U.S. Code » Title 11 » Chapter CHAPTER 5— CREDITORS, THE DEBTOR, AND THE ESTATE › Subchapter SUBCHAPTER I— CREDITORS AND CLAIMS

11 U.S.C. § 510

Subordination

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(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, § 451, July 10, 1984, 98 Stat. 375.)Historical and Revision Noteslegislative 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.

Editorial NotesAmendments

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.”

Statutory Notes and Related SubsidiariesEffective 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.

Notes of Decisions
Cited in 1,093 cases (84 in the last 5 years), 1947–2026 · leading case: Life Partners Creditors' Trust v. Cowley (In Re Life Partners Holdings, Inc.), 926 F.3d 103 (5th Cir. 2019).
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Life Partners Creditors' Trust v. Cowley (In Re Life Partners Holdings, Inc.), 926 F.3d 103 (5th Cir. 2019). · cites it 3× “• Count 8: Equitable subordination of the Licensees' claims against the LP Entities' bankruptcy estates under 11 U.S.C. § 510 (c) (against all Licensees).”
In Re NAL Fin. Grp., Inc., 237 B.R. 225 (Bankr. S.D. Florida 1999). · cites it 17× “Accordingly, the Committee filed two objections to Claim Number 102, the latter of which asserts that pursuant to 11 U.S.C. § 510 (b) Claim Number 102 should be subordinated in payment to the claims of all unsecured creditors and have the same priority as a Class 9 interest…”
United States v. Reorganized CF&I Fabricators of Utah, Inc., 518 U.S. 213 (1996). · cites it 6× “, at 340 , and by subsequent order subordinated the claim to those of all other general unsecured creditors, on the supposed authority of the Bankruptcy Code's provision for equitable subordination, 11 U. S. C. § 510 (c). The Government appealed to the District Court for the…”
Templeton v. O'Cheskey (In Re Am. Hous. Found.), 785 F.3d 143 (5th Cir. 2015). · cites it 7× “The bankruptcy court issued a judgment subordinating those claims “pursuant to the provisions of 11 U.S.C. § 510 (b).” The court also voided, as preferential, transfers made to Tem-pleton within 90 days of the bankruptcy filing.”
Zafar Khan v. Kenneth Barton, 846 F.3d 1058 (9th Cir. 2017). · cites it 6× “11 U.S.C. § 510 (b) requires that claims for damages arising from the purchase or sale of a security of the debtor or an affiliate of the debtor be subordinated to certain other claims or interests.”
Lehman Com. Paper, Inc. v. Palmdale Hills Prop., LLC (In Re Palmdale Hills Prop., LLC), 423 B.R. 655 (9th Cir. BAP 2009). · cites it 8× “(c) The automatic stay arising from the bankruptcy case of Lehman Commercial does not apply to any objection to the claim of Lehman Commercial, any proceeding to subordinate the claim of Lehman Commercial pursuant to 11 U.S.C. § 510 (c)(1), and/or the transfer of a lien securing…”
Adler v. Lehman Bros. Holdings Inc. (In re Lehman Bros. Holdings Inc.), 855 F.3d 459 (2d Cir. 2017). · cites it 4× “First, it concluded that because the claims arise from the purchase or sale of securities, they must be subordinated to the claims of general creditors pursuant to section 510(b) of the Bankruptcy Code, 11 U.S.C. § 510 (b). Second, the court decided that because an RSU is an…”
