In the 1938 case of Guaranty Trust Co., Trustee, v. Henwood, Trustee, et al., the United States Supreme Court ruled on a matter involving bankruptcy and bondholders' rights. The Missouri Pacific Railroad Company had defaulted on its bonds during the Great Depression and entered into reorganization under Section 77 of the Bankruptcy Act. A group of bondholders led by Guaranty Trust Co., who held first mortgage bonds secured by a lien on some railroad properties, argued that they were entitled to full payment before any junior creditors could receive anything from those specific assets. However, other creditors represented by Henwood disagreed with this interpretation. The Supreme Court sided with Henwood's argument that all claims should be treated equitably in line with principles established in previous cases such as Northern Pacific Railway Co v Boyd (1913). It was determined that while senior liens do have priority over junior ones when it comes to distribution from specific assets securing their debt; however, they are not immune from being affected or reduced through equitable subordination if necessary for fair treatment of all claimants involved in a bankruptcy proceeding.

In the dissenting opinion for Guaranty Trust Co. v. Henwood, Justice Black disagreed with the majority's decision to allow a creditor to collect on a debt that had been discharged in bankruptcy proceedings because of an alleged fraud by the debtor. He argued that this violated the principle of finality in bankruptcy law and would undermine confidence in such proceedings if creditors could later claim fraud and seek payment outside of them. Furthermore, he contended that it was unfair to other creditors who had accepted less than full payment during those proceedings under the assumption they were sharing equally with all others. Finally, he pointed out there was no evidence presented at trial proving any fraudulent intent by the debtor when obtaining credit or concealing assets from his creditors.