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

Heading: The Language of Section 510(b) is Ambiguous

Text: 24 Although Allen and Geneva each claim that the language of section 510(b) is plain and unambiguous, they nonetheless arrive at starkly different interpretations. Arguing for a narrow construction, Allen says that the phrase arising from the purchase or sale of such a security refers back to the first clause of the statute, which speaks of rescinding the purchase or sale of the debtor's security. He insists that the simplest and least strained means of interpreting the statute is to require a direct nexus to what he calls the original purchase or sale of the security. Aplt's Br. at 16-17. By contrast, Geneva interprets the statute more broadly, pointing out that Allen's damages, assuming he was defrauded, can only be measured by establishing the price at which he could have sold Geneva's bonds had he been given accurate information. Unavoidably, then, his damages are causally connected to his purchase and sale of the debt securities. Appellee's Br. at 6. 25 We conclude, at least with respect to fraudulent retention claims like Allen's, that the language of section 510(b) is ambiguous. In reaching this conclusion, we rely on the acute and thorough analysis provided by the bankruptcy court in In re Granite Partners, L.P., 208 B.R. 332 (Bankr.S.D.N.Y.1997). 26 A hedge fund seeking Chapter 11 protection, debtor Granite Partners, through its trustee, moved to subordinate various investors' fraud claims under section 510(b). The investors charged that they were deceived into retaining their investments by the debtors' post-investment fraud. They claimed that because their fraudulent retention claims alleged independent torts, the claims did not arise from the purchase or sale of the debtor's securities and therefore should be treated as general unsecured claims. Id. at 334. 27 The bankruptcy court agreed with the investors' contention that the phrase `arising from' requires some causal connection between the initial security purchase or sale and the fraud. Id. at 339. But, suggested the court, that such a causal connection is required does little to shed light on the disputed statutory language, which lends itself to two different interpretations, both of them reasonable: 28 A literal reading implies that the injury must flow from the actual purchase or sale; a broader reading suggests that the purchase or sale must be part of the causal link although the injury may flow from a subsequent event. Since the fraudulent maintenance claim cannot exist without the initial purchase, the purchase is a causal link. 29 Id. In the opinion of that court, such an interpretive condition defines ambiguity: Reasonably well-informed persons, said the court, could interpret section 510(b) in either [the broad or narrow] sense, and hence, the section is ambiguous. Id. 30 We agree. We cannot discern the scope of section 510(b) by examining only the text of the statute.