CHAPTER 5CREDITORS, 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
(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
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
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.
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.