The court in In re Aida’s Paradise, LLC, 485 B.R. 806 (2013) has warned lenders not to become overly involved in a debtor’s business affairs, even if all of its actions are legally permissible. The court cited the Eastern District of New York for the proposition that “[w]henever a creditor interferes in the business affairs of a financially troubled corporate debtor, it risks the possibility that such interference may provide a basis for the equitable adjustment of its claims against the debtor, the imposition of statutory liability or the imposition of liabilities at common law.”
In Aida’s Paradise, the debtor sought to equitably subordinate a lender’s unsecured deficiency claim arguing the lender had unjustifiably frustrated efforts to evict one of its tenants by accepting partial rent payments under an Assignment of Leases and Rents. The lender claimed it was merely acting as a prudent lender under the terms of the loan documents and protecting its investment. The court viewed the lender’s actions as an exercise of excessive dominion and control over the debtor’s operations. While a lender is entitled to protect its interests and investment, it ought to be careful not to become overly involved in the business affairs of a financially troubled corporate debtor, or it will risk subordination of its unsecured claim.