IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF ILLINOIS 

EASTERN DIVISION 

CHAZ EBERT, 

Appellant, 

v. 

FRANCES GECKER, as Chapter 7 

Trustee of the Bankruptcy Estate of 

Emerald Casino, Inc., 

Appellee. 

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No. 20 C 04679 

Judge John J. Tharp, Jr. 

(Bankr. No. 02 B 22977) 

MEMORANDUM OPINION AND ORDER 

Appellant Chaz Ebert, a putative claimant in Emerald Casino, Inc.’s Chapter 7 

bankruptcy case, appeals from a sustained objection to her claim against the estate for 

reimbursement of funds owed under a provision in her stock subscription conditioning issuance 

of Emerald stock on approval by the Illinois Gaming Board. Approval was never received, so her 

stock never issued; and thus, per her stock subscription, she has a contractual right to repayment. 

Ms. Ebert argues this right should be characterized as a general unsecured claim and not, as the 

bankruptcy court held, an equity interest. This Court agrees that Ms. Ebert’s right is properly 

characterized as a general unsecured claim, but because it is also subject to mandatory 

subordination by 11 U.S.C. § 510(b) and therefore equivalent to an equity interest for 

distribution purposes, the bankruptcy court’s order is affirmed. 

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I. BACKGROUND1

Emerald Casino, Inc. began operating a riverboat casino in 1992 pursuant to one of ten 

gaming licenses then available in Illinois.2

 It could not compete with its Iowan counterparts on 

the Mississippi River however, and so in 1997, after shuttering its casino, Emerald lobbied the 

Illinois General Assembly for help. And help it did. In May 1999, the General Assembly 

amended the Illinois Riverboat Gambling Act to provide Emerald—and only Emerald—an 

exclusive right to relocate its moribund gaming license to a landed location (Rosemont, Illinois 

would be eventually named). See 230 Ill. Comp. Stat. 10/11.2(a). As a condition of the 

amendment, Emerald was required to attain at least 20% minority and female ownership. See id.

§ 11.2(b). 

Ms. Ebert was one such prospective owner. She, like twenty-two other minority and 

female investors (the “Statutory Investors”), paid Emerald $750,000 and signed a stock 

subscription in September 1999 for approximately thirty-five shares of no-par value common 

stock. The stock subscription, however, called for the stock to be held in escrow until the Illinois 

Gaming Board (IGB)—a subagency of the Illinois Department of Revenue—approved her as an 

acceptable owner, at which time her stock certificates would issue. If the IGB disapproved, her 

money was to be returned and the stock subscription would terminate. As it happened, the IGB 

never granted or denied approval of Ms. Ebert or any other Statutory Investor. It instead became 

preoccupied with a fraud investigation focused on Emerald’s principals. 

1

 The factual and legal saga that gave rise to this matter is complex and spans several 

decades. For an extensive account, see In re Emerald Casino, Inc., 530 B.R. 44, 59–171 (N.D. 

Ill. 2014), aff’d in part, vacated in part, 867 F.3d 743 (7th Cir. 2017). The background set forth 

in this ruling is limited to information necessary to understand the present dispute. 

2

 Emerald originally incorporated under the name HP, Inc. The company changed its 

name on August 12, 1999. 

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Within weeks of Ms. Ebert signing her stock subscription, the IGB launched what would 

become a sixteen-month investigation of Emerald. At the time, Emerald had already begun 

preparing to build a casino in Rosemont, Illinois, and the IGB suspected Emerald and certain 

Rosemont officials of nefarious dealings. In March 2001, a month after its investigation 

concluded, the IGB issued a five-count disciplinary complaint accusing Emerald of giving the 

IGB false or incomplete information about its agreements, ownership transfers, and construction 

activities. See generally Ill. Admin. Code tit. 86, §§ 3000.140, 235(a). The complaint also 

accused Emerald of selling shares to persons associated with organized crime. See generally id.

§ 3000.110(a)(5). Consequently, the IGB revoked Emerald’s gaming license. See also Emerald 

Casino v. Ill. Gaming Bd., No. 4-06-0051, 2007 Ill. App. Unpub. LEXIS 3, at *137, *195 (May 

30, 2007), reported in table, 372 Ill. App. 3d 1106 (affirming the IGB’s revocation decision but 

overturning the IGB’s findings related to organized crime). 

The loss of Emerald’s gaming license (its principal asset) prompted a group of its 

creditors to file an involuntary bankruptcy petition in 2002, which was shortly thereafter 

converted to a Chapter 11 proceeding. In response, Ms. Ebert filed a proof of claim for recovery 

of the $750,000 she paid Emerald pursuant to her stock subscription. She also filed a proof of 

interest based on the shares of common stock the stock subscription contemplated she would 

receive. 

In 2006, Ms. Ebert and all but three of her fellow Statutory Investors brought a federal 

action against Emerald’s directors and officers alleging violation of the Racketeer Influence and 

Corrupt Organizations (RICO) Act and liability under various state law theories, including fraud, 

breach of fiduciary duty, and conspiracy. The federal court, however, held the RICO claim was 

barred by the Private Securities Litigation Reform Act, 18 U.S.C. § 1964(c), and declined to 

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exercise supplemental jurisdiction over the state law claims. Payton v. Flynn, No. 06-cv-00465, 

2006 WL 3087075, at *9 (N.D. Ill. Oct. 26, 2006). Sixteen of these federal plaintiffs (the 

“Payton Plaintiffs”) then reasserted their state law claims in the Circuit Court of Cook County. 

