Opinion ID: 760170
Heading Depth: 2
Heading Rank: 4

Heading: equitable subordination or avoidance of gateway lenders' claims

Text: 59 Paulman argues that the bankruptcy court should have equitably subordinated the claims of Gateway Lenders or, in the alternative, avoided them as preferential transfers. Neither argument has merit. 60 A bankruptcy court's decision regarding equitable subordination pursuant to 11 U.S.C. § 510(c)(1) is reviewed for abuse of discretion. See Christian Life Ctr. Litig. Defense Comm. v. Silva (In re Christian Life Ctr.), 821 F.2d 1370, 1376 (9th Cir.1987). We find none here. Equitable subordination requires that: (1) the claimant who is to be subordinated has engaged in inequitable conduct; (2) the misconduct results in injury to competing claimants or an unfair advantage to the claimant to be subordinated; and (3) subordination is not inconsistent with bankruptcy law. Spacek v. Thomen (In re Universal Farming Indus.), 873 F.2d 1334, 1337 (9th Cir.1989) (citing Wardley Int'l Bank, Inc. v. Nasipit Bay Vessel, 841 F.2d 259, 263 (9th Cir.1988)). Paulman asserts that Gateway Lenders and Filtercorp engaged in inequitable conduct because Gateway Lenders made the loans to Filtercorp LP while it was insolvent and Gateway Lenders backdated the security agreements to apply to loans made a month earlier. The fact that Filtercorp was insolvent is insufficient to require subordination of claims. See Wood v. Richmond (In re Branding Iron Steak House), 536 F.2d 299, 302 (9th Cir.1976). [A] Bankruptcy Court is a court of equity, and subordination requires some showing of suspicious, inequitable conduct beyond mere initial undercapitalization of the enterprise. Id. The case relied on by Paulman, Summit Coffee Co. v. Herby's Foods, Inc. (In re Herby's Foods, Inc.), 2 F.3d 128 (5th Cir.1993), is readily distinguishable. In Herby's Foods the insider creditors made no capital contributions of any kind to the debtor corporation and executed the security agreement almost a year after the loans were made. See id. at 130. By contrast, Gateway Lenders injected capital of $1.7 million into Filtercorp LP prior to loaning the company $355,000. In addition, it executed the security agreement at issue within two months of the time it made its initial loans to Filtercorp LP and on the same day that it made the final loan. 61 With respect to the backdating of the security agreements, both the bankruptcy court and the BAP found Gateway Lenders' position that the loans were part of a single continuous loan transaction credible. Nevertheless, the bankruptcy court avoided all of the security interests as preferential transfers except that which attached on the date the last advance was made, February 24, 1995, which rendered the backdating of the other security agreements immaterial. 62 Paulman's argument that the February 24, 1995, security interest should also have been avoided under 11 U.S.C. § 547 as a preferential transfer for antecedent debt similarly fails. Although Gateway Lenders filed its financing statement on March 1, 1995, five days after the creation of the security interest, the bankruptcy court correctly concluded that the transfer was a substantially contemporaneous exchange for new value. See 11 U.S.C. § 547(c)(1)(A) (1994) (a transfer may not be avoided to the extent that it was intended by the debtor and the creditor ... to be a contemporaneous exchange for new value given to the debtor); id. § 547(e)(2)(A) (1994) (a transfer is made at the time such transfer takes effect between the transferor and transferee, if such transfer is perfected at, or within 10 days after, such time). 63