Ltc of William Del Biaggio III v. David Freeman

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

IN RE WILLIAM JAMES DEL No. 13-17500
BIAGGIO, III,
Debtor, D.C. No.
4:12-cv-06447-YGR

LIQUIDATING TRUST
COMMITTEE OF THE DEL OPINION
BIAGGIO LIQUIDATING TRUST,
Plaintiff-Appellee,

v.

DAVID FREEMAN,
Defendant-Appellant.

Appeal from the United States District Court
for the Northern District of California
Yvonne Gonzalez Rogers, District Judge, Presiding

Submitted January 6, 2016*
San Francisco, California

Filed August 22, 2016

*
The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
2 IN RE DEL BIAGGIO

Before: Alex Kozinski, John T. Noonan,
and Diarmuid F. O’Scannlain, Circuit Judges.

Opinion by Judge O’Scannlain

SUMMARY**

Bankruptcy

Affirming the district court’s affirmance of the
bankruptcy court’s summary judgment in an adversary
proceeding, the panel held that an individual creditor’s
general unsecured fraud claim was properly subordinated to
other claims senior or equal to it.

The panel held that the claim was properly subordinated
under 11 U.S.C. § 510(b) because it was a damages claim
arising from the purchase or sale of securities of an affiliate
of the debtor. The panel held that the claim arose from the
sale or purchase of securities in Predators Holdings, LLC,
owner of Nashville Hockey Club Limited Partnership, LLC,
which owned and operated the Nashville Predators National
Hockey League team. The panel also held that § 510(b) is
not limited to corporate debtors, but also applies to individual
debtors.

**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 IN RE DEL BIAGGIO 3

COUNSEL

Merle C. Meyers and Michele Thompson, Meyers Law
Group, P.C., San Francisco, California, for Defendant-
Appellant.

Michael M. Lauter, Michael H. Ahrens and Steven B. Sacks,
Sheppard, Mullin, Richter & Hampton LLP, San Francisco,
California, for Plaintiff-Appellee.

OPINION

O’SCANNLAIN, Circuit Judge:

A provision of the Bankruptcy Code requires that
damages claims arising from the purchase or sale of the
security of a debtor be subordinated to other claims senior to
or equal to it. We must decide whether such treatment
applies where the debtor is an individual.

I

A

The Nashville Predators are a National Hockey League
(“NHL”) team in Nashville, Tennessee. As of 2007, the
Predators were owned by Craig Leipold and his family.
During that year, however, David Freeman learned that
Leipold intended to sell the team to a third party who wanted
to move the Predators to another state. As a result, Freeman
began organizing a group of Nashville investors to buy the
team. Leipold talked with Freeman about purchasing the
Predators, but was also in conversation with other potential
4 IN RE DEL BIAGGIO

buyers, including William Del Biaggio, III. Eventually,
Leipold and the NHL Commissioner suggested to Freeman
that his group of investors join forces with Del Biaggio to
make a joint bid to buy the team. In so suggesting, Leipold
related previous assertions made to him by Del Biaggio that
stressed Del Biaggio’s ability to fund the purchase and his
experience with professional hockey.

During the summer and fall of 2007, Freeman and Del
Biaggio engaged in negotiations concerning the acquisition
of the Predators. Del Biaggio confirmed his ability to fund a
$70 million share in the investment, and told Freeman he had
connections in the NHL and hoped to become a major owner
of a second NHL team. Freeman and his investors ultimately
reached an agreement with Del Biaggio to purchase the
Predators from Leipold for $193 million. Before the closing
date, however, Del Biaggio contacted Freeman and informed
him he could only invest $25 million, not the $70 million he
originally promised. He proposed to replace the remainder
with a $40 million increase in a loan from CIT Bank. Del
Biaggio reported that he personally guaranteed the loan and
that he would pay all the interest accrued on account of the
loan increase. He also agreed to provide a personal guarantee
to underwrite the Predators’ lease obligations up to $10
million.

The sale of the Predators to Freeman and his cohort of
investors, including Del Biaggio, closed on December 7,
2007. As a result of the sale, the Predators became wholly
owned and operated by Nashville Hockey Club Limited
Partnership, LLC, which is in turn wholly owned by
Predators Holdings, LLC (“Holdings”).
 IN RE DEL BIAGGIO 5

B

Freeman invested $31 million to obtain 31 Common Units
of Holdings. Common Units were subject to capital calls and
not afforded a liquidation preference, unlike the other form of
equity investment in Holdings, the Series A Units. Freeman
also made a $5 million subordinated loan to Holdings in
exchange for its promissory note.

