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The Expansive Equitable Powers of Bankruptcy Courts Under Section 510(C)
In a recent decision in the case of In re National Realty Investment Advisors, Case No. 22-14539, the U.S. Bankruptcy Court for the District of New Jersey subordinated a 502(h) claim to prevent the claimant from being paid in full prior to investors defrauded by the debtors’ pre-petition operation of a Ponzi scheme. In its decision, the court maintained that the equitable powers of bankruptcy courts were sufficiently broad to subordinate a claim (even a claim that arose under 502(h)) on equitable grounds under Section 510(c) and that there is nothing in the Bankruptcy Code that prevents a court from so doing.
Background
In June 2022, New Jersey-based real-estate developer National Realty Investment Advisors (the NRIA) along with its subsidiaries (collectively, the debtors) filed for Chapter 11 protection in the U.S. Bankruptcy Court for the District of New Jersey. At the time of filing, the debtors owned several properties, many of which were incomplete and still in their planning phase. Months after the petition date, NRIA’s shadow CEO, Nicholas Salzano, along with another top officer at the company, were arrested and charged for their roles in, among other things, orchestrating a plan to defraud more than 2,000 investors in a $658 million Ponzi scheme. Salzano was later convicted and sentenced to 12 years in prison.
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