F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
FEB 27 2002
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
In re:
GENEVA STEEL COMPANY,
Debtor.
RICHARD M. ALLEN, No. 01-4085
Appellant,
v.
GENEVA STEEL COMPANY,
Appellee.
APPEAL FROM THE UNITED STATES BANKRUPTCY
APPELLATE PANEL FOR THE TENTH CIRCUIT
(BAP No. UT-00-070)
(Bankr. No. 99-21130 )
Submitted on the briefs:
Richard M. Allen, pro se.
Ralph R. Mabey, Steven J. McCardell, Joseph M.R. Covey, of LeBoeuf, Lamb,
Greene & MacRae, L.L.P., Salt Lake City, Utah, and Mark C. Ellenberg of
Cadwalader, Wickersham & Taft, Washington, D.C., for Appellee.
Before EBEL , KELLY , and BRISCOE , Circuit Judges.
EBEL , Circuit Judge.
After a steel manufacturer sought bankruptcy protection, an investor
charged that company fraud deceived him into retaining–rather than selling–his
securities. For purposes of distribution priority, the Bankruptcy Code
subordinates claims “arising from the purchase or sale” of a debtor’s security.
This language, courts have universally held, covers claims alleging fraud in the
inducement to purchase or sell such a security. In this appeal, we are confronted
with the question whether it also reaches claims alleging fraud in the retention of
a security. We conclude that it does. 1
I. BACKGROUND
The undisputed facts are set out in the published decision of the Tenth
Circuit Bankruptcy Appellate Panel. See Allen v. Geneva Steel Co. (In re Geneva
Steel Co.) , 260 B.R. 517 (10th Cir. BAP 2001). We restate only the relevant
points here.
1
After examining the briefs and appellate record, this panel has determined
unanimously to grant the parties’ request for a decision on the briefs without oral
argument. See Fed. R. App. P. 34(f); 10th Cir. R. 34.1(G). The case is therefore
ordered submitted without oral argument.
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In 1999, Geneva Steel Company filed a petition in bankruptcy court seeking
to reorganize under Chapter 11 of the Bankruptcy Code. The petition listed,
among other debt, two public bond issues, the first issue coming due in 2001, the
second in 2004. Under the terms of Geneva’s proposed reorganization plan, all
bondholders, regardless of the maturity date of their bonds, were grouped into
a single class. Each member of the class would receive common stock in the
reorganized company. Classes subordinate to the bondholders would receive
nothing.
A trustee for each of the two bond issues submitted proofs of claim for the
bondholders, including Richard Allen, who held notes due in 2001. Allen, on his
own initiative, filed a $500,000 proof of claim, alleging that company fraud
caused him to retain his debt securities. Accompanying his proof of claim was
a letter from Allen to Geneva’s chief executive officer. It stated that he had
retained his notes, much to his detriment, because company officials remained
silent in the face of growing financial difficulties.
Geneva moved to disallow Allen’s claim as redundant to the claim filed on
his behalf by the trustee. Allen objected, asserting that his claim rested on
principles of fraud, not upon his ownership of the bonds. The bankruptcy court
ruled that: (1) to the extent Allen’s claim is based on his bonds, it duplicates the
trustee’s claim and is therefore disallowed; and (2) to the extent it is based on
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fraud, it is subordinate to the claims of both bondholders and general goods and
services creditors, since it is a claim, under section 510(b) of the Code, “for
damages arising from the purchase or sale of [ ] a security.” 11 U.S.C. § 510(b).
Geneva later amended its reorganization plan to create a new class of
creditors: those whose claims were subordinated pursuant to section 510 of the
Code. Claims in this category, which include only Allen’s, receive no
distributions.
The Tenth Circuit’s Bankruptcy Appellate Panel affirmed the bankruptcy
trial court’s ruling, and Allen appeals. The order subordinating his claim is
a final order. See Adelman v. Fourth Nat’l Bank & Trust Co., N.A. (In re
Durability, Inc.) , 893 F.2d 264, 265-66 (10th Cir. 1990). We exercise jurisdiction
under 28 U.S.C. § 158(d).
II. HISTORY AND POLICY BEHIND SECTION 510(b)
A. Early Treatment of Investor Claims in Bankruptcy
“In adopting section 510(b) Congress did not write on a clean slate.”