Del Biaggio invested in Holdings through an entity called
Forecheck Investments, LLC (“Forecheck”). Forecheck paid
$30 million to obtain all 30 Series A Units of Holdings.
These Series A Units gave Forecheck 32.6% of the voting
units in Holdings. Del Biaggio in turn invested $25 million
to acquire an 83.33% interest in Forecheck. As a result, Del
Biaggio controlled roughly 27% of the voting securities of
Holdings.

C

Several months after the sale, Freeman learned that Del
Biaggio never had the funds to support his guarantees and
that the $25 million Del Biaggio already invested was in fact
money he had embezzled from his clients. Del Biaggio filed
for Chapter 11 bankruptcy which gave rise to the current
proceeding. He was later indicted and convicted for various
financial frauds and sentenced to an eight-year prison term.

Del Biaggio’s fraud became headline news in Nashville,
and as a result Predators revenues stagnated. To keep the
business afloat, Holdings made capital calls to holders of the
company’s Common Units, including Freeman. Freeman
satisfied this first capital call with a payment of $2,632,075.
To prevent termination of the CIT Bank loan and the
6 IN RE DEL BIAGGIO

Predators’ lease, he also replaced Del Biaggio’s guarantees
with his own. Freeman alleges he was unable to satisfy later
capital calls because of these guarantees, and that as a result,
his membership units in Holdings became “heavily diluted
and virtually worthless.”

D

In October 2008, Freeman filed a general unsecured claim
against Del Biaggio’s bankruptcy estate seeking damages of
an undetermined amount arising from his fraud in the
Holdings transaction.1 In a later amended proof of claim,
Freeman sought damages of $38,632,075. This amount
included Freeman’s initial $31 million investment in
Holdings securities, the $5 million of subordinated debt he
issued to Holdings in exchange for the promissory note, and
the $2,632,075 paid in the first capital call. In response, the
Liquidating Trust Committee of the Del Biaggio Liquidating
Trust, the entity charged with prosecuting claims objections
in Del Biaggio’s bankruptcy, filed a counterclaim against
Freeman and sought summary judgment. The counterclaim
sought subordination and disallowance of Freeman’s claim
based on 11 U.S.C. § 510(b).

E

The bankruptcy court granted the Committee’s motion for
summary judgment, finding Freeman’s claim was subject to
mandatory subordination under § 510(b). After determining

1
Holdings’ other investors submitted identical claims against Del
Biaggio’s estate. When the bankruptcy court approved Holdings’
repurchase of Del Biaggio’s estate’s interest in the Predators, Holdings
and all other investors except Freeman released their claims.
 IN RE DEL BIAGGIO 7

that Holdings was an “affiliate” of Del Biaggio via his
ownership in Forecheck the court concluded that § 510(b)
applied to Freeman’s fraud claim because the plain language
of the statute covers claims arising from the purchase of the
securities of a debtor’s affiliate. The bankruptcy court further
reasoned that subordinating Freeman’s claim under § 510(b)
served the purposes of the statute, because as an investor in
Holdings, he bargained for both a greater share of profits and
a greater share of risks than Del Biaggio’s unsecured
creditors. The court also determined that the claims of Del
Biaggio’s other creditors were senior to Freeman’s claim
based on its conclusion that notes or shares issued by a
subsidiary create no claim to the assets of a parent. Freeman
appealed to the district court, which in turn affirmed the order
and judgment of the bankruptcy court. Freeman timely
appealed here.

II

We review a district court’s decision on appeal from a
bankruptcy court de novo, and apply the same standards
applied by the district court without deference to that court.
In re Thorpe Insulation Co., 677 F.3d 869, 879 (9th Cir.
2012). When considering a bankruptcy court’s grant of
summary judgment, we apply the regular summary judgment
standard in order to “determine whether there are any genuine
issues of material fact and whether the bankruptcy court
correctly applied the substantive law.” In re Caneva,
550 F.3d 755, 760 (9th Cir. 2008) (quoting In re Bakersfield
Westar Ambulance, Inc., 123 F.3d 1243, 1245 (9th Cir.
1997)).
8 IN RE DEL BIAGGIO

III

Freeman first contends that the bankruptcy court and the
district court erred in applying Bankruptcy Code Section
510(b) to his claim against Del Biaggio.

