## Facts

- King Resources Company entered Chapter X reorganization after an involuntary petition filed August 14, 1971.
- The debtor’s capital structure included subordinated domestic and foreign debentures totaling roughly $41.1 million (principal plus accrued pre-petition interest).
- A group of commercial banks held nearly $30 million in “senior” loans to the debtor.
- The debenture indentures contained contractual subordination provisions placing the debentures behind the banks’ senior debt.
- A dispute arose over approximately $12 million in post-petition interest accruing on the bank loans after the filing date.
- The banks did not seek to collect the post-petition interest as an allowed claim against the estate; instead, they sought to have distributions otherwise payable to debenture holders diverted to the banks to satisfy that post-petition interest.
- The Chapter X trustee’s proposed plan did not provide for payment of the banks’ post-petition interest by debenture holders, and the trustee was largely neutral on the contract dispute.
- The district court ruled the indenture language did not permit the banks to obtain post-petition interest from debenture-holder distributions; the banks appealed.

## Issues

1. Whether the debenture indentures’ subordination provisions required subordinated debenture holders, in a Chapter X reorganization, to bear senior banks’ post-petition interest by diverting plan distributions to the banks.
2. Whether a bankruptcy court may treat post-petition interest as payable ahead of subordinated debentures based on subordination language that does not expressly address post-petition interest.

## Decision

- The Tenth Circuit affirmed the district court’s judgment.
- The court rejected the banks’ attempt to use the subordination provisions to obtain payment of post-petition interest from distributions otherwise payable to subordinated debenture holders.
- The court held the indenture language did not clearly and unambiguously extend subordination to the banks’ post-petition interest, and the plan could not be restructured to create that additional priority without such contractual clarity.

## Legal Principles

- Subordination agreements are enforceable in bankruptcy according to their terms, but courts will not extend subordination beyond what the contract clearly provides.
- Post-petition interest on unsecured claims is generally not payable in bankruptcy absent a surplus; attempts to shift post-petition interest to junior creditors require explicit, unambiguous contractual language.
- Contract interpretation principles apply to indenture subordination provisions, and ambiguous drafting will not be construed to create additional bankruptcy priorities.

## Conclusion

The Tenth Circuit affirmed that the senior banks could not compel subordinated debenture holders to fund the banks’ post-petition interest through diverted plan distributions because the subordination clauses did not expressly and unambiguously provide for that result, consistent with bankruptcy’s general rule disfavoring payment of post-petition interest absent surplus.


In re King Res. Co., 528 F.2d 789 (10th Cir. 1976)