Bankruptcy Forms: Filing Bankruptcy Chapter 7 Bankruptcy Software Chapter 13

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TITLE 11–BANKRUPTCY

CHAPTER 5–CREDITORS, THE DEBTOR, AND THE ESTATE

Sub Chapter – Creditors and Claims

Sec. 510. Subordination

    (a) A subordination agreement is enforceable in a case under this 
title to the same extent that such agreement is enforceable under 
applicable nonbankruptcy law.
    (b) For the purpose of distribution under this title, a claim 
arising from rescission of a purchase or sale of a security of the 
debtor or of an affiliate of the debtor, for damages arising from the 
purchase or sale of such a security, or for reimbursement or 
contribution allowed under section 502 on account of such a claim, shall 
be subordinated to all claims or interests that are senior to or equal 
the claim or interest represented by such security, except that if such 
security is common stock, such claim has the same priority as common 
stock.
    (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 an allowed interest 
    to all or part of another allowed interest; or
        (2) order that any lien securing such a subordinated claim be 
    transferred to the estate.

(Pub. L. 95-598, Nov. 6, 1978, 92 Stat. 2586; Pub. L. 98-353, title III, 
Sec. 451, July 10, 1984, 98 Stat. 375.)


                      Historical and Revision Notes

                         legislative statements

    Section 510(c)(1) of the House amendment represents a compromise 
between similar provisions in the House bill and Senate amendment. After 
notice and a hearing, the court may, 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 an allowed interest to all or part of another allowed interest. As a 
matter of equity, it is reasonable that a court subordinate claims to 
claims and interests to interests. It is intended that the term 
``principles of equitable subordination'' follow existing case law and 
leave to the courts development of this principle. To date, under 
existing law, a claim is generally subordinated only if holder of such 
claim is guilty of inequitable conduct, or the claim itself is of a 
status susceptible to subordination, such as a penalty or a claim for 
damages arising from the purchase or sale of a security of the debtor. 
The fact that such a claim may be secured is of no consequence to the 
issue of subordination. However, it is inconceivable that the status of 
a claim as a secured claim could ever be grounds for justifying 
equitable subordination.
    Subordination: Since the House amendment authorizes subordination of 
claims only under principles of equitable subordination, and thus 
incorporates principles of existing case law, a tax claim would rarely 
be subordinated under this provision of the bill.
    Section 511 of the Senate amendment is deleted. Its substance is 
adopted in section 502(b)(9) of the House amendment which reflects an 
identical provision contained in H.R. 8200 as passed by the House.


                        senate report no. 95-989

    Subsection (a) requires the court to enforce subordination 
agreements. A subordination agreement will not be enforced, however, in 
a reorganization case in which the class that is the beneficiary of the 
agreement has accepted, as specified in proposed 11 U.S.C. 1126, a plan 
that waives their rights under the agreement. Otherwise, the agreement 
would prevent just what chapter 11 contemplates: that seniors may give 
up rights to juniors in the interest of confirmation of a plan and 
rehabilitation of the debtor. The subsection also requires the court to 
subordinate in payment any claim for rescission of a purchase or sale of 
a security of the debtor or of an affiliate, or for damages arising from 
the purchase or sale of such a security, to all claims and interests 
that are senior to the claim or interest represented by the security. 
Thus, the later subordination varies with the claim or interest 
involved. If the security is a debt instrument, the damages or 
rescission claim will be granted the status of a general unsecured 
claim. If the security is an equity security, the damages or rescission 
claim is subordinated to all creditors and treated the same as the 
equity security itself.
    Subsection (b) authorizes the bankruptcy court, in ordering 
distribution of assets, to subordinate all or any part of any claim to 
all or any part of another claim, regardless of the priority ranking of 
either claim. In addition, any lien securing such a subordinated claim 
may be transferred to the estate. The bill provides, however, that any 
subordination ordered under this provision must be based on principles 
of equitable subordination. These principles are defined by case law, 
and have generally indicated that a claim may normally be subordinated 
only if its holder is guilty of misconduct. As originally introduced, 
the bill provided specifically that a tax claim may not be subordinated 
on equitable grounds. The bill deletes this express exception, but the 
effect under the amendment should be much the same in most situations 
since, under the judicial doctrine of equitable subordination, a tax 
claim would rarely be subordinated.


                               Amendments

    1984--Subsec. (b). Pub. L. 98-353 amended subsec. (b) generally. 
Prior to amendment, subsec. (b) read as follows: ``Any claim for 
recission of a purchase or sale of a security of the debtor or of an 
affiliate or for damages arising from the purchase or sale of such a 
security shall be subordinated for purposes of distribution to all 
claims and interests that are senior or equal to the claim or interest 
represented by such security.''


                    Effective Date of 1984 Amendment

    Amendment by Pub. L. 98-353 effective with respect to cases filed 90 
days after July 10, 1984, see section 552(a) of Pub. L. 98-353, set out 
as a note under section 101 of this title.

                  Section Referred to in Other Sections

    This section is referred to in sections 106, 349, 509, 522, 541, 
726, 747, 752, 766, 901, 1129 of this title.



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