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1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may have

(see Fed. R. App. P. 32.1), it has no precedential value. See 9th

Cir. BAP Rule 8013-1.

1

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NC-11-1426-DHSa

)

SWIFT INSTRUMENTS, INC., ) Bk. No. 06-50896-CN

)

Debtor. ) Adv. No. 09-5335-CN

______________________________)

)

CAROLYN WU, Chapter 7 Trustee,)

)

Appellant, )

)

v. ) M E M O R A N D U M1

)

STEPHEN H. SWIFT TRUST; ANNE )

H. SWIFT; STEPHEN H. SWIFT; )

SAMUEL H. SWIFT; QTIP TRUST #2)

OF HUMPHREY H. SWIFT TRUST - )

1966 U/I DATED AUGUST 1, 1966,)

)

Appellees. )

______________________________)

Submitted on January 19, 2012

at San Francisco, California

Filed - March 8, 2012

Appeal from the United States Bankruptcy Court

for the Northern District of California

Honorable Charles Novak, Bankruptcy Judge, Presiding 

Appearances: Kevin W. Coleman of Schnader Harrison Segal & Lewis

LLP for Appellant Carol Wu; Marcia Gerston of Trepel

Greenfield Sullivan & Draa, LLP for Appellee QTIP

FILED

MAR 08 2012

SUSAN M SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT
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2 Hon. Deborah J. Saltzman, United States Bankruptcy Judge

for the Central District of California, sitting by designation.

3 Unless otherwise specified, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

all “Rule” references are to the Federal Rules of Bankruptcy

Procedure, Rules 1001-9037. The Federal Rules of Civil Procedure

are referred to as “Civil Rules.”

2

Trust #2 of Humphrey H. Swift Trust, 1966 U/I Dated

August 1, 1966; and Dennison Gallaudet, Trustee of

the Stephen H. Swift Trust, pro se. 

Before: DUNN, HOLLOWELL, and SALTZMAN,2 Bankruptcy Judges.

 On the record submitted to the Panel, we AFFIRM the bankruptcy

court’s summary judgment determination that certain claims are not

subject to subordination pursuant to § 510(b).3

I. FACTS

By agreement dated June 19, 1952 (“1952 Stock Restriction

Agreement”), Swift and Anderson, Inc., predecessor in interest to

Swift Instruments, Inc. (“Debtor”), agreed to repurchase and pay for

all the stock held by stockholders Stephen H. Swift (“Stephen”) and

Humphrey H. Swift (“Humphrey”) upon their deaths. The terms of

repayment were to be “one-fifth of the purchase price in cash and

[the Debtor’s] promissory note or notes for four-fifths of the

purchase price payable in four equal annual installments with

interest at five per cent upon the unpaid balance. . . .” By an

amendment (“1993 Amendment”) to the 1952 Stock Restriction

Agreement, dated June 25, 1993, the terms of repayment were changed

to provide that one-twelfth of the purchase price was payable in
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4 Notwithstanding this statement, Humphrey still was living

and remained a party to the 1952 Stock Restriction Agreement.

5 At the time of Stephen’s death, Stephen Hyde Swift, Anne

Hathaway Swift and Samuel Hyde Swift each received individual

promissory notes for their respective interests attributable to

Stephen’s stock owned by the Divorce Settlement Trust. Stephen Hyde

Swift, Anne Hathaway Swift and Samuel Hyde Swift although named as

appellees did not participate in this appeal.

3

cash, with the eleven-twelfths balance to be paid by the Debtor’s

promissory note or notes in eleven equal installments with simple

interest at five percent on the unpaid balance. The 1993 Amendment

stated that the 1952 Stock Restriction Agreement was “still in

effect solely with respect to [Stephen].”4 The 1993 Amendment was

acknowledged and agreed to by the Stephen H. Swift and Caroline H.

Swift Settlement Trust dated March 17, 1969 (“Divorce Settlement

Trust”), and by the beneficiaries under the Divorce Settlement

Trust: Stephen Hyde Swift, Anne Hathaway Swift and Samuel Hyde

Swift. As relevant to this appeal, the Divorce Settlement Trust was

funded by some of Stephen’s shares in the Debtor.

