5th Circ. Stresses Equitable Subordination Rule

Law360, New York (August 5, 2008, 12:00 AM EDT) -- In a recent case,[1] the Fifth Circuit emphasized its rule that a creditor's claim may be equitably subordinated to the claims of other creditors only to the extent necessary to offset the harm that the other creditors have suffered, based on specific findings and conclusions.

Background

In April and November 2003, John and Jeffrey Wooley made a pair of loans to Schlotzsky's Inc. for $1 million and $2.5 million, respectively.

The loans were secured by Schlotzsky's rights to royalty streams from franchisees, intellectual property rights and...
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