Fatefully, Ms. Ebert declined to join them.3

Meanwhile in bankruptcy court, a Committee of Unsecured Creditors was contemplating 

its own derivative action against Emerald’s directors and officers. When the Committee 

informed the bankruptcy court in February 2008 of such intent, the court decided to convert the 

case to a Chapter 7 proceeding and appoint a trustee—Frances Gecker—to pursue the 

Committee’s claims. Soon after, Ms. Gecker saw an opportunity to align the estate’s interests 

with those of the Payton Plaintiffs. The Payton Plaintiffs—as a subset of the Statutory 

Investors—had filed proofs of claim against the estate based on their stock subscriptions and 

were contending that their repayment rights under the subscription agreement were general 

unsecured claims because the IGB never approved, and thus Emerald never effected, issuance of 

their stock. The Payton Plaintiffs were also contesting a bankruptcy stay of their state action 

against Emerald’s directors and officers. Rather than challenge the Payton Plaintiffs on these 

issues, Ms. Gecker joined forces. 

In a settlement agreement approved by the bankruptcy court in November 2008, the 

Payton Plaintiffs agreed to assign their state law claims to Ms. Gecker so she could coordinate a 

joint prosecution of the claims of both the Payton plaintiffs and the Creditors Committee against 

Emerald’s directors and officers. In return, Ms. Gecker agreed to split with the Payton Plaintiffs 

any recovery she realized on account of these claims (after deduction of attorneys’ fees) and—

3

 No explanation has been given as to why Ms. Ebert chose not to participate in the 

Payton Plaintiffs’ state court action. See R. at 326–27, ECF No. 8-2 (May 23, 2019 Bankr. Hr’g 

Tr.). 

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importantly—to subordinate the Payton Plaintiffs’ claims against the estate to the claims of 

general unsecured creditors only until such creditors received a distribution equal to 75% of their 

claims, at which point the Payton Plaintiffs would share pro rata with other unsecured creditors. 

R. at 198–99, ECF No. 8-2 (Settlement Agreement). Ms. Ebert did not object to or ask to join in 

this settlement agreement. 

After the settlement agreement was approved, Ms. Gecker (alternatively, the “Trustee”) 

removed the Payton Plaintiffs’ state law claims to bankruptcy court. There, ruling that the claims 

were severable from the bankruptcy’s core proceedings, the bankruptcy judge abstained, thus 

thwarting the Trustee’s plan to prosecute all claims against Emerald’s directors and officers in 

one action. Eventually in November 2009, while back in the Circuit Court of Cook County, all of 

the Payton Plaintiffs’ state law claims were dismissed on various grounds, including the time bar 

contained in the Illinois Securities Law of 1953, 815 Ill. Comp. Stat. 5/13. At that point, what 

remained in bankruptcy court were the claims originally asserted on behalf of the Committee of 

Unsecured Creditors. These—following a motion for recusal and subsequent withdrawal of the 

bankruptcy court’s referral—went to a bench trial before Judge Pallmeyer, who in September 

2014 held six Emerald officers liable in the aggregate amount of $272 million for breach of 

Emerald’s shareholders’ agreement. In re Emerald Casino, Inc., 530 B.R. 44, 237–38 (N.D. Ill. 

2014), aff’d in part, vacated in part, 867 F.3d 743 (7th Cir. 2017).4

In the years following entry of this judgment, the Trustee made two distributions to the 

Payton Plaintiffs in accordance with their 2008 settlement agreement. First, in April 2016, after 

collecting via settlement from two of the six Emerald officers, the Payton Plaintiffs were paid 

4

 The Seventh Circuit found error only in Judge Pallmeyer’s decision not to hold the 

defendants jointly and severally liable. In re Emerald Casino, Inc., 867 F.3d 743, 763–66 (7th 

Cir. 2017). 

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their original attorneys’ fees and $11.4 million (representing half of the Trustee’s net recoveries). 

Ms. Ebert did not object to this distribution. Then in April 2019, the Trustee again split further 

recoveries with the Payton Plaintiffs and paid them an additional $15.4 million. 

Ms. Ebert objected to the second distribution. Her contention was that because the Payton

Plaintiffs’ claims against the estate only totaled $24.0 million, the second distribution 

represented a $2.8 million windfall to the Payton Plaintiffs. She claimed this was inequitable 

because she, as a Statutory Investor, had an identical claim which was yet to be awarded any 

distribution. This objection was overruled by the bankruptcy court and affirmed on appeal. The 

bankruptcy court reasoned that the Payton Plaintiffs’ distribution rights derived from their 

settlement agreement with the Trustee and not the original proofs of claim they filed as Statutory 

Investors. Therefore, Ms. Ebert’s decision to forego joining the Payton Plaintiffs in settlement 

with the Trustee precluded her from joining them in recovery pursuant to that agreement. In re 

Emerald Casino, Inc., No. 19-cv-04376, 2020 WL 918988, at *2–4 (N.D. Ill. Feb. 26, 2020). 

Finally, in August 2019, the Trustee raised an omnibus objection to twenty-six proofs of 

claim submitted by similarly situated Emerald investors; among them were two claims from 

Ms. Ebert: one was the proof of claim Ms. Ebert submitted in 2002 for the $750,000 she paid 

towards the Emerald stock she never received; the second was a proof of claim she submitted in 

2015 that amended the first to include an additional $285,954 worth of accrued interest and 

attorneys’ fees.5

 The Trustee objected, contending that these claims should be treated as equity 

interests and not as general unsecured claims. See Fed. R. Bankr. P. 3007(d)(7) (permissible 

grounds for omnibus objection). The bankruptcy court sustained the Trustee’s objection. It held 

5

 In actuality, Ms. Ebert’s 2002 proof of claim included $172,597 worth of accrued 

interest and attorneys’ fees on top of her $750,000 principal. The 2015 proof of claim simply 

added $113,357 to this figure. 

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that Ms. Ebert’s claims should be treated as equity interests or, in the alternative, were subject to 

mandatory subordination pursuant to 11 U.S.C. § 510(b). In re Emerald Casino, Inc., 622 B.R. 

44, 47, 49–51 (Bankr. N.D. Ill. 2020). It is this order Ms. Ebert now appeals. 

