HSBC Bank USA v. Branch (In re Bank of New England Corp.)

Bank of New England (BONE) (debtor) issued three senior and three junior debt instruments that were governed by New York law. Contractual subordination language in the junior debt instruments specified that upon payment or distribution of BONE’s assets to creditors in listed triggering circumstances, including bankruptcy, payment of “interest due or to become due” on the senior debt would occur in full before any payment on the outstanding junior debt. BONE filed for bankruptcy while the senior and junior debts were mostly still outstanding. BONE’s bankruptcy estate paid the senior debtholders their full unpaid principal and prepetition interest, plus fees and expenses. Bankruptcy trustee Ben Branch (defendant) determined that BONE’s obligation to the senior debtholders was satisfied and sought permission to make a distribution to the junior debtholders. HSBC Bank USA (HSBC) and JPMorgan Chase Bank (Chase) (plaintiffs), the indenture trustees of the senior debt, objected to the requested distribution because Branch had not paid postpetition interest to the senior debtholders. The bankruptcy court overruled the objection and allowed the distribution, finding that the equitable rule of explicitness required a contractual subordination agreement to explicitly alert subordinated creditors that postpetition interest would be paid to senior creditors from funds that would otherwise go to the subordinated creditors. The bankruptcy court found that the junior debt instruments’ contractual subordination language did not satisfy the rule. The district court affirmed, and HSBC and Chase appealed.