Kenneth B. Davis, Jr., The Status of Defrauded Securityholders in Corporate
Bankruptcy , 1983 Duke L.J. 1, 4. American and British courts have struggled for
more than a century to referee battles between a bankrupt’s creditors and its
defrauded investors. Id. Early cases in both countries tended to side with the
creditors, supported by the theory that a company’s capital reserves represented
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a “‘trust fund’ for payment of corporate debts.” Id. at 5. By the early 1900s,
courts began questioning the “trust fund” theory in favor of one that focused more
narrowly on creditor reliance. Under this view, only creditors who could show
actual reliance on a particular shareholder contribution warranted a superior claim
to the capital invested by that shareholder. Id. at 5-6. By the 1930s, American
courts routinely allowed investors to rescind their equity purchases, allowing
investors not only to litigate their fraud claims but arming them, as well, with
various procedural devices to ensure that creditors could not move ahead in the
distribution line. Id. at 6-7.
B. The Oppenheimer Decision and Its Criticism
In 1937, the United States Supreme Court put its weight behind the rule
allowing investor participation on a par with general creditors. Called upon to
review the liquidation of a depression-era bank, which had fallen into
receivership, the lower court had rejected a shareholder rescission claim. It ruled
that the shareholder could not receive any distribution until after all creditors
were paid in full. The Supreme Court reversed, finding no statutory basis to
support the appellate court’s priority scheme; hence the Court refused to
subordinate the shareholder’s claim. Oppenheimer v. Harriman Nat’l Bank
& Trust Co. , 301 U.S. 206, 215 (1937).
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Although Oppenheimer was not, strictly speaking, a bankruptcy case, the
high court subsequently declined to review two cases challenging whether its
ruling applied in bankruptcy. See Robert J. Stark, Reexamining The
Subordination of Investor Fraud Claims in Bankruptcy: A Critical Study of In re
Granite Partners, L.P. , 72 Am. Bankr. L.J. 497, 503 (1998) (discussing
Oppenheimer and the Court’s refusal to decide whether its principle extended to
bankruptcy cases). For their part, lower courts relied on Oppenheimer in
continuing to treat defrauded investors in bankruptcy cases no differently from
general creditors. Id. at 503-04 (discussing cases).
This tropism toward shareholder participation came to a dramatic halt in
1973 with the release of a report authored by the Commission on the Bankruptcy
Laws, a blue ribbon panel created by Congress to recommend comprehensive
changes to the Bankruptcy Code. See Davis, 1983 Duke L.J. at 10. The
commission’s report in turn embraced an influential article written by law
professors John Slain and Homer Kripke. See John 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 criticized the favorable treatment that bankruptcy courts
were extending to shareholder fraud claims. Their argument rested on the bargain
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and reliance interests formed by creditors and equity-holders. They pointed out
that allowing equity-holders to become effectively creditors–by treating these two
classes as though they were one–gives investors the best of both worlds: a claim
to the upside in the event the company prospers and participation with creditors if
it fails. It also dilutes the capital reserves available to repay general creditors,
who rely on investment equity for satisfaction of their claims. Giving shareholder
claims the same priority as creditor claims, reasoned Slain and Kripke, eliminates
this safety cushion. Id. at 286-91; see also Stark, 72 Am. Bankr. L.J. at 504
(discussing the Slain/Kripke position).
C. The Enactment of Section 510(b)
In enacting the Bankruptcy Code of 1978, Congress found the Slain and
Kripke position compelling. As the report accompanying the House version of
the bill noted, Congress generally “adopt[ed] the Slain/Kripke position” tailoring
section 510(b) in a manner that it considered “administratively more workable.”
H.R. Rep. No. 95-595, at 196 (1977), reprinted in 1978 U.S.S.C.A.N. 5963, 6156.
Its intent was to “subordinate[ ] in priority of distribution rescission claims to all
claims that are senior to the claim or interest on which the rescission claims are
based.” Id. , reprinted in 1978 U.S.S.C.A.N. 5963, 6156-57.
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Effective November 1978, the Bankruptcy Reform Act inserted the
subordination principle first articulated by Slain and Kripke into bankruptcy law.
The language of the statute, altered only slightly since its enactment, reads:
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).
