Opinion ID: 162082
Heading Depth: 1
Heading Rank: 3

Heading: interpreting the language of the statute

Text: 19 Thus, if a claim (usually alleging some sort of securities-related fraud or similar injury) falls within the reach of the statute, it is treated on an inferior or equal basis with the security from which the claim arose. That is, a fraud claim arising from the purchase or sale of a security is treated not as a general unsecured claim but rather as a claim below or equivalent to the rights afforded by the underlying security. See Stark, 72 Am. Bankr.L.J. at 497 (explaining operation of statute). (In 1984, Congress amended the statute to make clear that fraud claims springing from the purchase or sale of common stock are treated on the same level as common stock. All other claims are subordinated to their underlying security.) This adverse treatment carries serious implications for investors, because a Chapter 11 reorganization plan, as is the case here, may deny distributions to entire classes of inferior security interests. Id. 20 Joining three separate, dependent clauses, the statute subordinates three types of claims: (1) an actual attempt to rescind a purchase or sale of a security issued by the debtor or one of its affiliates; (2) a claim for damages arising from a purchase or sale of such a security; and (3) a claim for reimbursement or contribution for a purchase or sale of such a security under section 502 of the Code. 21 The parties agree that Allen's bonds are securities within the meaning of section 510(b). They further agree that his claim is neither an effort to rescind the purchase of his securities nor to seek reimbursement or contribution for their purchase. They dispute only whether his proof of claim falls within the second category of subordinated items — whether it is a claim for damages arising from the purchase or sale of[] a security. Id. To resolve this dispute, we must decide whether post-investment fraud that causes an investor to hold rather than sell his securities arises from the purchase or sale of those securities.
22 We begin, as we do any instance of statutory construction, with the language of the statute. Yankee Atomic Elec. Co. v. N.M. & Ariz. Land Co., 632 F.2d 855, 857 (10th Cir.1980). A statute clear and unambiguous on its face must be interpreted according to its plain meaning. Id. An [a]mbiguity exists when a statute is capable of being understood by reasonably well-informed persons in two or more different senses. 2A Norman J. Singer, Statutes and Statutory Construction, § 45.02, at 11-12 (6th ed.2000). If a statute is ambiguous, a court may seek guidance from Congress's intent, a task aided by reviewing the legislative history. United States v. Simmonds, 111 F.3d 737, 742 (10th Cir.1997). Ambiguous text can also be decoded by knowing the purpose behind the statute. Singer, Statutes and Statutory Construction, § 45.09, at 49. 23
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.
31 The legislative history behind section 510(b) is helpful but not dispositive. On the one hand, as we mentioned above, it is clear that Congress embraced Professors Slain and Kripke's theory of risk allocation, namely, that general creditors assume a different type of risk with respect to the debtor's insolvency than do investors. And not only are general creditors unable to share in the potential benefits flowing from company success, they rely on the equity cushion created by the investors' capital contributions for payment. While Slain and Kripke focused primarily on shareholder rescission claims, their larger concerns sprang from what they termed the disaffected stockholder's efforts to recapture his investment from the corporation. Slain and Kripke, 48 N.Y.U. L.Rev. at 267, quoted In re Granite Partners, 208 B.R. at 339. 32 On the other hand, it is equally true that neither Congress nor Slain and Kripke discussed or even mentioned fraudulent retention claims. At least one commentator speculates, moreover, that the term rescission claims, which appears in both the statute and its legislative history, reflects Congress's use of a shorthand reference to both rescission and damage claims based on fraud in the inducement. Stark, 72 Am. Bankr.L.J. at 507. This commentator argues that the lack of any reference to fraud in the retention was not oversight: Congress, he says, simply held a narrow vision of the problem it sought to address when it drafted and voted on section 510(b), a vision that suggests it had no intent of subordinating fraudulent retention claims. Id. at 523. Were it otherwise, he adds, Congress could easily have drafted the statute to subordinate all investor fraud claims, including fraud in the retention claims, if that was Congress's intent. Id. at 521. 33 We do not share the certitude by which this commentator views the legislative history. Like the text of the statute itself, we believe that it is indeterminate and indeed susceptible to opposing interpretations.
34 It is here, in examining the statute's purposes and objectives within the larger context of bankruptcy law, that we find the most compelling reasons for subordinating Allen's retention claim. Again we rest heavily on the reasoning set out in Granite Partners. That court seized on what for investors is the unfortunate reality behind section 510(b): its language, its legislative history, and most important, its embodied legislative policy choices, reflect strong congressional disapproval of investor fraud claims in bankruptcy. With that principle firmly in mind, Granite Partners found no good reason to distinguish so-called fraudulent inducement claims from fraudulent retention claims. Nor do we. Put simply, creditors stand ahead of the investors on the receiving line. In re Granite Partners, 208 B.R. at 344. 2 35 Two separate but related policy reasons convinced the Granite Partners court to treat retention claims no differently than inducement claims: 36 First, from the creditors' point of view, it does not matter whether the investors initially buy or subsequently hold on to their investments as a result of fraud. In either case, the enterprise's balance sheet looks the same, and the creditors continue to rely on the equity cushion of the investment. 37 Second, a fraudulent retention claim involves a risk that only the investors should shoulder. In essence, the claim involves the wrongful manipulation of the information needed to make an investment decision. The [investors] charge that the debtors' [sic] wrongfully deprived them of the opportunity to profit from their investment (or minimize their losses) by supplying misinformation which affected their decision to sell. Just as the opportunity to sell or hold belongs exclusively to the investors, the risk of illegal deprivation of that opportunity should too. In this regard, there is no good reason to distinguish between allocating the risks of fraud in the purchase of a security and post-investment fraud that adversely affects the ability to sell (or hold) the investment; both are investment risks that the investors have assumed. 38 Id. at 342. 39 We find the risk allocation argument persuasive in this case. 3 Allen's claim, at its essence, accuses Geneva of manipulating information concerning his investment. He acquired and held that investment with the belief that its value would increase, though he no doubt recognized that for any number of reasons it might not; indeed, he recognized that it might even lose value. In contrast, a mere creditor of Geneva could expect nothing more than to recoup the value of goods or services supplied to the company. Yet now, having watched his investment gamble turn sour, Allen would shift his losses to those same creditors. We think this effort clashes with the legislative policies that section 510(b) purports to advance. 40 Furthermore, we echo two additional concerns expressed by the Granite Partners court. First, Allen's position, if accepted, would produce an anomalous result. By holding his bonds as a result of the allegedly fraudulent conduct by Geneva, he says that he asserts a claim exempt from section 510(b). Yet were he to sell his bonds to a third party, a party duped by the same fraudulent conduct, that buyer would hold only a subordinated claim. Id. at 342 n. 11. Second, Allen's position weakens a central feature of American bankruptcy law: the absolute priority rule. 4 As Granite Partners recognized, When an investor seeks pari passu treatment with the other creditors, he disregards the absolute priority rule[ ] and attempts to establish a contrary principle that threatens to swallow up this fundamental rule of bankruptcy law. Id. at 344. 41