Beyond the Limits of Equity Jurisprudence: No-Fault Equitable Subordination

Abstract:     
In two 1996 decisions involving equitable subordination of claims in bankruptcy cases, United States v. Noland and United States v. Reorganized CF&I Fabricators of Utah, Inc., the Supreme Court did not answer the question of whether a bankruptcy court must find creditor misconduct before it equitably subordinates a creditor's claim. This Note argues that the Court should have established a bright-line rule that requires such a finding, using prepetition, nonpecuniary loss tax penalty claims of the IRS as a model. After showing that, as codified in the Bankruptcy Code, the doctrine of equitable subordination requires a finding of creditor misconduct, it analyzes circuit courts of appeals cases decided prior to Noland and Reorganized CF&I Fabricators that upheld equitable subordination of IRS prepetition tax penalty claims under a no-fault standard. The Note concludes that use of a no-fault standard of equitable subordination by a bankruptcy court constitutes impermissible judicial activism and that any unfairness resulting from the treatment of claims by the Bankruptcy Code should be remedied by Congress.

Number of Pages in PDF File: 28

Keywords: bankruptcy, equitable subordination

Accepted Paper Series