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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 93-3581
_____________________
IN RE UNITED STATES ABATEMENT CORPORATION,
a/k/a U.S.A. Corp.,
Debtor
UNITED STATES ABATEMENT CORP.,
a/k/a U.S.A. Corp.,
Appellant,
v.
MOBIL EXPLORATION & PRODUCING U.S., INC.,
as agent for Mobil Oil Exploration & Producing Southeast, Inc.
and Mobil Exploration and Producing North America, Inc.,
Appellee.
_________________________________________________________________
Appeal from the United States District Court
for the Eastern District of Louisiana
_________________________________________________________________
(November 23, 1994)
Before KING, JOLLY, and STEWART, Circuit Judges.
KING, Circuit Judge:
This appeal involves the question whether a bankruptcy
court, upon motion of a Chapter 11 debtor, may equitably
subordinate the claim of a creditor who exercised a contractual
right to recoup from the debtor sums it became obligated to pay
to other creditors who had filed liens against the recouping
creditor's property. The debtor contended that the exercise of
the right of recoupment constituted an inequitable exercise of

control over the debtor, forcing the debtor into bankruptcy, all
to the detriment of other creditors. The bankruptcy court held
that the exercise of a contractual right of recoupment did not
amount to a type of inequitable conduct that could form the basis
for equitable subordination and dismissed the debtor's claim for
equitable subordination under Rule 12(b)(6). The district court
affirmed. We also affirm.
I. FACTUAL AND PROCEDURAL HISTORY
On March 13, 1992, United States Abatement Corporation
("USA") filed a voluntary petition for bankruptcy under Chapter
11 of the Bankruptcy Code. On April 20, 1992, Mobil Exploration
and Producing U.S., Inc. ("Mobil") filed a timely unsecured
nonpriority Proof of Claim in the amount of $365,000, asserting
that Mobil had a contractual right to indemnification from USA
for amounts expended to pay off the liens of subcontractors.1
These liens had attached to Mobil's property when USA failed to
pay subcontractors who provided services pursuant to two
contracts between USA and Mobil calling for USA to sandblast and
paint certain structures belonging to Mobil located on the Outer
Continental Shelf.
1 Our opinion in a related appeal, also decided today,
describes in greater detail the relationship between USA and
Mobil and the circumstances that led to this litigation. See
United States Abatement Corp. v. Mobil Exploration & Producing
U.S., Inc. (In re United States Abatement Corp.), No. 93-3582,
___ F.3d ___, slip op. at _____ (5th Cir. 1994).
2

On June 15, 1992, USA filed a complaint seeking equitable
subordination of Mobil's claim. Mobil responded by filing a
motion pursuant to Rule 12(b)(6) of the Federal Rules of Civil
Procedure asserting that USA had failed to state a claim upon
which relief could be granted. USA filed an amended complaint on
November 6, 1992, in which it set forth additional facts in
support of its equitable subordination claim. Specifically, USA
contends that the facts set forth in its amended complaint
establish that Mobil exercised control over the financial affairs
of USA to such an extent that USA's other creditors were harmed
thereby.
On November 13, 1993, the bankruptcy court granted Mobil's
motion to dismiss USA's equitable subordination claim. On August
4, 1993, the district court entered judgment affirming the
bankruptcy court's decision. In re U.S. Abatement Corp., 157
B.R. 590 (E.D. La. 1993). USA filed a timely appeal to this
court, asserting two points of error: (1) the bankruptcy court
erred in addressing USA's equitable subordination action prior to
determining whether Mobil held a valid claim against USA's
estate; and (2) the bankruptcy and district courts erred in
concluding that USA had failed to state a claim justifying
equitable subordination.
II. STANDARD OF REVIEW
A dismissal for failure to state a claim is disfavored in
the law and justified only if it appears beyond doubt that the
3

plaintiff can prove no set of facts in support of his claim that
would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-
46 (1957); Carney v. Resolution Trust Corp., 19 F.3d 950, 954
(5th Cir. 1994); Mahone v. Addicks Util. Dist. of Harris County,
836 F.2d 921, 926 (5th Cir. 1988). In evaluating the propriety
of a dismissal, we accept the plaintiff's well-pleaded facts as
true. Norman v. Apache Corp., 19 F.3d 1017, 1021 (5th Cir.
1994); Shushany v. Allwaste, Inc., 992 F.2d 517, 520 (5th Cir.
1993). Furthermore, the question of whether a creditor's conduct
is so egregious as to require the remedy of equitable
subordination is a question of law, over which an appellate court
may exercise plenary review. Smith v. Associates Commercial
Corp. (In re Clark Pipe & Supply Co.), 893 F.2d 693, 699-700 n.5
(5th Cir. 1990).
III. ANALYSIS
In order properly to assess USA's claim of equitable
subordination, it is helpful to summarize the key provisions of
the two contracts between Mobil and USA. Both contracts
contained three relevant clauses: (1) a termination clause; (2)
an indemnification clause; and (3) a retainage clause. The
termination clause stated, "Company [Mobil] reserves the right to
terminate this contract with or without cause at any time." The
termination clause also contained a provision for calculating
compensation due to USA should Mobil exercise its right to
terminate the contracts. Thus, the termination clause on its
4

