Opinion ID: 162082
Heading Depth: 2
Heading Rank: 4

Heading: Policy Objectives

Text: 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