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Priority Defeated by Ambiguity of Subordination Clause.

Article Excerpt
The relative priority of secured and unsecured debts has been the focus of painstaking efforts undertaken by creditors (and their professionals) for as long as the lending industry has been in existence. Loan and security agreements have become more complicated and voluminous as drafters strive to express in writing the full complement of the parties' intentions. Sophisticated lending transactions routinely involve documentation that appears to account for every circumstance and contingency that could conceivably affect the relationship among borrowers, lenders, the loaned funds and any security serving as collateral. Still, lending agreements sometimes prove to be inadequate or incomplete due to either inartful drafting or simple oversight. The consequences of a loan agreement's defects were the subject of a decision recently handed down by the 7th Circuit Court of Appeals in Heller Financial, Inc. v. Prudential Insurance Co. of America.

Subordination In Bankruptcy

The concept of claim or debt subordination, whether contractual, statutory or equitable, is well recognized under federal bankruptcy law. If the claims of one creditor or group of creditors are subordinated in accordance with the provisions of a valid and enforceable agreement, the subordination clause, by virtue of Bankruptcy Code section 510(a), is enforceable in...