face permitted Mobil to terminate the contracts for any reason,
yet ensured that USA would be compensated for any work it had
completed up until the time of termination. The bankruptcy court
in this case concluded that the termination clause was valid
under Louisiana law. See American Waste and Pollution Control
Co. v. Jefferson Davis Parish Sanitary Landfill Comm'n, 578 So.
2d 541 (La. Ct. App. 1991), cert. denied, 581 So. 2d 694 (La.
1991) (enforcing termination clause on grounds that "[a] written
contract between two parties is the law as to those parties and
the courts are bound to enforce the contract as written."). USA
does not contest the bankruptcy court's legal conclusion that the
termination clause is fully enforceable as written.
The two contracts between Mobil and USA also contained an
indemnification clause which read:
Contractor [USA] further agrees to pay Company [Mobil] for
damages to its property and to indemnify and hold Company
harmless against the payment of any and all taxes,
penalties, interest, liens or indebtedness or claims against
its property, or for work performed, or measured by the work
performed, growing out of or incident to Contractor's
operations hereunder.
(emphasis added).
The contracts also contained a retainage clause whereby
Mobil was authorized to withhold thirty percent of money due to
USA as leverage to ensure that USA paid off all subcontractors
who might assert liens against Mobil's property. The bankruptcy
court concluded that the indemnification clause was unambiguous
and enforceable as written, rejecting USA's argument that the
retainage clause superseded the indemnification clause by placing
5

a "cap" of thirty percent on the amount to which Mobil was
contractually entitled to recoup from USA to clear its property
of subcontractors' liens. The bankruptcy court reasoned that
while the retainage clause provided Mobil with prophylactic
protection against the formation of liens, the indemnification
clause provided additional protection by explicitly granting
Mobil a right of full indemnification should any subcontractors'
liens actually materialize. USA does not contest the bankruptcy
court's interpretation of the relationship between the
indemnification and retainage clauses.
The bankruptcy court concluded that under the terms of the
two contracts between USA and Mobil, Mobil was entitled to recoup
the full amount of all subcontractors' liens paid and owing on
its property against the amounts due to USA under the contracts.
Thus, of the $692,099 owed by Mobil to USA under the contracts,
the bankruptcy court found that Mobil could subtract $607,052.82,
the amount Mobil paid or owed subcontractors who had filed liens
against Mobil's property. Mobil's total remaining obligation to
USA on the contracts was therefore $85,046.18.2
USA's first argument on appeal is that the bankruptcy court
erred in deciding the request for equitable subordination prior
to deciding whether Mobil had a valid claim against USA's estate.
In other words, USA believes the bankruptcy court "put the cart
before the horse" by deciding that there was no reason to invoke
2 The bankruptcy court noted that because USA had assigned
all of its accounts receivable to Delta Bank, the $85,046.18 owed
to USA actually belonged to Delta.
6

equitable subordination of Mobil's claim because the bankruptcy
court never determined that Mobil had a valid claim against USA's
estate in the first place. USA asserts that the bankruptcy
court's order of addressing these issues deprived it of a full
panoply of litigation choices. Specifically, USA contends that
if the bankruptcy court first had addressed the issue of whether
Mobil had a valid claim, USA would have been in a better position
to evaluate the propriety of pursuing its equitable subordination
claim. We find this contention to be without merit.
We initially note that the bankruptcy court's determination
as to what order it should address motions before it is a matter
best left to its sound discretion. Landis v. North Am. Co., 299
U.S. 248, 254 (1936) (acknowledging "the power inherent in every
court to control the disposition of the causes on its docket with
economy of time and effort for itself, for counsel, and for the
litigants. How this can best be done calls for the exercise of
judgment . . . ."). There is no requirement in the Bankruptcy
Code, Bankruptcy Rules or case law that a bankruptcy court
address the merits of a pending claim prior to disposing of a
motion for equitable subordination.3 Thus, an appellate court
3 In fact, the resolution of a claim for equitable
subordination -- particularly when the amount owed by the debtor
could represent a material portion of the debtor's liabilities --
may foster the expeditious and orderly structuring of the
reorganization plan. The same can often be said for a claim that
related debtors should be substantively consolidated. It may be
desirable for the bankruptcy court to resolve such claims as
early as possible.
We also note that the speedy resolution of USA's equitable
subordination claim was not, and was not alleged to be, part of a
subterfuge to avoid the mechanisms and protections of Chapter 11;
7

