## Facts

- W.T. Grant Co., a national retail chain, experienced financial distress and shifted financing from commercial paper to long-term bank loans from institutional lenders.
- Grant also issued public debentures whose indentures contractually subordinated debentureholders’ claims to the banks’ claims.
- A lead bank had a director who simultaneously served on Grant’s board and executive committee; the banks monitored Grant’s finances and provided advice.
- Grant entered Chapter XI proceedings and was later adjudged bankrupt.
- The trustee and creditors negotiated a settlement to avoid protracted litigation; under the settlement, debentureholders would recover about 19 cents on the dollar.
- Debentureholders objected, arguing the banks effectively controlled Grant and engaged in inequitable conduct warranting equitable subordination of the banks’ claims.
- The district court approved the settlement as fair and reasonable; debentureholders appealed.

## Issues

1. Whether the district court abused its discretion in approving the bankruptcy settlement as fair, equitable, and in the best interests of the estate.
2. Whether the record showed sufficient creditor control and inequitable conduct by the banks to make equitable subordination likely, such that approving the settlement was improper.
3. How contractual subordination of the debentures affected the evaluation of the debentureholders’ objections and the settlement’s fairness.

## Decision

- The Second Circuit affirmed the order approving the settlement.
- The court held the settlement fell within a permissible range of reasonableness given litigation risk, expected expense, and delay.
- The court found the evidence did not establish the level of bank control or inequitable conduct necessary to make equitable subordination a strong likelihood.
- The court treated the debentureholders’ contractual subordination as a significant factor weighing against disturbing the banks’ priority absent substantial misconduct.

## Legal Principles

- A bankruptcy compromise may be approved when it is fair and equitable and serves the best interests of the estate, assessed by considering the probability of success in litigation, litigation complexity, expense and delay, and creditor interests.
- Appellate review of settlement approval is deferential; reversal requires a showing of abuse of discretion.
- Equitable subordination requires inequitable conduct by the creditor, resulting injury to other creditors or an unfair advantage, and consistency with bankruptcy policy; alleged “control” must be clearly shown, particularly when used to infer insider-like misconduct.
- Contractual subordination provisions are generally enforced in bankruptcy; equitable subordination is remedial and does not function to rewrite bargained-for priorities without substantial proof of misconduct.

## Conclusion

The Second Circuit upheld the settlement because the approving court acted within its discretion in concluding that costly, uncertain equitable-subordination litigation did not justify rejecting a negotiated compromise, especially where the debentureholders had expressly agreed to be junior to the banks absent strong proof of inequitable conduct.


In re W.T. Grant Co., 699 F.2d 599 (2d Cir. 1983)