In re Bellucci, Bankruptcy No. 4-80-00213-G.

CourtUnited States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts
Writing for the CourtPAUL W. GLENNON
Citation24 BR 493
PartiesIn re Elio C. BELLUCCI, Debtor.
Decision Date09 November 1982
Docket NumberBankruptcy No. 4-80-00213-G.

24 B.R. 493 (1982)

In re Elio C. BELLUCCI, Debtor.

Bankruptcy No. 4-80-00213-G.

United States Bankruptcy Court, D. Massachusetts.

November 9, 1982.


Michael B. Katz, Bacon, Wilson, Ratner, Cohen, Salvage, Fialky & Fitzgerald, P.C., Springfield, Mass., for plaintiff.

John P. McAllister, Tax Division, Dept. of Justice, Washington, D.C., for defendant.

Office of the U.S. Trustee, Boston, Mass., for Trustee.

MEMORANDUM AND ORDER ON TRUSTEE'S APPLICATION FOR EQUITABLE SUBORDINATION

PAUL W. GLENNON, Bankruptcy Judge.

The trustee in bankruptcy, Michael B. Katz ("trustee") filed the within application

24 BR 494
requesting that the court equitably subordinate the tax claims of the Internal Revenue Service ("IRS") to the claims of a class of creditors to be created and comprised of former clients ("clients") of the debtor, Elio C. Bellucci ("Bellucci"), who were defrauded by the illegal activities of Bellucci

FACTS

Bellucci was an attorney practicing law in Springfield, Massachusetts. Due to certain fraudulent and illegal activities, he is no longer licensed to practice law. These activities included the misuse of more than $500,000 of his clients' funds. On April 14, 1980, the clients filed an involuntary chapter 11 petition. The IRS then filed a proof of claim for unpaid taxes owing, plus interest, for the years 1977 through 1979. For the reasons set forth more fully below, I am of the opinion that the claims of the IRS may not be subordinated to the claims of the clients, however much I sympathize with the clients.

DISCUSSION

Under § 510(c)(1) of the Bankruptcy Code, (11 U.S.C. §§ 101 et seq.), the court may: "under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest. . . ." An examination of the legislative history provides an insight into the intent of Congress in enacting this provision. In H.R.Rep. No. 595, 95th Cong. 1st Sess. 359 (1977) U.S.Code Cong. & Admin.News, pp. 5787, 6315 it is provided:

Subsection (b) now subsection (c) permits the court to subordinate, on equitable grounds, all or any part of an allowed claim or interest to all or any part of another allowed claim or interest, and permits the court to order that any lien securing claim subordinated under this provision to be transferred to the estate. This section is intended to codify case law, such as Pepper v. Litton, 308 U.S. 295 60 S.Ct. 238, 84 L.Ed. 281 (1939), and Taylor v. Standard Gas and Electric Co., 306 U.S. 307 59 S.Ct. 543, 83 L.Ed. 669 (1938), and is not intended to limit the court\'s power in any way. The bankruptcy court will remain a court of equity, proposed 28 U.S.C. 1481; Local Loan v. Hunt, 292 U.S. 234, 240 54 S.Ct. 695, 697, 78 L.Ed. 1230 (1934). Nor does this subsection preclude a bankruptcy court from completely disallowing a claim in appropriate circumstances. See Pepper v. Litton, supra. The court\'s power is broader than the general doctrine of equitable subordination, and encompasses subordination on any equitable grounds.

S.Rep. No. 989, 95th Cong. 2d Sess. 74 (1978) U.S.Code Cong. & Admin.News, p. 5860 reads, in relevant part, as follows:

Subsection (b) now subsection (c) authorizes the bankruptcy court, in ordering distribution of assets, to subordinate all or any part of any claim to all or any part of another claim, regardless of the priority ranking of either claim. In addition, any lien securing such a subordinated claim may be transferred to the estate. The bill provides, however, that any subordination ordered under this provision must be based on principles of equitable subordination. These principles are defined by case law, and have generally indicated that a claim may normally be subordinated only if its holder is guilty of misconduct. As originally introduced, the bill provided specifically that a tax claim may not be subordinated on equitable grounds. The bill deletes this express exception, but the effect under the amendment should be much the same in most situations since, under the judicial doctrine of equitable subordination, a tax claim would rarely be subordinated.

