Ltc of William Del Biaggio III v. David Freeman

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE WILLIAM JAMES DEL No. 13-17500

BIAGGIO, III,

Debtor, D.C. No.

4:12-cv-06447-YGR

LIQUIDATING TRUST

COMMITTEE OF THE DEL OPINION

BIAGGIO LIQUIDATING TRUST,

Plaintiff-Appellee,

v.

DAVID FREEMAN,

Defendant-Appellant.

Appeal from the United States District Court

for the Northern District of California

Yvonne Gonzalez Rogers, District Judge, Presiding

Submitted January 6, 2016*

San Francisco, California

Filed August 22, 2016

*

The panel unanimously concludes this case is suitable for decision

without oral argument. See Fed. R. App. P. 34(a)(2).

2 IN RE DEL BIAGGIO

Before: Alex Kozinski, John T. Noonan,

and Diarmuid F. O’Scannlain, Circuit Judges.

Opinion by Judge O’Scannlain

SUMMARY**

Bankruptcy

Affirming the district court’s affirmance of the

bankruptcy court’s summary judgment in an adversary

proceeding, the panel held that an individual creditor’s

general unsecured fraud claim was properly subordinated to

other claims senior or equal to it.

The panel held that the claim was properly subordinated

under 11 U.S.C. § 510(b) because it was a damages claim

arising from the purchase or sale of securities of an affiliate

of the debtor. The panel held that the claim arose from the

sale or purchase of securities in Predators Holdings, LLC,

owner of Nashville Hockey Club Limited Partnership, LLC,

which owned and operated the Nashville Predators National

Hockey League team. The panel also held that § 510(b) is

not limited to corporate debtors, but also applies to individual

debtors.

**

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

IN RE DEL BIAGGIO 3

COUNSEL

Merle C. Meyers and Michele Thompson, Meyers Law

Group, P.C., San Francisco, California, for Defendant-

Appellant.

Michael M. Lauter, Michael H. Ahrens and Steven B. Sacks,

Sheppard, Mullin, Richter & Hampton LLP, San Francisco,

California, for Plaintiff-Appellee.

OPINION

O’SCANNLAIN, Circuit Judge:

A provision of the Bankruptcy Code requires that

damages claims arising from the purchase or sale of the

security of a debtor be subordinated to other claims senior to

or equal to it. We must decide whether such treatment

applies where the debtor is an individual.

I

A

The Nashville Predators are a National Hockey League

(“NHL”) team in Nashville, Tennessee. As of 2007, the

Predators were owned by Craig Leipold and his family.

During that year, however, David Freeman learned that

Leipold intended to sell the team to a third party who wanted

to move the Predators to another state. As a result, Freeman

began organizing a group of Nashville investors to buy the

team. Leipold talked with Freeman about purchasing the

Predators, but was also in conversation with other potential

4 IN RE DEL BIAGGIO

buyers, including William Del Biaggio, III. Eventually,

Leipold and the NHL Commissioner suggested to Freeman

that his group of investors join forces with Del Biaggio to

make a joint bid to buy the team. In so suggesting, Leipold

related previous assertions made to him by Del Biaggio that

stressed Del Biaggio’s ability to fund the purchase and his

experience with professional hockey.

During the summer and fall of 2007, Freeman and Del

Biaggio engaged in negotiations concerning the acquisition

of the Predators. Del Biaggio confirmed his ability to fund a

$70 million share in the investment, and told Freeman he had

connections in the NHL and hoped to become a major owner

of a second NHL team. Freeman and his investors ultimately

reached an agreement with Del Biaggio to purchase the

Predators from Leipold for $193 million. Before the closing

date, however, Del Biaggio contacted Freeman and informed

him he could only invest $25 million, not the $70 million he

originally promised. He proposed to replace the remainder

with a $40 million increase in a loan from CIT Bank. Del

Biaggio reported that he personally guaranteed the loan and

that he would pay all the interest accrued on account of the

loan increase. He also agreed to provide a personal guarantee

to underwrite the Predators’ lease obligations up to $10

million.