Section 510(b) reads as follows:

§ 510. Subordination

....

(b) For the purpose of distribution under
this title, a claim arising from rescission
of a purchase or sale of a security of the
debtor or of an affiliate of the debtor, for
damages arising from the purchase or sale
of such a security, or for reimbursement
or contribution allowed under section 502
on account of such a claim, shall be
subordinated to all claims or interests that
are senior to or equal the claim or interest
represented by such security, except that if
such security is common stock, such claim
has the same priority as common stock.

11 U.S.C. § 510(b). The statute operates in two steps. First,
it commands that specific types of claims relating to
securities, including claims “for damages arising from the
purchase or sale” of a debtor’s securities or the securities of
an affiliate “shall be subordinated.” See In re Betacom of
Phoenix, Inc., 240 F.3d 823, 828–29 (9th Cir. 2001)
(observing that subordination of qualifying claims under
§ 510(b) is mandatory). Second, it identifies other claims to
 IN RE DEL BIAGGIO 9

which a qualifying claim must be subordinated—“all claims
or interests that are senior to or equal the claim or interest
represented by” the debtor’s security or the security of his
affiliate. Considered as a whole, § 510(b) “effectuate[s] one
of the general principles of corporate and bankruptcy law:
that creditors are entitled to be paid ahead of shareholders in
the distribution of corporate assets.” In re Am. Wagering,
Inc., 493 F.3d 1067, 1071 (9th Cir. 2007). This principle is
broadly known as the absolute priority rule. See, e.g., In re
Telegroup, Inc., 281 F.3d 133, 139–40 (3d Cir. 2002)
(explaining the absolute priority rule and its relation to
§ 510(b)).

It is undisputed that Freeman’s claim is a damages claim.
Freeman also admits that his Holdings investments are
securities2 and that Holdings is an affiliate3 of Del Biaggio.
At this first step, Freeman argues only that the bankruptcy
court and the district court erred in applying § 510(b) to his

2
Interests in limited liability companies are “securities” under the
Bankruptcy Code. See In re Tristar Esperanza Props., LLC, 782 F.3d
492, 495 (9th Cir. 2015) (noting that among the non-exhaustive list of
items defined as securities in 11 U.S.C. § 101(49) “[an] LLC interest
either qualifies as a ‘transferable share’ or falls within the broad residual
category” (quoting In re SeaQuest Diving, LP, 579 F.3d 411, 418 (5th Cir.
2009))). Likewise, the term “security” as employed in the statute includes
a promissory note. See 11 U.S.C. § 101(49)(A)(i).
3
The Bankruptcy Code defines affiliate as a “corporation 20 percent or
more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with the power to vote, by the debtor.”
11 U.S.C. § 101(2)(B); see also 11 U.S.C. § 101(9)(A)(ii) (defining
‘corporation’ as including a “partnership association organized under a
law that makes only the capital subscribed responsible for the debts of
such association”). It is uncontested that Del Biaggio controlled more
than 20% of Holdings, given his interest in Forecheck.
10 IN RE DEL BIAGGIO

claim against Del Biaggio because his claim is not one
“arising from the purchase or sale” of Holdings.

A

Beginning with the statute’s plain text, we observe that
§ 510(b)’s “arising from” language reaches broadly to
subordinate damage claims involving qualifying securities.
The phrase “arising from” as employed in § 510(b)
“connotes, in ordinary usage, something broader than
causation” and is instead “ordinarily understood to mean
‘originating from,’ ‘having its origin in,’ ‘growing out of,’ or
‘flowing from’ or in short, ‘incident to, or having connection
with.’” In re Tristar Esperanza Props., LLC, 782 F.3d 492,
497 (9th Cir. 2015) (quoting Underwriters at Lloyd’s of
London v. Cordova Airlines, Inc., 283 F.2d 659, 664 (9th Cir.
1960)). In Tristar, we applied this reading of the statute’s
text to conclude that a claim involving the withdrawal of a
member from an LLC was rightly subordinated, despite the
fact that the withdrawal converted the claimant’s interest
from an equity interest to a debt interest before the
bankruptcy filing. Id. at 497–98.

