Equitable Subordination Law and Legal Definition

Equitable subordination refers to the legal action by which a court postpones payment to one specific creditor until other creditors are paid.

Traditionally, equitable subordination has been limited to cases involving:

a. fraud, illegality, or breach of fiduciary duty;

b. undercapitalization; or

c. control or use of the debtor as an alter ego for the benefit of the claimant.

The following is an example of a case law on equitable subordination:

Equitable subordination usually applies to three situations: the fiduciary's misuse of his position to the disadvantage of creditors; third party domination and control plus disadvantage; and fraud. Thus, it is not enough to allege simply that the defendant engaged in inequitable conduct, the party seeking equitable subordination must allege conduct that fits within one of the three paradigms. [ABF Capital Mgmt. v. Kidder Peabody & Co. (In re Granite Partners, L.P.), 210 B.R. 508 (Bankr. D.N.Y. 1997)].