And, finally, in 124 Cong.Rec.H. 11,095 (daily ed. Sept. 28, 1978) (statement of Rep Edwards) it is stated:

It is intended that the term "principles of equitable subordination" follow existing case law and leave to the courts development of this principle. To date, under existing law, a claim is generally subordinated only if the holder of such claim is
24 BR 495
guilty of inequitable conduct, or the claim itself is of a status susceptible to subordination, such as a penalty or a claim for damages arising from the purchase or sale of a security of the debtor.

See also 124 Cong.Rec. S17,412 (daily ed. Oct. 6, 1978) (statement of Sen. DeConcini).

As case law provides, and the legislative history reflects, the court, as a court of equity may equitably subordinate one claim to another claim. In Pepper v. Litton, 308 U.S. 295, 307-308, 60 S.Ct. 238, 245-246, 84 L.Ed. 281 (1939), perhaps the leading case on equitable subordination, the Supreme Court held that: "In the exercise of its equitable jurisdiction the bankruptcy court has the power to sift the circumstances surrounding any claim to see that injustice or unfairness is not done in administration of the bankrupt estate." See also Providence Realization Corp. v. Geist, 316 U.S. 89, 62 S.Ct. 978, 86 L.Ed. 1293 (1942); Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 61 S.Ct. 904, 85 L.Ed. 1293 (1941); Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669 (1939); In re Multiponics, Inc., 622 F.2d 709 (5th Cir.1980); In re Mobile Steel Co., 563 F.2d 692 (5th Cir.1977); In re Ahlswede, 516 F.2d 784 (9th Cir.), cert. denied, Stebbins v. Crocker Citizens National Bank, 423 U.S. 913, 96 S.Ct. 218, 46 L.Ed.2d 142 (1975); Central States Corp. v. Luther, 215 F.2d 38 (10th Cir.1954), cert. denied, 348 U.S. 951, 75 S.Ct. 438, 99 L.Ed. 743 (1955); Columbia Gas & Electric Corp. v. United States, 153 F.2d 101 (6th Cir.1946); Corley v. Cozart, 115 F.2d 119 (5th Cir.1940); and In re Loewer's Gambrinus Brewery Co., 74 F.Supp. 909 (S.D.N.Y.1947), aff'd, 167 F.2d 318 (1948).

Traditionally, it has been held that absent some showing of fraud or inequitable conduct on the part of the claimant injurious to other creditors, no equitable ground exists for subordination of a claim. In In re...

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1 practice notes
  • Matter of Thayer, Bankruptcy No. MM7-82-01441.
    • United States
    • United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin
    • 9 Noviembre 1982
    ...what it is precluded by 11 U.S.C. § 362(a) and 11 U.S.C. § 524(a) from collecting directly. The numerous cases holding that pursuit of 24 BR 493 prosecution on bad checks is a violation of the stay reflect that philosophy. See In Re Johnson, 16 B.R. 211 (Bkrtcy.M.D.Fla.1981); In Re Lake, 11......
1 cases
  • Matter of Thayer, Bankruptcy No. MM7-82-01441.
    • United States
    • United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin
    • 9 Noviembre 1982
    ...what it is precluded by 11 U.S.C. § 362(a) and 11 U.S.C. § 524(a) from collecting directly. The numerous cases holding that pursuit of 24 BR 493 prosecution on bad checks is a violation of the stay reflect that philosophy. See In Re Johnson, 16 B.R. 211 (Bkrtcy.M.D.Fla.1981); In Re Lake, 11......

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