should be loathe to substitute its judgment for the bankruptcy
court regarding such matters of docket management absent an abuse
of discretion. In re Stone, 986 F.2d 898, 903 n.3 (5th Cir.
1993) (noting that decisions regarding docket management are
subject to an abuse of discretion standard); accord Penn v. Iowa
State Bd. of Regents, 999 F.2d 305, 307 (8th Cir. 1993)
("District courts have the duty and power to manage their dockets
and we will not interfere in the absence of an abuse of
discretion.").
Other than its allegation that the bankruptcy court's
prioritization of these issues deprived it of maximum litigation
choice, USA offers no facts to indicate an abuse of discretion.
It is important to note that the bankruptcy court's chosen order
of resolving these claims did not deprive USA of the opportunity
to litigate the question of whether Mobil held a valid claim;
rather, the validity of Mobil's claim was simply resolved later
than USA would have preferred. USA also fails to recognize that
the swift disposition of the equitable subordination claim was at
least partially dictated by USA's own act of filing a motion for
equitable subordination before the bankruptcy court had
determined whether Mobil held a valid claim. Thus, it appears
that USA is asking us to characterize the bankruptcy court's
decision on the equitable subordination motion as an abuse of
discretion because it was arrived at too expeditiously. We
thus, the so-called Braniff doctrine is inapposite. See Pension
Benefit Guaranty Corp. v. Braniff Airways, Inc. (In re Braniff
Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983).
8

decline the invitation to condemn lower courts for promptly
resolving the issues before them.
The second issue raised in this appeal is whether the
bankruptcy and district courts erred in determining that USA's
request for equitable subordination of Mobil's claim lacked
merit. After a careful review of the record, we agree with the
lower courts that there is no basis for equitably subordinating
Mobil's claim.
The law of equitable subordination in this Circuit is well
established. The judicially-created doctrine of equitable
subordination is presently codified at 11 U.S.C. � 510(c).4
While � 510(c) does not specify the circumstances under which
equitable subordination may be imposed, the legislative history
of that section reveals that Congress intended it to encompass
existing common law principles. See S. Rep. No. 989, 95th Cong.,
2d Sess., at 74, reprinted in 1978 U.S.C.C.A.N. 5787; accord
Fabricators, Inc. v. Technical Fabricators, Inc. (In re
Fabricators, Inc.), 926 F.2d. 1458, 1464 (5th Cir. 1991); Holt v.
FDIC (In re CTS Truss, Inc.), 868 F.2d 146, 148 (5th Cir. 1989).
Equitable subordination is a remedial, not penal, measure
which is used only sparingly. In re Fabricators, Inc., 926 F.2d
4 Section 510(c) provides in relevant part:
(c) . . . after notice and a hearing, the court may--
(1) under principles of equitable subordination,
subordinate for purposes of distribution all or part of an
allowed claim to all or part of another allowed claim . . . .
11 U.S.C. � 510(c).
9

at 1464. This court has established a three-prong test to
identify those situations in which equitable subordination is
permitted: (1) the claimant must have engaged in some type of
inequitable conduct; (2) the conduct must have resulted in injury
to the creditors or conferred an unfair advantage on the
claimant; and (3) the invocation of equitable subordination must
not be inconsistent with the provisions of the Bankruptcy Code.
In Re Fabricators, Inc., 926 F.2d at 1464-65; Smith v. Associates
Commercial Corp. (In re Clark Pipe & Supply Co.), 893 F.2d 693,
699 (5th Cir. 1990); Benjamin v. Diamond (In re Mobile Steel
Co.), 563 F.2d 692, 700 (5th Cir. 1977).
While our three-pronged test appears to be quite broad, we
have largely confined equitable subordination to three general
paradigms: (1) when a fiduciary of the debtor misuses his
position to the disadvantage of other creditors; (2) when a third
party controls the debtor to the disadvantage of other creditors;
and (3) when a third party actually defrauds other creditors.
Holt v. FDIC (In re CTS Truss, Inc.), 868 F.2d 146, 148-49 (5th
Cir. 1989) (citing cases). The first paradigm is inapplicable in
this case because USA has offered no facts to establish that
Mobil had a fiduciary obligation to USA. Mobil was merely in a
contractual relationship with USA, not a relationship of trust
which would give rise to mutual fiduciary duties.5 The third
5 USA's only allegation of the existence of a fiduciary
relationship appears in its brief, which asserts that because
Mobil was a recipient of services who failed to pay for services
rendered, it "can in fact, or should in fact, become a fiduciary
to USA because of its control and domination over the debtor."
10

