Excerpt from Practical Guidance

A Brief History Of Subordination And Recharacterization

Law360, New York (March 23, 2015, 2:07 PM EDT) -- Section 510 of the Bankruptcy Code discusses subordination in the context of a bankruptcy filing. Pursuant to section 510(a) of the Bankruptcy Code, contractual subordination provisions are enforceable in bankruptcy to the same extent that they are enforceable under applicable nonbankruptcy law. Section 510(b) of the Bankruptcy Code provides for subordination of claims arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution. In accordance with section 510(c) of the Bankruptcy Code, equitable subordination is permissible and authorizes a court to subordinate the claim of any creditor or party-in-interest that has behaved wrongfully. In In re Mobile Steel Co., 563 F.2d 692 (5th Cir. 1977), the Fifth Circuit found that courts can equitably subordinate a claim when the claimant has engaged in some type of inequitable conduct, the misconduct has resulted in injury to the creditors of the debtor or conferred an unfair advantage on the claimant, and such equitable subordination would not be inconsistent with the Bankruptcy Code....

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