the form of stock for services rendered must be subordinated to a heavy ice preferred shareholders and other creditors under section five ten b of the bankruptcy code now section five ten be implemented what is referred to as the absolute priority rule in bankruptcy and that simply stated it is that equity investors those who have the opportunity to share in the debtors gains must bear the greater risk of loss by having their claims to the board unaided to creditors seeking recovery of fix the debt now i would submit today and i hope to be able to discuss with the court that the absolute priority rule that rethink and also the recently decided enron case which i expect to be central to their arguments in the first of those reasons is the fact that and it's almost seems to elementary to say but that's the claim to be subordinated must be in the nature of the risk return claim o and what i mean by that is simply this if you are going to say that the claims of investors those in the position to take the rest or not take the risk of gain those are going to be subordinated then you have to have that kind of a claim you have to have a claim from somebody who has that kind of investment choice what happened here of course  be i breached the agreement between the parties by not tendering the stock to mr rackets and and deprived him of the not only the benefits of stock ownership that we know about but also the benefits of the unique opportunity to participate in the i p o now on day to come this court said you don't need a physical delivery of stock but what you did have was a tender of stock that was refused by the complaining party and enron involved employee stock options and the court made it very clear those options were on exercised but they could have been exercised the point here is the opportunity for investor choice the control of that opportunity in this case was kept by  they never tendered the stock they never made it available indeed at the beginning at the portion after the i p l when it every i stock was on the rise and stayed at a high level they took the position they didn't even knowing the stock what they owed him was a poor ssion of the proceeds of the i p o calculated by reference to stuff then of course when the stock dropped they flipped over to the other side of the equation and you have what they now say mr rackets and has only an equity claim to stock and because he only has an equity claim to stock we can subordinate so the first important point to recognize here is they want to insist that mr rock us and be treated as shareholder when he had neither the benefits of the shareholder or the investment choice that is the very rationale for subordination and all of that due to their own wrongful conduct now the second corollary of the absolute priority rule is that the nature of the claim that is asserted hass the be the variable risk return claim of an investor not the fixed claim of a creditor and we know that from the montgomery ward case the mobile tool case and the discussion of those cases  manager right that is the amount of the judgment i do not have the interest calculations that would go with that in front of me that's another appeal that's been decided by this court court's permission i'll refer that to the debtors counsel because i'm i i'm hesitate to make statements about the bankruptcy proceedings that may not  now one thing and respect to your question of course is that the subordination argument that is being made here is subordination not only to creditors but the preferred stock holders and  conversion feature that i talked about that is recognized in the cases is what derives from this court's earlier decision this is not the first time that american wagering has attempted to fo know for this reason very small change but very significant in the wording of the agreement you graeme it was one hundred fifty thousand in cash and a be in a form of stock why isn't that quote of supposed to be that's exactly the issue that was resolved in the two thousand and one decision of this court that was the very argument that was made by a w i was the court's decision below was correct because the agreement said pay it in the form of stock to which this court said no mr ra claim for money damages for breach of the agreement that's what he's entitled to recover and that's why it's important to go back to the nature of the claim what the in this case is to you literally say the world stops turning the moment the agreement is made at that point in time it doesn't matter what kind of a plane is brought it has to be by as a matter of law an equity claim and it has to be subordinate well when you look at mobile tool when you look at the montgomery ward case and when you look at beta com and enron even enron itself that just simply isn't true what you look at is the nature of the claim that is brought under the events as they transpired and here the reality is because of the fact that the i p l occurred at a specific point in time under specific market conditions you put not be fully compensated by a specific performance degree that would give you market traded stock much much later after the market conditions of changed and after mr rackets and has lost the unique advantages and potential detriment of the i p l this is a unique market condition that cannot be effectively remedied by a specific performance degree and that's the very reason he thought on what he signed his contract the agreement a circumstance that would give him the risk return position with a certain amount of cash now he never got that and that's the whole point somebody as the choice the stock is there it's standard and they turn it now you have the opportunity the risk return opportunity that leads to subordination but if the stock is never tendered you don't have that opportunity for gain or loss that you're referring to your five and a hypothetical situation suppose that there is this agreement that that was his compensation was based upon what the value of the stock but on that day the value of the underwriters evaluate not the value of the site at the value