Kirkland Alert Kirkland & Ellis LLP

Insiders’ Last Resort Secured Loan to Cash-Strapped Company Cannot Be Equitably Subordinated Without Specific Evidence of Actual Harm to Creditors

Section 510(c) permits a bankruptcy court (subject to appeal, of course) to subordinate one claim to another claim or even to an equity interest if the offending party engaged in inequitable conduct that resulted in actual injury. A recent federal appeals court decision on the extent to which insider loans may be equitably subordinated has provided an opportunity to examine how those rules of the road work.