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Equitable Subordination: When Will the Order of Creditors Be Changed?

In the ordinary course of business, debts become due. This is especially true when a company goes out of business, and has to pay out whatever assets it has left to the creditors that remain. There are general rules for how these are due, including situations whereby the creditors are paid on a pro rata basis. However, in some instances, a creditor’s claims will be subordinated to others, whether the creditor is inside the business or from outside. This action is known as equitable subordination.

Equitable subordination will occur when a creditor fulfills three conditions. First, the claimant must have engaged in some type of inequitable conduct. That misconduct must then have resulted in injury to the creditors of the bankrupt company or conferred an unfair advantage on the claiming creditor. Finally, equitable subordination of the claim must be in line with the Bankruptcy Act. In essence, the court utilizes this doctrine to subordinate certain creditors’ claims in order to offset the harm caused by that claimant.

Equitable subordination will only occur in extraordinary circumstances. Courts are concerned with protecting the debts due to creditors, and that they should be collected in due course. When a creditor engages in some action that seeks to give them precedence in debt collection, courts will step in to ensure this will not occur.

Whether you are a business owner and have questions regarding debts that must be paid out, or feel as though you are a creditor who has been cheated out of what is due to you because of the actions of others, consulting an experienced legal team is in your best interests. Call the Trembly Law Firm at (305) 431-5678 today to schedule a consultation.

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