III. INTERPRETING THE LANGUAGE OF THE STATUTE
Thus, if a claim (usually alleging some sort of securities-related fraud or
similar injury) falls within the reach of the statute, it is treated on an inferior or
equal basis with the security from which the claim arose. That is, a fraud claim
arising from the purchase or sale of a security is treated not as a general
unsecured claim but rather as a claim “below or equivalent to the rights afforded
by the underlying security.” See Stark, 72 Am. Bankr. L.J. at 497 (explaining
operation of statute). (In 1984, Congress amended the statute to make clear that
fraud claims springing from the purchase or sale of common stock are treated on
the same level as common stock. All other claims are subordinated to their
underlying security.) This adverse treatment carries serious implications for
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investors, because a Chapter 11 reorganization plan, as is the case here, may deny
distributions to entire classes of inferior security interests. Id.
Joining three separate, dependent clauses, the statute subordinates three
types of claims: (1) an actual attempt to rescind a purchase or sale of a security
issued by the debtor or one of its affiliates; (2) a claim for damages arising from
a purchase or sale of such a security; and (3) a claim for reimbursement or
contribution for a purchase or sale of such a security under section 502
of the Code.
The parties agree that Allen’s bonds are “securities” within the meaning of
section 510(b). They further agree that his claim is neither an effort to rescind
the purchase of his securities nor to seek reimbursement or contribution for their
purchase. They dispute only whether his proof of claim falls within the second
category of subordinated items–whether it is a claim “for damages arising from
the purchase or sale of [ ] a security.” Id. To resolve this dispute, we must
decide whether post-investment fraud that causes an investor to hold rather than
sell his securities “arises” from the “purchase or sale” of those securities.
A. Rules of Statutory Construction
We begin, as we do any instance of statutory construction, with the
language of the statute. Yankee Atomic Elec. Co. v. N.M. & Ariz. Land Co. ,
632 F.2d 855, 857 (10th Cir. 1980). A statute clear and unambiguous on its face
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must be interpreted according to its plain meaning. Id. An “[a]mbiguity exists
when a statute is capable of being understood by reasonably well-informed
persons in two or more different senses.” 2A Norman J. Singer, Statutes and
Statutory Construction , § 45.02, at 11-12 (6th ed. 2000). If a statute is
ambiguous, a court may seek guidance from Congress’s intent, a task aided by
reviewing the legislative history. United States v. Simmonds, 111 F.3d 737, 742
(10th Cir. 1997). Ambiguous text can also be decoded by knowing the purpose
behind the statute. Singer, Statutes and Statutory Construction, § 45.09, at 49.
B. The Language of Section 510(b) is Ambiguous
Although Allen and Geneva each claim that the language of section 510(b)
is plain and unambiguous, they nonetheless arrive at starkly different
interpretations. Arguing for a narrow construction, Allen says that the phrase
“arising from the purchase or sale of such a security” refers back to the first
clause of the statute, which speaks of rescinding the purchase or sale of the
debtor’s security. He insists that the “simplest and least strained” means of
interpreting the statute is to require a direct nexus to what he calls the “original”
purchase or sale of the security. Aplt’s Br. at 16-17. By contrast, Geneva
interprets the statute more broadly, pointing out that Allen’s damages, assuming
he was defrauded, can only be measured by establishing the price at which he
could have sold Geneva’s bonds had he been given accurate information.
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Unavoidably, then, his damages “are causally connected” to his purchase and sale
of the debt securities. Appellee’s Br. at 6.
We conclude, at least with respect to fraudulent retention claims like
Allen’s, that the language of section 510(b) is ambiguous. In reaching this
conclusion, we rely on the acute and thorough analysis provided by the
bankruptcy court in In re Granite Partners, L.P. , 208 B.R. 332 (Bankr. S.D.N.Y.
1997).
A hedge fund seeking Chapter 11 protection, debtor Granite Partners,
through its trustee, moved to subordinate various investors’ fraud claims under
section 510(b). The investors charged that they were deceived into retaining their
investments by the debtors’ post-investment fraud. They claimed that because
their fraudulent retention claims alleged independent torts, the claims did not
arise from the purchase or sale of the debtor’s securities and therefore should be
treated as general unsecured claims. Id. at 334.
The bankruptcy court agreed with the investors’ contention that the phrase
“‘arising from’” requires “some causal connection” between the initial security
purchase or sale and the fraud. Id. at 339. But, suggested the court, that such
a causal connection is required does little to shed light on the disputed statutory
language, which lends itself to two different interpretations, both of them
reasonable:
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A literal reading implies that the injury must flow from the actual
purchase or sale; a broader reading suggests that the purchase or sale
must be part of the causal link although the injury may flow from
a subsequent event. Since the fraudulent maintenance claim cannot
exist without the initial purchase, the purchase is a causal link.
