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- Title
The Inequities of Equitable Subordination.
- Authors
Schwarcz, Steven L.
- Abstract
The doctrine of equitable subordination is extraordinary, enabling judges to change the relative repayment priorities of bargained, for creditor claims. The doctrine originated in 1939 to subordinate the intercompany claims of a parent company that plundered its subsidiary to the detriment of the subsidiaTy's inno. cent creditors. Ovey time, however, judges have inconsistently expanded the doc. tn'ne, sometimes to suboTdinate claims in a nofault manner according to their personal views Of equity. The resulting uncertainty distorts commercial expecta. tions and raises the cost of credit. This Article examines how and why the doctrine devolued in this way and analyzes how the doctrine should be Teconcep. tualized to presrue its equitable benefits while Motecting fairness and ex ante expectations. Among other things, it argues that courts should adhere to a faultbased doctrine and that they should assess misconduct by a business judg. ment Tule, similar to how courts assess corporate governance. Lastly, the Article explains why certain related doct~ines of bal*uptcy exceptionalism that often are conflated with equitable subordination-recharacterization and equitable disallowance-are confusing and irrelevant and should be discarded.
- Subjects
EQUITY (Law); BANKRUPTCY; CORPORATE governance; REPAYMENTS; DEBTOR &; creditor; SUBSIDIARY corporations
- Publication
American Bankruptcy Law Journal, 2022, Vol 96, Issue 1, p29
- ISSN
0027-9048
- Publication type
Article