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

Heading: The Oppenheimer Decision and Its Criticism

Text: 11 In 1937, the United States Supreme Court put its weight behind the rule allowing investor participation on a par with general creditors. Called upon to review the liquidation of a depression-era bank, which had fallen into receivership, the lower court had rejected a shareholder rescission claim. It ruled that the shareholder could not receive any distribution until after all creditors were paid in full. The Supreme Court reversed, finding no statutory basis to support the appellate court's priority scheme; hence the Court refused to subordinate the shareholder's claim. Oppenheimer v. Harriman Nat'l Bank & Trust Co., 301 U.S. 206, 215, 57 S.Ct. 719, 81 L.Ed. 1042 (1937). 12 Although Oppenheimer was not, strictly speaking, a bankruptcy case, the high court subsequently declined to review two cases challenging whether its ruling applied in bankruptcy. See Robert J. Stark, Reexamining The Subordination of Investor Fraud Claims in Bankruptcy: A Critical Study of In re Granite Partners, L.P., 72 Am. Bankr.L.J. 497, 503 (1998) (discussing Oppenheimer and the Court's refusal to decide whether its principle extended to bankruptcy cases). For their part, lower courts relied on Oppenheimer in continuing to treat defrauded investors in bankruptcy cases no differently from general creditors. Id. at 503-04 (discussing cases). 13 This tropism toward shareholder participation came to a dramatic halt in 1973 with the release of a report authored by the Commission on the Bankruptcy Laws, a blue ribbon panel created by Congress to recommend comprehensive changes to the Bankruptcy Code. See Davis, 1983 Duke L.J. at 10. The commission's report in turn embraced 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 Securityholders and the Issuer's Creditors, 48 N.Y.U. L.Rev. 261 (1973). 14 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 satisfaction of their claims. Giving shareholder claims the same priority as creditor claims, reasoned Slain and Kripke, eliminates this safety cushion. Id. at 286-91; see also Stark, 72 Am. Bankr.L.J. at 504 (discussing the Slain/Kripke position).