Matter of Clark Pipe & Supply Co.
United States Court of Appeals for the Fifth Circuit
893 F.2d 693 (1990)
Clark Pipe & Supply (Clark) entered a revolving-loan agreement with Associates Commercial Corporation (ACC) (defendant), secured by accounts receivable and inventory, with ACC holding unilateral discretion to reduce the advance-rate percentage; when the oil industry faltered in 1981-82, ACC began reducing advances specifically to a level letting Clark keep operating just enough to repay ACC through receivables, without dictating which other bills Clark should pay. Clark sold inventory to keep paying ACC but couldn't pay other creditors, and after three creditors began foreclosure, Clark filed for Chapter 11 reorganization, later converted to Chapter 7 liquidation; the trustee (plaintiff) sued for equitable subordination of ACC's claims, winning in the bankruptcy court and district court, and a Fifth Circuit panel initially affirmed before granting ACC's rehearing petition.
Whether a lender acts inequitably, for purposes of equitable subordination, where the lender holds and exercises significant leverage over the debtor's ability to operate and pay its creditors but does not exert total control over the debtor and does not act in contravention of the lending agreement.