HSBC Bank USA v. Bank of New York Mellon Trust Co. (In re Bank of New England Corp.)

Summarized by Craig Lutterbein , M&T Bank
14 years 9 months ago

Citation:

HSBC Bank USA v. Bank of New York Mellon Trust Co. (In re Bank of New England Corp.), No. 10-1456 (1st Cir. June 23, 2011)

Tag(s):

1st Circuit

Ruling:

Under New York law and New York custom and practice, a senior debt holder is not entitled to receive post-petition interest unless a subordination agreement expressly provides that the senior debt holder is entitled to post-petition interest. The court explained that under section 510(a) of the Bankruptcy Code a subordination agreement is enforceable to the extent that the agreement is enforceable under state law. Accordingly, whether or not a senior party is entitled to post-petition interest is determined by applying state law. In this case, the subordination agreement contained a choice of law clause that specified that New York law would control the agreement. Because New York does not have a specific rule governing post-petition interest, the court determined that whether the senior party was entitled to post-petition interest was governed by the intent of the parties. The court agreed with the bankruptcy court’s determination that based on the customs and practices used in New York at the time the subordination agreement was entered into the parties would have expressly stated that the senior party was entitled to post-petition interest if parties intended for the senior debt to receive post-petition.

Procedural context:

The holders of the senior debt appealed the rulings of both the bankruptcy court and district court that the senior debt was not entitled to post-petition interest.

Facts:

During the 1970’s and 1980’s, the Bank of New England issued several series unsecured debt with senior and junior classes. The subordination agreements between the senior and junior classes contained a clause that stated “all principal . . . and interest due or to become due upon all Senior Indebtedness of the Company shall first be paid in full . . . before any payment is made on account of the principal of or interest on the indebtedness evidenced by [Subordinated Notes] . . . .” During the Bank of New England’s bankruptcy, the senior class argued that the above quoted clause entitled it to be paid post-petition interest before the junior class received any distributions. The bankruptcy court heard expert testimony, reviewed documents written by prominent law firms, and reviewed authoritative treatises in order to determine whether the clause reflected the intent of the parties to provide the senior class with post-petition interest. The bankruptcy court held that according to the customs and practices followed in New York at the time of the agreement the clause did not reflect an intent of the parties to provide the senior class with post-petition interest. The circuit court affirmed.

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