FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

In re: AMERICAN WAGERING, INC., a 

Nevada corporation; In re: LEROY’S

HORSE & SPORTS PLACE, a Nevada

corporation,

Debtors, No. 05-15969

Bankruptcy

Appellate Panel MICHAEL RACUSIN, d/b/a M.  Case No. Racusin & Company, NV-04-1029-BuBS Appellant,

OPINION

v.

AMERICAN WAGERING, INC.;

LEROY’S HORSE & SPORTS PLACE,

Appellees. 

Appeal from the Ninth Circuit

Bankruptcy Appellate Panel

Smith, Brandt, and Bufford, Bankruptcy Judges, Presiding

Argued and Submitted

July 24, 2006—San Francisco, California

Filed October 6, 2006

Before: Procter Hug, Gilbert S. Merritt,* and

Richard A. Paez, Circuit Judges.

Opinion by Judge Merritt

*The Honorable Gilbert S. Merritt, Senior Circuit Judge, United States

Court of Appeals for the Sixth Circuit, sitting by designation. 

17461
COUNSEL

David N. Frederick, Dennis L. Kennedy, Sarah E. Harmon,

Jennifer A. Smith, Lionel Sawyer & Collins, Las Vegas,

Nevada, for the defendant-appellant. 

Gerald M. Gordon, Thomas H. Fell, Ambrish S. Sidhu, Gordo

& Silver, Las Vegas, Nevada, for the plaintiffs-appellees. 

OPINION

MERRITT, Senior Circuit Judge: 

This is an appeal from a decision of the Bankruptcy Appellate Panel for the Ninth Circuit in favor of debtors, American

Wagering, Inc. and Leroy’s Horse and Sports Place. The only

issue on appeal is whether the claim against the bankrupt corporation by Michael Racusin, a former business consultant to

debtors, should be regarded as the debt of a creditor, or as a

suit by a shareholder subject to subordination pursuant to 11

U.S.C. § 510(b). The bankruptcy court found that the claim

was a debt not subject to subordination, but the Bankruptcy

Appellate Panel reversed, characterizing Racusin as an investor. In re American Wagering, Inc., 326 B.R. 449 (9th Cir.

BAP 2005). We agree with the bankruptcy court that Racusin,

as the holder of a money judgment, should be regarded as a

creditor and reverse the decision of the Bankruptcy Appellate

Panel and remand for further proceedings. 

I.

Facts and Procedural History

The litigation leading to this bankruptcy proceeding has a

lengthy and convoluted history. In 1994, debtor Leroy’s

Horse and Sports Place hired Michael Racusin as a financial

17464 IN RE AMERICAN WAGERING, INC.
advisor in connection with the initial public offering of

Leroy’s stock. In preparation for the initial public offering,

Leroy’s formed American Wagering, Inc. and became a subsidiary of American Wagering, Inc., which would become the

publicly-owned entity after the initial public offering. On

April 20, 1994, Racusin, doing business as M. Racusin and

Company, and Leroy’s entered into an agreement that stated:

Should M. Racusin & Company bring in a buyer for

Leroy’s Horse and Sports Place, said company will

be paid a commission based on 5% of the purchase

price. All terms and conditions must be acceptable to

Vic Salerno and commission would be paid by

Leroy’s Horse and Sports Place at closing. 

A subsequent agreement was entered into on November 11,

1994, by the same parties that provided as follows: 

Michael Racusin has been our financial advisor for

the purpose of an initial public offering by Rodman

and Renshaw, Inc., Equity Securities Trading Co.,

Inc., or Orida Capital International, Ltd. As compensation he would be paid 4% of the final evaluation

in the form of Leroy’s common stock and $150,000

cash upon completion of common offering or IPO. 

Excerpts of Record on Appeal at 2. 