of the underwriters evaluate evaluation the judgment you look at the underlying transaction or you look at the nature of the client yes you can look through the judgment but i think that's where i would disagree ok i think i think you look through the judgment to see the nature of the underlying claim because the statute talks about subornation point counsel let me ask you this give me again the date of the completion of the column offering in his discretion or with limitations he was an insider and no i wasn't an insider the problem is is the rule one forty four we strictly stock which means he could have sold it please the court my name is thomas fell represent the debtors they have u i and they were his horse and sports place the issues have been stated quite correctly this case is a case about priority and that's all priorit of a claim filed an event proceed proceeding not whether or not the claim is to be paid in cash paid in stock or one it's about the priority of a claim the treatment of a claim is contingent upon how a plan that is ultimately confirmed in a few days provides for a particular class of claimants or equity security holders so the issue is where does this claim fall within that scheme in the bankruptcy co priority structure under the bankruptcy code and the mandatory subordination required by five ten b when a claim arises out of the purchase and sale of security there is no dispute in this case none whatsoever that under the agreement mr rasmussen was to receive stock for compensation in addition to one hundred fifty thousand dollars in cash that he received the only element of his claim is what is left under that agreement which is the stock that was never issued to him but there's no dispute it was to be issued the parties all acknowledge that this case the only thing about the underlying case was about damages for the thalia of a both shares were tendered they were in astro an offer that's correct and the parties refused then given where they were chairs were refused were never offered were never tendered to him that's correct that's correct but again  me tell you why that is it's true in beta com that shares were tender but by the time they were tendered the parties were already in litigation and thus the parties didn't agree to accept those shares there were multiple claims of breach back and forth take enron however for example enron dealt with employee plans whereby employees were to receive options as part of their compensation package those options they did not receive and were unable to exercise then as a result of the intervening bankruptcy one of the claimant which they call the phantom stock claimant when you get towards the end of the enron decision that was even an option that was the failure of enron to issue stock to that employee who acquired the stock to his employees plan and in fact when the employee inquired of the company where is my stock enron said here in puerto rico letters that were not an issue until there it's true it's true that  schools willing to take the risk of seeming equity in the corporation but also isn't it true that he if he had received the equity and the but a part of the risk he took was a choice of when to sell that choice of windows that was denied that sure it was wrong or he could have written it up or he could have written it down and that we didn't will never know how that would have won how that would have played out over was whether or not he was entitled to four and a half percent of the forty five million or four and a half percent of the portion of the company that was sold the whole company wasn't sold at forty five million the company only sold a portion of it it was over you were alone to say that we must look upon this as though there was no money judgment in the case and look behind the money judgment to  that would require him despite the money judgment in the district court for us to assume that he still is an equitable owner of the star sure you are and again almost every case that has dealt with five ten p support is almost not all almost almost every one of those cases you have a situation where he has already entered into the geishas and a judgment has been entered and the reason is pretty obvious and a lot of those that you ations one party or both parties reaches an agreement or fails to perform there may be financial difficulties going on somebody runs the courthouse or somebody gets a judgement but if they get a judgment before the bankruptcy the courts have stated there should be no distinction between whether or not what is the theory what is the legal theory it's the analysis that was set forth by this court and made a come it's the risk analysis that someone who is bargaining for an equity position in the company is accepting but there was tendered here that he refused to take the tender and that case in this case it was never tendered so he although he assumed the beginning to take the risk as an equitable investor he that's why i'm saying what is your theory that you would say he he took a risk on the front end but when there was a breach of contract he didn't have the right on the back him to sell soon the rest but he assumed the writer received the right he didn't get that right but that's true in every one of the situ the five ten b cases where judgments were entered it's just a race to the courthouse steps in other words what you're saying your honor is had we filed chapter what he would have done or alternately not done with that stock becomes irrelevant the fact is that's what he bargained for he barked to have an equity position he didn't get the benefit of his bargain i agree with that but the bottom line is that's what he was looking for number of the cases that were set in their briefs that almost everyone had been reduced to judgement for example the all to cast case was reduced to judgement in fact in that case it was where the company refused to purchase back the stock for under the employment agreement and the jury returned a verdict for damages because again at that point in time when the stock hadn't been purchased the breach of