The sale of the Predators to Freeman and his cohort of

investors, including Del Biaggio, closed on December 7,

2007. As a result of the sale, the Predators became wholly

owned and operated by Nashville Hockey Club Limited

Partnership, LLC, which is in turn wholly owned by

Predators Holdings, LLC (“Holdings”).

IN RE DEL BIAGGIO 5

B

Freeman invested $31 million to obtain 31 Common Units

of Holdings. Common Units were subject to capital calls and

not afforded a liquidation preference, unlike the other form of

equity investment in Holdings, the Series A Units. Freeman

also made a $5 million subordinated loan to Holdings in

exchange for its promissory note.

Del Biaggio invested in Holdings through an entity called

Forecheck Investments, LLC (“Forecheck”). Forecheck paid

$30 million to obtain all 30 Series A Units of Holdings.

These Series A Units gave Forecheck 32.6% of the voting

units in Holdings. Del Biaggio in turn invested $25 million

to acquire an 83.33% interest in Forecheck. As a result, Del

Biaggio controlled roughly 27% of the voting securities of

Holdings.

C

Several months after the sale, Freeman learned that Del

Biaggio never had the funds to support his guarantees and

that the $25 million Del Biaggio already invested was in fact

money he had embezzled from his clients. Del Biaggio filed

for Chapter 11 bankruptcy which gave rise to the current

proceeding. He was later indicted and convicted for various

financial frauds and sentenced to an eight-year prison term.

Del Biaggio’s fraud became headline news in Nashville,

and as a result Predators revenues stagnated. To keep the

business afloat, Holdings made capital calls to holders of the

company’s Common Units, including Freeman. Freeman

satisfied this first capital call with a payment of $2,632,075.

To prevent termination of the CIT Bank loan and the

6 IN RE DEL BIAGGIO

Predators’ lease, he also replaced Del Biaggio’s guarantees

with his own. Freeman alleges he was unable to satisfy later

capital calls because of these guarantees, and that as a result,

his membership units in Holdings became “heavily diluted

and virtually worthless.”

D

In October 2008, Freeman filed a general unsecured claim

against Del Biaggio’s bankruptcy estate seeking damages of

an undetermined amount arising from his fraud in the

Holdings transaction.1 In a later amended proof of claim,

Freeman sought damages of $38,632,075. This amount

included Freeman’s initial $31 million investment in

Holdings securities, the $5 million of subordinated debt he

issued to Holdings in exchange for the promissory note, and

the $2,632,075 paid in the first capital call. In response, the

Liquidating Trust Committee of the Del Biaggio Liquidating

Trust, the entity charged with prosecuting claims objections

in Del Biaggio’s bankruptcy, filed a counterclaim against

Freeman and sought summary judgment. The counterclaim

sought subordination and disallowance of Freeman’s claim

based on 11 U.S.C. § 510(b).

E

The bankruptcy court granted the Committee’s motion for

summary judgment, finding Freeman’s claim was subject to

mandatory subordination under § 510(b). After determining

1

Holdings’ other investors submitted identical claims against Del

Biaggio’s estate. When the bankruptcy court approved Holdings’

repurchase of Del Biaggio’s estate’s interest in the Predators, Holdings

and all other investors except Freeman released their claims.

IN RE DEL BIAGGIO 7

that Holdings was an “affiliate” of Del Biaggio via his

ownership in Forecheck the court concluded that § 510(b)

applied to Freeman’s fraud claim because the plain language

of the statute covers claims arising from the purchase of the

securities of a debtor’s affiliate. The bankruptcy court further

reasoned that subordinating Freeman’s claim under § 510(b)

served the purposes of the statute, because as an investor in

Holdings, he bargained for both a greater share of profits and

a greater share of risks than Del Biaggio’s unsecured

creditors. The court also determined that the claims of Del

Biaggio’s other creditors were senior to Freeman’s claim

based on its conclusion that notes or shares issued by a

subsidiary create no claim to the assets of a parent. Freeman

appealed to the district court, which in turn affirmed the order

and judgment of the bankruptcy court. Freeman timely

appealed here.