Our other precedents evince a similarly broad reading of
§ 510(b)’s “arising from” language. In Betacom, we found
that a damages claim based on a purported breach of contract
in a merger agreement was one that arose from the sale or
purchase of a debtor’s securities under § 510(b), even though
the claimants never actually purchased or received stock.
240 F.3d at 830. In so holding, we construed the claim as one
“surrounding” the sale or purchase of a security of the debtor.
Id. at 829.
 IN RE DEL BIAGGIO 11

Likewise, in American Wagering, we concluded that
§ 510(b)’s “arising from” language requires that claims be
subordinated “where there exists ‘some nexus or causal
relationship between the claim and the purchase of the
securities.’” 493 F.3d at 1072 (quoting Telegroup, 281 F.3d
at 138). Other courts interpreting § 510(b)’s “arising from”
language have also endorsed this expansive “some nexus”
reading. See, e.g., In re Am. Hous. Found., 785 F.3d 143, 155
(5th Cir. 2015); SeaQuest Diving, LP, 579 F.3d 411, 421–22
(5th Cir. 2009); In re Med Diversified, Inc., 461 F.3d 251,
254–55 (2d Cir. 2006).

Applying our past reading of § 510(b), Freeman’s
damages claim is clearly one “arising from” the sale or
purchase of securities in Holdings. The basis of Freeman’s
claim for damages against Del Biaggio’s estate is not Del
Biaggio’s fraudulent misrepresentations, but rather Freeman’s
detrimental reliance on those misrepresentations in the form
of his Holdings investment. Indeed, the damages sought by
Freeman correspond exactly to the amount he invested in
Holdings through his initial purchase of Holdings securities,
the promissory note he obtained, and the money spent in the
first capital call occasioned by his purchase of Common Unit
stock. In light of these facts, we have no doubt that
Freeman’s claim “originates from” from his purchase of
securities in Holdings, Tristar, 782 F.3d at 497, and thus
possesses “some nexus” to that purchase, Am. Wagering,
493 F.3d at 1072 (citation and internal quotation marks
omitted). Put simply, Freeman’s claim is really no claim at
all but for his investment in Holdings.

Freeman attempts to avoid this conclusion by analogizing
his case to the facts of American Wagering, but such
argument lacks merit. In American Wagering, we concluded
12 IN RE DEL BIAGGIO

that a claimant’s assertion of a court-ordered money
judgment against a debtor for breach of contract was not
subject to subordination under § 510(b). 493 F.3d at 1073.
We reasoned that such a claim fell outside § 510(b)’s “arising
from” provision because the contract with the debtor merely
used stock value as a basis for calculating compensation and
the claim did not seek to recover an investment loss. Id. But
Freeman’s claim does not value a free-standing injury by
reference to a security; rather, as we have already explained,
Freeman’s asserted injury is inseparable from his Holdings
investment.

Freeman also argues that his claim is not one “arising
from the purchase or sale” of the securities of Del Biaggio’s
affiliate since he purchased the Holdings securities from
Leipold rather than Del Biaggio. But nothing in § 510(b)
requires that the debtor be the seller of the security at issue;
indeed, the statute says only that a damages claim must be
one arising from the purchase of securities “of an affiliate of
the debtor,” not from the debtor himself. § 510(b). The text
of the statute clearly points toward subordination of
Freeman’s claim.

B

Freeman next seeks to avoid § 510(b)’s plain language by
arguing that even if the statute’s text points in favor of
subordination, its purposes do not. Our Bankruptcy Appellate
Panel (“BAP”) appears to agree. In In re Kahn, 523 B.R.
175, 183 (B.A.P. 9th Cir. 2014), appeal docketed, No. 15-
60002 (9th Cir. Jan. 13, 2015), the BAP concluded that the
text of § 510(b) was ambiguous as to whether the law applies
to individual debtors. Turning to legislative history and
statutory purposes, the BAP then determined that applying
 IN RE DEL BIAGGIO 13

the statute to individual debtors was outside of Congress’s
intent. Id. While we generally treat decisions of the BAP as
persuasive authority because of its “special expertise in
bankruptcy issues and to promote uniformity of bankruptcy
law throughout the Ninth Circuit,” In re Silverman, 616 F.3d
1001, 1005 n.1 (9th Cir. 2010), in this case we are not
persuaded.

