Court Explains Subordination of Claims in California Bankruptcy Matters

In bankruptcy actions, the courts aim not only to help debtors alleviate their overall debt load but also to protect the interests of the debtor’s creditors. Among other things, this means that creditor claims in bankruptcy actions are essentially ranked by priority, with some claims being subordinated to others. In a recent ruling, a California court rejected a creditor’s objection to the subordination of his claim and, in doing so, explained when subordinating claims is appropriate. If you need assistance with a bankruptcy matter, it is in your best interest to meet with a California bankruptcy lawyer as soon as possible.

Procedural Background of the Case

It is reported that the claimant obtained a judgment against the debtor in a state court action. The basis of the claimant’s case was the debtor’s failure to fully reimburse the claimant, who was an equity holder in the debtor’s company, for the value of his stake. The debtor subsequently filed a bankruptcy action. The claimant filed a creditor’s claim, which the bankruptcy court subsequently subordinated; the court subordinated the claimant’s judgment lien as well. The claimant appealed, and the Bankruptcy Appellate Panel affirmed the court’s decisions. He then appealed to the United States Court of Appeals, Ninth Circuit.

Subordination of Bankruptcy Claims

On appeal, the court affirmed the lower court rulings, finding that the Bankruptcy Appellate Panel did not err in finding that the claimant’s bankruptcy claim was properly subordinated. Specifically, the court explained that the applicable law stated that a bankruptcy claim for damages arising out of the sale or purchase of a security has to be subordinated to all interests or claims that are equal or senior to the interest or claim such security represents.

The court noted that the phrase rising out of should be interpreted broadly and requires only an adequate causal relationship or nexus between the sale or purchase of securities and the claim. As the claimant’s claim related to the sale of a security, the court properly found that it was subordinated to other senior claims.

Further, the court found that the Bankruptcy Appellate Panel did not err in finding that the judgment lien should be subordinated as well. In doing so, it explained that a lien is considered a claim within the provisions of the bankruptcy code, and therefore, the claimant’s judgment lien was also subject to subordination. Thus, it denied the claimant’s appeal.

Speak to a Capable California Bankruptcy Attorney

Pursuing relief via bankruptcy actions can help many people manage crushing debts, and in many instances, their creditors can recover outstanding debts from the bankruptcy estate. If you have significant debts you cannot pay, and you are interested in learning more about bankruptcy, it is wise to speak to an attorney about your options. Matthew D. Roy is a capable California bankruptcy lawyer who can advise you of your rights and help you pursue relief from your debts. You can contact Mr. Roy through the form online or by calling (916) 361-6028 to set up a meeting.