a party, no extrinsic evidence concerning the contract having been presented, and appellant being a stranger to the contract. We reject Fleet's contention. The terms of the ARK Contract — a sophisticated, detailed legal document drawn up to guide a business transaction — seem to us sufficiently unambiguous to allow interpretation without extrinsic evidence and in ARK's absence. See Bethlehem Steel Co. v. Turner Constr. Co., 2 N.Y.2d 456, 161 N.Y.S.2d 90, 141 N.E.2d 590, 593 (1957); see also, Ronnen v. Ajax Elec. Corp., 88 N.Y.2d 582, 648 N.Y.S.2d 422, 671 N.E.2d 534, 536-37 (1996); Lui v. Park Ridge at Terryville Ass'n, Inc., 196 A.D.2d 579, 601 N.Y.S.2d 496, 498 (N.Y.App.Div.1993) (stating, [i]t is settled that the responsibility to interpret a contract falls upon the court, `which must ascertain the intention of the parties from the language which they have employed.' The `interpretation of an unambiguous contract provision is a function for the court, and matters extrinsic to the agreement may not be considered when the intent of the parties can be gleaned from the face of the instrument.') (citations omitted). 36 The ARK Contract governed Fleet's sale to ARK of a $1.4 billion portfolio of loans, including the loans to Bankvest. It is, in effect, two contracts in one. First, it is an agreement between Fleet and JJDD LLC, an intermediary, through which Fleet sold to JJDD LLC a 100% undivided participation interest in the Participated Loans 10 ... and the Transferred Rights related thereto and ... the Nonparticipated Transferred Rights. Second, it is an agreement between JJDD LLC and ARK, through which JJDD LLC sold to ARK — in exchange for the purchase price and assumption of the Assumed Obligations — the 100% undivided participation interest in the Participated Loans, the Nonparticipated Transferred Rights 11 , and all of JJDD LLC's rights remedies, interests, powers and privileges under its agreement with Fleet. Since JJDD transferred to ARK everything transferred to it from Fleet, the contract, for present purposes, operates essentially as an agreement between Fleet and ARK. 37 The ARK Contract defines Transferred Rights as, inter alia, any and all of Fleet's and JJDD LLC's right, title and interest in the related Loans and Commitments, but excluding the Retained Interest, if any related thereto. The definition of Transferred Rights further includes, inter alia, to the extent related to the aforementioned right, title and interests, the following: 38 all claims (including `claims' as defined in Bankruptcy Code § 101(5)), suits, causes of action, and any other right of [Fleet] ... whether known or unknown, against the related [borrower under each loan transferred], the related [entity other than the borrower and lender that is obligated under each loan transferred], if any, or any of their respective Affiliates, agents, representatives, contractors, advisors, or any other Entity that in any way is based upon, arises out of or is related to any of the foregoing.... 39 The bankruptcy court concluded that Fleet's then unknown and inchoate 502(h) claim fell within the broad definition of Transferred Rights, but the district court disagreed, being of the opinion that the 502(h) claim fit within the definition of Retained Interest. 12 Fleet Nat'l Bank, 2003 WL 1700978 at -. As discussed below, we think the bankruptcy court erred in determining that Fleet's 502(h) claim fell within the Transferred Rights definition. We also question the district court's view that the 502(h) claim fell expressly within the Retained Interest clause. 13 But since Fleet, in any event, neither sold to ARK the gap payments themselves, nor, as discussed below, its 502(h) claim relating to them, we conclude that it never divested itself of the latter. That being so, Fleet is entitled, as the district court ruled, to retain and pursue its 502(h) remedy now. 40 In support of its contention that the 502(h) claim fit within the Transferred Rights definition, appellant argues that the 502(h) claim is a claim of right of Fleet, either known or unknown at the time of the agreement, against a borrower, Bankvest, of a loan transferred in the ARK Contract and, therefore, fell squarely within the definition of Transferred Rights. 41 The clause defining Transferred Rights, however, must be read in light of the ARK Contract's definitions of other terms contained within or related to that clause. Thus, while it may well be that claims known or unknown encompass future-arising claims such as a subsequent 502(h) claim, the loans transferred under the ARK Contract, as defined, did not include the portions thereof that were not outstanding under Schedule 1, nor did they include claims unrelated to Schedule 1 loans. Neither the gap payments nor claims relating to them formed part of the scheduled loans. 42 Under the ARK Contract, ARK received Fleet's right, title, and interest in, to and under the related Loans and Commitments, if any, and to the extent related thereto ... all claims (including `claims as defined in Bankruptcy Code § 101(5)), suits, causes of action, and any other right ... whether known or unknown .... (emphasis added). Loans are defined as, with respect to each Loan Agreement, the loan(s) outstanding under such Loan Agreement in the amount(s) specified in Schedule 1, and includes the note(s) (if any) evidencing such loan(s) issued under such Loan Agreement ....' (emphasis added). Loan Agreement is defined as any document identified as such on Annex A of the contract. The Bankvest loans are listed as loan agreements on Annex A. Schedule 1 incorporates the amounts of the loans as listed in Annex B. 43 Thus, in selling to ARK the related Loans and Commitments, Fleet sold only the loan(s) outstanding under such Loan Agreement in the amount(s) specified in Schedule 1, and in selling claims it did so only to the extent related thereto (i.e. related to the outstanding loans specified in Schedule 1). 44 Under this same provision in Schedule 1 is provided a definition of Commitments. Similar to Loans, Commitments are, with respect to each Loan Agreement that provides for a commitment by Fleet to make a Loan or Loans,  the principal balance of the commitments ... set forth ... on Annex B. 14 (emphasis added). 45 It is undisputed that Fleet sold to ARK the amount outstanding on the BB Warehouse Obligation after deduction of the gap payments from that amount. The amount listed in Annex B as outstanding on the BB Warehouse Obligation reflects the deduction of $2,155,427 caused by the application of the gap payments. From the definition of Transferred Rights together with the definitions of Loans and Commitments, it is apparent that Transferred Rights includes only those claims and rights under the Bankvest loan relating to the aforementioned outstanding amount, which does not include the gap payments. A fortiori, any intangible rights, like Fleet's later-established 502(h) claim relating to the gap payments, were not transferred to ARK by the Transferred Rights provision. We interpret the ARK Contract, therefore, as not resulting in a transfer by Fleet to ARK of Fleet's later-arising 502(h) claim relative to the gap payments. We conclude, therefore, that Fleet has not divested itself of the 502(h) claim. We reach the same result on this point as the district court, albeit by a slightly different path.