“It is well established that when the statute’s language is
plain, the sole function of the courts—at least where the
disposition required by the text is not absurd—is to enforce
it according to its terms.” Lamie v. U.S. Tr., 540 U.S. 526,
534 (2004) (citation and internal quotation marks omitted).
Only when statutes are ambiguous may courts look to
legislative history. See Nakano v. United States, 742 F.3d
1208, 1214 (9th Cir. 2014). We doubt any recourse to
sources outside the text is necessary to determine whether
Freeman’s transaction is one “arising from” the purchase or
sale of the securities of a debtor’s affiliate. As the Tenth
Circuit has noted, § 510(b)’s “arising from” language has
been “universally held” to cover “claims alleging fraud in the
inducement to purchase or sell [a covered] security.” In re
Geneva Steel Co., 281 F.3d 1173, 1174 (10th Cir. 2002).

C

Even assuming consideration of the statute’s legislative
history and purposes is useful and appropriate, they provide
no help to Freeman.

In Betacom, we identified “two main rationales for
mandatory subordination: (1) the dissimilar risk and return
expectations of shareholders and creditors; and (2) the
reliance of creditors on the equity cushion provided by
14 IN RE DEL BIAGGIO

shareholder investment.” 240 F.3d at 830; see also Am.
Wagering, 493 F.3d at 1072. On the one hand, § 510(b) aims
at subordinating claims “arising from” qualifying securities
because “[s]hareholders expect to take more risk than
creditors in return for the right to participate in firm profits.”
Betacom, 240 F.3d at 829. On the other, § 510(b)’s
mandatory subordination is justified because “creditors
extend credit in reliance on the cushion of investment
provided by the shareholders.” Id.

1

Both Freeman and the BAP in Kahn appear to assume the
risk-allocation rationale does not apply to cases like
Freeman’s because an investor cannot have a profit
expectation in an individual debtor. See Kahn, 523 B.R. at
183 (insisting that the risk-allocation rationale applies only to
corporate debtors because “equity interests do not exist” in an
individual debtor). But that reading overlooks that Congress
did not limit § 510(b)’s application to damage claims related
to a debtor’s own securities. Instead, Congress included
within § 510(b)’s ambit claims arising from the purchase of
the securities of “an affiliate of the debtor.” We think it
reasonable to assume that in expanding § 510(b)’s reach to
include such claims, Congress recognized what our pre-
Bankruptcy Code precedent already had—namely, that the
fairness concerns underlying the risk-allocation rationale
apply whether the investor’s profit expectation is directed at
the debtor or at an associated entity. See In re THC Fin.
Corp., 679 F.2d 784, 786 (9th Cir. 1982) (rejecting the idea
that “the relative equitable position of a defrauded
stockholder should be enhanced” merely because a
stockholder’s claim involves an affiliate).
 IN RE DEL BIAGGIO 15

Those concerns are clearly implicated in Freeman’s case.
As an investor in an affiliate of Del Biaggio, Freeman
bargained for increased risk in exchange for an expectation in
the profits of Holdings as he himself admits. Del Biaggio’s
creditors made no such gamble. Allowing Freeman to stand
on par with Del Biaggio’s creditors “would give [Freeman]
the best of both worlds—the right to share in profits if
[Holdings] succeeded and the right to repayment as a creditor
[of Del Biaggio] if it failed.” In re VF Brands, Inc., 275 B.R.
725, 728 (Bankr. D. Del. 2002). It was precisely that kind of
inequity that Congress meant § 510(b) to eliminate. See
Tristar, 782 F.3d at 496 (“Congress sought to subordinate
claims . . . that unfairly shift to creditors risks associated with
stock ownership.”); see also Telegroup, 281 F.3d at 142
(“Congress enacted § 510(b) to prevent disappointed
shareholders from recovering their investment loss by using
fraud and other securities claims to bootstrap their way to
parity with general unsecured creditors in a bankruptcy
proceeding.”).4