Stephen died in 1997. Under his will, the 1000 Debtor shares

Stephen still owned personally were transferred to the Stephen H.

Swift Trust (“SHS Trust”). At the time of Stephen’s death the stock

was valued at $100.65 per share. In accordance with the 1952 Stock

Restriction Agreement and the 1993 Amendment, the Debtor was

obligated to repurchase the SHS Trust’s shares for a total purchase

price of $110,650. One-twelfth of that amount was paid in cash, and

the Debtor issued a promissory note dated December 1, 1997 for the

$101,429.13 balance.5
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6 Paragraph 14 of the 1999 Restated Agreement recited that

prior stockholder agreements, including the 1952 Stock Restriction

Agreement and other agreements dated October 10, 1960 and April 28,

1975, previously were rescinded and cancelled. The 1999 Restated

Agreement purported to amend and restate the agreement dated

September 15, 1977 between the Debtor and certain shareholders

regarding the transfer of stock. Only the 1952 Stock Restriction

Agreement is included in the record on appeal.

7 Excluded from Humphrey’s shares subject to repurchase by

the Debtor were shares that Humphrey left to his daughter, Alison,

who succeeded to Humphrey’s position as Chief Executive Officer of

the Debtor upon his death.

8 The 1999 Restated Agreement required the Debtor, upon the

death of Humphrey, to use the entire proceeds of the “key man” life

insurance policy on Humphrey to redeem in cash all stock held by

shareholder Harold Mercer. Any remaining proceeds were to be used

to purchase Humphrey’s stock. As a result, Humphrey’s estate

received a cash payment equivalent to 25% of the value of Humphrey’s

stock at the time of his death, rather than the one-twelfth cash

payment otherwise contemplated.

4

After Stephen’s death, Humphrey and the remaining shareholders

of the Debtor executed an “Amended and Restated Stock Restriction

Agreement” dated October 12, 1999 (“1999 Restated Agreement”).6

Substantial changes were made to the terms for required repurchase

and payment for Humphrey’s stock upon his death.

Humphrey died on January 20, 2002. Upon his death, his estate

sold his shares7

 to the Debtor in accordance with the 1999 Amended

and Restated Agreement. The Debtor made a partial payment of

$788,560.44 to Humphrey’s estate, using proceeds from a life

insurance policy bought for that purpose.8 The Debtor then executed

two promissory notes, payable to Humphrey’s estate for the balance

of the repurchase price for his shares. The first note, dated
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5

June 24, 2002, was in the amount of $1,635,551.21; the second note,

dated March 13, 2003, was in the amount of $337,238.68. These notes

were consolidated into a single note dated April 15, 2003, in the

amount of $2,012,749.89, made payable to the QTIP Trust #2 of The

Humphey H. Swift Trust - 1966 u/I, dated August 1, 1966 (“HHS

Trust”), based upon an assignment, also dated April 15, 2003.

As early as October 2002, the Debtor began negotiations with

the holders of the promissory notes representing the unpaid balances

for the repurchase of Stephen and Humphrey’s shares to alter their

terms. Between 1998 and 2002, Debtor’s overall sales declined by

27% with no corresponding decline in its operating expenses. By

letter dated November 29, 2002, the Debtor advised Humphrey’s estate

that it would be unable to make the payments due in June 2003 on the

outstanding promissory notes without creating an “emergency

liquidation situation.” In March 2003, the Debtor proposed to

convert 75% of the outstanding balances on the promissory notes due

Humphrey’s estate to equity. Instead, the parties agreed to

restructure the obligation reflected in the note, now payable to the

HHS Trust, by deferring principal payments for approximately four

years. In exchange for the deferral, the HHS Trust was given a

warrant for 10% of the amount of the Debtor’s current outstanding

stock at a $1.00 per share exercise price. To effectuate the

restructuring, the Debtor executed a Restated Promissory Note

payable to the HHS Trust, dated January 31, 2004, in the amount of

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9 The record on appeal suggests that with respect to the