II. DISCUSSION 

This Court sits in review of the bankruptcy court’s final order pursuant to 28 U.S.C. 

§ 158(a). Its conclusions of law are reviewed de novo and its findings of fact are reviewed for 

clear error. Stamat v. Neary, 635 F.3d 974, 979 (7th Cir. 2011). Likewise, mixed questions of 

law and fact are subject to de novo review. Id. 

A. Characterization of Ms. Ebert’s Claims 

Ms. Ebert’s principal contention is that the bankruptcy court erred in treating her claims 

against the estate as or equivalent to equity interests. The bulk of the bankruptcy court’s opinion 

concerned whether Ms. Ebert’s claims should be considered subordinated claims under 11 

U.S.C. § 510(b)—a status, for Ms. Ebert’s purposes, equivalent to an equity interest. But despite 

the attention the bankruptcy court gave that question, it held it was immaterial because it was 

subsumed by the larger question of whether Ms. Ebert’s claims were claims at all. See Emerald, 

622 B.R. at 50. On this question, the bankruptcy court held that Ms. Ebert’s claims were, 

categorically, not claims but equity interests. Id. at 47. This Court disagrees with that conclusion 

but agrees with the bankruptcy court’s alternative view that Ms. Ebert’s claims must be 

subordinated to those of unsecured creditors pursuant to section 510(b). 

To begin, it is important to acknowledge the distinction between interests and claims. The 

term interest is not defined by the Bankruptcy Code, but it refers to an equity interest in property 

of the debtor (e.g., common stock). Robert E. Ginsberg et al., Ginsberg & Martin on Bankruptcy 

§ 10.02 (5th ed. 2021). A claim, on the other hand, is defined broadly as any “right to payment” 

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by the debtor. 11 U.S.C. § 101(5); In re S. Beach Sec., Inc., 606 F.3d 366, 376 (7th Cir. 2010). 

Ms. Ebert’s stock subscription affords her a right to payment. 

A stock subscription, to be clear, is “[a] written contract to purchase newly issued shares 

of stock . . . .” Black’s Law Dictionary (11th ed. 2019). The relevant portion of Ms. Ebert’s stock 

subscription provides: 

In the event that the [IGB] determines that the undersigned is an 

acceptable owner of the Company, the Issuer shall credit the 

Purchase Price as payment toward the Shares and promptly issue 

the Shares to the undersigned. In the event that the IGB 

determines that the undersigned is not an acceptable owner of 

the Issuer, (a) this agreement shall immediately terminate . . ., (b) 

the Issuer shall not issue the Shares, and (c) the Issuer shall . . . 

return the Purchase Price without interest to the undersigned 

within ninety days . . . . 

R. at 385, ECF No. 8-2 (Subscription Agreement) (emphasis added). Thus, Ms. Ebert has a 

contractual right to repayment of her purchase price given that the IGB did not determine that 

she was an acceptable owner. 

In this Court’s view, Ms. Ebert’s contractual right to payment by Emerald, the debtor, 

falls squarely within the Bankruptcy Code’s definition of claim: it is a right to payment by the 

debtor. And since claims for contract damages are routinely classified as general unsecured 

claims—see, e.g., Nelson v. Stewart, 422 F.3d 463, 473 (7th Cir. 2005); In re Health Mgmt. Ltd. 

P’ship, 332 B.R. 360, 363 (Bankr. C.D. Ill. 2005); In re Nat’l Steel Corp., 316 B.R. 287, 304 

(Bankr. N.D. Ill. 2004); In re Res. Tech. Corp., 254 B.R. 215, 221 (Bankr. N.D. Ill. 2000); In re 

Ind. Grocery Co., 138 B.R. 40, 50 (Bankr. S.D. Ind. 1990)—this Court finds no cause to 

characterize Ms. Ebert’s claims otherwise. 

In holding that “Ebert holds an equity interest,” the bankruptcy court reasoned that 

because “Ebert’s claims are prima facie evidence of the amount and the type of claim,” and 

because “the face of [each] claim shows [they are] for a ‘stock subscription,’” they should be 

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treated as equity interests. Emerald, 622 B.R. at 47, 49 (emphasis added). But in treating the 

proofs of claim as prima facie evidence of their characterization as claims, the bankruptcy court 

appears to have misquoted Bankruptcy Rule 3001, which states that “[a] proof of claim executed 

and filed in accordance with these rules shall constitute prima facie evidence of the validity and 

amount of the claim”—not of the “type” of claim. Fed. R. Bankr. P. 3001(f) (emphasis added). 

More importantly, even if a proof of claim is also prima facie evidence of its type, prima facie 

evidence only establishes a fact in the absence of contradictory evidence. Here, the whole of 

Ms. Ebert’s opposition to the Trustee’s claim objection below adequately rebutted any 

presumptive characterization her proofs of claim may have facially established. She persistently 

argued that her claims were based on the conditional reimbursement provision within her stock 

subscription and not on stock ownership, R. at 539–40, ECF No. 8-2 (Resp. to Omnibus Claim 

Obj.); she introduced a letter from Emerald reinforcing this provision’s import, id. at 547; and 

she cited various acknowledgments by the Trustee that Ms. Ebert’s stock ownership never 

vested, id. at 540. In short, regardless of whether Ms. Ebert’s proofs of claim are prima facie 

evidence of their type, such evidence has been sufficiently rebutted. 

In further support of its holding that Ms. Ebert’s claims were in fact equity interests, the 

bankruptcy court appears to have placed considerable weight on Ms. Ebert’s putative de facto

status as a shareholder. Although the IGB never formally approved of Ms. Ebert as a 

shareholder, Ms. Ebert enjoyed shareholder privileges: she was party to the shareholders’ 

agreement and attended shareholder meetings where her vote was solicited. Emerald also 

identified Ms. Ebert as a shareholder in all relevant books, records, and tax filings. Thus, the 

bankruptcy court concluded that because “Emerald treated [Ms. Ebert] as a shareholder in every 

way,” “her interest should be treated as equity.” Emerald, 622 B.R. at 49, 51. 

