What Is Equitable Subordination?
Video Transcript What Is Equitable Subordination? You’re involved in a bankruptcy event and you’ve heard the term “Equitable Subordination.” What is Equitable Subordination? My name is Andy Forman and I’m a Business and Consumer Bankruptcy lawyer in Tampa, Florida, and I’m going to try and explain it to you. Equitable Subordination is an equitable remedy provided by the bankruptcy court in certain circumstances. More specifically, when either a creditor or one of the insiders of a corporate debtor does something inappropriate to advance their own position, either transfer assets away where they can’t be recovered. The court can equitably subordinate the claim of the wrong-doer such that they don’t receive any benefit until all the other creditors receive distribution up to a hundred percent. Equitable Subordination is a remedial power that the court has although it has the real effect of punishing the wrong-doer by minimizing or totally mitigating their claim as a result of their wrong
Subordination in banking and finance refers to the order of priorities in interests in various assets. Bankruptcy courts in the United States, as well as courts of general jurisdiction in the various states, have the power and authority to subordinate prior claims on the assets of a debtor to the claims of junior claimants based on equitable principles . This remedy is called “equitable subordination.” The basis for this subordination is usually the inequitable conduct of the prior creditor with respect to junior creditors. Equitable subordination can be used to subordinate both secured and unsecured interests. Equitable subordination is an extraordinary remedy and courts have generally held that the following conditions must be satisfied before sanctions will be imposed: (1) the prior creditor must have engaged in some kind of inequitable conduct; (2) the misconduct must have resulted in injury to the subordinate creditors of the bankrupt or conferred an unfair advantage on the prior
