Security Pacific National Bank v. Resolution Trust Corp.

The issue is priority of subordinated debenture holders after a bank failure. When a bank fails, and the Resolution Trust Corporation (RTC) repudiates the bank’s subordinated debentures, do subordinated debenture holders get the same priority as holders of other debt? No. Their interest remains subordinated.

I. Facts.

No facts were disputed. The district court granted summary judgment in favor of the holders of the subordinated debentures. We reverse, and remand for entry of summary judgment in favor of the RTC.

Debentures are ordinarily unsecured obligations of a corporation. They typically differ from promissory notes, in that they are issued pursuant to a trust indenture. The trustee acts as an agent for the debenture holders, to supervise the debtor’s compliance with its covenants in the debentures, and to collect the debt when due. This trust indenture scheme makes it practical to issue debentures for many millions of dollars, to many investors. The investors do not have to supervise compliance or collect the money when due, and the corporation does not have to deal with large numbers of investors. See Henry Winthrop Ballantine, Ballantine on Corporations 494-497 (rev. ed.…