Id. In the opinion of that court, such an interpretive condition defines ambiguity:
“Reasonably well-informed persons,” said the court, “could interpret section
510(b) in either [the broad or narrow] sense, and hence, the section is
ambiguous.” Id.
We agree. We cannot discern the scope of section 510(b) by examining
only the text of the statute.
C. Legislative History
The legislative history behind section 510(b) is helpful but not dispositive.
On the one hand, as we mentioned above, it is clear that Congress embraced
Professors Slain and Kripke’s theory of risk allocation, namely, that general
creditors assume a different type of risk with respect to the debtor’s insolvency
than do investors. And not only are general creditors unable to share in the
potential benefits flowing from company success, they rely on the equity cushion
created by the investors’ capital contributions for payment. While Slain and
Kripke focused primarily on shareholder rescission claims, their larger concerns
sprang from what they termed the “disaffected stockholder’s efforts to recapture
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his investment from the corporation.” Slain and Kripke, 48 N.Y.U. L. Rev.
at 267, quoted In re Granite Partners , 208 B.R. at 339.
On the other hand, it is equally true that neither Congress nor Slain and
Kripke discussed or even mentioned fraudulent retention claims. At least one
commentator speculates, moreover, that the term “rescission claims,” which
appears in both the statute and its legislative history, reflects Congress’s use of
a “shorthand reference to both rescission and damage claims based on fraud in the
inducement.” Stark, 72 Am. Bankr. L.J. at 507. This commentator argues that
the lack of any reference to fraud in the retention was not oversight: Congress,
he says, simply held a narrow vision of the problem it sought to address when it
drafted and voted on section 510(b), a vision that suggests it had no intent of
subordinating fraudulent retention claims. Id. at 523. Were it otherwise, he adds,
Congress could “easily” have drafted the statute “to subordinate all investor fraud
claims, including fraud in the retention claims, if that was Congress’s intent.”
Id. at 521.
We do not share the certitude by which this commentator views the
legislative history. Like the text of the statute itself, we believe that it is
indeterminate and indeed susceptible to opposing interpretations.
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D. Policy Objectives
It is here, in examining the statute’s purposes and objectives within the
larger context of bankruptcy law, that we find the most compelling reasons for
subordinating Allen’s retention claim. Again we rest heavily on the reasoning set
out in Granite Partners . That court seized on what for investors is the
unfortunate reality behind section 510(b): its language, its legislative history, and
most important, its embodied legislative policy choices, reflect strong
congressional disapproval of investor fraud claims in bankruptcy. With that
principle firmly in mind, Granite Partners found no good reason to distinguish
so-called fraudulent inducement claims from fraudulent retention claims. Nor do
we. Put simply, “creditors stand ahead of the investors on the receiving line.”
In re Granite Partners , 208 B.R. at 344. 2
Two separate but related policy reasons convinced the Granite Partners
court to treat retention claims no differently than inducement claims:
2
We are well aware that some commentators have criticized Congress’s
decision to disfavor investors in bankruptcy proceedings. Professor Davis, for
instance, believes a better rule would allow securities law claimants to participate
on a par with other unsecured creditors. He argues that such a rule “produces
allocations that are better for public policy and fairer than the allocations
produced by the subordination doctrine.” Davis, 1983 Duke L.J. at 4. His
trenchant analysis is not without force, but our task here is only to discern
Congress’s intent. We do not “sit as a super-legislature to weigh the wisdom of
legislation.” Bensing v. United States , 551 F.2d 262, 265 (10th Cir. 1977).
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First, from the creditors’ point of view, it does not matter whether
the investors initially buy or subsequently hold on to their
investments as a result of fraud. In either case, the enterprise’s
balance sheet looks the same, and the creditors continue to rely on
the equity cushion of the investment.
Second, a fraudulent retention claim involves a risk that only the
investors should shoulder. In essence, the claim involves the
wrongful manipulation of the information needed to make an
investment decision. The [investors] charge that the debtors’ [sic]
wrongfully deprived them of the opportunity to profit from their
investment (or minimize their losses) by supplying misinformation
which affected their decision to sell. Just as the opportunity to sell
or hold belongs exclusively to the investors, the risk of illegal
deprivation of that opportunity should too. In this regard, there is no
good reason to distinguish between allocating the risks of fraud in
the purchase of a security and post-investment fraud that adversely
affects the ability to sell (or hold) the investment; both are
investment risks that the investors have assumed.