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This Court takes no issue with the bankruptcy court’s finding that Ms. Ebert was treated 

as a shareholder in all but name. The issue is that Ms. Ebert’s status is not relevant to the claiminterest taxonomy. See In re Airadigm Commc’ns, Inc., 616 F.3d 642, 658 (7th Cir. 2010) (The 

character of a claim “focuses on the underlying substance of the disputed transaction . . . .”); In 

re AutoStyle Plastics, Inc., 269 F.3d 726, 749 (6th Cir. 2001) (listing eleven factors to consider 

when recharacterizing a claim from debt to equity). A claim, to reiterate, is for something owed 

by the estate, whereas an interest is some ownership of the estate. The substance of the proof of 

claim, rather than the identity of the claimant, is what determines its characterization; nothing 

precludes a shareholder from also being a creditor. In submitting her claim, Ms. Ebert was not 

seeking recovery of principal or equity in Emerald; she was seeking return of funds owed under 

the repayment provision of her stock subscription. The bankruptcy court’s reliance on Emerald’s 

treatment of Ms. Ebert as a de facto shareholder does not, therefore, determine the 

characterization of Ms. Ebert’s putative claim. 

Arguing on appeal, the Trustee echoes the bankruptcy court’s rationales but adds that 

Ms. Ebert’s proofs of claim should be considered judicial admissions of their character. Appellee 

Br. at 13–14, ECF No. 17. Those proofs of claim are quite succinct. Claim No. 65, dated 

December 20, 2002, is for Ms. Ebert’s purchase price of $750,000 plus an approximation of 

accrued interest and attorneys’ fees. R. at 399–400, ECF No. 8-2. Claim No. 124, dated March 

11, 2015, updates the approximate figure and claims a total of $1,035,954. Id. at 403–06. Both 

proofs of claim however, are simple, two-page form documents containing only basic 

information. On both, in the block titled “Basis for Claim,” Ms. Ebert answered “Stock 

Subscription.” Id. at 399, 403. The Trustee contends that this statement estops Ms. Ebert from 

arguing she has anything but an equity interest. 

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“A judicial admission is a statement, normally in a pleading, that negates a factual claim 

that the party making the statement might have made or considered making.” Robinson v. McNeil 

Consumer Healthcare, 615 F.3d 861, 872 (7th Cir. 2010). Importantly, to qualify as a judicial 

admission, a statement must be “deliberate, clear and unambiguous.” Id. (quoting MacDonald v. 

General Motors Corp., 110 F.3d 337, 340 (6th Cir. 1997)). Here, Ms. Ebert’s stated basis for her 

claim (“Stock Subscription”) does not unambiguously denote stock ownership despite the 

Trustee’s assertion to the contrary. This stated basis most readily suggests that Ms. Ebert’s claim 

is based either on the contingent interest in common stock Ms. Ebert purchased or the contingent 

refund Emerald promised. Without further context (and the proofs of claim provide none), it is 

simply not clear that Ms. Ebert’s claim is the former. 

Further context, the Trustee says, is supplied by Ms. Ebert’s separate proof of interest. 

Ms. Ebert filed one for “Common Stock” at the same time she filed her original 2002 proof of 

claim. R. at 401, ECF No. 8-2. Unlike her proofs of claim, this proof of interest is 

unambiguously premised on equity holder rights, yet there is no indication that Ms. Ebert 

intended these documents to be coterminous. Presuming otherwise—as the Trustee’s argument 

requires—would render Ms. Ebert’s proofs of claim superfluous. That presumption is 

unreasonable. No one contests the fact that Emerald never issued Ms. Ebert’s common stock. 

And given, then, that Ms. Ebert’s equity interest never actually vested, the more reasonable 

presumption is that Ms. Ebert’s proofs of claim are based on something other than an equity 

interest. Therefore, the meaning the Trustee ascribes to Ms. Ebert’s proofs of claim (or her proof 

of interest) cannot be held against Ms. Ebert as judicial admissions. 

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B. 11 U.S.C. § 510(b) Subordination 

Having found Ms. Ebert to possess a general unsecured claim, the analysis turns to 

whether that claim is subject to mandatory subordination pursuant to 11 U.S.C. § 510(b). 

Although the bankruptcy court below couched its section 510(b) analysis as “unnecessary,” 

Emerald, 622 B.R. at 50, it evaluated the question in earnest and concluded section 510(b) would 

apply to Ms. Ebert even if, contrary to its principal holding, she possessed a general unsecured 

claim rather than an equity interest. This Court agrees. 

Section 510(b) reads: 

For the purpose of distribution under this title, a claim . . . for 

damages arising from the purchase or sale of . . . a security [of 

the debtor] . . . 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) (emphasis added). There is no question here that the common stock 

contemplated by Ms. Ebert’s stock subscription represents a “security.” See 11 U.S.C. § 101(49) 

(defining security); see also Payton v. Flynn, No. 06-cv-00465, 2006 WL 3087075, at *8 (N.D. 

Ill. Oct. 26, 2006) (finding Ms. Ebert’s stock subscription constitutes an “investment contract” 

and thus a “security” under federal securities laws). The question is whether the contract 

damages she claims “arise from” the purchase of such stock. If so, section 510(b) mandates that 

her general unsecured claims receive distributions in parity with equity interest holders (and 

subordinate to unsecured creditor claims).6

6

 The distribution priority a subordinated claim receives depends on the nature of the 

underlying security claim or interest from which the subordinated claim arose. 11 U.S.C. 

§ 510(b). When the underlying security interest is common stock, there is no functional 

difference for distribution purposes between holding the claimant to be an equity interest holder 

or a general unsecured creditor with a subordinated claim. The distinction is important in other 

contexts, however. For instance, only creditors can file an involuntary petition, vote for a 

Chapter 7 trustee, or sit on an unsecured creditors committee. 11 U.S.C. §§ 303, 702, 1102. 

