Beyond the Limits of Equity Jurisprudence: No-Fault Equitable Subordination
Rafael Ignacio Pardo
In two 1996 decisions involving equitable subordination of claims in bankruptcy cases, United States v. Noland and United States v. Reorganized CF&I Fabricators of Utah, Inc., the Supreme Court did not answer the question of whether a bankruptcy court must find creditor misconduct before it equitably subordinates a creditor’s claim. In this Note, Rafael Pardo argues that the Court should have established a bright-line rule that requires such a finding, using prepetition, nonpecuniary loss tax penalty claims of the IRS as a model. After showing that, as codified in the Bankruptcy Cod, the doctrine of equitable subordination requires a finding of creditor misconduct, he analyzes circuit courts of appeals cases prior to Noland and Reorganized CF&I Fabricators that upheld equitable subordination of IRS prepetition tax penalty claims wider a no-fault standard. Pardo argues that use of a no-fault standard of equitable subordination by a bankruptcy court constitutes impermissible judicial activism, and concludes that any unfairness resulting from the treatment of claims by the Bankruptcy Code should be remedied by Congress.