In bankruptcy, a creditor’s ability to recover on its claim against a debtor results from two basic factors—the amount for which the claim is allowed and the priority granted to the claim in the waterfall of payments made by the debtor under a chapter 11 plan.
In addition to applying the statutory priorities for certain categories of claims and seeking subordination of claims under §510 of the Bankruptcy Code,1 debtors and other parties in interest have in certain instances sought—with varying success—the equitable disallowance of claims. A recent decision in the Washington Mutual (WaMu) chapter 11 case pending in the U.S. Bankruptcy Court for the District of Delaware again raises the possibility that equitable disallowance of claims may be within the power of bankruptcy courts, although the WaMu court did not actually disallow claims in its ruling or define the precise standards for granting such a remedy.2
Equitable Disallowance