Id. at 342.
We find the risk allocation argument persuasive in this case. 3
Allen’s
claim, at its essence, accuses Geneva of manipulating information concerning his
investment. He acquired and held that investment with the belief that its value
would increase, though he no doubt recognized that for any number of reasons it
might not; indeed, he recognized that it might even lose value. In contrast, a mere
creditor of Geneva could expect nothing more than to recoup the value of goods
3
The equity cushion argument may not apply in all cases. Take, for
instance, an investor who purchases a security on the secondary market. Because
it contributes no cash to the company, such a purchase does not bear on the
company’s capital reserve stock, nor can it comprise any part of the equity
cushion on which a general creditor relies.
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or services supplied to the company. Yet now, having watched his investment
gamble turn sour, Allen would shift his losses to those same creditors. We think
this effort clashes with the legislative policies that section 510(b) purports to
advance.
Furthermore, we echo two additional concerns expressed by the Granite
Partners court. First, Allen’s position, if accepted, would produce an anomalous
result. By holding his bonds as a result of the allegedly fraudulent conduct by
Geneva, he says that he asserts a claim exempt from section 510(b). Yet were he
to sell his bonds to a third party, a party duped by the same fraudulent conduct,
that buyer would hold only a subordinated claim. Id. at 342 n.11. Second,
Allen’s position weakens a central feature of American bankruptcy law: the
absolute priority rule. 4
As Granite Partners recognized, “When an investor seeks
pari passu treatment with the other creditors, he disregards the absolute priority
rule[ ] and attempts to establish a contrary principle that threatens to swallow up
this fundamental rule of bankruptcy law.” Id. at 344.
4
The absolute priority rule requires that certain classes of claimants be paid
in full before any member of a subordinate class is paid. Under this rule,
unsecured creditors stand ahead of investors in the receiving line and their
claims must be satisfied before any investment loss is compensated. 11 U.S.C.
§ 1129(b)(2)(B)(ii); Unruh v. Rushville State Bank , 987 F.2d 1506, 1508
(10th Cir. 1993). The rule reflects the different degree to which each class
assumes the risk of the debtor’s insolvency. See Granite Partners , 208 B.R.
at 337, 344.
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IV. OTHER DECISIONS INTERPRETING SECTION 510(b)
A. In re Betacom
A recent Ninth Circuit decision bolsters our decision to subordinate Allen’s
claim. See Am. Broadcasting Sys., Inc. v. Nugent (In re Betacom of Phoenix,
Inc. ), 240 F.3d 823 (9th Cir. 2001). That case stemmed from the merger of two
corporations. For several convoluted reasons (including litigation), a group of
shareholders from the acquired corporation never received delivery of the stock
certificates for the acquiring corporation, stock promised to them as consideration
for the merger. Id. at 826. The shareholders sued for breach of the merger
agreement. While their lawsuit was pending, the merged corporation filed
a Chapter 11 bankruptcy petition. The shareholders responded by repackaging
their breach of contract action as a proof claim in the bankruptcy court.
Id. at 827.
The debtor corporation sought to subordinate the investors’ claims under
section 510(b). The bankruptcy court agreed, but the district court reversed,
holding that an actual purchase or sale of a security is required to trigger the
statute. The district court reasoned that because the merger agreement had never
been consummated (since the shares in the acquiring entity had never been
delivered), there had been no purchase or sale of the debtor’s securities; hence
section 510(b) did not apply. Id.
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Rejecting the shareholders’ efforts to avoid the reach of section 510(b), the
Ninth Circuit reversed the district court. The appellate court concluded that the
statute is not limited to fraud claims, i.e, that it reaches certain breach of contract
claims; and it concluded as well that the statute is implicated, at least in some
instances, without an actual purchase or sale of a security. Id. at 828, 830-31.
The court relied heavily on the same concepts we employ to subordinate Allen’s
fraudulent retention claim. Citing Professors Slain and Kripke, as well as Granite
Partners , it reasoned that shareholders bargained for substantially more risk than
creditors, and that it would be unfair to dilute creditor claims when those
creditors looked for repayment to the “equity cushion” that invested capital
provides. Id. at 829-30. Consequently, it mattered little that the investors’ claim
arose from a breach of contract. What is important is the potential effect of
the claim: it would dilute the capital available to repay general creditors.