promissory notes relating to the repurchase of Stephen’s stock, the

promissory notes held by Stephen Hyde Swift, Anne Hathaway Swift and

Samuel Hyde Swift also were restructured on January 31, 2004, but

not the promissory note held by the SHS Trust. See (1) allegations

in the complaint (paragraphs 15-17, 23 and 29), (2) the answers

filed by the SHS Trust, by Stephen Hyde Swift, and by Samuel Hyde

Swift (if Anne Hathaway Swift filed an answer to the complaint, it

is not included in the record on appeal), and (3) SHS Trust’s

memorandum in support of its motion for summary judgment (“The SHS

Trust was not asked to participate and did not participate in this

exchange [for a restated promissory note] and holds no warrants to

purchase stock of the Debtor.”).

6

$2,177,402.87.9

The Debtor made the quarterly interest only payments on the

restated promissory notes to Stephen Hyde Swift, Anne Hathaway

Swift, Samuel Hyde Swift, and the HHS Trust through the payment due

September 2005. 

On May 24, 2006, the Debtor filed a voluntary chapter 11

petition. The following claims were filed based upon the promissory

notes for Debtor’s repurchase of Stephen and Humphrey’s stock:

- Claim No. 25, filed by Anne Hathaway Swift, asserting a general

unsecured claim in the amount of $299,020.19.

- Claim No. 29, filed by the SHS Trust, asserting a general

unsecured claim in the amount of $80,336.63.

- Claim No. 39, filed by Stephen Hyde Swift, asserting a general

unsecured claim in the amount of $234,746.90.

- Claim No. 49, filed by Samuel Hyde Swift, asserting a general

unsecured claim in the amount of $226,407.09.

- Claim No. 31, filed by the HHS Trust, asserting a general
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10 The Trustee’s claim for relief for avoidance of transfers

(the quarterly interest payments in the year before the Debtor filed

its bankruptcy petition) against Stephen Hyde Swift, Anne Hathaway

Swift, Samuel Hyde Swift, and the HHS Trust, were dismissed as

untimely pursuant to § 546. No appeal was taken from that

determination of the bankruptcy court.

The Trustee also sought to disallow the claims of Stephen

Hyde Swift, Anne Hathaway Swift, Samuel Hyde Swift, and the HHS

Trust on the basis that they failed to return the alleged

preferential transfers. The bankruptcy court did not grant summary

judgment on this claim for relief. However, the Trustee has

stipulated to the dismissal of this claim for relief as to all

defendants.

7

unsecured claim in the amount of $2,265,095.53.

The bankruptcy court entered an order converting the case to

chapter 7 on November 28, 2007, and Carol Wu was appointed the

chapter 7 trustee (“Trustee”). On December 16, 2009, the Trustee

filed her complaint pursuant to § 510(b) of the Bankruptcy Code,

seeking to subordinate the claims represented by the promissory

notes to claims of general unsecured creditors.10 In their answers

to the complaint, all defendants asserted that the Trustee was not

entitled to equitable subordination of their claims pursuant to

§ 510(b) because not only were they not, nor had they ever been,

equity owners and/or shareholders of the Debtor, but the Stock

Repurchase Agreement by its terms precluded them from being

shareholders.

The Trustee, the SHS Trust and the HHS Trust all filed crossmotions for summary judgment. None of the summary judgment motions

are in the record on appeal. The only pleadings filed in connection

with the summary judgment motions included in the record before the
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8

Panel are: the memorandum of the SHS Trust in support of its motion

for summary judgment, the identical declarations of Preston H.

Saunders filed (1) September 3, 2010 in support of HHS Trust’s

motion for summary judgment and (2) October 10, 2010 in opposition

to the Trustee’s motion for summary judgment, and the identical

declarations of Alison C. Swift filed (1) September 3, 2010 in

support of HHS Trust’s motion for summary judgment and

(2) October 10, 2010 in opposition to the Trustee’s motion for

summary judgment.

