Opinion ID: 162082
Heading Depth: 2
Heading Rank: 2

Heading: In re Amarex

Text: 45 Some courts, we recognize, have accepted Allen's narrow interpretation of section 510(b) and have held that the statute does not reach fraudulent retention claims. Indeed one of them is from within this circuit: Ltd. Partners' Comm. of Amarex v. Official Trade Creditors' Comm. of Amarex, Inc. (In re Amarex, Inc.), 78 B.R. 605 (W.D.Okla.1987). That case, which arose from the failure of an oil and gas drilling partnership, involved post-investment fraud claims brought by hundreds of the limited partners against the general partner. Id. at 606. Appearing in the bankruptcy proceedings, the limited partners charged, among other things, that the general partner wasted company assets, breached its fiduciary duties, and committed various acts of common law fraud. Id. 46 The limited partners resisted subordination under section 510(b) by arguing that their claims were not related to the purchase or sale of a security. Id. at 608. Disagreeing, the bankruptcy court ruled they would have no claims against the debtor but for their purchase of the limited partnership interests (which the bankruptcy code defines as securities). The court also invoked the risk allocation rationale advanced by Professors Slain and Kripke. Id. 47 The district court reversed. After reviewing the statute's text and legislative history, it concluded, Section 510(b) reveals a Congressional desire to shift to the shareholders the risk of fraud in the issuance and sale of the security — no more. Id. at 609-10 (italics in original). It also accused the bankruptcy court of ignor[ing] the clear language of section 510(b), its underlying policies and the purposes for which it was enacted. Id. at 610. And it emphasized that the statute pertains only to claims based upon the alleged wrongful issuance and sale of the security and does not encompass claims based upon conduct by the issuer of the security which occurred after this event. Id. (emphasis added). 48 We respectfully decline to follow this reasoning, not least because it rests on a small but significant error in reading the statutory language. As the italicized terms above show, the district court read section 510(b) as limited to the issuance and sale of a debtor's security. In fact, the statute contains no such restriction; it bars claims arising from the purchase or sale of a security. The word issuance does not appear in the statutory language, and indeed, as courts have held, the statute is not limited to issuance-related claims. See, e.g., In re Betacom, 240 F.3d at 828-29; In re Lenco, Inc., 116 B.R. 141, 144 (Bankr.E.D.Mo.1990). We fear that the district court's constricted interpretation of section 510(b) flows from a mistaken reading of the statutory text, a reading that erroneously substituted the more restrictive term issuance for the actual term purchase. 5