Opinion ID: 162082
Heading Depth: 2
Heading Rank: 1

Heading: In re Betacom

Text: 42 A recent Ninth Circuit decision bolsters our decision to subordinate Allen's claim. See Am. Broadcasting Sys., Inc. v. Nugent (In re Betacom of Phoenix, Inc. ), 240 F.3d 823 (9th Cir.2001). That case stemmed from the merger of two corporations. For several convoluted reasons (including litigation), a group of shareholders from the acquired corporation never received delivery of the stock certificates for the acquiring corporation, stock promised to them as consideration for the merger. Id. at 826. The shareholders sued for breach of the merger agreement. While their lawsuit was pending, the merged corporation filed a Chapter 11 bankruptcy petition. The shareholders responded by repackaging their breach of contract action as a proof claim in the bankruptcy court. Id. at 827. 43 The debtor corporation sought to subordinate the investors' claims under section 510(b). The bankruptcy court agreed, but the district court reversed, holding that an actual purchase or sale of a security is required to trigger the statute. The district court reasoned that because the merger agreement had never been consummated (since the shares in the acquiring entity had never been delivered), there had been no purchase or sale of the debtor's securities; hence section 510(b) did not apply. Id. 44 Rejecting the shareholders' efforts to avoid the reach of section 510(b), the Ninth Circuit reversed the district court. The appellate court concluded that the statute is not limited to fraud claims, i.e., that it reaches certain breach of contract claims; and it concluded as well that the statute is implicated, at least in some instances, without an actual purchase or sale of a security. Id. at 828, 830-31. The court relied heavily on the same concepts we employ to subordinate Allen's fraudulent retention claim. Citing Professors Slain and Kripke, as well as Granite Partners, it reasoned that shareholders bargained for substantially more risk than creditors, and that it would be unfair to dilute creditor claims when those creditors looked for repayment to the equity cushion that invested capital provides. Id. at 829-30. Consequently, it mattered little that the investors' claim arose from a breach of contract. What is important is the potential effect of the claim: it would dilute the capital available to repay general creditors. Id; see also In re NAL Fin. Group, Inc., 237 B.R. 225, 232, 234 (Bankr.S.D.Fla. 1999) (agreeing with Granite Partners and subordinating post-investment claims pursuant to section 510(b), stating there is no distinction between fraud committed during the purchase of securities and fraud... committed subsequent thereto that adversely affects one's ability to sell those securities).