Two years later, in 1996, while the initial public offering

was pending, Leroy’s brought suit against Racusin seeking a

determination that the contract was unenforceable. Racusin

removed the case to federal court based on diversity and

counterclaimed for breach of contract and other state-law

claims. In September 1997, after a bench trial, the district

court granted judgment to Racusin for $732,972. Racusin

appealed on the ground he was entitled to a jury trial. This

Court reversed and remanded, holding that Racusin was entitled to a jury trial. Leroy’s Horse and Sports Place v. Racusin,

IN RE AMERICAN WAGERING, INC. 17465
No. 97-17283, 1999 WL 147118 (9th Cir. Mar. 16, 1999). On

remand, the jury found in favor of Racusin, finding that the

amount of compensation should be “stock in Leroy’s . . . in

an amount equal to 4.5% of $45,000,000 [the final valuation

of the common stock] and $150,000 in cash.” Based on this

finding, the district court awarded Racusin 337,500 shares of

stock worth $2.025 million [4.5% of $45,000,000] at $6 per

share. 

Racusin again appealed, contending it was error for the district court to award specific performance when he requested

only money damages. This Court agreed and remanded the

case to the district court to calculate the monetary value of the

337,500 shares. Leroy’s Horse and Sports Place v. Racusin,

Nos. 99-16909, 00-16642, 00-17001, 2001 WL 1345974 (9th

Cir. Nov. 1, 2001). The calculation was to be based on when

Racusin could have legally begun selling his shares, as well

as how many shares he likely would have been able to sell at

what times. Id. at 4. On remand, Racusin was awarded damages of $2,310,000; the sum of $150,000 cash plus

$2,160,000, the value of the stock in 1996 when Racusin

could have first legally sold shares.1 Leroy’s Horse and Sports

Place, No. CV-S-95-00927 (D. Nev. July 8, 2003). 

A few days after the district court decision awarding Racusin monetary damages, and six years after Racusin first

reduced his claim to a money judgment in federal court,

Leroy’s and American Wagering each filed for Chapter 11

bankruptcy protection and the cases were consolidated for

administrative purposes. Racusin filed a claim for $2,275,012,

an amount based on the district court judgment with a set-off

for the $150,000 cash that had already been paid, plus the

1Racusin again appealed, claiming he was entitled to prejudgment interest. We again remanded the matter to the district court for a determination

on the appropriate amount of prejudgment interest. Hartunian v. Racusin,

Nos. 03-16245, 03-16434, 03-16248, 03-16378, 2005 WL 79089 (9th Cir.

Jan. 14, 2005). 

17466 IN RE AMERICAN WAGERING, INC.
amount of prejudgment interest sought in the then-pending

appeal. The debtors brought an adversary proceeding against

Racusin, alleging that his claim is one that must be subordinated under 11 U.S.C. § 510(b), which mandates subordination of “a claim . . . for damages arising from the purchase or

sale of . . . a security.” In an oral ruling, the bankruptcy court

granted summary judgment to Racusin and denied the cross

motion of Leroy’s and American Wagering. In re American

Wagering, Inc., No. BK-N-03-52529, Transcript of Hearing

on Cross-Motions for Summary Judgment at pp. 71-77

(Bankr. Nev. Jan. 5, 2004). On appeal, the Bankruptcy Appellate Panel reversed and held that the claim should be subordinated. American Wagering, Inc. v. Racusin, 326 B.R. 449 (9th

Cir. BAP 2005). This appeal followed. 

II.

Jurisdiction and Standard of Review

This Court conducts de novo review of a Bankruptcy

Appellate Panel decision, In re Burnett, 435 F.3d 971, 975

(9th Cir. 2006), and independently reviews a bankruptcy

court’s ruling on appeal from the Bankruptcy Appellate Panel.

In re DeVille, 361 F.3d 539, 547 (9th Cir. 2004). An appellate

court reviews the bankruptcy court’s findings of fact for clear

error and the grant or denial of summary judgment by a bankruptcy court is reviewed de novo. In re Nys, 446 F.3d 938,

943 (9th Cir. 2006); Thrifty Oil Co. v. Bank of Am. Nat’l Trust

& Sav. Ass’n, 322 F.3d 1039, 1046 (9th Cir. 2003); In re

Prestige Ltd. P’ship-Concord, 234 F.3d 1108, 1112-14 (9th

Cir. 2000). This court has jurisdiction pursuant to 28 U.S.C.

§ 158(d)(1). 

III.