Id; see also In re NAL Fin. Group, Inc. , 237 B.R. 225, 232, 234 (Bankr. S.D. Fla.
1999) (agreeing with Granite Partners and subordinating post-investment claims
pursuant to section 510(b), stating “there is no distinction between fraud
committed during the purchase of securities and fraud . . . committed subsequent
thereto that adversely affects one’s ability to sell those securities”).
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B. In re Amarex
Some courts, we recognize, have accepted Allen’s narrow interpretation of
section 510(b) and have held that the statute does not reach fraudulent retention
claims. Indeed one of them is from within this circuit: Ltd. Partners’ Comm. of
Amarex v. Official Trade Creditors’ Comm. of Amarex, Inc. (In re Amarex, Inc.) ,
78 B.R. 605 (W.D. Okla. 1987). That case, which arose from the failure of an oil
and gas drilling partnership, involved post-investment fraud claims brought by
hundreds of the limited partners against the general partner. Id. at 606.
Appearing in the bankruptcy proceedings, the limited partners charged, among
other things, that the general partner wasted company assets, breached its
fiduciary duties, and committed various acts of common law fraud. Id.
The limited partners resisted subordination under section 510(b) by arguing
that their claims were not related to the purchase or sale of a security. Id. at 608.
Disagreeing, the bankruptcy court ruled they would have no claims against the
debtor but for their purchase of the limited partnership interests (which the
bankruptcy code defines as securities). The court also invoked the risk allocation
rationale advanced by Professors Slain and Kripke. Id.
The district court reversed. After reviewing the statute’s text and
legislative history, it concluded, “Section 510(b) reveals a Congressional desire to
shift to the shareholders the risk of fraud in the issuance and sale of the
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security–no more.” Id. at 609-10 (italics in original). It also accused the
bankruptcy court of “ignor[ing] the clear language of section 510(b), its
underlying policies and the purposes for which it was enacted.” Id. at 610. And
it emphasized that the statute “pertains only to claims based upon the alleged
wrongful issuance and sale of the security and does not encompass claims based
upon conduct by the issuer of the security which occurred after this event.”
Id. (emphasis added).
We respectfully decline to follow this reasoning, not least because it rests
on a small but significant error in reading the statutory language. As the
italicized terms above show, the district court read section 510(b) as limited to the
“issuance and sale” of a debtor’s security. In fact, the statute contains no such
restriction; it bars claims arising from the “purchase or sale” of a security. The
word “issuance” does not appear in the statutory language, and indeed, as courts
have held, the statute is not limited to issuance-related claims. See, e.g., In re
Betacom , 240 F.3d at 828-29; In re Lenco , Inc. , 116 B.R. 141, 144
(Bankr. E.D. Mo. 1990). We fear that the district court’s constricted
interpretation of section 510(b) flows from a mistaken reading of the statutory
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text, a reading that erroneously substituted the more restrictive term “issuance”
for the actual term “purchase.” 5
V. CONCLUSION
For more than two decades, courts have looked skeptically at any effort by
an investor in a bankrupt entity to refashion himself or herself into a general
creditor. 6
This case is no different. Allen accepted a different and higher risk of
insolvency than did the general creditors. In subordinating his claim, we do not
suggest it lacks merit (though we note that Geneva denies committing any fraud);
we instead refuse to treat it as a general unsecured claim.
The judgment of the United States Bankruptcy Appellate Panel
is AFFIRMED.
5
We note that In re Amarex was followed by a later decision from the
bankruptcy court of the Central District of California, In re Angeles Corp. ,
177 B.R. 920, 927 (Bankr. C.D. Cal. 1995) (stating that In re Amarex provides
“the correct interpretation of the ‘arising from’ language in 11 U.S.C. § 510(b)”).
Having rejected the holding of In re Amarex , we similarly decline to follow
In re Angeles .
6
As the Second Circuit put it: “When a corporation becomes bankrupt, the
temptation to lay aside the garb of a shareholder, on one pretense or another, and
to assume the role of a creditor, is very strong, and all attempts of that kind
should be viewed with suspicion.” Jezarian v. Raichle (In re Stirling Homex
Corp.) , 579 F.2d 206, 213 (2nd Cir. 1978) (quotation omitted).
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