Publications

Equitable Subordination Still Requires Proof of Harm

September 2008
The Bankruptcy Strategist

The U.S. Court of Appeals for the Fifth Circuit reversed a bankruptcy court’s equitable subordination order on June 20, 2008. According to the court, subordination of the insiders’ secured claims was “inappropriate” because the bankruptcy trustee had failed to show that the defendant insiders’ “loans to the debtor harmed either the debtor or the general creditors.” The court also rejected the trustee’s “deepening insolvency” argument on the facts and as a matter of law. The defendants had been officers, directors and the largest shareholders of the corporate debtor.