Title 15, Commerce and TradeRelease 119-110
§77kkk Preferential Collection of Claims Against Obligor
Title 15 › CHAPTER 2A — SECURITIES AND TRUST INDENTURES › SUBCHAPTER III — TRUST INDENTURES › § 77kkk
Summary
If the trustee for bondholders becomes a creditor of the bond issuer within three months before a payment default, or becomes a creditor after that default, the trustee must set aside and hold in a special account for itself and the bondholders any reductions in what it is owed and any property or proceeds it receives on that claim that happened after the start of that three-month period. The trustee may still keep payments made by other people, money from a real sale of the claim, distributions from bankruptcy or reorganization proceedings, and value from security it held before that three-month period (or certain security received at the same time a new claim was made if the trustee can prove it had no reason to expect a default). If required to divide the special account, the trustee and the bondholders must end up recovering the same percentage of their claims, and the bankruptcy or reorganization court can split the money or simply judge what is fair instead of doing exact math. A trustee who resigned or was removed after the start of the three-month period is treated the same as if still trustee; a trustee who left before that period is only covered if the receipts or reductions happened after the start and within three months after resignation or removal. “Default” means failure to pay principal or interest when due, and “bondholders” means all holders of securities under the affected indenture. In cases started under the Bankruptcy Act before November 6, 1978, any reference to three months means four months. The qualified indenture is treated as excluding from these rules, unless it says otherwise, certain creditor relationships, including ownership or purchase of long-term securities (maturity one year or more), court-approved advances to protect the trust property, ordinary trustee business disbursements, debts for services or cash sales, ownership of stock in certain Federal Reserve Act corporations, and self‑liquidating paper as defined in the indenture.
Full Legal Text
Title 15, §77kkk
Commerce and Trade, Source: USLM XML via OLRC
(a)Trustee as creditor of obligor (b) Exclusion of creditor relationship arising from specified classes
Subject to the provisions of subsection (b) of this section, if the indenture trustee shall be, or shall become, a creditor, directly or indirectly, secured or unsecured, of an obligor upon the indenture securities, within three months prior to a default as defined in the last paragraph of this subsection, or subsequent to such a default, then, unless and until such default shall be cured, such trustee shall set apart and hold in a special account for the benefit of the trustee individually and the indenture security holders—
(1)an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such three months’ period and valid as against such obligor and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this subsection, or from the exercise of any right of setoff which the trustee could have exercised if a petition in bankruptcy had been filed by or against such obligor upon the date of such default; and
(2)all property received in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such three months’ period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of such obligor and its other creditors in such property or such proceeds.
Nothing herein contained shall affect the right of the indenture trustee—
(A)to retain for its own account (i) payments made on account of any such claim by any person (other than such obligor) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the trustee to a third person, and (iii) distributions made in cash, securities, or other property in respect of claims filed against such obligor in bankruptcy or receivership or in proceedings for reorganization pursuant to the Bankruptcy Act or applicable State law;
(B)to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such three months’ period;
(C)to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such three months’ period and such property was received as security therefor simultaneously with the creation thereof, and if the trustee shall sustain the burden of proving that at the time such property was so received the trustee had no reasonable cause to believe that a default as defined in the last paragraph of this subsection would occur within three months; or
(D)to receive payment on any claim referred to in paragraph (B) or (C) of this subsection, against the release of any property held as security for such claim as provided in said paragraph (B) or (C), as the case may be, to the extent of the fair value of such property.
For the purposes of paragraphs (B), (C), and (D) of this subsection, property substituted after the beginning of such three months’ period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any preexisting claim of the indenture trustee as such creditor, such claim shall have the same status as such preexisting claim. If the trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned between the trustee and the indenture security holders in such manner that the trustee and the indenture security holders realize, as a result of payments from such special account and payments of dividends on claims filed against such obligor in bankruptcy or receivership or in proceedings for reorganization pursuant to the Bankruptcy Act or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the trustee anything on account of the receipt by it from such obligor of the funds and property in such special account and before crediting to the respective claims of the trustee and the indenture security holders dividends on claims filed against such obligor in bankruptcy or receivership or in proceedings for reorganization pursuant to the Bankruptcy Act or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term “dividends” shall include any distribution with respect to such claim, in bankruptcy or receivership or in proceedings for reorganization pursuant to the Bankruptcy Act or applicable State law, whether such distribution is made in cash, securities, or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership, or proceeding for reorganization is pending shall have jurisdiction (i) to apportion between the indenture trustee and the indenture security holders, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the indenture trustee and the indenture security holders with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. Any indenture trustee who has resigned or been removed after the beginning of such three months’ period shall be subject to the provisions of this subsection as though such resignation or removal had not occurred. Any indenture trustee who has resigned or been removed prior to the beginning of such three months’ period shall be subject to the provisions of this subsection if and only if the following conditions exist—
(i)the receipt of property or reduction of claim which would have given rise to the obligation to account, if such indenture trustee had continued as trustee, occurred after the beginning of such three months’ period; and
(ii)such receipt of property or reduction of claim occurred within three months after such resignation or removal.
As used in this subsection, the term “default” means any failure to make payment in full of principal or interest, when and as the same becomes due and payable, under any indenture which has been qualified under this subchapter, and under which the indenture trustee is trustee and the person of whom the indenture trustee is directly or indirectly a creditor is an obligor; and the term “indenture security holder” means all holders of securities outstanding under any such indenture under which any such default exists. In any case commenced under the Bankruptcy Act of July 1, 1898, or any amendment thereto enacted prior to November 6, 1978, all references to periods of three months shall be deemed to be references to periods of four months.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
References in Text
section 25(a) of the Federal Reserve Act, as amended, referred to in subsec. (b)(5), which is classified to subchapter II (§ 611 et seq.) of chapter 6 of Title 12, Banks and Banking, was renumbered section 25A of that act by Pub. L. 102–242, title I, § 142(e)(2), Dec. 19, 1991, 105 Stat. 2281.
Amendments
2010—Subsec. (c). Pub. L. 111–203 struck out subsec. (c) which related to issue or sale of securities by a registered holding company. 1990—Subsec. (a). Pub. L. 101–550, § 409(1)–(4), struck out “the indenture to be qualified shall provide that” before “if” in first par., substituted “If” for “The indenture to be qualified shall provide that, if” in third par., substituted “three months” for “four months” and “three months’ ” for “four months’ ” wherever appearing, and inserted at end “In any case commenced under the Bankruptcy Act of
July 1, 1898, or any amendment thereto enacted prior to
November 6, 1978, all references to periods of three months shall be deemed to be references to periods of four months.” Subsec. (b). Pub. L. 101–550, § 409(5), substituted “shall automatically be deemed (unless it is expressly provided therein that any such provision is excluded) to” for “may”.
Statutory Notes and Related Subsidiaries
Effective Date
of 2010 AmendmentAmendment by Pub. L. 111–203 effective 1 day after July 21, 2010, except as otherwise provided, see section 4 of Pub. L. 111–203, set out as an
Effective Date
note under section 5301 of Title 12, Banks and Banking.
Executive Documents
Transfer of Functions
For
Transfer of Functions
of Securities and Exchange Commission, with certain exceptions, to Chairman of such Commission, see Reorg. Plan No. 10 of 1950, §§ 1, 2, eff. May 24, 1950, 15 F.R. 3175, 64 Stat. 1265, set out under section 78d of this title.
Reference
Citations & Metadata
Citation
15 U.S.C. § 77kkk
Title 15, Commerce and Trade
Last Updated
Sep 23, 2026
Release point: 119-110