Rule of Explicitness

“A judicial doctrine that prevents a junior creditor under a subordination agreement from being forced to give up its distributions under a bankruptcy plan to pay interest to the senior (but undersecured) creditor under the agreement unless the subordination agreement specifically requires that result.

An unsecured (or undersecured) creditor is not entitled to payment of interest on its claim in bankruptcy. But senior creditors argued that they could be paid postpetition interest on their claims—not from the debtor, but out of bankruptcy plan distributions that otherwise would have been paid to the junior creditors under the subordination agreements. This argument rested on language commonly included in subordination agreements providing that the junior creditor is not entitled to any payment until the senior creditor is paid in full. The courts found it unlikely that junior creditors would, under this language, anticipate being forced to hand over their bankruptcy plan distributions to a senior creditor to pay postpetition interest on the senior creditor’s unsecured claim, and therefore developed the rule that the junior creditor under a subordination agreement will not be required to give up its bankruptcy plan distributions to pay postpetition interest to the senior creditor unless the subordination agreement clearly provides that result by, for example, explicitly stating that if the borrower files bankruptcy, the senior lender is entitled to payment of interest from bankruptcy plan distributions that would otherwise be paid to the junior creditor.”

This definition is courtesy of our friends at Polsinelli who publish the Devil’s Dictionary of Bankruptcy Terms. You can access the Devil’s Dictionary here.

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