Originally published in the NYU Journal of Law & Business - Vol. 9:269, 2012.

This article suggests that the generally accepted “offensive/defensive” standard used by bankruptcy courts to determine whether a debtor may equitably subordinate a claim asserted by another debtor should not necessarily be extended to disputes with a debtor subject to a foreign insolvency proceeding. At the outset, this article surveys the history of caselaw in this “dueling debtor” context and concludes that bankruptcy courts have generally deemed equitable subordination of a secured claim under section 510(c) of the Bankruptcy Code to be an “offensive” remedy unavailable to a debtor when the claimant is itself a chapter 11 debtor. Next, this article summarizes two recent disputes in the Lehman Brothers chapter 11 cases that bear on the availability of equitable subordination in the “dueling debtor” context. Lastly, this article analyzes the legacy of the Lehman Brothers cases in the “dueling debtor” context before concluding that while the “offensive/defensive” standard remains viable for bankruptcy court disputes within the United States, it may be inappropriate in “dueling debtor” disputes where one debtor is subject to a foreign insolvency proceeding.

In This Article:

I. INTRODUCTION . . . . 270

II. ENRON AND THE HISTORICAL INTERPLAY BETWEEN THE AUTOMATIC STAY AND EQUITABLE SUBORDINATION IN THE “DUELING DEBTOR” CONTEXT . . . 273

A. Enron in Detail . . . 277 B. Other Relevant Case Precedents . . . 279

III. RECENT DEVELOPMENT 1: LCPI AND THE SUNCAL DEBTORS . . . 281

IV. RECENT DEVELOPMENT 2: LEHMAN BROTHERS HOLDINGS, INC. AND SHINSEI BANK . . . 285

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