Court MAY equitably subordinate C-lender’s claim ONLY to claim of major supplier (partial equitable subordination)… BUT, NO to claims of minor equitable subordination … suppliers that were influenced by major supplier’s reliance (recall reliance”) “ripple suppliers did NOT inquire to C-lender thus, were NOT misled by C-lender… BUT, foreseeable to C-lender that misleading major supplier … would influence minor suppliers as well (§ Subordination agreements 510(a))… D goes to C-lender for additional funding, already owing C-lender $10M won’t/can’t loan more $$)… SO, D goes to emergency lender, who is willing to loan $1M… BUT, emergency does NOT want to be junior to C-lender C-lender contractually subordinates to emergency lender C-lender MAY be unable to loan more $$ if insufficient borrowing base, then can’t go of formula”… “out BUT, C-lender MAY be willing to subordinate better alternative than D … filing for bankruptcy (AND, collateral subsequently dropping in value) MAY contain if newly-senior C Subordination agreement turn-over clause obtains any $$, then must first to newly-junior C over” “turn Ordinary payments will be to newly-junior C… BUT, over” “turned newly-junior C also wants post-petition interest (which newly-senior C would NOT have received but for subordination agreement) Courts used to NOT enforce w/ Draconian subordination agreements unless explicitly set out (“rule BUT, now, clauses, of explicitness”)… courts will enforce to same extent as subordination agreements “applicable (negotiating for newly-junior C) nonbankruptcy law” AUTOMATIC STAY once filed, every proceeding against D § 362(a) bankruptcy petition (commencement AND continuation) stops… Counsel subject to discipline (i.e. sanction, civil/criminal contempt) if NOT stopping upon bankruptcy filing do NOT assume that proceeding is immune from attack (trustee/DIP will come after C, potential for punitive damages)… rather, go to bankruptcy and seek permission/relief from automatic … AND, notify state court (MAY have to dismiss action against D w/o stay… prejudice)
Court MAY equitably subordinate C-lender’s claim ONLY to claim of major supplier (partial equitable subordination)… … BUT, NO equitable subordination to claims of minor suppliers that were influenced by major supplier’s reliance (recall “ripple reliance”) suppliers did NOT inquire to C-lender thus, were NOT misled by C-lender… … BUT, foreseeable to C-lender that misleading major supplier would influence minor suppliers as well Subordination agreements (§ 510(a))… D goes to C-lender for additional funding, already owing C-lender $10M won’t/can’t loan more $$)… SO, D goes to emergency lender, who is willing to loan $1M… BUT, emergency does NOT want to be junior to C-lender C-lender contractually subordinates to emergency lender C-lender MAY be unable to loan more $$ if insufficient borrowing base, then can’t go “out of formula”… … BUT, C-lender MAY be willing to subordinate better alternative than D filing for bankruptcy (AND, collateral subsequently dropping in value) Subordination agreement MAY contain turn-over clause if newly-senior C obtains any $$, then must first “turn over” to newly-junior C Ordinary payments will be “turned over” to newly-junior C… BUT, newly-junior C also wants post-petition interest (which newly-senior C would NOT have received but for subordination agreement) Courts used to NOT enforce subordination agreements w/ Draconian clauses, unless explicitly set out (“rule of explicitness”)… BUT, now, courts will enforce subordination agreements to same extent as “applicable nonbankruptcy law” (negotiating for newly-junior C) AUTOMATIC STAY § 362(a) once bankruptcy petition filed, every proceeding against D (commencement AND continuation) stops… Counsel subject to discipline (i.e. sanction, civil/criminal contempt) if NOT stopping upon bankruptcy filing do NOT assume that proceeding is immune from attack (trustee/DIP will come after C, potential for punitive damages)… … rather, go to bankruptcy and seek permission/relief from automatic stay… AND, notify state court (MAY have to dismiss action against D w/o prejudice)
Bankruptcy_Schechter-Fall-2009.docx