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'My Claim Is What?'
For many years, the holder of a stock redemption claim against a company in bankruptcy faced almost certain demotion to the class of interest holders. No matter how long ago the stock redemption occurred, no matter the solvency of the company, and no matter how innocent the holder appeared, any claim for unpaid installments due under a stock redemption agreement was sent to the back of the line. In 1996, the Supreme Court issued a decision that rekindled hope for stock redemption claimants; recent case law, unfortunately, has failed to maintain a uniform front on this issue.
Section 510(c) empowers a bankruptcy court to equitably subordinate a claim:
“(c) Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may – (1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of another allowed interest …” 11 U.S.C. '510(c) (2002). Generally, a court should not equitably subordinate a particular claim or interest under '510(c) absent a showing of some form of inequitable conduct by the claimant or interest holder. See United States v. Noland, 517 U.S. 535, 538, 116 S.Ct. 1524, 1526, 134 L.Ed.2d 748 (1996); Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 700-02 (5th Cir. 1977). In the absence of inequitable conduct, a debt obligation claim may be “recharacterized” as equity upon a detailed factual showing of certain indicia of equity. For particular classes of claims, however, the courts have not strictly adhered to the general principals requiring inequitable conduct by the claimant or a demonstration of the recharacterization factors.
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