paradigm is inapplicable because USA has not alleged that Mobil
defrauded USA or its creditors. Thus, USA's equitable
subordination claim rests upon the second paradigm; specifically,
USA asserts that Mobil controlled USA to the detriment of other
creditors.
USA's only factual basis for asserting that Mobil controlled
USA to the detriment of other creditors is that Mobil refused to
pay certain sums due under the two contracts. USA further
asserts that the sums due were "not under a bona fide dispute"
because USA had substantially completed certain structures, Mobil
had no complaints about the quality of the work performed, and
the contracts called for structure-by-structure payment. Because
the sums due under the contracts with Mobil represented all (or
virtually all) of the income flow of USA, USA contends that
Mobil's non-payment resulted in detriment to other creditors.
More specifically, USA contends that Mobil's non-payment
effectively forced USA to pay off certain subcontractors who had
placed liens on Mobil's property to the detriment of Delta Bank,
Thus, USA appears to assert that the mere existence of control or
domination over the debtor gives rise to a fiduciary
relationship. Such a theory would not only make the control
paradigm superfluous, but would also turn the law of fiduciary
relationships on its head. It is hornbook law that a fiduciary
relationship arises when one party has a duty to act for the
benefit of the other party as to matters within the scope of the
relationship. See AUSTIN WAKEMAN SCOTT & WILLIAM FRANKLIN FRATCHER, 1
THE LAW OF TRUSTS � 2.5, at 43 (4th ed. 1987); RESTATEMENT (SECOND) OF
AGENCY � 13, cmt. a (1958). Classic examples of fiduciary
relationships are agent/principal, attorney/client, and
guardian/ward. As a mere party to a contract for services, Mobil
was not in a fiduciary relationship with USA because Mobil had no
duty to act for the benefit of USA.
11

to whom USA had assigned all its receivables, and to the
detriment of other unsecured creditors who were not in a position
to place liens on Mobil's property.
We know of no cases (and USA cites none in its brief) in
which the exercise by one party to a contract of a contractual
right to withhold payment occasioned by the breach by the other
contracting party of that contract has been considered the type
of inequitable "control" which would justify equitable
subordination. Indeed, in an analogous case, Smith v. Associates
Commercial Corp. (In re Clark Pipe & Supply Co.), 893 F.2d 693
(5th Cir. 1990), we held that a lender's reduction of available
funds to a borrower (a subsequent Chapter 7 debtor) in a
revolving line of credit was not the type of unconscionable
conduct which would constitute "control" sufficient to invoke
equitable subordination. We reached this conclusion based
primarily upon the fact that the contract between the lender and
borrower expressly permitted the lender to reduce available funds
according to the level of the borrower's accounts receivable.
Because the lender had merely exercised his contractual right to
reduce the available funds when the borrower's accounts
receivable declined, there was not, absent more, any inequitable
conduct to invoke equitable subordination. As we explained:
Associates' control over Clark's finances, admittedly
powerful and ultimately severe, was based solely on the
exercise of powers found in the loan agreement. Associates'
close watch over Clark's affairs does not, by itself,
however, amount to such control as would justify equitable
subordination. . . . Although the terms of the agreement did
give Associates potent leverage over Clark, that agreement
did not give Associates total control over Clark's
12

activities. At all material times Clark had the power to
act
autonomously and, if it chose, to disregard the advice
of
Associates; for example, Clark was free to shut its doors
at
any time it chose to do so and to file for bankruptcy.
In re Clark Pipe & Supply Co., 893 F.2d at 702.
In this case, Mobil had the contractual right to recoup from
the amount due to USA the amount of any liens placed on Mobil's
property by USA's subcontractors. Because USA disputed this
recoupment right, there was a bona fide dispute among the parties
as to what amount (if any) Mobil owed USA under the contracts.
In order to resolve this dispute, Mobil filed a declaratory
judgment action and withheld payment to USA pending resolution of
this matter by the courts. While Mobil's withholding of payment
certainly created economic hardship for USA, the act of
withholding was made pursuant to Mobil's contractual right to do
so. Thus, as in Clark Pipe, Mobil's actions created economic
leverage to force USA to pay off the subcontractors who had filed
liens on Mobil's property prior to paying off other creditors.
Yet this economic leverage, asserted by Mobil pursuant to the
terms of the contracts, did not give Mobil inequitable control
over USA. Because the behavior of Mobil which USA complains of
would not support a finding of inequitable conduct by Mobil, we
agree that dismissal of USA's equitable subordination claim for
failure to state a claim was proper.
IV. CONCLUSION
13

For the foregoing reasons, we AFFIRM the judgment of the
district court.
14