11 U.S.C. § 510; Equitable Subordination
Westek Georgia, LLC v. Oglesbee, 332 B.R. 850, Adv. No. 04-5058 (Bankr. M.D.Ga. October 6, 2005)(Hershner)
Defendants were the owners of the parent company of a manufacturing company. After the manufacturing company experienced financial difficulties, Debtor purchased substantially all of the assets of the company and assumed most of its financial obligations. As consideration, Debtor paid $300,000 at closing and entered into non-competition agreements with the Defendants whereby Defendants were to be paid $1,080,000. Payments under the non-competition agreements were the primary vehicle to pay for the assets, and the Defendants took a security interest in the transferred assets.
The Debtor’s business was not successful and Debtor filed suit against the Defendants for fraudulently misrepresenting the company’s liabilities. Creditors subsequently filed an involuntary petition against the Debtor, and Debtor filed an adversary seeking subordination of the Defendants’ claims and the cancellation of their security interest.

The Court granted the Defendants’ Motion for Summary Judgment. The court first noted that the standard of proof under §510(c) varied depending on whether the claimant is an insider or fiduciary of the debtor. If an insider or fiduciary, the debtor bears the burden of presenting evidence of unfair conduct, then the burden shifts to the claimant to prove the fairness of his actions. If the claimant is not an insider or fiduciary, the debtor must prove with particularity more egregious conduct such as fraud, spoliation or overreaching.
Here, the defendants were not insiders or fiduciaries during the critical time period – the time period during which the Defendants transferred the company’s liabilities to the Debtor and took a first priority security interest in the Debtor’s assets. The agreements were negotiated at arms length, and the parties had no duty to represent or advance the other parties’ interests. No fiduciary obligation shifted from the selling company to the acquiring company. Therefore, the Defendants were not insiders or fiduciaries. Moreover, Defendants’ claims were not treated as stock redemption claims based on Debtor’s argument that the transaction was essentially a sale of stock in the selling company. Defendants never owned stock in the Debtor company.