In re SI Restructuring, Inc.
United States Court of Appeals for the Fifth Circuit
532 F.3d 355 (2008)
John and Jeffrey Wooley (defendants), officers, directors, and largest shareholders of Schlotzsky's, loaned the company $1 million in April 2003 secured by franchise royalties and IP rights, a transaction negotiated at arm's length and properly approved and disclosed; when cash-flow problems persisted, the Wooleys borrowed $2.5 million from a bank on Schlotzsky's behalf via an emergency board meeting with short notice, secured by the same collateral, and separately secured their own preexisting personal guarantees of $4.3 million in company debt with that same collateral. Schlotzsky's eventually filed Chapter 11, the Wooleys filed secured claims for both loans, and the unsecured creditors' committee (plaintiff) sought equitable subordination of those claims, arguing breach of fiduciary duty in pressuring the board on short notice, receiving valuable collateral, and securing personal guarantees; the bankruptcy court and district court agreed and subordinated the claims, and the Wooleys appealed.
Whether a corporate insider's claim may be equitably subordinated without proof that the claimant acted inequitably, harmed the debtor or its creditors, or provided an unfair advantage to the claimant.