On December 14, 2010, the bankruptcy court entered its

Memorandum Decision and Order Granting Motion for Summary Judgment

(“Memorandum Decision”), stating that all parties have agreed that

no questions of fact exist regarding the Trustee’s § 510(b) claim

for relief, and that “this court’s sole task is to interpret that

code section and apply it to the undisputed facts.” Holding that

§ 510(b) is “aimed at equity interests attempting to elevate their

claim,” the bankruptcy court ruled that, in light of the mandate in

the 1952 Stock Restriction Agreement that the Debtor repurchase

Stephen and Humphrey’s shares upon their deaths, the defendants were

seeking only to enforce their debt instruments, i.e. the promissory

notes, and were not asserting claims that relied on or were tied to

the value of the Debtor’s stock, or to recharacterize a securities

or equity claim as debt. On July 25, 2011, the bankruptcy court

entered judgment in favor of the defendants on the Trustee’s

§ 510(b) claim for relief, and the Trustee timely appealed.
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II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334

and 157(b)(2)(A) and (O). We have jurisdiction under 28 U.S.C.

§ 158.

III. ISSUE

Whether the bankruptcy court erred when it ruled that the

claims of the SHS Trust, Stephen Hyde Swift, Anne Hathaway Swift,

Samuel Hyde Swift, and the HHS Trust were not subject to

subordination under § 510(b).

IV. STANDARDS OF REVIEW

We review de novo a decision to grant summary judgment. See

FTC v. Stefanchik, 559 F.3d 924, 927 (9th Cir. 2009). De novo

review requires that we view the case from the same position as the

bankruptcy court. See Lawrence v. Dep’t of Interior, 525 F.3d 916,

920 (9th Cir. 2008). In our review of the grant of a motion for

summary judgment, we are governed by the same standard used by the

bankruptcy court under Civil Rule 56(c), applicable in the adversary

proceeding pursuant to Rule 7056. See Suzuki Motor Corp. v.

Consumers Union, Inc., 330 F.3d 1110, 1131 (9th Cir.), cert. denied,

540 U.S. 983 (2003). Summary judgment may be appropriate when a

mixed question of fact and law involves undisputed underlying facts. 

See EEOC v. UPS, 424 F.3d 1060, 1068 (9th Cir. 2005). 

We also review de novo the bankruptcy court’s interpretation of

a statute, including provisions of the Bankruptcy Code. See Beeman

v. TDI Managed Care Svcs., 449 F.3d 1035, 1038 (9th Cir. 2006).
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26 11 HHS Trust’s Opening Brief on Appeal at p. 6.

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V. DISCUSSION

At the outset, we note the difficulty imposed on us by the

Trustee’s failure to provide a complete record of what was presented

to the bankruptcy court. Although “[c]omprehensive briefs were

filed and an extended oral argument took place”11 before the

bankruptcy court, the only summary judgment pleadings we have in the

record before us are (1) the memorandum filed by the SHS Trust in

response to the Trustee’s motion for summary judgment, and (2) two

declarations, without the referenced exhibits attached, that were

filed in support of HHS Trust’s position in opposition to the

Trustee’s motion for summary judgment and in support of its own. We

have no transcript of the “extended oral argument” on the crossmotions for summary judgment. The Trustee’s failure to provide a

complete record of material pleadings and documents, as well as the

hearing transcript, in itself constitutes a basis to dismiss this

appeal or summarily affirm the bankruptcy court’s decisions. See

Kyle v. Dye (In re Kyle), 317 B.R. 390, 393 (9th Cir. BAP 2004);

Ehrenberg v. Cal. State Univ., Fullerton Found. (In re Beachport

Entm’t), 396 F.3d 1087-88 (9th Cir. 2005) (When the inadequacy of

the record provided to the Panel affords little choice but to

summarily affirm, we may do so.). 

The problem created by the lack of record manifests itself, in

part, in this way: “Ordinarily, we do not consider arguments that

were neither raised nor addressed before the bankruptcy court.” 
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11

Charlie Y., Inc. v. Carey (In re Carey), 446 B.R. 384, 393 (9th Cir.

BAP 2011), citing Cooper Indus., Inc. v. Aviall Servs., Inc., 543

U.S. 168-69 (2004). Because we do not have before us any memorandum

the Trustee may have filed either in support of her own motion for

summary judgment or in opposition to the cross motion filed by the

HHS Trust or the transcript of the argument on the cross motions, we

do not know what arguments included in the Trustee’s Opening Brief

on Appeal (“Trustee’s Opening Brief”) were presented to the

bankruptcy court. 

