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Rough Justice? The Nature and Limits of Equitable Subordination

39 Pages Posted: 10 May 2006  

Adam J. Levitin

Georgetown University Law Center

Date Written: September 13, 2006

Abstract

Courts have repeatedly stated that equitable subordination is a compensatory remedy. This view is demonstrably mistaken; if equitable subordination is compensatory, only injured creditors, and not trustees or debtors in possession, would have Constitutional standing to bring equitable subordination actions.

Rather, equitable subordination is quasi-punitive remedy akin to unjust enrichment, which looks to the actions of the inequitable party, not the harm caused. The proper compensatory remedy for injured creditors is direct tort suits against the inequitable creditor. Equitable subordination should be granted only when an injured creditor cannot bring a direct action against the inequitable creditor or when a creditor has engaged in inequitable behavior in the bankruptcy process itself. A quasi-punitive view of equitable subordination could resolve the problem of Constitutional standing for trustees and DIPs. More significantly, if equitable subordination is a punitive remedy, it changes litigation leverage and implies different limits on the action, particularly in regard to the liability of transferees of the inequitable party.

Keywords: equitable subordination, remedy, standing, priority, bankruptcy, creditor, debtor, punitive, compensatory, equity, inequitable, trustee, debtor in possession, Enron, public adjudication, private adjudication

JEL Classification: G33, K11, K12, K13, K19, K20, K29, K30, K39

Suggested Citation

Levitin, Adam J., Rough Justice? The Nature and Limits of Equitable Subordination (September 13, 2006). Available at SSRN: https://ssrn.com/abstract=900444 or http://dx.doi.org/10.2139/ssrn.900444

Adam J. Levitin (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

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