4
The BAP in Kahn also observed that in drafting § 510(b), Congress
relied on an influential law review article by John J. Slain and Homer
Kripke that discusses only corporate bankruptcy. See Kahn, 523 B.R. at
183; see also John J. Slain & Homer Kripke, The Interface Between
Securities Regulation and Bankruptcy—Allocating the Risk of Illegal
Securities Issuance Between Securityholders and the Issuer’s Creditors,
48 N.Y.U. L. Rev. 261 (1973) (“Slain and Kripke”); H.R. Rep. No.
95–595, at 195–96 (1977). Congress may well have crafted § 510(b) with
Slain and Kripke’s policy rationales in mind. See Betacom, 240 F.3d at
829 (discussing Congress’s apparent reliance on Slaine and Kripke’s
article). But there is no question that the text of § 510(b) reaches further
than Slain and Kripke’s precise concerns. Indeed, as the Second Circuit
has observed, “Slain and Kripke did not propose subordinating claims
arising from the purchase or sale of securities of the debtor’s affiliate, and
therefore had no occasion to consider how or whether the rationales they
offered might bear upon the subordination of such securities.” See In re
16 IN RE DEL BIAGGIO

2

Freeman also argues that his claim cannot be subordinated
since his investment in Holdings provided no equity upon
which Del Biaggio’s creditors could rely. But courts are
otherwise agreed that the equity cushion rationale is the less
important of the two, and actually unnecessary for § 510(b)
to apply in the affiliate scenario. See In re Lehman Bros. Inc.,
808 F.3d 942, 949 (2d Cir. 2015) (observing the risk-
allocation rationale is “more integral” than the equity-cushion
rationale and “serves as an effective rationalization for
subordination in those circumstances when an affiliate’s
securities provided the basis for the claim”); see also
SeaQuest Diving, 579 F.3d at 421; Med Diversified, 461 F.3d
at 259; Geneva Steel, 281 F.3d at 1180 n.3. That conclusion
makes sense. In the context of claims “arising from”
securities transactions involving a debtor’s affiliate, the
equity-cushion rationale will almost always remain
unfulfilled, since creditors of the parent do not rely on the
equity contributed by the affiliate’s investors as the basis for
extending credit. Refusing to apply § 510(b) in such cases
would render the statute basically inapplicable to claims
involving the securities of an affiliate—a result that Congress
itself has foreclosed through the statutory text. See Lehman
Bros., 808 F.3d at 950 (noting that the text of § 510(b)
indicates that “Congress has already determined” that the
risk-allocation rationale “is strong enough to warrant
subordination of claims arising out of transactions in affiliate

Lehman Bros. Inc., 808 F.3d 942, 949 n.8 (2d Cir. 2015). Our analysis of
§ 510(b) convinces us that the presence or absence of a debtor’s corporate
status makes no difference. Freeman presents the quintessential case of
an investor trying to recoup a bad investment ahead of those who assumed
no such risks.
 IN RE DEL BIAGGIO 17

securities”); see also RadLAX Gateway Hotel, LLC v.
Amalgamated Bank, 132 S.Ct. 2065, 2073 (2012) (observing
that a “generalized statutory purpose” cannot override a
statute’s text).

Because we conclude that Freeman’s claim is one “arising
from” his purchase of securities and that § 510(b) is not
limited to corporate debtors, we conclude that Freeman’s
claim must be subordinated.

IV

Freeman next argues that even assuming his claim is
subject to subordination, the bankruptcy court erred by
subordinating his claim to the unsecured claims of Del
Biaggio’s creditors. According to Freeman, only “other
interests in Holdings and claims against Holdings” are
actually senior or equal to his claim. He contends that
because his claims against Holdings are in a different priority
scheme than claims against Del Biaggio, there are no claims
to which his must be subordinated.

A

Kahn offered a similar reading of § 510(b)’s “senior to or
equal” language to conclude that the statute does not apply in
individual debtor cases. The BAP reasoned that this language
likely limits § 510(b) to corporate debtors because “[i]t is
axiomatic that a claim or interest based on stock may exist
only at a corporate level.” 523 B.R. at 183. Moreover, the
BAP observed that because other creditors with claims
against the individuals in Kahn could not “seek recovery as
creditors at the corporate level,” these creditors held no
claims senior to or equal to claims within the affiliate’s own
18 IN RE DEL BIAGGIO

priority scheme. Id. Like Freeman, the BAP in Kahn found
§ 510(b) inapplicable to individual debtors because an
individual debtor’s priority scheme cannot and does not
include claims involving affiliate securities.

