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1. Whether the subordination agreement in the principal case should be described as an equitable assignment, a constructive trust, or merely as a subordination agreement, in the common debtor's bankruptcy, the bankruptcy court will order dividends on the subordinated claim paid to the senior creditor (who thus receives double dividends — his own as well as the subordinator's). See Bankruptcy Code §510(a). From this point of view, the only unusual facet of the principal case was the subordinator's attempt to waive his dividend. Is the court's theory that Freedman was a "constructive trustee" for Delaware Mills the only way of preventing him from reneging on his agreement?3
2. If Freedman is a "trustee" for Delaware, what happens if Freedman himself becomes bankrupt? Does Delaware still get the money or should the money now go to Freedman's trustee in bankruptcy? In re Wyse (Pioneer-Cafeteria Feeds, Ltd. v. Mack), 340 F.2d 719 (6th Cir. 1965) appears to be the first case to have considered the effectiveness of a subordination agreement against the subordinator's trustee in bankruptcy. The majority and concurring opinions in the Wyse case, both notably obscure, suggest, as through a glass darkly, that the senior creditor does not prevail. For discussions of the Wyse case from somewhat different points of view, see 2 G. Gilmore, Security Interests in Personal Property §37.2 (1965); Coogan, Kripke & Weiss, The Outer Fringes of Article 9, 79 Harv. L. Rev. 229, 247-253 (1965). The similarities and dissimilarities between "assignment" of a claim and "subordination" of a claim are discussed in both the references just cited as well as in Calligar, Subordination Agreements, 70 Yale L.J. 376 (1961).4
3. In Cherno v. Dutch American Mercantile Corp., 353 F.2d 147 (2d Cir. 1965) Blanmill had advanced money to Itemlab. The Blanmill loan was evidenced by Itemlab's promissory note and secured by a chattel mortgage that had been properly filed under New York Lien Law §230. Subsequently, in order to induce Dutch American to make a loan to Itemlab, Blanmill subordinated its claim against Itemlab to a note that Itemlab gave to Dutch American. The Dutch American loan was unsecured, except to the extent that, under the subordination agreement, it might be entitled to Blanmill's security. Blanmill, however, without Dutch American's knowledge, caused its mortgage to be released of record as satisfied. In fact the mortgage had not been satisfied; Blanmill released it in order to induce still a third lender (18th Avenue Land Corp.) to advance money to Itemlab, which it did, taking a mortgage on Itemlab's apparently unencumbered assets. Despite Blanmill's diligent efforts to shore it up, Itemlab finally collapsed into bankruptcy. In the bankruptcy proceeding, the mortgage given to 18th Avenue Land Corp. was declared invalid. Dutch American claimed that, by virtue of the subordination agreement, it was entitled to a first lien on the proceeds from the sale of the chattels which had been subiect to Blanmill's mortgage. In this argument it was successful in the District Court on a theory of equitable assignment. The Second Circuit, however, reversed in all opinion by Judge Anderson which stated in part:5
The claims of Dutch American that it either has an equitable assignment, an equitable lien or a constructive trust all invoke the equity powers of the court. Even if there were substance to the claims, which we are satisfied there is not, Dutch American would be barred from equitable relief because of the basic principle that he who seeks equity must do equity. By its failure and neglect to file or record any instrument giving notice of its claim of an equitable interest in the chattels, Dutch American enabled Blanmill and Itemlab to mislead 18th Avenue Land Corp. As far as innocent third persons were concerned, Dutch American left it within its power of Blanmill to release the mortgage at any time without notice of any claim of interest on the part of Dutch American, which had an equitable duty to give notice to third persons, who might be dealing with Itemlab, that it asserted an equitable claim against the chattels either directly or via Blanmill's mortgage. Having failed to do so it cannot now assert in equity a priority over 18th Avenue Land Corp., who, the Referee found, "made its loan in reliance upon the fact that it had secured a release of the lien of Blanmill and without knowledge of the subordination agreement held by Dutch American Mercantile Corp.," nor can it gain a preference over other unsecured creditors and over substantial wage claims which accrued subsequent to the release of the Blanmill mortgage.
Id. at 155.
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