The Trustee makes three arguments in this appeal. First, the

bankruptcy court erred in its interpretation and application of the

Ninth Circuit’s decision in In re Betacom of Phoenix, 240 F.3d 823

(9th Cir. 2001), which the Trustee characterizes as “[t]he

controlling law in this Circuit regarding the possible subordination

of promissory notes arising from a sale of securities.” Trustee’s

Opening Brief at pp. 11-12. Second, the Trustee asserts that the

assignment of the claims subject to subordination does not alter the

Betacom analysis. Id. at pp. 16-19. Third, although she concedes

that the bankruptcy court correctly identified the policy underlying

§ 510(b), the Trustee contends that the bankruptcy court erred when

it focused on the form of the claim rather than analyzing the risk

represented by the claim. Because the bankruptcy court’s Memorandum

Decision contains no discussion of the legal effect of assignment,

we presume the argument was not raised by the Trustee and therefore

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12 In any event, it appears that the issue of assignment is

irrelevant in the bankruptcy court’s analysis. The bankruptcy court

points out that, “No one contests that the notes result from the

Stock Restriction Agreement purchases.” Memorandum Decision at p. 6

n.7. The bankruptcy court also states that the defendants, “and

their predecessors in interest,” i.e., Stephen and Humphrey’s

respective estates which last held actual stock, “removed themselves

as equity holders when the company issued the promissory notes.” 

Id. at 8:6-7.

13 In re Am. Wagering, Inc., 493 F.3d 1067 (9th Cir. 2007).

12

conclude that the Trustee waived that argument on appeal.12

We therefore limit our de novo review to the bankruptcy court’s

interpretation and application of § 510(b).

Section 510(b) provides:

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.

The principal cases in this circuit with respect to § 510(b)

are Betacom and American Wagering.13 In Betacom, the Ninth Circuit

ruled that a claim for damages for breach of a merger agreement was

properly subordinated under § 510(b) where the alleged breach was

the corporation’s failure to convey shares of stock. In reaching

that decision, the Ninth Circuit suggested that assessing the

application of § 510(b) to any claim requires an analysis of “the

two main rationales for mandatory subordination: 1) the dissimilar
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risk and return expectations of shareholders and creditors; and

2) the reliance of creditors on the equity cushion provided by

shareholder investment.” See, generally, Betacom, 240 F.3d at

828-30. 

American Wagering concerned a claim based upon a judgment debt

held by a financial advisor who had performed services relating to

the initial public offering of the stock of debtor’s predecessor-ininterest. Under his employment agreement, the financial advisor was

to be paid $150,000 cash plus “4.5 percent of the final evaluation

in the form of . . . common stock.” Overruling this Panel’s

decision (326 B.R. 449 (9th Cir. BAP 2005)), the Ninth Circuit

determined that the financial advisor’s claim was not subject to

subordination under § 510(b), because he never contracted to hold

shares of stock, only to receive compensation measured against the

value of stock. He therefore never undertook the risks of a

shareholder.

The Trustee asserts on appeal that under Ninth Circuit

precedent, the claims of the SHS Trust, Stephen Hyde Swift, Anne

Hathaway Swift, Samuel Hyde Swift, and the HHS Trust are subject to

“mandatory” subordination to the claims of the Debtor’s general

unsecured creditors pursuant to § 510(b). The Trustee cites Betacom

for the proposition that claims based on fixed payment promissory

notes must be subordinated under § 510(b) if they were “linked to”

the stock repurchase. The Trustee contends that § 510(b) is to be

read “broadly” to include claims in which “there exists some nexus

or causal relationship between the claim and the purchase of the
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securities. . . .” Am. Wagering, 493 F.3d at 1072.

In granting summary judgment against the Trustee, the

bankruptcy court recognized that for purposes of § 510(b), the

Debtor’s repurchase of Stephen and Humphrey’s stock constituted

purchases of the Debtor’s securities. Memorandum Decision at 5:26-

27. The bankruptcy court further recognized that contract claims

and even claims by persons or entities who are not and never were

shareholders of the debtor are subject to § 510(b) subordination. 