Discussion

In claiming error by the Bankruptcy Appellate Panel, Racusin makes two main arguments: (1) his claim in the bankIN RE AMERICAN WAGERING, INC. 17467
ruptcy proceeding is not an equity claim but a debt claim that

cannot be subordinated because he received a money judgment prior to the commencement of the bankruptcy proceeding and (2) in any event, his claim is not one “for damages

arising from the purchase or sale of a security” subject to subordination under section 510(b). We agree that his claim is

not one that is properly subordinated because it is not one “for

damages arising from the purchase or sale of a security.” The

stock was never tendered to Racusin, resulting in a lawsuit for

breach of contract seeking damages based on the value of the

stock. Racusin received a money judgment for the breach and

initiated legal action to receive that award long before the

bankruptcy proceeding at issue here commenced. Accordingly, his claim in the bankruptcy proceeding is more akin to

that of a creditor than an investor and subordinating his claim

as “arising from the purchase or sale” of stock would not

serve the underlying purposes of subordination under section

510(b). 

A. The Statute — Plain Language, Purpose and Policies

Section 510(b) reads as follows: 

§ 510. Subordination 

. . . 

(b) 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. 

17468 IN RE AMERICAN WAGERING, INC.
11 U.S.C. § 510(b). 

[1] Section 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. The principles behind corporate and bankruptcy laws generally do not favor shifting the risk of loss

from shareholders to creditors, even if the shareholders are

blameless. One of the primary purposes of section 510(b),

therefore, is to prevent disappointed shareholders, sometimes

the victims of corporate fraud, from recouping their investment in parity with unsecured creditors. 

[2] Although many subordination cases sound in fraud, the

scope of section 510(b) has been broadened over the years to

include claims based on contract law and other actions. The

majority of courts in recent years that have confronted the

scope of § 510(b), including this one, have concluded that the

phrase “arising from” should be read broadly to encompass

claims other than fraud claims, such as claims for breach of

contract. See, e.g., In re Telegroup, 281 F.3d 133, 144 (3d Cir.

2002) (breach of stock purchase agreement); In re Betacom of

Phoenix, Inc., 240 F.3d 823, 829 (9th Cir. 2001) (breach of

merger agreement); In re Int’l Wireless Communications

Holdings, Inc., 257 B.R. 739, 746 (Bankr. D. Del. 2001),

aff’d, 279 B.R. 463 (D. Del. 2002), aff’d, 2003 WL 21466898

(3d Cir. 2003) (breach of stock purchase agreement); In re

PT-1 Communications, Inc., 304 B.R. 601, 608 (Bankr.

E.D.N.Y. 2004) (tortious interference). That the claim is for

breach of contract is not sufficient alone to prevent subordination. As noted above, a number of courts, including this one,

have held that breach of contract claims may be subordinated

under section 510(b) where there exists “some nexus or causal

relationship between the claim and the purchase of the securities . . . .” Telegroup, 281 F.3d at 138; Betacom, 240 F.3d at

829; Int’l Wireless, 257 B.R. at 746; In re NAL Fin. Group,

Inc., 237 B.R. 225, 234 (Bankr. S. D. Fla. 1999). These opinions make clear that they were concerned with claims that

IN RE AMERICAN WAGERING, INC. 17469
tried to recharacterize or restate what would otherwise be subordinated securities claims. 

As a remedial statute, section 510(b) should be interpreted

broadly in order to effectuate the intent of Congress. This

principle was recognized in our earlier opinion, American

Broadcasting Sys., Inc. v. Nugent (In re Betacom of Phoenix,

Inc.), 240 F.3d 823 (9th Cir. 2001), which examined the scope

of section 510(b) and is the governing precedent on section

510(b) in the Circuit. In Betacom, the claimants held shares

in a corporation that entered into a merger agreement with the

debtor. The agreement called for the claimants to receive

stock of the surviving company in exchange for their shares

in the acquired company. The merger agreement never closed

and claimants never accepted their tendered shares, which

remained in escrow. We held that the claim should be subordinated under section 510(b). 

[3] Betacom identifies two main reasons for subordination

of a claim pursuant to section 510(b): (1) dissimilar risk and

return expectations of creditors and shareholders and (2) the

reliance of creditors on the equity cushion provided by shareholder investment. Betacom focused on the fact that investors

expect to take more risks than creditors when they deal with

a corporate entity, but we also made clear that a claim should

only be subordinated when it will accomplish the purposes of

section 510(b). Neither rationale applies here. Racusin’s claim

became a money judgment six years before the bankruptcy.