II

We review a district court’s decision on appeal from a

bankruptcy court de novo, and apply the same standards

applied by the district court without deference to that court.

In re Thorpe Insulation Co., 677 F.3d 869, 879 (9th Cir.

2012). When considering a bankruptcy court’s grant of

summary judgment, we apply the regular summary judgment

standard in order to “determine whether there are any genuine

issues of material fact and whether the bankruptcy court

correctly applied the substantive law.” In re Caneva,

550 F.3d 755, 760 (9th Cir. 2008) (quoting In re Bakersfield

Westar Ambulance, Inc., 123 F.3d 1243, 1245 (9th Cir.

1997)).

8 IN RE DEL BIAGGIO

III

Freeman first contends that the bankruptcy court and the

district court erred in applying Bankruptcy Code Section

510(b) to his claim against Del Biaggio.

Section 510(b) reads as follows:

§ 510. Subordination

....

(b) For the purpose of distribution under

this title, a claim arising from rescission

of a purchase or sale of a security of the

debtor or of an affiliate of the debtor, for

damages arising from the purchase or sale

of such a security, or for reimbursement

or contribution allowed under section 502

on account of such a claim, shall be

subordinated to all claims or interests that

are senior to or equal the claim or interest

represented by such security, except that if

such security is common stock, such claim

has the same priority as common stock.

11 U.S.C. § 510(b). The statute operates in two steps. First,

it commands that specific types of claims relating to

securities, including claims “for damages arising from the

purchase or sale” of a debtor’s securities or the securities of

an affiliate “shall be subordinated.” See In re Betacom of

Phoenix, Inc., 240 F.3d 823, 828–29 (9th Cir. 2001)

(observing that subordination of qualifying claims under

§ 510(b) is mandatory). Second, it identifies other claims to

IN RE DEL BIAGGIO 9

which a qualifying claim must be subordinated—“all claims

or interests that are senior to or equal the claim or interest

represented by” the debtor’s security or the security of his

affiliate. Considered as a whole, § 510(b) “effectuate[s] one

of the general principles of corporate and bankruptcy law:

that creditors are entitled to be paid ahead of shareholders in

the distribution of corporate assets.” In re Am. Wagering,

Inc., 493 F.3d 1067, 1071 (9th Cir. 2007). This principle is

broadly known as the absolute priority rule. See, e.g., In re

Telegroup, Inc., 281 F.3d 133, 139–40 (3d Cir. 2002)

(explaining the absolute priority rule and its relation to

§ 510(b)).

It is undisputed that Freeman’s claim is a damages claim.

Freeman also admits that his Holdings investments are

securities2 and that Holdings is an affiliate3 of Del Biaggio.

At this first step, Freeman argues only that the bankruptcy

court and the district court erred in applying § 510(b) to his

2

Interests in limited liability companies are “securities” under the

Bankruptcy Code. See In re Tristar Esperanza Props., LLC, 782 F.3d

492, 495 (9th Cir. 2015) (noting that among the non-exhaustive list of

items defined as securities in 11 U.S.C. § 101(49) “[an] LLC interest

either qualifies as a ‘transferable share’ or falls within the broad residual

category” (quoting In re SeaQuest Diving, LP, 579 F.3d 411, 418 (5th Cir.

2009))). Likewise, the term “security” as employed in the statute includes

a promissory note. See 11 U.S.C. § 101(49)(A)(i).

3

The Bankruptcy Code defines affiliate as a “corporation 20 percent or

more of whose outstanding voting securities are directly or indirectly

owned, controlled, or held with the power to vote, by the debtor.”

11 U.S.C. § 101(2)(B); see also 11 U.S.C. § 101(9)(A)(ii) (defining

‘corporation’ as including a “partnership association organized under a

law that makes only the capital subscribed responsible for the debts of

such association”). It is uncontested that Del Biaggio controlled more

than 20% of Holdings, given his interest in Forecheck.

