The Logical Structure of Fraudulent Conveyances and Equitable Subordination

Fraudulent conveyances are supposedly "avoided." Wicked creditors are supposedly equitably "subordinated" in federal bankruptcy proceedings. In this article, Professor Carlson argues that these concepts inadequately describe a legal regime in which only some (not all creditors) have avoidance rights, or where some (but not all) creditors have been harmed by the creditor's wicked act. In fact, what really occurs in both these areas of law is that third party property is transferred to the set of creditors with rights under fraudulent transfer law or under equitable subordination law. Once this is realized, fraudulent transfer law and equitable subordination are revealed to be precisely the same remedy. Given this equation, various aspects of American debtor-creditor law are revealed to be irrational. For instance, in federal bankruptcy proceedings, creditors always share and share alike when fraudulent transfers are avoided. But this is not always so in equitable subordinations. In addition, courts have held that equitable subordination is a uniquely federal remedy. But this is not so if equitable subordination is just ordinary fraudulent transfer law in the context of a liquidation regime. The article also shows that the origin of equitable subordination is in fraudulent transfer law and other state-law concepts, further bolstering the view that there is no distinction between fraudulent transfer avoidance and equitable subordination in general.