contract asked action was for damages just as it was here and it was a jury verdict for damages that was all done preposition  other than a back to tell a group case which is the third circuit court of appeals that wasn't a breach of an agreement to register to do your best efforts to register shares again that court focused on the absolute priority rule issue and the fixed dollar versus the variable profit that an investor hopes to achieve just like and could have been reduced to judgement i'm sorry but that claim been reduced to judgement in until the group your honor i don't have that note directly or call that i don't recall specifically that one had been used to judgment or not this case it was never can you are you have to be careful when you when you asked that i believe that was lost tribes needs careful thinking i'm starting to suspect that what i mean by that is i mean when we say that the stock was offered or tender when you look at data com the stock was tendered after the allegations and the fighting began between the parties and the litigation commenced and thus the stock was tender and they said now we don't want it and because of course it becomes it's common sense at that point in time once the steere prices start going down people don't want the stock any longer and in all the cases where they have sued they haven't sued none of the cases of this of the stock they've always sued for monetary damages because by the time a company realize we're going outside the record and i don't realize opposing counsel could not answer the question regarding the status of the bankruptcy estate this case was brought as many cases are long before plans ever proposed at the time that this case was brought we had no idea it was going to be paid and secured creditors or what was going to be paid equity if anything i am the bankruptcy counsel for this estate and i can tell you subsequent times of the cross most interest summary judgment and the original ruling by the bankruptcy court after that time a plan in fact was proposed the treatment under the plan for unsecured creditors and for equity interest is different however because of a separate resolution with mr rackets and the truth his treatment is governed pursuant to a confirmed plan reorganization and that is between that was in a deal that was approved by the bankruptcy court through the plan so what you're what your role is here today is only to determine what priority classes mr rackets and falls into whether he falls into an unsecure mr rackets and will be treated along with all of the common shareholders and roll receive the exact same thing the common shareholders this which is shares in the reorganised entity ok that's what he receives if the bank if it is not and mr rack is in the street is an unsecured creditor he is not paid with the other and secured creditors due to provisions in the plan there is a payment schedule that he'll receive payments over time now have didn't follow and care i wish that under the act of a clause if he is if he's treated as an unsecured creditors right he doesn't get shares he will receive payments over time for stash but over time over time and right now the shares have already been issued to mr rectus and they've been interplay with the bankruptcy court because they're competing claims to them by various creditors of him so they've already been issued and and where particular claims fall again as we stated in our pleading it was never an intent to do anything to modify or affect mr rackets and claim that much has been made about the fact that this court previously said well mr rock is the only sued for damages thus he should be awarded a monetary judgment as opposed to specific performance no argument there and we weren't saying his claim of two point three million dollars should be disallowed we never said it should be disallowed his claim for two point three million i think a lot of history with accrued interest to her but again the claim is what it is it exist the only question under five ten b is where as in any other priority statute under the bankruptcy code all about priority it's all about priority not may begin with a qualification and i'm going to state this in very general terms and that is that his counsel has gone outside the record with respect to the status of the plan and the treatment et c i am not going to here today either agree or disagree with him other than to say that i'll accept his representation there's been a confirmed plan however that doesn't necessarily mean because of other agreements which he referred to as quote unquote outside a court that necessarily matters have been fully resolved but let me go directly to your question about what's the theory here what are we doing with subordination council says it's only about priority but the point of the priority here is to subordinate investment loss cla behind fixed creditor points and all of the cases he referred to are cases that in fact deal with investment losses that simply is not the nature of the claim that we are dealing with here mr rackets and claim has nothing to do with whether the stock price went up or went down yes it was measured by the stock price on a particular day that was the measure of damages but it was not the kind of risk return claim that is or should be subject to subordination let me talk for just a moment about the the discussion enron a phantom stock which counsel referred to the problem there was yes there was a fair deliver a point but it was the failure to deliver the value in question because the failure to deliver the stock was a part of the of the compensation plan for tax purposes so it simply is not the same kind of a claim that we have here at this point the key point i would like to leave with the court is this subordinat has to do with investment loss claims this is a claim for compensation the agreement said pay compensation in the form of stock the debtor breach that agreement compensation claim is not an investment loss point and you look to the composition nature of the claim to decide subordination thank you and i will be submitted