In the Matter of Fabricators, Inc., Debtor. Fabricators, Inc., Cross-Appellant v. Technical Fabricators, Inc., Cross-Appellee, 926 F.2d 1458 (5th Cir. 1991). · cites it 5× “(“Fabricators”) pursuant to 11 U.S.C. § 510 (c). In a cross appeal, Fabricators, through its bankruptcy trustee, alleges error in the subordination of TFI’s claims to a level equal to and not below that of general unsecured creditors.”
Chittenden Trust Co. v. Sebert Lumber, Co. (In Re Vermont Toy Works, Inc.), 82 B.R. 258 (Bankr. D. Vt. 1987). · cites it 9× “, shareholder, and his spouse, and pledged by the Debtor for its loans in the unlikely event the guarantees are insufficient; that the proceeds from the repossessed collateral are property of the Estate; and, after marshaling, that Debt- or’s director, officer, and shareholder’s…”
Am. Honda Fin. Corp. v. Cilek (In Re Cilek), 115 B.R. 974 (Bankr. W.D. Wis. 1990). · cites it 7× “§ 523 (a)(6); 2 and 4) Whether Dairyland Insurance’s control of the proceeds from the sale of Lady-smith Motors gives rise to equitable subordination under 11 U.S.C. § 510 (c). ANALYSIS 1. THE INDIVIDUAL RETIREMENT ACCOUNT FACTS On August 6, 1987, the Debtors filed a petition…”
Glinka v. Dartmouth Banking Co. (In Re Kelton Motors Inc.), 121 B.R. 166 (Bankr. D. Vt. 1990). · cites it 8× “§ 303 (i); 2 Count II, “Equitable Subordination” under 11 U.S.C. § 510 (c); 3 and, Count III, violation of the “Automatic Stay” under 11 U.”
Midlantic Nat'l Bank North, N.A. v. Borg-Warner Acceptance Corp. (In Re Mayo), 112 B.R. 607 (Bankr. D. Vt. 1990). · cites it 10× “CLAIMS OF THE PARTIES We have issued previously a Memorandum Decision, dated March 1, 1989, denying post-trial motions of BWAC and VNB to amend their pleadings to add the affirmative defense of statute of frauds in opposition to Midiantic’s claim for equitable subordination…”
Show all 1,093 citing cases →
— 11 U.S.C. § 510(a) — 2 cases
In re 431 W. Ponce De Leon, LLC, 515 B.R. 660 (Bankr. N.D. Ga. 2014).
Enstar Grp., Inc. v. Bank of New York (In Re Amret, Inc.), 174 B.R. 315 (M.D. Ala. 1994).
— 11 U.S.C. § 510(b) — 1 case
In Re Unbreakable Nation Co., 437 B.R. 189 (Bankr. E.D. Pa. 2010).
— 11 U.S.C. § 510(c) — 7 cases
In The Matter of The Liquidation of Freestone Ins. Co., 143 A.3d 1234 (Del. Ch. 2016).
Shearer v. Tepsic (In Re Emergency Monitoring Tech., Inc.), 366 B.R. 476 (Bankr. W.D. Pa. 2007).
Fogg v. Sherman Homes, Inc. (In Re Sherman Homes, Inc.), 28 B.R. 176 (Bankr. D. Me. 1983).
Cuda v. Nigro (In Re Northview Motors, Inc.), 202 B.R. 389 (Bankr. W.D. Pa. 1996).
M.S v. Inc. v. Bank of Boston-W. Massachusetts, N.A. (In Re Martin Specialty Vehs., Inc.), 87 B.R. 752 (Bankr. D. Mass. 1988).
— 11 U.S.C. § 510(c)(1) — 3 cases
Enron Corp. v. Avenue Special Situations Fund II, LP (In Re Enron Corp.), 333 B.R. 205 (Bankr. S.D.N.Y. 2005).
In Re Med. Equities, Inc., 83 B.R. 954 (Bankr. S.D. Ohio 1987).
In Re Biscayne Inv. Grp., Ltd., 264 B.R. 765 (Bankr. S.D. Florida 2001).
— 11 U.S.C. § 510(c)(2) — 2 cases
Franklin v. Union Mortg. Co. (In Re Franklin), 126 B.R. 702 (Bankr. N.D. Miss. 1991).
In Re Racca, 40 B.R. 622 (Bankr. W.D. La. 1984).
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