On January 27, 2017, the United States District Court for the Southern District of New York ruled that the subordinated creditor was entitled to payment of post-petition interest prior to repayment of the senior lender’s outstanding principal. Interpreting the loan documents under applicable state law, the Court determined that the documents were sufficiently explicit as to entitle the subordinated lender to receive post-petition interest, notwithstanding the Bankruptcy Code’s general prohibition on post-petition interest for unsecured claims.

Background -

The plaintiff, U.S. Bank National Association (“Plaintiff”), and the defendant, T.D. Bank. N.A. (“Defendant”), were both senior lenders of Bionol Clearfield, LLC (“Bionol”) under a senior credit agreement (the “Credit Agreement”) that covered five tranches of secured loans. Defendant was a lender under three of the tranches (the Tranche A Loans, the Tranche B Loans, and the Working Capital Loans), and was appointed as collateral agent and administrative agent. Plaintiff was the sole lender under a separate tranche, the Tranche TEX Loans. The parties entered into an intercreditor agreement (the “Intercreditor Agreement”) which set forth the following waterfall for application of proceeds upon the exercise of remedies. For purposes of this dispute, the priority of payments were: (1) fees, costs and expenses then due and payable under the loan documents; (2) any interest then due and payable under the loan documents to all lenders (including Plaintiff); and (3) any principal amounts then due and payable with respect to the five tranches of loans in order of priority (with the Plaintiff’s Tranche TEX Loans only receiving principal distributions after repayment of all other loans).