Southeast Banking Corp. v. First Trust of New York, 1999 N.Y. Int. 0058 (Apr. 29, 1999).

BANKRUPTCY - SUBORDINATION AGREEMENT - NOTICE TO JUNIOR CREDITOR

ISSUE & DISPOSITION

Issue

What, if any, language does New York law require in a subordination agreement to alert a junior creditor to its assumption of the risk and burden of the senior creditor's post-petition interest?

Disposition

The Court answered the above certified question as follows: "In accordance with the Rule of Explicitness, New York law would require specific language in a subordination agreement to alert a junior creditor to its assumption of the risk and burden of allowing the payment of a senior creditor's postĄpetition interest demand."

SUMMARY

The United States Court of Appeals for the Eleventh Circuit certified the above question to the Court of Appeals. It did so following a conclusion that a 1978 revision to the Bankruptcy Code had abrogated the Rule of Explicitness previously operating as a matter of federal law. The Eleventh Circuit held that the statutory phrase "applicable nonbankruptcy law" refers to any relevant Federal or State law. In the absence of any ascertainable Federal law on the subject, the court turned to the choice of law provisions in the indentures before it and concluded that New York substantive contract law should govern. Noting that since the issue of post-petition interest arises almost exclusively in bankruptcy proceedings, New York courts had not previously considered the issue, it certified the question.

Based on a strong reliance interest in the Rule of Explicitness and the conviction that the commercial and legal policies underlying the Rule remain sound and relevant the Court of Appeals enunciated it as New York law.