## Facts

- A holding company issued multiple series of senior notes and junior (subordinated) notes under New York law–governed indentures.
- The junior indentures contained subordination clauses requiring that, upon specified events including bankruptcy, distributions be made so that senior indebtedness was paid “in full” before any payment on junior notes.
- The subordination language referenced payment of “principal of and interest on” senior indebtedness, including phrasing such as “interest due or to become due.”
- The issuer entered Chapter 7 liquidation while both senior and junior notes remained outstanding.
- The estate paid senior noteholders the full unpaid principal and all prepetition interest (plus certain fees and expenses), satisfying the senior creditors’ allowed unsecured claims.
- The Chapter 7 trustee sought to distribute remaining estate assets to junior noteholders.
- Senior indenture trustees objected, asserting the subordination clauses required payment of contract-rate postpetition interest to senior noteholders before any distribution to junior noteholders.
- The trustee responded that postpetition interest is generally not payable on allowed unsecured claims from the estate once the petition is filed.

## Issues

1. Whether contractual subordination requires a Chapter 7 estate to pay postpetition interest on unsecured senior debt before distributing to subordinated noteholders when senior allowed claims (principal and prepetition interest) have been paid in full.
2. Whether a subordination agreement must explicitly provide for payment of postpetition interest from funds otherwise distributable to junior creditors as a prerequisite to enforcement in bankruptcy.

## Decision

- The First Circuit affirmed the order permitting distributions to junior noteholders without paying postpetition interest to senior noteholders.
- The court held that interest on general unsecured claims stops accruing against the estate as of the bankruptcy petition date, and postpetition interest is generally not recoverable from the debtor or the estate.
- Because senior creditors had received full payment of their allowed unsecured claims (principal and prepetition interest), they had no entitlement to additional estate distributions for postpetition interest ahead of subordinated creditors.
- The court treated the “rule of explicitness” as non-dispositive and resolved the dispute by applying the Bankruptcy Code’s limits on claim allowance and distribution.

## Legal Principles

- Postpetition interest on general unsecured claims is generally not payable from the bankruptcy estate; it is excluded from allowed unsecured claims absent specific statutory circumstances.
- A subordination agreement enforceable under 11 U.S.C. § 510(a) may reorder priority among creditors only with respect to amounts that are allowable and distributable under the Bankruptcy Code.
- Contract language referring to payment of “interest due or to become due” does not, by itself, create an allowed claim for postpetition interest against the estate when the Code bars such recovery on unsecured claims.
- Courts need not rely on an extra-textual “rule of explicitness” where the Bankruptcy Code independently determines whether postpetition interest can be paid from the estate.

## Conclusion

The court held that contractual subordination could not be used to obtain postpetition interest from a Chapter 7 estate on unsecured senior debt once the senior creditors’ allowed claims were paid in full, and it affirmed distributions to subordinated noteholders without paying senior postpetition interest.


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