Id. at 5:27-6:2. See also Betacom, 240 F.3d at 829 (“There is

nothing . . . to suggest that Congress’s concern with creditor

expectations and equitable risk allocation was limited to cases of

debtor fraud.”), and (“Nothing in § 510(b)’s text requires a

subordinated claimant to be a shareholder.”). Finally, the

bankruptcy court agreed that § 510(b) was to be interpreted broadly. 

Memorandum Decision at 6:6-8. However, the bankruptcy court further

stated that the critical question it had to decide for purposes of

§ 510(b) was whether the claims for damages for breach of contract,

i.e., for Debtor’s failure to pay the notes, “arose” from the

Debtor’s repurchase of Stephen and Humphrey’s stock.

The bankruptcy court rejected the Trustee’s assertion that

Betacom and American Wagering required the application of a “but

for” analysis, a mere nexus between the claim and the repurchase of

stock. The bankruptcy court interpreted American Wagering as

requiring not simply that § 510(b) be interpreted broadly as the

Trustee suggested, but rather that it be interpreted broadly “to

give effect to the statute’s remedial goals.” Id. at 6:6-7, citing
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14 In enacting § 510(b), Congress adopted the position

articulated in “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 Security Holders and

the Issuer's Creditors, 48 N.Y.U. L.Rev. 261 (1973).” Geneva Steel,

281 F.3d at 1176. 

Slain and Kripke criticized the favorable treatment that

bankruptcy courts were extending to shareholder fraud

claims. Their argument rested on the bargain 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

(continued...)

15

Am. Wagering, 493 F.3d at 1072. The bankruptcy court thus rejected

a mandatory application of § 510(b) in the absence of a

determination that subordinating the claims satisfied the purposes

of § 510(b). Id. at 6:23-7:4, citing In re JTS Corp., 305 B.R. 529,

545 (Bankr. N.D. Cal. 2003).

We agree with the bankruptcy court that it is not appropriate

to adopt a rule that all claims based on stock redemption notes must

be subordinated. The language of § 510(b) is not sufficiently clear

to impose such a rule. The Tenth Circuit provides a good analysis

both of the policies behind the addition of § 510(b) to the

Bankruptcy Code and of the ambiguity of the language of § 510(b). 

See Allen v. Geneva Steel Co. (In re Geneva Steel Co.), 281 F.3d

1173 (10th Cir. 2002).14
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14(...continued)

satisfaction of their claims. Giving shareholder claims

the same priority as creditor claims, reasoned Slain and

Kripke, eliminates this safety cushion.

Id.

15 This approach is similar to that enunciated by the First

Circuit in the context of equitable subordination under § 510(c). 

Noting the Supreme Court has stated that “‘categorical reordering of

priorities that takes the place at the legislative level of

consideration is beyond the scope of judicial authority’ with

respect to equitable subordination under section 510(c),” the First

Circuit rejected the “rule” that all claims based on stock

redemption notes must be subordinated. Merrimac Paper Co., Inc. v.

Harrison (In re Merrimac Paper Co., Inc.), 420 F.3d 53, 62 (1st Cir.

2005) (quoting U.S. v. Reorganized CF & I Fabricators of Utah, Inc.,

518 U.S. 213, 229 (1996)). Instead, a court sitting in equity must

consider whether subordinating a particular claim would be fair

based on the totality of the circumstances in the individual case. 

Merrimac, 420 F.3d at 63.

16

In Betacom, the Ninth Circuit remanded two claims based on

promissory notes to the bankruptcy court, with direction that the

promissory note claims should be subordinated along with the claim

for breach of the merger agreement, “[i]f the note claims are linked

to the Merger Agreement.” Betacom, 240 F.3d at 832. Thus

“[although Betacom indicates that promissory note claims can be

subject to mandatory subordination under appropriate circumstances,

it does not describe what type of circumstances justify

subordination.” JTS Corp., 305 B.R. at 546. We therefore find no

error in the bankruptcy court’s determination that it was required

to decide whether subordinating the claims would satisfy the

purposes of § 510(b).15
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17

Section 510 of the Bankruptcy Code is an integral part of

the scheme established in subchapter I of chapter 5 of the

Bankruptcy Code. That subchapter, consisting of sections

501 through section 510, seeks to establish a fair

allocation of estate assets among the many types of

claimants in a liquidation or reorganization case. 