We decline to endorse this reading of § 510(b). Courts
have differed in their readings as to the level of subordination
mandated by § 510(b)’s “senior to or equal” provision when
the qualifying claim involves affiliate securities. See Lehman
Bros., 808 F.3d at 950 & n.10 (collecting cases). Yet as the
Second Circuit has noted, “[e]very other court that has
applied § 510(b) to claims based on affiliate securities”—
with the exception of Kahn—“has required subordination.”
Lehman Bros., 808 F.3d at 950. There is good reason for that
consensus. As the district court in this case noted, reading
§ 510(b)’s “senior to or equal” language as requiring
subordination only when claims fall within the same priority
scheme would render the statute’s application to affiliates
meaningless, since claims against a debtor arising from the
purchase or sale of a security of the debtor’s affiliate will
almost never be included in the same priority scheme. Such
a reading simply cannot be squared with the plain language
of the statute. See Williams v. Taylor, 529 U.S. 362, 404
(2000) (explaining that it is a “cardinal principle of statutory
construction” that courts should “‘give effect, if possible, to
every clause and word of a statute’” (quoting United States v.
Menasche, 348 U.S. 528, 538–39 (1955)); see also In re
Lehman Bros. Inc., 519 B.R. 434, 450 (S.D.N.Y. 2014)
(observing that limiting § 510(b)’s “senior to or equal”
comparison to securities existing with the debtor’s capital
structure “would automatically exclude claims arising from
the purchase or sale of securities of an affiliate in derogation
of the plain language of the statute”). The question is not
whether § 510(b) requires subordination of claims involving
 IN RE DEL BIAGGIO 19

affiliate securities in a debtor’s bankruptcy proceeding, but
how it does so.

B

Courts applying § 510(b)’s “senior to or equal” provision
to claims involving affiliate securities have endorsed one of
three approaches.

1

The first approach, employed by the bankruptcy court in
this case, reads § 510(b)’s “senior to or equal” provision as
requiring that a claim involving a security of the debtor’s
affiliate be subordinated below all claims actually included in
the debtor’s priority scheme, with the possible exception of
claims involving an affiliate’s common stock. See In re
Lernout & Hauspie Speech Prods., N.V., 264 B.R. 336, 341
(Bankr. D. Del. 2001) (considering an identical interpretation
of § 510(b)). Under this approach, Freeman’s claim would be
subordinated to all general unsecured claims against Del
Biaggio’s estate on the theory that shares issued by a
subsidiary create no claim to the assets of a parent. Although
the bankruptcy court did not so explain, this approach places
emphasis on § 510(b)’s mention of “such security” as the
provision’s interpretive touchstone. See § 510(b) (requiring
subordination of qualifying claims to other claims or interests
“senior to or equal the claim or interest represented by such
security”).

2

By contrast, a second approach employed by other courts
focuses not on the affiliate security at issue, but instead on the
20 IN RE DEL BIAGGIO

claim made against the debtor. In VF Brands, for instance,
the Delaware bankruptcy court acknowledged that
shareholders of a subsidiary are “not part of any priority
scheme of claims against the parent,” but concluded
nonetheless that claims involving an affiliate’s securities
could be incorporated into the parent’s priority scheme
because these claims are also general unsecured claims
against the debtor. 275 B.R. at 727. On this reading, claims
involving the securities of an affiliate are conceptualized as
general unsecured claims against the debtor, and subordinated
under § 510(b) because they are “equal [to]” other general
unsecured claims. Id.; see also Lehman Bros., 503 B.R. at
784–85 (adopting the approach endorsed in VF Brands).
Unlike the first approach that focuses on the affiliate security,
this approach focuses on “the claim or interest represented by
such security.” § 510(b) (emphasis added). Like the first
approach, however, this approach also mandates
subordination of Freeman’s claim. On this reading,
Freeman’s claim would be considered a general unsecured
claim on par with other general unsecured claims against Del
Biaggio’s estate. Because Freeman’s claim involves affiliate
securities, however, § 510(b) mandates subordination of his
claim to these other unsecured claims, since they are “equal
[to]” Freeman’s.