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Broadly speaking, “[f]or a claim to ‘arise from’ the purchase or sale of a security, there 

must be some nexus or causal relationship between the claim and the sale.” In re SeaQuest 

Diving, LP, 579 F.3d 411, 421 (5th Cir. 2009). Circuit courts agree the contours of this causal 

relationship are ambiguous. See, e.g., id. at 418; In re Med Diversified, Inc., 461 F.3d 251, 255 

(2d Cir. 2006); In re Telegroup, Inc., 281 F.3d 133, 138 (3d Cir. 2002); In re Geneva Steel Co., 

281 F.3d 1173, 1178 (10th Cir. 2002); In re Betacom of Phoenix, Inc., 240 F.3d 823, 830 (9th 

Cir. 2001).7

 Thus, “the policy rationales behind Section 510(b) must always guide its 

interpretation and application to particular facts.” Matter of Linn Energy, L.L.C., 936 F.3d 334, 

341 (5th Cir. 2019). 

Section 510(b)’s purpose is clearly evidenced by its legislative history—principally, the 

House Report on the 1978 Bankruptcy Reform Act, wherein Congress attributes section 510(b)’s 

inspiration to a journal article by Professors Slain and Kripke. See H. Rep. No. 95–595, at 194–

96 (1977), citing with approval John J. Slain & Homer Kripke, The Interface Between Securities 

Regulation and Bankruptcy–Allocating the Risk of Illegal Securities Issuance Between 

Securityholders and the Issuer’s Creditors, 48 N.Y.U. L. Rev. 261 (1973); see also Med 

Diversified, 461 F.3d at 255–56 (noting Slain and Kripke’s article as the accepted starting-point 

for section 510(b) analysis). The takeaway from Professors Slain and Kripke was that without 

mandatory subordination, disappointed shareholders could recover their investment losses by 

using fraud and other securities claims to bootstrap their way to parity with general unsecured 

creditors in bankruptcy proceedings. Telegroup, 281 F.3d at 140–41. This, fundamentally, would 

Likewise, only equity interest holders can approve certain Chapter 11 plans. 11 U.S.C. 

§ 1126(d). 

7

 The Seventh Circuit has yet to speak on the scope of section 510(b). As a matter of first 

impression within the Seventh Circuit, however, Judge Pallmeyer addressed the question in In re 

Pre-Press Graphics Co., 307 B.R. 65 (N.D. Ill. 2004). Her analysis aligns with non-Seventh 

Circuit caselaw. 

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subvert bankruptcy’s absolute priority rule, which holds that “stockholders seeking to recover 

their investments cannot be paid before provable creditor claims have been satisfied in full.” Id.

at 139 (quoting Slain & Kripke, supra, at 261). The rule is premised on the dissimilar risk-return 

expectations held by shareholders and creditors. Id.; see Commodity Futures Trading Comm’n v. 

Lake Shore Asset Mgmt. Ltd., 646 F.3d 401, 408 (7th Cir. 2011) (“The creditors’ priority in 

bankruptcy mirrors the contractual allocation of risk and reward between creditors and 

shareholders.”). 

As for those dissimilar risk-return expectations, “[s]hareholders expect to take more risk 

than creditors in return for the right to participate in firm profits.” Betacom, 240 F.3d at 829; see 

Elizabeth Warren, Bankruptcy Policy, 54 U. Chi. L. Rev. 775, 792 (1987) (“An almost axiomatic 

principle of business law is that, because equity owners stand to gain the most when a business 

succeeds, they should absorb the costs of the business’s collapse—up to the full amount of their 

investment.”). The risk of illegality in the issuance of stock is also borne completely by 

shareholders. Telegroup, 281 F.3d at 140; see Slain & Kripke, supra, at 288 (“It is difficult to 

conceive of any reason for shifting even a small portion of the risk of illegality from the 

stockholder, since it is to the stockholder, and not to the creditor, that the stock is offered.”). In 

contrast, creditors “only expect[] repayment of a fixed debt” and, crucially, “extend credit in 

reliance on the cushion of investment provided by the shareholders.” Betacom, 240 F.3d at 829. 

Because these dissimilar risk-reward expectations animate the absolute priority rule, they 

also guide the application of section 510(b). Hence, a claim is only said to have “arisen from” the 

purchase or sale of a security “if [a claimant] (1) took on the risk and return expectations of a 

shareholder, rather than a creditor, or (2) seeks to recover a contribution to the equity pool 

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presumably relied upon by creditors in deciding whether to extend credit to the debtor.” Med 

Diversified, 461 F.3d at 256. 

Notably, shareholder status is again not relevant to this formulation. The parties here 

have argued considerably over the bankruptcy court’s holding that Ms. Ebert should be identified 

as a shareholder despite never receiving her stock. But it is the nature of the claim asserted, not 

the claimant’s identity, which determines the applicability of section 510(b). See Telegroup, 281 

F.3d at 144 n.2 (“[I]n enacting § 510(b), Congress did not intend to subordinate every claim 

brought by a shareholder, regardless of the nature of the claim. . . . [Nothing] require[s] the 

subordination of a claim simply because the identity of the claimant happens to be a 

shareholder . . . .”); Betacom, 240 F.3d at 829 (“Nothing in § 510(b)’s text requires a 

subordinated claimant to be a shareholder.”); see also In re Angeles Corp., 177 B.R. 920, 927 

(Bankr. C.D. Cal. 1995) (“If Congress had wanted to subordinate all claims of security holders to 

an equity position, regardless of the source of the claim, Congress would have worded Section 

510(b) to say: ‘All claims made by security holders, regardless of the source of the claim, shall 

be subordinated to an equity class . . . .’”). 