10 IN RE DEL BIAGGIO

claim against Del Biaggio because his claim is not one

“arising from the purchase or sale” of Holdings.

A

Beginning with the statute’s plain text, we observe that

§ 510(b)’s “arising from” language reaches broadly to

subordinate damage claims involving qualifying securities.

The phrase “arising from” as employed in § 510(b)

“connotes, in ordinary usage, something broader than

causation” and is instead “ordinarily understood to mean

‘originating from,’ ‘having its origin in,’ ‘growing out of,’ or

‘flowing from’ or in short, ‘incident to, or having connection

with.’” In re Tristar Esperanza Props., LLC, 782 F.3d 492,

497 (9th Cir. 2015) (quoting Underwriters at Lloyd’s of

London v. Cordova Airlines, Inc., 283 F.2d 659, 664 (9th Cir.

1960)). In Tristar, we applied this reading of the statute’s

text to conclude that a claim involving the withdrawal of a

member from an LLC was rightly subordinated, despite the

fact that the withdrawal converted the claimant’s interest

from an equity interest to a debt interest before the

bankruptcy filing. Id. at 497–98.

Our other precedents evince a similarly broad reading of

§ 510(b)’s “arising from” language. In Betacom, we found

that a damages claim based on a purported breach of contract

in a merger agreement was one that arose from the sale or

purchase of a debtor’s securities under § 510(b), even though

the claimants never actually purchased or received stock.

240 F.3d at 830. In so holding, we construed the claim as one

“surrounding” the sale or purchase of a security of the debtor.

Id. at 829.

IN RE DEL BIAGGIO 11

Likewise, in American Wagering, we concluded that

§ 510(b)’s “arising from” language requires that claims be

subordinated “where there exists ‘some nexus or causal

relationship between the claim and the purchase of the

securities.’” 493 F.3d at 1072 (quoting Telegroup, 281 F.3d

at 138). Other courts interpreting § 510(b)’s “arising from”

language have also endorsed this expansive “some nexus”

reading. See, e.g., In re Am. Hous. Found., 785 F.3d 143, 155

(5th Cir. 2015); SeaQuest Diving, LP, 579 F.3d 411, 421–22

(5th Cir. 2009); In re Med Diversified, Inc., 461 F.3d 251,

254–55 (2d Cir. 2006).

Applying our past reading of § 510(b), Freeman’s

damages claim is clearly one “arising from” the sale or

purchase of securities in Holdings. The basis of Freeman’s

claim for damages against Del Biaggio’s estate is not Del

Biaggio’s fraudulent misrepresentations, but rather Freeman’s

detrimental reliance on those misrepresentations in the form

of his Holdings investment. Indeed, the damages sought by

Freeman correspond exactly to the amount he invested in

Holdings through his initial purchase of Holdings securities,

the promissory note he obtained, and the money spent in the

first capital call occasioned by his purchase of Common Unit

stock. In light of these facts, we have no doubt that

Freeman’s claim “originates from” from his purchase of

securities in Holdings, Tristar, 782 F.3d at 497, and thus

possesses “some nexus” to that purchase, Am. Wagering,

493 F.3d at 1072 (citation and internal quotation marks

omitted). Put simply, Freeman’s claim is really no claim at

all but for his investment in Holdings.

Freeman attempts to avoid this conclusion by analogizing

his case to the facts of American Wagering, but such

argument lacks merit. In American Wagering, we concluded

12 IN RE DEL BIAGGIO

that a claimant’s assertion of a court-ordered money

judgment against a debtor for breach of contract was not

subject to subordination under § 510(b). 493 F.3d at 1073.

We reasoned that such a claim fell outside § 510(b)’s “arising

from” provision because the contract with the debtor merely

used stock value as a basis for calculating compensation and

the claim did not seek to recover an investment loss. Id. But

Freeman’s claim does not value a free-standing injury by

reference to a security; rather, as we have already explained,

Freeman’s asserted injury is inseparable from his Holdings

investment.

