Equitable Subordination

EQUITABLE SUBORDINATION

In re First Alliance Mortg. Co., 471 F.3d 977, 1006 (9th Cir. 2006)

“Where non-insider, non-fiduciary claims are involved, as is the case here, the level of

pleading and proof is elevated: gross and egregious conduct will be required before a court will

equitably subordinate a claim”

In re Filtercorp, Inc., 163 F.3d 570 (9th Cir. 1998)

Mere undercapitalization of debtor is insufficient basis to equitably subordinate claims.

U.S. v. Noland, 517 U.S. 535 (1996)

May not equitably subordinate on a categorical basis. May not always need to show

creditor misconduct as condition to equitable subordination.

In re Lazar, 83 F.3d 306 (9th Cir. 1996)

Three findings are generally required before equitable subordination will be granted:

1) that the claimant engaged in some type of inequitable conduct,

2) that the misconduct injured creditors or conferred unfair advantage on the claimant, and

3) that subordination would not be inconsistent with the Bankruptcy Code

In order to justify equitable subordination, the court is required to make specific findings

and conclusions with respect to each of the requirements.

Stoumbos v. Kilimnik, 988 F.2d 949 (9th Cir. 1993), cert. denied, 510 U.S. 867 (1993)

1) claimant who is to be subordinated engaged in inequitable conduct,

2) the misconduct results in injury to competing claimants or an unfair advantage to the claimant

3) subordination is not inconsistent with bankruptcy law

Insider’s action is subject to “rigorous scrutiny”

In re Fabricators, Inc., 926 F.2d 1458 (5th Cir. 1991)

Court found creditor/insider

1) engaged in inequitable conduct

2) which resulted in injury to creditors

3) equitable subordination consistent with provisions of the code

In re Virtual Network Services Corp., 902 F.2d 1246 (7th Cir. 1990)

Equitable subordination not limited to situations of inequitable action

Matter of Clark Pipe and Supply Co., Inc., 893 F.2d 693 (5th Cir. 1990)

In re Universal Farming Industries, 873 F.2d 1334 (9th Cir. 1989)

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