The actual sale or physical possession of a security is also not necessary for a claim to be 

considered “arising from” the purchase or sale of a security. In Betacom, the Ninth Circuit 

considered whether a claim for breach of a merger agreement should be subordinated. 240 F.3d 

at 826–27. Per the agreement, the claimants relinquished their interest in the acquired company 

in exchange for the debtor’s stock, which was to be held in escrow and transferred after an audit. 

Id. The debtor, however, failed to conduct the audit and never transferred the shares. Id. The 

claimants argued this amounted to unlawful conversion. Id. at 829–30. No matter, the Ninth 

Circuit explained: “Even though the [claimants] never received their stock, it remains true that 

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they decided to enter the Merger Agreement with the understanding that they faced the risk that 

[the debtor’s] [Initial Public Offering] could fail and that [the debtor] might go bankrupt.” Id. at 

830. Plus, “creditors relied on the . . . assets transferred by the [claimants to the debtor] in their 

decisions to extend credit to [the debtor].” Id. Therefore, even though the claimants never 

received their promised shares, their claims required subordination. Id. at 832. 

Similarly in Med Diversified, the Second Circuit subordinated the claim of an executive 

whose severance payment agreement with the debtor obligated the debtor to exchange its stock 

with stock the executive owned in another company. 461 F.3d at 254–55, 257. That transaction, 

however, did not occur prior to the debtor filing bankruptcy, and the executive claimed damages 

for breach. Id. Contesting subordination, the executive argued the debtor’s promise to exchange 

stock was no different than a promise to purchase his stock with cash. Id. at 256. The Second 

Circuit reasoned, nevertheless, that the executive had bargained not for cash but to become a 

shareholder in the debtor. Id. His damages, too, were connected to the value of the debtor’s 

stock, not fixed debt. Id. at 257. Therefore, the fact that the executive was never issued his stock 

did not prevent subordination of his claim. Id. at 259. 

Considering these principles, Ms. Ebert’s claims must be subordinated. As a preliminary 

matter, this Court notes (and the parties do not contest) that there is a causal relationship between 

Ms. Ebert’s claims and the purchase of a security: her claims would not exist but-for the 

purchase of common stock contemplated by her stock subscription. This relationship’s proximate 

quality is also within the ambit circumscribed by section 510(b)’s two guiding rationales—that 

is, subordination is required whenever a claimant takes on the risk and return expectations of a 

shareholder or seeks to recover a contribution to the equity pool presumably relied upon by 

creditors in deciding whether to extend credit to the debtor. 

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As for the first rationale, by executing her stock subscription, Ms. Ebert sought to take on 

the risk and return expectations of a shareholder, not a creditor. The sole benefit of Ms. Ebert’s 

stock subscription was that she would become an Emerald owner and would share in Emerald’s 

potential success. The fact that she never actually became a shareholder does not change the riskreward expectations inherent in her bargain. 

Ms. Ebert frames it differently. She argues that because her investment was conditional, 

the rewards associated with stock ownership were contingent upon IGB’s approval of her as a 

shareholder. She maintains that unless and until she received such approval, she was not entitled 

to share in Emerald’s profits. In this vein, she characterizes her purchase money as debt made 

payable upon IGB disapproval. She is not alone in this characterization, as three other Statutory 

Investors of the six total who were subject to the Trustee’s omnibus claim objection submitted 

proofs of claim based on “money loaned.” R. at 383, 393, 470, ECF No. 8-2 (First Omnibus 

Claim Obj.). 

Ms. Ebert’s characterization might be more persuasive if not for the fact that the alleged 

“loan” she conditionally gave Emerald was interest-free. Interest is the conventional 

consideration offered for debt. But Ms. Ebert’s stock subscription made explicit that her 

purchase money would be returned, if at all, “without interest.” Id. at 385 (Subscription 

Agreement). Thus, if she truly considered herself to be a creditor in the interval preceding IGB’s 

approval decision, she failed to bargain as one. In lieu of interest payments, the consideration 

Ms. Ebert did receive in exchange for her purchase money was a chance to co-own Emerald. 

And it is this consideration to which Emerald affixed a warning: 

For good and valuable consideration received, the undersigned 

does hereby acknowledge that . . . the business to be conducted by 

the Issuer will be of a risky and speculative nature; [and] that the 

undersigned’s investment in the Issuer involves a high degree of 

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risk of loss of the undersigned’s entire investment in the 

Issuer . . . . 

Id. at 389 (Subscription Agreement). 

In the same vein, Ms. Ebert also argues that unless and until she received IGB approval, 

she was not exposed, as a shareholder would have been, to the risk of Emerald’s venture. This 

facet does make Ms. Ebert’s claim distinguishable from other section 510(b) cases in the sense 

that her claim is not tied to the value of Emerald’s stock. Cf. Med Diversified, 461 F.3d at 257. 

Given a disapproval by IGB, Ms. Ebert’s reimbursement was set at her purchase price regardless 

of whether Emerald’s stock value had soared or tanked. Hence, she maintains that when she 

executed her stock subscription, the anticipated IGB decision served to mitigate her venture risk. 

But it is hard to imagine why she would have held this view when she executed her stock 

subscription. The inquiry here is into Ms. Ebert’s risk and return expectations in the moment she 

gave money to Emerald. And in that moment, Ms. Ebert was ostensibly privy to everything on 

which the anticipated IGB decision was going to be based. This is because the IGB decision 

concerned her intrinsic characteristics, whether she was an acceptable owner (e.g., whether she 

was female or a minority or—more conceivably—was a straw owner or had ties to organized 

crime). Thus, Ms. Ebert understood whether she was eligible to become a Statutory Investor 

prior to executing her stock subscription, and so it is implausible—given that she knowingly 

signed it anyway—that she expected anything but IGB agreement. If, alternatively, approval of 

her shareholder status turned on some intrinsic quality of Emerald, it would be more plausible to 

view the IGB decision as Ms. Ebert’s bargained-for escape hatch. In that instance, the IGB 

decision could have uncovered negative information about Emerald then unknown to Ms. Ebert 

and conceivably mitigated the risk of such discovery through her subsequent disapproval. But 

that is not the case here. Here, Ms. Ebert’s shareholder eligibility was wholly independent from 

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Emerald’s venture risk.8

 Therefore, it should not have been expected that IGB’s decision on the 

former would insulate Ms. Ebert from the latter. 

