Equitable Subordination

Equitable subordination is an equitable remedy for bankruptcy debtors or creditors when one creditor has performed inequitable conduct that has harmed the debtor or creditors of the bankruptcy estate. Equitable subordination was codified in the Bankruptcy Code under section 11 U.S.C. 510 (c) and is within the court’s discretion whether this remedy will be utilized.
In order for a court to grant an equitable subordination claim, three elements must be met: (1) the claimant engaged in some type of inequitable conduct, (2) the misconduct injured creditors or conferred unfair advantage on the claimant, and (3) that subordination would not be consistent with the Bankruptcy Code. In re First Alliance Mortgage Co., 471 F.3d 977, 1006 (9th Cir. 2006) (citing Matter of Mobile Steel Co., 563 F.2d 692, 701 (5th Cir. 1977)). Even though equitable subordination is an equitable remedy, it “is a dramatic remedy, and one that is rarely granted.” In re GTI Capital Holdings, LLC, No. 03-07923-SSC, 2007 WL 2493671 at *14 (Bankr. D. Ariz. Aug. 30, 2007). The Ninth Circuit has explained that gross and egregious conduct is required before a court will equitably subordinate a claim. In re First Alliance Mortgage Co., 471 F.3d at 1006. Additionally, “the level of egregious conduct necessary for equitable subordination is high; even independently tortious and fraudulent conduct does not necessarily rise to the level required for equitable subordination in bankruptcy.” Id. (citing In re First Alliance Mortgage Co., 471 F.3d at 1007).