He never became a shareholder nor did he provide any equity

that would be relied on by creditors in their dealings with

debtors. Shares were tendered to the claimants in Betacom but

the claimants refused them. Here, Racusin never was offered

the shares due him under the agreement. His potential opportunity for profit as a shareholder was eliminated long before

the bankruptcy and incidents of an equity interest in the corporation were eliminated. The lengthy time period between

Racusin’s first favorable judicial ruling and the filing of the

bankruptcy petition distinguish this case from others with

17470 IN RE AMERICAN WAGERING, INC.
much shorter time frames between the claimant’s obtaining a

judgment and the filing of the bankruptcy by the debtor. See,

e.g., In re Betacom, 240 F.3d at 826 (lawsuit filed three years

before bankruptcy petition, but suit not concluded and no

judgment issued at time of bankruptcy filing); In re

Alta+Cast, 301 B.R. 150, 152 (Bankr. D. Del. 2003) (same).

[4] A look at the plain language of the statute demonstrates

its inapplicability to the circumstances here. Under the plain

language of the statute a claim must be subordinated if it is

one for damages arising from “rescission of a purchase or sale

of a security of the debtor.” Racusin’s claim arises from the

fact that the value of the stock on the date of the public offering was simply the basis for calculating his compensation. He

has never been a shareholder, has never attempted to recover

an investment loss and since 1996 he has only sought to collect compensation owed for services he performed pursuant to

a contract that the debtors breached. 

In In re Alta+Cast, 301 B.R. 150 (Bankr. D. Del. 2003), a

case relied on by the Bankruptcy Appellate Panel, the debtor

sought to subordinate a former employee’s claim. There, the

debtor and claimant had an agreement by which the debtor

agreed to repurchase its stock from the claimant if he was terminated for cause. When the debtor did not repurchase the

securities after terminating claimant for cause, the claimant

obtained a judgment against the debtor. The bankruptcy court

held that the judgment arose from an agreement for the sale

or purchase of a security because the claimant retained the

risk of ownership by holding the stock until his termination

— the claimant actually obtained an equity interest and the

lawsuit arose from the debtor’s refusal to repurchase the

equity interest. Id. at 155. Here, Racusin never obtained an

equity interest in debtors, and his lawsuit arose from the

refusal to issue stock as compensation for services rendered.

[5] Racusin received a money judgment for services rendered nine years before the bankruptcy; he did not seek to

IN RE AMERICAN WAGERING, INC. 17471
enforce an award of an equity interest in debtors’ companies.

Racusin therefore contends that because the claim is based on

a pre-petition money judgment it simply is not subject to subordination under section 510(b). In In re Montgomery Ward

Holding Corp., 272 B.R. 836, 842 (Bankr. D. Del. 2001), the

court held that a claim based on a promissory note is not subject to subordination under section 510(b) because such

claims are only for the recovery of an unpaid debt. Id. at 842-

43; accord In re Mobile Tool Int’l, Inc., 306 B.R. 778 (Bankr.

D. Del. 2004). Although Racusin did not exchange his stock

for a debt instrument, like the notes in Montgomery Ward, he

sought to receive money damages for failure to deliver the

stock well in advance of the debtors’ filing for bankruptcy. He

filed his lawsuit well before the onset of the bankruptcy filing,

rebutting any charge that he was trying to convert an equity

interest into an unsecured claim only when the debtors’ stock

started to decline in value — one of the claimed purposes

behind section 510(b). Our earlier decision reversing a stock

award to Racusin makes clear that his underlying claim is a

debt claim, not an equity claim, for purposes of the bankruptcy proceeding. 

[6] Racusin did not sue debtors as an equity investor seeking monetary damages for fraud or breach of contract related

to their mishandling of shareholders’ economic investment in

the company. He sued as an agent who did not receive compensation promised in an employment agreement. The money

judgment awarded at the direction of our Court in its earlier

opinion established a fixed, pre-petition debt due and owing

Racusin as a creditor, not the risk/return position of an equity

investor in the now-bankrupt corporation. 

For the foregoing reasons, we reverse the judgment of the

Bankruptcy Appellate Panel and remand for further proceedings. 

Reversed and Remanded. 

17472 IN RE AMERICAN WAGERING, INC.