## Facts

- Lemco Gypsum, Inc., a gypsum recycling company, was owned and controlled by L. E. Miller and his sons (the Millers).
- The Millers arranged a $3 million bond financing secured by Lemco’s assets and personally guaranteed the bonds.
- After default, the Millers satisfied about $1.37 million of remaining bond indebtedness and took an assignment of the bonds and related security interests.
- While controlling Lemco, the Millers engaged in insider-directed practices found to benefit insiders and affiliated entities, including self-dealing transactions, maintaining or increasing insider/relative compensation while outside creditors went unpaid, and delaying a bankruptcy filing as liabilities mounted.
- Lemco filed for bankruptcy in October 1986; the Millers filed proofs of claim asserting (1) a $1.37 million secured claim based on the assigned bonds and (2) a $132,000 judgment claim purchased post-petition for $30,000.
- Unsecured creditors sought equitable subordination of the Millers’ claims; the bankruptcy court subordinated both claims to other unsecured creditors, except it allowed the $30,000 paid for the judgment to share pro rata with general unsecured claims.
- The district court affirmed; the Millers appealed.

## Issues

1. Whether the bankruptcy court properly equitably subordinated the Millers’ insider bond and judgment claims under federal bankruptcy law.
2. Whether the Millers engaged in inequitable conduct that injured creditors or gave the Millers an unfair advantage in distribution.
3. Whether subordination could extend to the full amounts asserted (subject to the $30,000 carve-out) and remain remedial and consistent with the Bankruptcy Code.

## Decision

- The Eleventh Circuit affirmed the equitable subordination order.
- The court held that the Millers’ insider conduct was inequitable and harmed creditors and/or conferred an unfair advantage on the Millers.
- The court upheld full subordination of the $1.37 million bond claim to other unsecured claims.
- The court upheld subordination of the $132,000 judgment claim except for the $30,000 actually paid to acquire it, which could share pari passu with other unsecured claims.

## Legal Principles

- Equitable subordination requires: (1) inequitable conduct by the claimant; (2) resulting injury to creditors or unfair advantage to the claimant; and (3) subordination consistent with the Bankruptcy Code (including 11 U.S.C. § 510(c)).
- Insider claims are subject to rigorous scrutiny because insiders can dominate the debtor and shape transactions affecting creditors.
- Inequitable conduct justifying subordination need not relate to how the claimant acquired the subordinated claim, so long as the conduct is directed toward the debtor or its creditors and affects distributional fairness.
- Equitable subordination is remedial, not punitive; the remedy should be limited to what is necessary to offset harm and restore fairness in the estate’s distribution.

## Conclusion

The Eleventh Circuit affirmed subordinating controlling insiders’ assigned bond claim and purchased judgment claim because insider self-dealing and creditor-disadvantaging conduct produced unfair advantage and injury, and equitable subordination may rest on insider misconduct even when not tied to acquisition of the specific claim.


In re Lemco Gypsum, Inc., 911 F.2d 1553 (11th Cir. 1990)