Legal Definitions - senior interest

A senior interest refers to a claim or right that holds a higher priority than other claims or rights against the same asset or debtor. This means that if there isn't enough money or value to satisfy all claims, the holder of the senior interest will be paid or satisfied before those with junior (subordinate) interests. The priority is typically established by law, contract, or the order in which the interests were created or recorded.

• Example 1: Real Estate Mortgages

  Imagine a homeowner who takes out a primary mortgage to buy their house. Years later, they take out a second mortgage, often called a home equity loan, from a different lender. If the homeowner defaults on both loans and the house is foreclosed and sold, the lender holding the first mortgage has a senior interest. This means that the proceeds from the sale of the house will first be used to pay off the primary mortgage in full before any money goes to the second mortgage lender.

  Explanation: The first mortgage is "senior" because it was recorded first and has a superior claim on the property's value compared to the second mortgage. Its claim must be satisfied before the junior claim.

• Example 2: Corporate Debt and Bankruptcy

  Consider a large corporation that issues different types of bonds to raise capital. They might issue "senior secured bonds" and "subordinated unsecured bonds." If the company faces severe financial difficulties and declares bankruptcy, the holders of the senior secured bonds have a senior interest. These bonds are typically backed by specific company assets, giving their holders priority in receiving repayment from the sale of those assets over the holders of the subordinated unsecured bonds.

  Explanation: The senior secured bonds are senior because they are backed by collateral and have a contractual agreement for priority repayment, meaning their claims are addressed before those of the subordinated, unsecured bondholders during liquidation.

• Example 3: Government Tax Liens

  A small business owner owes a significant amount in back taxes to the federal government. Separately, a supplier has obtained a court judgment against the business for unpaid invoices, which results in a judgment lien on the business's assets. In many jurisdictions, a government tax lien is automatically considered a senior interest over most other types of liens, including general judgment liens. If the business's assets are seized and sold, the government's tax lien would typically be paid first from the proceeds before the supplier's judgment lien.

  Explanation: The tax lien is senior due to specific laws that grant government claims a higher priority over many other creditors, ensuring the government's claim is satisfied before other, junior claims.