3

A third approach applying § 510(b)’s “senior to or equal”
provision to claims involving affiliate securities has recently
been endorsed by the Second Circuit. In Lehman Brothers,
former underwriters of unsecured notes issued by Lehman
Brothers Holdings, an affiliate of Lehman Brothers, Inc.
(LBI), brought claims for contribution against LBI’s bankrupt
estate. 808 F.3d at 945. The underwriters admitted that their
 IN RE DEL BIAGGIO 21

claims against LBI fell under the “affiliate” provision of
§ 510(b). Id. Relying on Kahn, however, the underwriters
asserted that there were no claims senior to or equal to their
claim, arguing that claims involving an affiliate can be
subordinated in a debtor’s bankruptcy proceeding “only when
claims also could be made in that proceeding based on
ownership of the affiliate’s securities.” Id. The Second
Circuit disagreed and found the underwriters’ claims were
properly subordinated. In so deciding, the Court held:

[I]n the affiliate securities context, ‘the claim
or interest represented by such security’
means a claim or interest of the same type as
the affiliate security. Claims arising from
securities of a debtor’s affiliate should be
subordinated in the debtor’s bankruptcy
proceeding to all claims or interests senior or
equal to claims in the bankruptcy proceeding
that are of the same type as the underlying
securities (generally, secured debt, unsecured
debt, common stock, etc.; and in some
circumstances potentially a narrower sub-
category).

Id. at 946. Like the two approaches described above, the
Second Circuit’s approach reads § 510(b)’s “senior to or
equal” provision as requiring subordination of claims
involving affiliate securities in a debtor’s bankruptcy. But
the approach employed by the Second Circuit arrives at this
conclusion by reasoning that § 510(b) requires
“superimpos[ing] the capital structure of the affiliate onto that
of the debtor.” Id. at 950. The court concluded that this
reading of § 510(b) was the most consistent with § 510(b)’s
directive that a claim involving qualifying securities be
22 IN RE DEL BIAGGIO

subordinated to all claims senior to or equal to those
“represented by” an affiliate security. Id. at 944–46.

We note that Lehman Brothers expressly distinguished
Kahn as a case concerning only § 510(b)’s application to
individual debtors. See id. at 950 n.11. But like the other
approaches applying § 510(b) to claims involving affiliate
securities, the Second Circuit’s reading of § 510(b)’s “senior
to or equal” provision is irreconcilable with the reading of the
statute offered by Kahn and Freeman. In Kahn, the BAP said
it would be nonsensical to apply § 510(b) to individual
debtors because claims based on affiliate securities are by
definition outside the priority scheme in an individual debt
case. 523 B.R. at 183. But the court in Lehman Brothers
concluded that claims involving affiliate securities can indeed
be subordinated in a debtor’s bankruptcy notwithstanding
varying priority schemes, and that the affiliate’s capital
structure should be “superimpose[d]” on the structure of the
debtor to determine the correct level of priority. 808 F.3d at
946, 950. Moreover, as with the other two approaches,
applying the Second Circuit’s approach in Freeman’s case
requires subordination of his claim below that of Del
Biaggio’s unsecured creditors. Although equity interests in
Holdings lie outside the priority scheme governing Del
Biaggio’s bankruptcy, under this approach Freeman’s claim
would be treated as if it arose from equity interests in Del
Biaggio other than common stock. Under the confirmed
bankruptcy plan, this “type” of interest is considered junior to
the claims of Del Biaggio’s unsecured creditors, and
accordingly subordinated under § 510(b).
 IN RE DEL BIAGGIO 23

C

We agree with the Second Circuit that of the three
approaches, Lehman Brothers is likely the best interpretation
of § 510(b)’s “senior to or equal” provision as it applies to
claims involving affiliate securities. For the purposes of this
appeal, however, we need not adopt a definitive reading of
this portion of the statute. Because under any legitimate
reading of § 510(b), the claims of Del Biaggio’s general
unsecured creditors are “senior to or equal [to]” Freeman’s
claim, his claim was rightly subordinated to the claims of Del
Biaggio’s creditors.

V

The bankruptcy court properly subordinated Freeman’s
claim under § 510(b). Fittingly, the order of the district court
affirming that judgment is also

AFFIRMED.