Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-01995/USCOURTS-cand-5_05-cv-01995-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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 This disposition is not designated for publication and may not be cited.

District Court Case No. CV-05-1995 (JF) Bankruptcy Court Case No.: 01-53291 (ASW)

ORDER ORDER DENYING APPEAL FROM JUDGMENT OF BANKRUPTCY COURT

(JFLC1)

** E-Filed 9/22/06 **

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

JOHNELLA SHACKELFORD,

 Appellant,

 v.

METRICOM, INC., et al.,

 Appellees.

Case Number CV-05-1995 (JF) 

ORDER1 DISMISSING

BANKRUPTCY APPEAL

[re: docket no. 1]

Appellant Johnella Shackelford appeals from the judgment of the Bankruptcy Court. For

the reasons discussed below, the appeal will be dismissed.

I. BACKGROUND

The dispute between the parties arises from an employee stock option program offered by

Appellee Metricom, Inc. Appellant, a former employee of Metricom, Inc., became eligible to

exercise options to purchase 1,375 shares of Metricom, Inc. on or around December 8, 1999 for

$6.75/share. The appellant’s account of the subsequent transaction is as follows. Appellant paid

Metricom, Inc. $9,281.25 to exercise her options on December 30, 1999, and 460 shares were

Case 5:05-cv-01995-JF Document 20 Filed 09/22/06 Page 1 of 7
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District Court Case No. CV-05-1995 (JF) Bankruptcy Court Case No.: 01-53291 (ASW)

ORDER ORDER DENYING APPEAL FROM JUDGMENT OF BANKRUPTCY COURT

(JFLC1)

immediately bought and sold. Purchase and sale of the 915 remaining shares were to be

completed in early January 2000. On January 11, 2000, Appellant paid $21,526.66 to Metricom,

Inc. for employment taxes associated with the exercise of the 915 options transaction. On May 5,

2000, the 915 remaining shares were received by E*Trade for deposit to Appellant’s personal

account. On November 19, 2000, Appellant notified Metricom, Inc. that she would not accept

the 915 shares and demanded that the 915 shares immediately be removed and her funds returned

to her. On December 29, 2000, Appellant filed suit against Metricom Inc. and Does 1 through 50

in the Santa Clara Superior Court (“the State Court”) for breach of contract, untimely

performance, fraud, malice, and intentional infliction of emotional distress. 

On July 2, 2001, Appellees Metricom, Inc.; Metricom Finance, Inc.; Metricom

Investments DC, Inc.; Metricom DC, LLC; and Metricom New York, LLC filed voluntary

petitions for reorganization in United States Bankruptcy Court in the Northern District of

California (“the Bankruptcy Court”). On September 5, 2002, the Bankruptcy Court entered an

order confirming Debtors’ First Amended Joint Plan of Reorganization. On November 5, 2002,

the State Court issued an order limiting appellant’s recovery against Metricom, Inc. to whatever

relief was afforded by the Bankruptcy Court. Appellees filed their eleventh omnibus objection to

claims on June 17, 2003. This omnibus objection included objections to the two proofs of claim

(562 and 679) that appellant filed on or about September 25, 2001. On July 29, 2003, the

Bankruptcy Court issued an order sustaining appellee’s eleventh omnibus objection to claims

(“the July 29 Order”). Appellant moved the Bankruptcy Court for reconsideration of the July 29

Order on February 3, 2004 on the basis of a lack of notice of the objection. The Bankruptcy

Court granted the motion for reconsideration on January 20, 2005. On March 9, 2005, appellees

filed an Objection to Claims of Johnella Shackelford. An initial hearing was held on April 7,

2005 and April 28, 2005. The Bankruptcy Court issued an order sustaining appellee’s objections

to the appellant’s claims and disallowing proofs of claim 562 and 679 on May 3, 2005. The

Bankruptcy Court explained the basis of its decision at the April 28, 2005 hearing (“April 28

Transcript”).

Appellant filed a notice of appeal and an election to have appeal heard by district court on

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District Court Case No. CV-05-1995 (JF) Bankruptcy Court Case No.: 01-53291 (ASW)

ORDER ORDER DENYING APPEAL FROM JUDGMENT OF BANKRUPTCY COURT

(JFLC1)

May 10, 2005. On March 7, 2006, this Court issued an Order to Show Cause why this appeal

should not be dismissed for failure to prosecute. It subsequently came to the Court’s attention

that, due to a clerical error, no briefing schedule had been issued in this case. On March 27,

2006, the Court issued a briefing schedule. On April 5, 2006, the Court accepted a copy of the

brief Appellant originally filed with the Bankruptcy Court on May 19, 2005 (“Appellant Brief”). 

