Liquidating Trust Committee of the Del Biaggio Liquidating Trust v. David Freeman (In re William James Del Biaggio, III)
- Citation:
- Ninth Circuit Court of Appeals, No. 13-17500 ((August 22, 2016)
- Tag(s):
-
- Ruling:
- General unsecured claim against individual debtor was properly subordinated pursuant to section 510(b) of the Bankruptcy Code because claim arose from an equity investment in an affiliate of the debtor.
- Procedural context:
- Appeal from order of district court upholding bankruptcy court order granting summary judgment that the creditor's claim was subject to mandatory subordination under section 510(b) of the Bankruptcy Code.
- Facts:
- Creditor and debtor entered into an agreement to purchase a hockey team. The creditor invested $31 million in the holding company of the purchaser and the debtor invested $25 million, which gave the debtor 27% of the voting securities. After the sale was consummated, the creditor learned that the debtor had funded his investment by embezzling his clients and the debtor did not have the promised resources to support the investment. The debtor's fraud necessitated capital calls on the creditor, which he could not satisfy, and the creditor's investment became worthless. After the debtor filed for bankruptcy, the creditor filed a general unsecured claim for $38 million based upon the debtor's fraud. The debtor's liquidating trust counterclaimed alleging the claim should be subordinated based on section 510(b). The bankruptcy court ruled in favor of the trust because the holding company was an affiliate of the debtor and the claim arose from the purchase of securities of the affiliate. On appeal, the creditor argued 510(b) did not apply because the creditor purchased the securities from a third party and not the debtor, but the Court of Appeals held the claim only need arise from the purchase of securities of an affiliate of the debtor and not from the debtor directly. The creditor argued that the purpose of 510(b) does not apply to claims against an individual debtor, but the Court of Appeals, disagreeing with the BAP decision in In re Kahn, 523 B.R. 175 (9th Cir. 2014), held that the language of the statute is broad enough to cover such claims. The creditor argued that his investment provided no equity upon which the debtor's creditors could rely, but the Court of Appeals held such reliance was not a necessary element of 510(b) subordination. The creditor argued his claim should only be subordinated to claims against the affiliate, but the court held that such a construction would render the statute's application to affiliates meaningless.
- Judge(s):
- Kozinski, Noonan and O'Scannlain
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