When a claim becomes subject to or is disallowed, reduced or subordinated by a bankruptcy court order the claim is considered to be “impaired." Claims are impaired by, among other things:
Bad Acts. A claim may be reduced or subordinated if the creditor (particularly a creditor who is an insider-creditor)has committed “bad acts” that have benefited one creditor (usually the offending creditor) at the expense of others.
Fraud/Insider Trading. A court also may subordinate a claim on the basis of: (1) fraud and other illegal acts; (2) non-arm’s length transactions with the debtor; (3) an insider’s breach of fiduciary duty; and (4) a creditor’s use of the debtor as an alter-ego.
Non-Compliance with Procedural or Substantive Requirements. If a claim holder fails to comply with the requirements for asserting a claim established by the bankruptcy court or cannot produce evidence to support the claim’s validity, the bankruptcy court may challenge, reduce or disallow the claim.
Preferential Transfer. A claim may be challenged or disallowed if the creditor received a preferential payment from the debtor within 90 days of the bankruptcy filing, even if it was unrelated to the bankruptcy claim being asserted.
