Delaware District Court: Using Contract Rights to Strategic Advantage Not Grounds for Equitable Subordination in Bankruptcy

Summary

This article discusses a recent decision by the Delaware District Court addressing what actions give rise to an equitable subordination claim. When lenders use an aggressive strategy to deal with a financially troubled borrower that ultimately files for bankruptcy protection, stakeholders in the case, including Chapter 11 debtors, trustees, committees, and even individual creditors or shareholders, frequently pursue causes of action against the lenders in an effort to augment or create recoveries. The incidence of lender liability-type claims in bankruptcy in the guise of litigation seeking, among other things, to equitably subordinate lender claims or to recharacterize such claims as equity has led some lenders to second-guess how aggressively they can enforce their rights under a loan agreement, including the extent to which they can take an active role in the affairs of a borrower.