Ms. Ebert’s claims are also somewhat exceptional for the fact that they do not directly 

implicate the type of risk exclusive to shareholders—i.e., the risk of illegality in the issuance of a 

security. All claims subject to section 510(b) implicate this type of risk, such as the risk of fraud, 

breach of contract, or violation of a securities regulation by the debtor (notably, the illegality 

need not be contemporaneous with the actual issuance of its associated security). See Telegroup, 

281 F.3d at 140–44. But here, Ms. Ebert’s claim is not directly premised on any unlawful 

conduct. The record does not suggest Emerald fraudulently induced or executed Ms. Ebert’s 

stock subscription. Emerald also committed no breach by retaining Ms. Ebert’s purchase money: 

Contractually, Ms. Ebert’s reimbursement was due upon IGB’s disapproval, but it never formally 

disapproved of Ms. Ebert as a shareholder. In fact, there is evidence that the IGB never even 

began investigating the Statutory Investors. Emerald, 530 B.R. at 70. Instead, IGB’s decision to 

revoke Emerald’s gaming license served as de facto disapproval. And when Emerald’s 

involuntary bankruptcy petition swiftly followed, Emerald was legally prohibited from 

reimbursing the Statutory Investors.9

 Strictly speaking, then, Ms. Ebert’s claims are premised on 

a theory of unjust enrichment rather than breach. 

8

 In relevant part, Ms. Ebert’s stock subscription certified that “no federal or state agency 

has passed upon the adequacy or accuracy of the information set forth in the Documents, or 

made any finding or determination as to the Shares as an investment . . . .” R. at 388, ECF No. 

8-2 (Subscription Agreement). 

9

 The IGB issued formal notice revoking Emerald’s license on March 6, 2001. Emerald, 

530 B.R. at 71. The involuntary bankruptcy petition was filed on June 13, 2002. Id. Although 

Emerald may have voluntarily reimbursed the Statutory Investors in the intervening time period, 

litigation over IGB’s revocation did not finally conclude until November 29, 2007, well after 

Emerald was drawn into bankruptcy. Id. at 74. 

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This distinction only matters to say that Ms. Ebert’s claims are not directly based on 

unlawful conduct. They are, however, indirectly so. At bottom, IGB revoked Emerald’s license 

because Emerald violated IGB’s rules.10 Emerald’s shareholders’ agreement obliged compliance 

with those rules. R. at 1156, ECF No. 8-2 (Shareholders’ Agreement) (“Each Shareholder . . . 

agrees to comply with the [Riverboat Gambling Act] and all rules and orders of the IGB and 

shall not commit any acts which would jeopardize the license or a renewal thereof.”). And in 

turn, Ms. Ebert’s stock subscription incorporated the shareholders’ agreement. Id. at 388 

(Subscription Agreement) (“The sale, transfer or encumbrance of this certificate is subject to the 

Shareholders’ Agreement . . . .”). Therefore, the risk of illegality which indirectly led to 

Emerald’s inability to repay Ms. Ebert is one she sufficiently assumed. 

As for section 510(b)’s second guiding rationale—the equity cushion relied upon by 

creditors—it too compels subordination of Ms. Ebert’s claims. No facet of Ms. Ebert’s 

investment supports viewing it apart from any other capital infusion that creditors may have 

relied upon in assessing Emerald’s credit worthiness. Had the Statutory Investors’ purchase 

money, rather than their stock certificates, been contractually escrowed pending IGB approval, 

things may have been different. In that case, potential creditors would have understood that 

Emerald was prohibited from using the Statutory Investors’ investments for corporate purposes. 

But that is not the case here. Upon collection, Emerald listed the Statutory Investors’ investments 

in its “paid-in capital account” and promptly spent the funds. Emerald, 530 B.R. at 70, 149; see 

10 Having spent the Statutory Investors’ capital investments immediately upon receipt, 

Emerald was in no apparent position to repay any of the Statutory Investors even if formal IGB 

disapproval had come prior to bankruptcy. This, however, was not one of Emerald’s cited rule 

violations. Emerald, 530 B.R. at 89 (“Though it appears that Emerald did not have a plan or the 

funds to refund the payments that it received from the Statutory Investors[] if the IGB did not 

approve them as shareholders, the IGB made no specific finding that this alone violated any IGB 

Rule.”) (citation removed). 

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also R. at 390, ECF No. 8-2 (Subscription Agreement) (“[T]his Subscription Agreement may not 

be canceled, revoked, or withdraw . . . . [and Emerald] may use the proceeds . . . for its 

unrestricted use . . . immediately upon acceptance . . . .”). 

In summary, Ms. Ebert bargained to become a shareholder; the risks and rewards inherent 

in that bargain are consistent with those of shareholder expectations; and treating Ms. Ebert as a 

creditor would be unfair to those creditors who may have relied on her investment. Therefore, 

section 510(b) mandates subordination. In reaching this conclusion, some relevant sentiments are 

worth echoing: 

This Court is not unsympathetic to the concerns of investors who 

fall victim to unscrupulous business practices, and it was certainly 

not Congress’ objective to stifle capital investment in start-up 

ventures. However, a balance must be struck between the concerns 

of the average investor and the unsecured trade creditor who 

provides products and services necessary for the business to 

succeed and for the investor to earn profits. That is what Congress 

envisioned by enacting section 510(b) of the Bankruptcy Code and 

that is the spirit by which this decision is rendered. 

