Allen v. Geneva Steel Company

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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