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agreement, or, if no agreement, by Court Order. The Debtor has paid adequate protection payments of $10,000.00 per month since July, 2007. These payments shall be applied first to interest and then to principal. The Class 2 Claim amount shall be determined by taking the pre-petition principal balance plus interest at the non-default contract rate less adequate protection payments (the "Sovereign Secured Claim")." (emphasis added.) The first emphasized sentence is the Fourth Sentence and the last emphasized sentence is the Seventh Sentence. After the confirmation, the Debtor filed a motion asking that the court "set" the amount of the Sovereign Secured Claim. The Debtor argues that "(1) its confirmed plan modifies and partly overrides Sovereign's rights under 11 U.S.C. § 506(b) by excluding postpetition attorneys' fees and postpetition late charges from Sovereign's allowed secured claim and (2) pursuant to 11 U.S.C. § 1141(a), Sovereign is bound by the confirmed plan's treatment of its secured claim." Sovereign, on the other hand, "asserts that the Debtor's plan provisions concerning Sovereign's claim are ambiguous, contradictory and do not (and should not be read to) override Sovereign's § 506(b) entitlement to postpetition attorney's fees and late charges."
Issue: Whether the Plan overrides Sovereign's § 506(b) rights.
Rule: The key legal principles that control the interpretation of a confirmed chapter 11 plan are as follows: "[(1)] In construing a confirmed plan of reorganization, courts apply contract principles. [(2)] The rules of contract interpretation applied are those of the state in which the plan was confirmed. [(3)] Under Pennsylvania law, if the intent of the parties to a written contract is clear from the writing itself, there is no need to consider extrinsic evidence. [(4)] If, however, a written contract is ambiguous, the parties may offer extrinsic evidence to clarify its meaning. [(5)] A provision is ambiguous if it is reasonably susceptible to different meanings. [(6)] In interpreting the meaning of an ambiguous contract provision, after consideration of the extrinsic evidence, the court may consider various principles or tools of contract interpretation. See, e.g., Restatement (Second) of Contracts § 201-206 (West 2009) ('the Restatement')."
Holding: "Sovereign is not entitled to include § 506(b) postpetition attorneys' fees and late charges in its allowed secured claim."
Reasoning: At the trial, the Debtor's bankruptcy counsel said that the intent of the relevant section - § 3.2 was as expressed in the Seventh Sentence and fixed the amount of Sovereign's claim to exclude the charges at issue here. Counsel explained that the Seventh Sentence defined the allowable substantive portion of Sovereign's claim and the Fourth Sentence described the procedure for determining the claim. On the other hand, Sovereign stated that it never meant to waive entitled to the fees and expenses allowed in § 506(b). Sovereign's lawyer could not harmonize the Fourth Sentence and the Seventh Sentence. Here, § 3.2 of the Plan is sufficiently ambiguous to consider extrinsic evidence. The court first said it is difficult to understand the relationship between the Fourth Sentence and the Seventh Sentence based only on the text of the Plan; the evidence presented at the trial was not helpful in determining the meaning of the two sentences. Ultimately, the court held that, standing alone, the Seventh Sentence restricted Sovereign's rights under § 506(b)- by referencing a component of § 506(b) (postpetition interest) but omitting other types of § 506(b) charges (postpetition attorneys' fees and interest) the Seventh Sentence expressed the Debtor's intent to exclude the omitted charges from Sovereign's claim. And, the court accepted the Debtor's harmonization of the Fourth Sentence and the Seventh Sentence: the Seventh Sentence "defines the methodology for computing Sovereign's allowed secured claim and the 4th Sentence speaks only to the procedure for dispute resolution." This interpretation gives meaning to all of the provisions in § 3.2, which is the preferred outcome.
*This holding is later reversed by the court for the Eastern District of Kentucky at 418 B.R. 217 (E.D. Ky. 2009)
Facts: The debtor filed its chapter 11 case on September 25, 1998. The debtor ultimately was forced to liquidate and filed a plan of liquidation, which was confirmed on May 31, 2001 and which provided for the sale of all of the assets of the debtor at auction. The debtor's assets were duly sold at the auction but a dispute arose as to
©2010 Leif M. Clark