Subordination of a claim alters the otherwise applicable

priority of that claim so that the subordinated claimant

receives a distribution only after the claims of other

identified creditors have been satisfied. 

4 COLLIER ON BANKRUPTCY ¶ 510.01, at p. 510-3 (Alan N. Resnick &

Henry J. Sommer, eds., 16th ed. 2011).

As the Ninth Circuit explained in American Wagering, § 510(b)

“serves to effectuate one of the general principles of corporate and

bankruptcy law: that creditors are entitled to be paid ahead of

shareholders in the distribution of corporate assets.” Am.

Wagering, 493 F.3d at 1071. Betacom directs that we look to the

origin of the promissory notes on which the claims are based to

determine whether they should be subordinated. Betacom, 240 F.3d at

832. However, merely because the debt represented in the promissory

notes is from the repurchase of Stephen and Humphrey’s stock does

not automatically mean that it is subject to subordination. See

4 COLLIER ON BANKRUPTCY ¶ 510.04[6] at pp. 510-15-16. 

Generally, state law governs the rights and status of the

claims of holders of promissory notes based on repurchased stock vis

a vis other unsecured creditors of the corporation. See Butner v.

U.S., 440 U.S. 48 (1979). 

Property interests are created and defined by state law. 

Unless some federal interest requires a different result,

there is no reason why such interests should be analyzed

differently simply because an interested party is involved

in a bankruptcy proceeding. Uniform treatment of property
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16 The promissory notes issued in connection with the

repurchase of Stephen’s stock are not in the record on appeal.

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interests by both state and federal courts within a State

serves to reduce uncertainty, to discourage forum

shopping, and to prevent a party from receiving "a

windfall merely by reason of the happenstance of

bankruptcy." Lewis v. Manufacturers Nat’l Bank, 364 U.S.

603, 609 . . . .

Id. at 55.

The 1952 Stock Restriction Agreement, the 1993 Amendment, and

the 1999 Restated Agreement all were executed in Massachusetts. 

Although only the 1999 Restated Agreement contains a choice of law

provision (“[t]his agreement shall be construed under and governed

by the laws of the Commonwealth of Massachusetts”), each version of

the agreement to repurchase the shares of Stephen and/or Humphrey

upon his death is governed by Massachusetts law. Each of the notes

payable to the HHS Trust contains the following language: “The

execution, delivery and performance of this Note shall be governed

by and construed in accordance with the laws of the Commonwealth of

Massachusetts.”16 

Under Massachusetts law, the effect on a corporation from a

distribution to a shareholder which occurs by repurchase of a

corporation’s shares is measured by the earlier of (I) the date the

debt was incurred by the corporation, or (ii) the date the

shareholder ceased to be a shareholder with respect to the

repurchase. Mass. Gen. Laws ch. 156D, § 6.40(e)(1). Further, a

corporation’s indebtedness to a shareholder created through a
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17 While the record before us, particularly the

correspondence from the Debtor to Humphrey’s estate explaining that

insolvency was imminent unless the terms of payment for the

repurchased stock was restructured, suggests that the repurchase of

Humphrey’s shares may have been in violation of Mass. Gen. Laws ch.

156D § 6.40(c), the Trustee made no effort to impose subordination

on that basis, certainly not based on the record before us. 

Accordingly, we assume for purposes of our review that the notes

issued to the HHS Trust are valid.

In contrast, in its summary judgment memorandum, the SHS Trust

alleged that the equity cushion for the Debtor at the time the notes

for the repurchase of Stephen’s shares were issued was 2.9 times the

amount of the debt incurred through the repurchase.

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distribution (repurchase of shares) is at parity with the

corporation’s indebtedness to its general, unsecured creditors

except to the extent subordinated by agreement. Id. at § 6.40(f). 