In re PT-1 Commc’ns, Inc., 304 B.R. 601, 610 (Bankr. E.D.N.Y. 2004). 

C. Equitable Estoppel 

Along with holding that section 510(b) applied to Ms. Ebert’s claims, the bankruptcy 

court also rejected Ms. Ebert’s defense that the Trustee was equitably estopped from treating her 

claims as equity. That ruling is affirmed, albeit for a slightly different reason than the one relied 

upon by the bankruptcy court. 

Ms. Ebert predicated her equitable estoppel defense on the following: Ms. Ebert claimed 

she spoke with the Trustee at least once a year regarding the status of Emerald’s bankruptcy 

case. R. at 659, ECF No. 8-3 (Decl. of Ebert). During these conversations, the Trustee 

supposedly “never told [her] that [she] should not expect to receive a recovery from the Debtor’s 

bankruptcy case or that [her] claim would be treated as equity.” Id. On at least one occasion, the 

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Trustee also allegedly “informed [Ms. Ebert] that [she] would share in the recovery that was paid 

to the [Payton Plaintiffs] under the [their] Settlement.” Id. Thus, Ms. Ebert believed “[she] would 

share in any recoveries from the Trustee’s litigation [against Emerald’s directors and officers]” 

and relied upon the Trustee’s representations in determining “the likelihood of recovering on 

[her] claim against Emerald Casino.” Id. 

The bankruptcy court found these allegations insufficient to support equitable estoppel. 

Equitable estoppel requires reasonable and detrimental reliance on another’s misrepresentation. 

Matter of Larson, 862 F.2d 112, 115 (7th Cir. 1988). But Ms. Ebert, the bankruptcy court 

explained, was unreasonable to think that the Trustee could alter the Bankruptcy Code’s priority 

distribution scheme without court approval. Emerald, 622 B.R. at 53. Ms. Ebert also failed to 

allege a detriment. Id. at 53–54. She did not, for instance, detail when the conversations with the 

Trustee took place nor did she explain what action she took or abandoned because of them. Id. 

This Court need not delve into these factual issues, for even if the bankruptcy court 

clearly erred in finding them, it is beyond the bankruptcy court’s equitable powers to ignore 

section 510(b). Those equitable powers stem generally from section 105(a), which provides that 

a “court may issue any order, process, or judgment that is necessary or appropriate to carry out 

the provisions of this title.” 11 U.S.C. § 105(a). But “[t]his does not create discretion to set aside 

the Code’s rules about priority and distribution; the power conferred by § 105(a) is one to 

implement rather than override.” In re Kmart Corp., 359 F.3d 866, 871 (7th Cir. 2004); see 

Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) (“[W]hatever equitable powers 

remain in the bankruptcy courts must and can only be exercised within the confines of the 

Bankruptcy Code.”); Matter of Lloyd, 37 F.3d 271, 275 (7th Cir. 1994) (“The bankruptcy court 

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does not have free-floating discretion[] to create rights outside the Code . . . .”) (internal 

quotations removed). 

 Having found that Ms. Ebert is a general unsecured creditor and not an equity interest 

holder, section 510(b) provides the bankruptcy court an inflexible statutory command. 

Notwithstanding any misrepresentations Ms. Ebert may have relied upon, then, the bankruptcy 

court cannot equitably estop the mandatory subordination of Ms. Ebert’s claims. 

D. Judicial Estoppel 

Ms. Ebert also appeals from the bankruptcy court’s rejection of her judicial estoppel 

defense. She asserted it in attempt to prevent the Trustee from identifying her as a shareholder. 

As previously mentioned, the parties thoroughly debated below whether Ms. Ebert was an actual 

shareholder, and the fact featured prominently in the bankruptcy court’s analysis. Ms. Ebert’s 

estoppel position was premised on the fact that the Trustee had argued in previous litigation that 

the Statutory Investors were not shareholders because they were not issued stock. See Emerald, 

530 B.R. at 151 n.74. Thus, her argument went, the Trustee is estopped from treating her as a 

shareholder, and therefore, her claims should not be subordinated. But, as discussed in part II.B, 

a claimant’s identity—shareholder or not—is not pertinent to the operation of section 510(b). 

Consequently, Ms. Ebert’s judicial estoppel defense is irrelevant and does not preclude the 

Trustee’s position that her claims should be subordinated under section 510(b).11

11 Ms. Ebert’s estoppel position is based on a prior argument by the Trustee that 

ultimately did not prevail. It is for this reason that the bankruptcy court rejected Ms. Ebert’s 

judicial estoppel defense. Emerald, 622 B.R. at 52; see generally Matter of Cassidy, 892 F.2d 

637, 641 (7th Cir. 1990) (“[T]he party to be estopped [must] have convinced the court to accept 

its position in the earlier litigation” in order for judicial estoppel to be appropriate.). This Court 

agrees with that reasoning. Thus, even if Ms. Ebert’s judicial estoppel defense was relevant, it 

would still be unavailing. 

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E. Motion to Compel 

Finally, Ms. Ebert appeals the denial of her motion to compel. In it, she sought discovery 

to support her equitable and judicial estoppel defenses. Because those defenses cannot avert 

subordination even if factually supported, further discovery is unnecessary. Thus, the bankruptcy 

court’s denial is affirmed. 

* * * 

The provision in Ms. Ebert’s stock subscription which conditions stock issuance on IGB 

approval affords her a right to repayment. This right is properly characterized as a general 

unsecured claim. Yet, it is also a claim subject to subordination under 11 U.S.C. § 510(b)—a 

legal mandate which no equitable defense may thwart. The bankruptcy court’s final order 

granting the Trustee’s objections to Ms. Ebert’s proofs of claim is therefore affirmed. Judgment 

will be entered for the appellee. 

Date: July 1, 2022 John J. Tharp, Jr. 

United States District Judge 

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