Appellee filed its brief on May 5, 2006 (“Appellee Brief”). The Court determines that the record

and the briefs adequately present the facts and legal arguments, and that oral argument would not

aid the Court in its decisional process. The Court therefore may decide the appeal without oral

argument pursuant to Fed. R. Bankr. Pro. 8012. 

II. LEGAL STANDARD

1. Standard of Review

A district court reviews a bankruptcy court's decision applying the same standard of

review used by circuit courts reviewing district court decisions. See Ford v. Baroff (In re Baroff),

105 F.3d 439, 441 (9th Cir.1997). The district court reviews the bankruptcy court's factual

findings for clear error and its conclusions of law de novo. See Diamant v. Kasparian (In re

Southern Cal. Plastics, Inc.), 165 F.3d 1243, 1245 (9th Cir.1999). 

2. Disallowance of Unsecured Claims

11 U.S.C. § 510(b) provides that 

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.

The Ninth Circuit interpreted this statutory section in 2001 in American Broadcasting Sys,,Inc. v.

Nugent (In re Betacom of Phoenix, Inc.), 240 F.3d 823 (9th Cir. 2001). It held that: (a)

mandatory subordination is not limited to securities fraud claims; (b) physical possession of stock

is not required under Section 510(b); and (c) an actual sale is not required to subordinate a claim. 

Id. at 828-31. 

III. DISCUSSION

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 Appellant argues that the “evidence presented by [appellees] does not support the

Bankruptcy court’s finding that Johnella Shackelford was an Equity Shareholder Subject to

Subordination under 11 U.S.C. § 510(b).” Appellant’s Brief 20. The Court reads this statement

in the context of the rest of Appellant’s Brief and understands the challenge to the sufficiency of

the evidence as a turn of phrase rather than an appeal of a factual finding by the Bankruptcy

Court. 

Appellant’s statement of “Facts Which Are Disputed” and “Facts Which Are Not

Disputed,” Appellant’s Brief 5-8, indicate that the two remaining disputes - whether Appellant is

a shareholder and whether the transaction is a rescission under § 510(b) - turn on legal issues

rather than factual issues. The statements of disputed facts does not claim that the Bankruptcy

Court mistook the contents of the Reorganization Plan or otherwise made an error of fact.

The transcript of the April 28, 2005 hearing confirms that the Bankruptcy Court decided

the case on the basis of legal rather than factual arguments. The Bankruptcy Court found that

Appellant “failed to rebut successfully the legal authority that requires her claim to be

subordinated as a matter of law.” Transcript of April 28, 2005 Hearing 5 (“April 28 Transcript”). 

The Bankruptcy Court stated that it had considered and understood “claimant’s argument that she

never really became a shareholder under the circumstances here,” but notes that Appellant did

not cite “any authority.” 

4

District Court Case No. CV-05-1995 (JF) Bankruptcy Court Case No.: 01-53291 (ASW)

ORDER ORDER DENYING APPEAL FROM JUDGMENT OF BANKRUPTCY COURT

(JFLC1)

Appellees frame the issue for appeal as: “Did the Bankruptcy Court err in disallowing the

appellant’s claims (Proof of Claim 562 and Proof of Claim 679) pursuant to both 11 U.S.C. §

510(b) and the terms of the Reorganized Debtors’ confirmed plan of reorganization?” 

Reorganized Debtors’ Designation of Additional Items on Appeal 7. The Appellant’s brief

argues that the Bankruptcy Court erred in concluding that 11 U.S.C. § 510(b) applied to

Appellant’s claims. Appellant’s Brief 8-20. The Court reviews this legal conclusion de novo. 

The Court finds that there is no factual determination to be reviewed on appeal.2 

Appellees objected to the claims on the basis of 11 U.S.C. § 510(b). Objection to Claims

of Johnella Schakelford 8. Appellee cited Betacom for the principle of risk allocation that

motivates mandatory subordination of equity claims. Id. Appellant argued in response that

Section 510(b) does not apply under the present facts because she never properly became a

shareholder and that a rescission did not occur. Declaration of Johnella Shackelford in Support

of Opposition ¶¶ 31-33, 37. Appellant makes the same arguments on appeal. Appellant’s Brief

11-14. Appellant points to authority from other federal circuits in support of these arguments. 

