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Both Senior and Subordinated Notes Bear A Burden Of Proofs In Establishing The Application of The Subordination Provisions of The Indentures To Post-Petition Interest

May 29, 2007
In re Bank of New England Corp., 2007 W.L. 70418 (Bankr. D. Ma. 1/9/07). In the latest opinion arising out of the long running[1] dispute over the operation of the subordination provisions in the indentures for the Bank of New England Corp. public debt, Bankruptcy Judge Hillman has determined that the senior and subordinated trustees each bear the burden of proof in establishing their right to the funds held aside from the distributions otherwise payable to the subordinated noteholders. The right of the senior noteholders are entitled to recover their post-petition interest and fees and expenses from the distributions to the subordinated noteholders will be decided after a trial. The senior noteholders have already received all of their principal and pre-petition interest in prior distributions by the chapter 7 trustee. 
 
Present Bankruptcy Code Sec 510(a) explicitly recognizes the enforceability of subordination provisions under otherwise applicable law.[2] Judge Hillman’s ruling is the latest in a series of decisions on the continued validity of the “Rule of Explicitness” originally developed in cases under the Bankruptcy Act[3] prior to the enactment of the Bankruptcy Reform Act of 1978 to the interpretation of subordination provisions in indentures. After the New York Court of Appeals[4] had responded affirmatively to the Eleventh Circuit Court of Appeals’ certified question[5] of the whether the Rule of Explicitness was a principle of New York contract law, the First Circuit found that the New York Court of Appeals did not have the power to establish a rule applicable only in bankruptcy cases and returned the case to the bankruptcy court for determination of the parties’ intent on the treatment of post-petition interest under general New York contract interpretation principles.[6] 
 
Judge Hillman’s resolution of the competing claims will be the subject of great interest and, based on the prior history of the case, likely further appeals.
 
Contributed by James Gadsden, Carter Ledyard & Milburn LLP in New York, gadsden@clm.com

Endnotes

[1] The Bank of New England bankruptcy case was filed on January 7, 1991.

[2] Bankruptcy Code § 510(a).

[3] Bankers Life Co. v. Manufacturers Hanover Trust Co. (In re Kingsboro Mortgage Co.), 514 F.2d 400 (2d Cir. 1975); In re Time Sales Fin. Corp., 491 841 (3d Cir. 1974).

[4] Chemical Bank v. First Trust of New York (In re Southeast Banking Corp.), 93 N.Y.2d 178, 688 N.Y.S.2d 484, 710 N.E.2d 1083 (1999).

[5] Chemical Bank v. First Trust of New York (In re Southeast Banking Corp.), 156 F.3d 1114 (11th Cir. 1998).

[6] HSBC Bank USA v. Branch (In re Bank of New England Corp.), 364 F.3d 355 (1st Cir. 2004).



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