However, 

No distribution may be made by a corporation which is a

going concern if, after giving it effect, 

(1) the corporation would not be able to pay its existing

and reasonably foreseeable debts, liabilities and

obligations, whether or not liquidated, matured, asserted

or contingent, as they become due in the usual course of

business. . . .

Id. at 6.40(c). 

Thus, outside of bankruptcy, the promissory notes were simply

debt instruments entitled to be paid on the same basis as the

Debtor’s other unsecured creditors in the absence of an evidentiary

record as to the Debtor’s solvency or insolvency during the relevant

time periods.17 The question we must address is whether § 510(b)

requires a different outcome once the Debtor corporation is in

bankruptcy. In doing so, we evaluate the claims in light of the two

main reasons for § 510(b) subordination identified in Betacom: the
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dissimilar risk and return expectations of shareholders and

creditors, and the reliance of creditors on the equity cushion

provided by shareholder investment. 

Under Mass. Gen. Laws ch. 156D, § 6.40(e)(1), any right of

Stephen to be a shareholder ended in 1997, when the Debtor issued

the notes for the repurchase of Stephen’s stock. Thus, as to the

notes issued in 1997 to the SHS Trust, Stephen Hyde Swift, Anne

Hathaway Swift and Samuel Hyde Swift, those parties held the risks

and return expectations of creditors based only upon the terms of

the notes they held. In addition, the bankruptcy court

affirmatively found that the Trustee presented no evidence that

creditors had relied upon equity created by Stephen’s stock in

deciding whether to extend credit to the Debtor.

Under Mass. Gen. Laws ch. 156D, § 6.40(e)(1), any right of

Humphrey to be a shareholder ended in 2003, when the Debtor issued

the notes for the repurchase of the then remaining shares of

Humphrey’s stock. Thus, as to the notes issued in 2002 and 2003 to

the HHS Trust, it held the risks and return expectations of a

creditor based only upon the terms of the notes it held. In

addition, the bankruptcy court affirmatively found that the Trustee

presented no evidence that creditors had relied upon equity created

by Humphrey’s stock in deciding whether to extend credit to the

Debtor.

The Trustee contends that the fact that the claimants (except

for the SHS Trust) held stock warrants issued in connection with the

Debtor’s issuance of the restated promissory notes in January 2004
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changes the analysis. We disagree. Black’s Law Dictionary defines

a stock warrant as a “[c]ertificate[] entitling the owner to buy a

specified amount of stock at a specified time(s) for a specified

price.” Holding a stock warrant is not the equivalent of holding

stock. In the January 2004 renegotiation of the notes, the Debtor

issued stock warrants to Stephen Hyde Swift, Anne Hathaway Swift,

Samuel Hyde Swift, and the HHS Trust. None of those stock warrants

ever was exercised. Further, no claim for the value of any stock or

stock warrants that might fall within the ambit of § 510(b) was ever

filed. The mere existence of the stock warrants does not taint the

claims based upon the promissory notes at issue in this appeal. 

Most importantly, § 101(49)(B)(iv) specifically excludes warrants

from the definition of “security” for purposes of the Bankruptcy

Code.

Summary judgment is appropriate where there is no genuine issue

of material fact and the moving party is entitled to judgment as a

matter of law. Civil Rule 56(c). The parties agreed that no

questions of fact existed with respect to the Trustee’s claim for

§ 510(b) subordination of the claims of the SHS Trust, Stephen Hyde

Swift, Anne Hathaway Swift, Samuel Hyde Swift, and the HHS Trust. 

We have analyzed the claims under the standards set forth in Betacom

and American Wagering, and we reach the same conclusion as did the

bankruptcy court. The Trustee is not entitled to a judgment

subordinating, pursuant to § 510(b), the Appellees’ claims to the

claims of other general unsecured creditors.
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VI. CONCLUSION

We AFFIRM the bankruptcy court’s determination that the claims

of the SHS Trust, Stephen Hyde Swift, Anne Hathaway Swift, Samuel

Hyde Swift, and the HHS Trust were based on debt instruments and

therefore not subject to subordination pursuant to § 510(b).