The Court understands the arguments made by Appellant. As noted by the Bankruptcy Court,

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District Court Case No. CV-05-1995 (JF) Bankruptcy Court Case No.: 01-53291 (ASW)

ORDER ORDER DENYING APPEAL FROM JUDGMENT OF BANKRUPTCY COURT

(JFLC1)

these arguments are not frivolous. April 28 Transcript 5-6. However, Betacom remains the

governing authority in the Ninth Circuit, and this Court must apply its holdings to the present

case. The Court concludes that the transaction at the basis of the current dispute is within the

scope of Section 510(b) under Betacom. The Court consequently must dismiss the appeal.

The Betacom case arose from a merger agreement between two corporations. American

Broadcasting Systems, Inc. (“ABS”) was to acquire Betacom in exchange for ABS stock. 

Betacom, 240 F.3d at 826. The merger agreement called for an audit prior to the merger to

determine the value of the liabilities assumed by ABS. Id. The audit never occurred and ABS

never paid the Betacom stockholders any cash or stock. Id. ABS subsequently entered Chapter

11 bankruptcy. Id. The Betacom shareholders filed three proofs of claim in the bankruptcy case. 

Id. at 827. One of these proofs of claim alleged an unsecured, non-priority claim against ABS for

ABS’s alleged breach of contract and fraud in the disputed merger. Id. ABS subsequently filed a

complaint in the bankruptcy court seeking mandatory subordination of these claims under

Section 510(b). Id. The bankruptcy court granted partial summary judgment, concluding that

Section 510(b) did apply despite the failure of the parties to conclude the merger transaction. Id. 

The district court reversed. Id. The Ninth Circuit agreed with the bankruptcy court and held

that: (a) mandatory subordination is not limited to securities fraud cases; (b) physical possession

of the stock is not required under Section 510(b); and (c) an actual sale is not required to

subordinate a claim. Id. at 829-30.

 The Court understands and has considered appellee’s argument that Betacom does not

control because she never properly became a shareholder. However, it concludes that Betacom

also applies to delayed or compromised transactions such as the one at issue here. The facts of

this case are analogous to those in Betacom. First, and most importantly, both cases involve

parties who entered into agreements to transfer stock: Appellant agreed to purchase stock from

her employer and the Betacom shareholders agreed to exchange their Betacom stock for ABS

stock. Second, neither contract was performed in the desired manner and both became subject to

a contract dispute. Third, appellant’s employer entered bankruptcy while the present dispute was

pending just as ABS entered bankruptcy while its dispute with the Betacom shareholders was

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District Court Case No. CV-05-1995 (JF) Bankruptcy Court Case No.: 01-53291 (ASW)

ORDER ORDER DENYING APPEAL FROM JUDGMENT OF BANKRUPTCY COURT

(JFLC1)

pending. Appellee has not identified and the Court does not perceive any ground on which to

distinguish the present case from Betacom. 

Since it is directly applicable Ninth Circuit authority, the Bankruptcy Court and this Court

must follow Betacom. Betacom requires the mandatory subordination of appellant’s claims

under Section 510(b). Accordingly, the Bankruptcy Court correctly sustained appellees’

objections to the appellant’s claims and disallowed proofs of claim 562 and 679. 

IV. ORDER

The appeal in District Court case number CV 05-1995 is DISMISSED.

DATED: September 22, 2006.

 

JEREMY FOGEL

United States District Judge

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District Court Case No. CV-05-1995 (JF) Bankruptcy Court Case No.: 01-53291 (ASW)

ORDER ORDER DENYING APPEAL FROM JUDGMENT OF BANKRUPTCY COURT

(JFLC1)

This Order has been served upon the following persons:

Notice will be electronically mailed to:

John D. Fiero jfiero@pszyjw.com, azaragoza@pszyjw.com

Joshua M. Fried jfried@pszyjw.com, mstickley@pszyjw.com

Notice will be delivered by other means to:

Richard Baumfield 

Andrews Kurth LLP

450 Lexington Avenue, 15th Floor

New York, NY 10017

Richard M. Pachulski 

Pachulski Stang Ziehl Young Jones & Weintraub

150 California Street

15th Floor

San Francisco, CA 94111-4500

Johnella Shackelford

1138 Del Oro Way

Gilroy, Ca 95020

Paul N. Silverstein 

Andrews Kurth LLP

450 Lexington Avenue, 15th Floor

New York, NY 10017

USBC Manager-San Jose

US Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

Arthur S. Weissbrodt

U.S. Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

Case 5:05-cv-01995-JF Document 20 Filed 09/22/06 Page 7 of 7