Opinion ID: 546944
Heading Depth: 3
Heading Rank: 5

Heading: equitable subordination, count vi

Text: 47 Even if the bankruptcy court had found collusive conduct between the Bank and Champlin at the Sec. 362 hearing, that finding would not have destroyed the Bank's claim or its lien, nor the Bank's priority in bankruptcy if the stay were kept in place. The issues involved in determining whether the automatic stay should be lifted have nothing to do with priorities between creditors inside the bankruptcy proceedings. Therefore the issue of whether the Bank's claim should have been equitably subordinated to the claims of the general creditors under Sec. 510(c) was not necessary to the Sec. 362 decision. Thus the grant of summary judgment on grounds of collateral estoppel was improper. On remand, the bankruptcy court is obligated to make findings of fact as to whether the Bank's actions call for subordination of its debt under the balancing test of Matter of Mobile Steel Co., 563 F.2d 692, 700 (5th Cir.1977). The court should consider whether (1) the claimant creditor has engaged in some sort of inequitable misconduct; (2) the misconduct has resulted in injury to other creditors or in unfair advantage to the miscreant; and (3) subordination of the debt is inconsistent with other provisions of the bankruptcy code. We recently held in Matter of Virtual Network Services Corp., 902 F.2d 1246 (7th Cir.1990), that it is not necessarily required that the creditor be found to have engaged in misconduct. We stated that the inquiry is to be made on a case-by-case basis focussing on fairness to the other creditors. The court should consider all the circumstances in determining whether the Bank's claim should be subordinated to that of the general creditors.