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  • Bankruptcy Litigation: James Gadsden Serves as Expert Witness in In re Bank of New England Corporation Subordination Litigation


Bankruptcy Litigation: James Gadsden Serves as Expert Witness in In re Bank of New England Corporation Subordination Litigation

Partner James Gadsden, former Chair of the Committee on Trust Indentures and Indenture Trustees of the American Bar Association’s Section of Business Law and a member of drafting group for the Revised Model Simplified Indenture and accompanying Notes published in 55 The Business Lawyer 1155 (2000), served as an expert witness in a bankruptcy case recently decided by the First Circuit Court of Appeals. In re Bank of New England Corporation, No. 10-1456 (1st Cir. June 23, 2011). The dispute, arising out of the 1991 bankruptcy filing by the holding company for Bank of New England and two other regional banks, involved whether, under the terms of the subordination provisions in the indentures for Bank of New England Corporation’s subordinated bonds, senior creditors could recover interest accruing on their claims after the filing of the bankruptcy case from the distributions to the subordinated creditors. The senior creditors had already recovered the entire principal and interest accrued up to the bankruptcy filing on their claims out of the proceeds of the liquidation of the holding company’s assets. In a previous appeal, the First Circuit had decided that “The Rule of Explicitness” for construing subordination provisions developed in cases decided by the Courts of Appeals in the 1970s did not survive the adoption of the Bankruptcy Code in 1978 and sent the case back to the bankruptcy court for a determination of the proper construction of the subordination article based on the intent of the parties. The Bankruptcy and District Courts relied on Mr. Gadsden’s testimony in construing the subordination articles in the underlying indentures, remarking that Mr. Gadsden’s testimony “added substantially to the picture of what was going on in this field in the 1980 period” when the indentures were drafted. In re Bank of New England Corporation, No. 10-1456, 15 (1st Cir. June 23, 2011) (quoting In re Bank of New England Corporation, 404 B.R. 17, 37 (Bankr. D. Mass. 2009)). The First Circuit affirmed the District Court and extensively quoted Mr. Gadsden’s testimony as supporting the District Court’s findings. 
Specifically, Mr. Gadsden testified that participants in the debt securities market during the 1980s understood that a debtor’s obligation to pay interest on unsecured debt ceased upon the filing of a bankruptcy petition, and that a junior creditor’s subordination obligations were coextensive with that of the debtor’s unless the subordination agreements explicitly stated otherwise. Id. He explained “‘that you needed to convey to the person who was going to acquire the subordinated debt that the rule that interest on the senior indebtedness would cease on the bankruptcy case was not going to apply.’” Id. (quoting Gadsden testimony). Gadsden also stated that, as an active participant in the American Bar Association’s Business Bankruptcy Committee and trust indenture committees during the 1980s, he had been and was still familiar with the three court of appeals decisions from the 1970s that articulated the Rule of Explicitness. Id. Notwithstanding this court’s conclusion that the Rule of Explicitness did not survive the 1978 enactment of the Bankruptcy Code, Mr. Gadsden testified that, as a factual matter, those three cases were the only cases on point as to the construction of subordination articles at the time that the junior indentures were executed. As such, lawyers drafting indentures during the mid-1980s knew the cases and would take them into account when drafting subordination provisions. Id. at 38. He explained that those cases “‘form[ed] the background against which people drafted indentures in the ‘80s. So they are . . . still part of what you have to analyze in understanding what people thought they would accomplish and would accomplish by a choice of words in the 1980s.’” Id. at 15-16. (quoting Gadsden testimony (emphasis in original)).
The Court of Appeals’ decision will make $100 million available for distribution to the holders of the subordinated debt.

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