On February 25, 2022, Judge Christopher J. Panos of the U.S. Bankruptcy Court for the District of Massachusetts granted in part and denied in part an assignee lender’s motion to dismiss claims brought by an affiliated group of debtors. The court first held that the debtors plausibly alleged that lender SHS ACK, LLC was not entitled to default interest. It then considered the debtors’ contentions that the lender’s bankruptcy claim should be subordinated—asking whether the complaint alleged that the claimant “engaged in inequitable conduct,” the alleged misconduct “resulted in injury to creditors” or gave the claimant “an unfair advantage,” and subordination would not “be in conflict with the provisions of federal bankruptcy law.” The court found the debtors’ allegations, though somewhat conclusory, sufficient to state a claim for equitable subordination because: (a) the claim was obtained for an improper purpose—to give SHS leverage in an attempt to take over the debtors—and (b) the lender’s aggressive tactics in instructing its predecessor lender to improperly demand default interest harmed the debtors by forcing them into bankruptcy.

The bankruptcy court next considered the debtors’ fraudulent transfer claims. The debtors alleged that one of the debtors gave SHS a mortgage without receiving any consideration in return while the entity was insolvent. SHS claimed that the debtors’ claim must fail because, among other things, the debtors did not allege any facts showing the affected debtor to have been insolvent. Because the debtors’ claim of insolvency was conclusory, and lacked specificity as to the value of the entity’s assets, debts, or capital requirement, the bankruptcy court dismissed this claim with leave to replead the claim in greater detail.

The case is NESV Ice, LLC v. SHS ACK, LCC (In re NESV Ice, LLC), No. 21-ap-1093 (Bankr. D. Mass. Feb. 25, 2022). The debtors are represented by Downes McMahon LLP. SHS is represented by Curran Antonelli, LLP. The order is available here