An obligation may be issued as subordinated to performance of another obligation of the person obligated, or a creditor may subordinate its right to performance of an obligation by agreement with either the person obligated or another creditor of the person obligated. Subordination does not create a security interest as against either the common debtor or a subordinated creditor.

History: 1953 Comp., § 50A-1-209, enacted by Laws 1961, ch. 96, § 1-209; 1978 Comp. §55-1-209; recompiled by compiler as 1978 Comp. § 55-1-310; Laws 2005, ch. 144, § 24.

OFFICIAL COMMENTS

UCC Official Comments by ALI & the NCCUSL. Reproduced with permission of the PEB for the UCC. All rights reserved.

Source. — Former Section 1-209 [55-1-209 NMSA 1978].

Changes from former law. — This section is substantively identical to former Section 1-209. The language in that section stating that it "shall be construed as declaring the law as it existed prior to the enactment of this section and not as modifying it" has been deleted.

1. Billions of dollars of subordinated debt are held by the public and by institutional investors. Commonly, the subordinated debt is subordinated on issue or acquisition and is evidenced by an investment security or by a negotiable or non-negotiable note. Debt is also sometimes subordinated after it arises, either by agreement between the subordinating creditor and the debtor, by agreement between two creditors of the same debtor, or by agreement of all three parties. The subordinated creditor may be a stockholder or other "insider" interested in the common debtor; the subordinated debt may consist of accounts or other rights to payment not evidenced by any instrument. All such cases are included in the terms "subordinated obligation," "subordination," and "subordinated creditor."

2. Subordination agreements are enforceable between the parties as contracts; and in the bankruptcy of the common debtor dividends otherwise payable to the subordinated creditor are turned over to the superior creditor. This "turn-over" practice has on occasion been explained in terms of "equitable lien," "equitable assignment," or "constructive trust," but whatever the label the practice is essentially an equitable remedy and does not mean that there is a transaction "that creates a security interest in personal property . . . by contract" or a "sale of accounts, chattel paper, payment intangibles, or promissory notes" within the meaning of Section 9-109 [55-9-109 NMSA 1978]. On the other hand, nothing in this section prevents one creditor from assigning his rights to another creditor of the same debtor in such a way as to create a security interest within Article 9, where the parties so intend.

3. The enforcement of subordination agreements is largely left to supplementary principles under Section 1-103 [55-1-103 NMSA 1978]. If the subordinated debt is evidenced by a certificated security, Section 8-202(a) [55-8-202(a) NMSA 1978] authorizes enforcement against purchasers on terms stated or referred to on the security certificate. If the fact of subordination is noted on a negotiable instrument, a holder under Sections 3-302 and 3-306 [55-3-302, 55-3-306 NMSA 1978] is subject to the term because notice precludes him from taking free of the subordination. Sections 3-302(3)(a), 3-306, and 8-317 [55-3-302(3)(a), 55-3-306, and 55-8-317 NMSA 1978, respectively] severely limit the rights of levying creditors of a subordinated creditor in such cases.

Compiler's notes. — Laws 2005, ch. 144, § 24, effective January 1, 2006, enacted a new 55-1-310 NMSA 1978 relating to subordinated obligations. With minor amendments, former 55-1-209 NMSA 1978 relating to subordinated obligations has been enacted as a new 55-1-310 NMSA 1978 by Laws 2005, ch. 144, § 24. See 12-2A-14 NMSA 1978 for repeal and reenactment of a law that is not a new enactment. For provisions of former 55-1-209 NMSA 1978, see the 2004 NMSA 1978 on NMOneSource.com.