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

Heading: Early Treatment of Investor Claims in Bankruptcy

Text: 9 In adopting section 510(b) Congress did not write on a clean slate. Kenneth B. Davis, Jr., The Status of Defrauded Securityholders in Corporate Bankruptcy, 1983 Duke L.J. 1, 4. American and British courts have struggled for more than a century to referee battles between a bankrupt's creditors and its defrauded investors. Id. Early cases in both countries tended to side with the creditors, supported by the theory that a company's capital reserves represented a `trust fund' for payment of corporate debts. Id. at 5. By the early 1900s, courts began questioning the trust fund theory in favor of one that focused more narrowly on creditor reliance. Under this view, only creditors who could show actual reliance on a particular shareholder contribution warranted a superior claim to the capital invested by that shareholder. Id. at 5-6. By the 1930s, American courts routinely allowed investors to rescind their equity purchases, allowing investors not only to litigate their fraud claims but arming them, as well, with various procedural devices to ensure that creditors could not move ahead in the distribution line. Id. at 6-7. 10