Freeman also argues that his claim is not one “arising

from the purchase or sale” of the securities of Del Biaggio’s

affiliate since he purchased the Holdings securities from

Leipold rather than Del Biaggio. But nothing in § 510(b)

requires that the debtor be the seller of the security at issue;

indeed, the statute says only that a damages claim must be

one arising from the purchase of securities “of an affiliate of

the debtor,” not from the debtor himself. § 510(b). The text

of the statute clearly points toward subordination of

Freeman’s claim.

B

Freeman next seeks to avoid § 510(b)’s plain language by

arguing that even if the statute’s text points in favor of

subordination, its purposes do not. Our Bankruptcy Appellate

Panel (“BAP”) appears to agree. In In re Kahn, 523 B.R.

175, 183 (B.A.P. 9th Cir. 2014), appeal docketed, No. 15-

60002 (9th Cir. Jan. 13, 2015), the BAP concluded that the

text of § 510(b) was ambiguous as to whether the law applies

to individual debtors. Turning to legislative history and

statutory purposes, the BAP then determined that applying

IN RE DEL BIAGGIO 13

the statute to individual debtors was outside of Congress’s

intent. Id. While we generally treat decisions of the BAP as

persuasive authority because of its “special expertise in

bankruptcy issues and to promote uniformity of bankruptcy

law throughout the Ninth Circuit,” In re Silverman, 616 F.3d

1001, 1005 n.1 (9th Cir. 2010), in this case we are not

persuaded.

“It is well established that when the statute’s language is

plain, the sole function of the courts—at least where the

disposition required by the text is not absurd—is to enforce

it according to its terms.” Lamie v. U.S. Tr., 540 U.S. 526,

534 (2004) (citation and internal quotation marks omitted).

Only when statutes are ambiguous may courts look to

legislative history. See Nakano v. United States, 742 F.3d

1208, 1214 (9th Cir. 2014). We doubt any recourse to

sources outside the text is necessary to determine whether

Freeman’s transaction is one “arising from” the purchase or

sale of the securities of a debtor’s affiliate. As the Tenth

Circuit has noted, § 510(b)’s “arising from” language has

been “universally held” to cover “claims alleging fraud in the

inducement to purchase or sell [a covered] security.” In re

Geneva Steel Co., 281 F.3d 1173, 1174 (10th Cir. 2002).

C

Even assuming consideration of the statute’s legislative

history and purposes is useful and appropriate, they provide

no help to Freeman.

In Betacom, we identified “two main rationales for

mandatory subordination: (1) the dissimilar risk and return

expectations of shareholders and creditors; and (2) the

reliance of creditors on the equity cushion provided by

14 IN RE DEL BIAGGIO

shareholder investment.” 240 F.3d at 830; see also Am.

Wagering, 493 F.3d at 1072. On the one hand, § 510(b) aims

at subordinating claims “arising from” qualifying securities

because “[s]hareholders expect to take more risk than

creditors in return for the right to participate in firm profits.”

Betacom, 240 F.3d at 829. On the other, § 510(b)’s

mandatory subordination is justified because “creditors

extend credit in reliance on the cushion of investment

provided by the shareholders.” Id.

1

Both Freeman and the BAP in Kahn appear to assume the

risk-allocation rationale does not apply to cases like

Freeman’s because an investor cannot have a profit

expectation in an individual debtor. See Kahn, 523 B.R. at

183 (insisting that the risk-allocation rationale applies only to

corporate debtors because “equity interests do not exist” in an

individual debtor). But that reading overlooks that Congress

did not limit § 510(b)’s application to damage claims related

to a debtor’s own securities. Instead, Congress included

within § 510(b)’s ambit claims arising from the purchase of

the securities of “an affiliate of the debtor.” We think it

reasonable to assume that in expanding § 510(b)’s reach to

include such claims, Congress recognized what our pre-

Bankruptcy Code precedent already had—namely, that the

fairness concerns underlying the risk-allocation rationale

apply whether the investor’s profit expectation is directed at

the debtor or at an associated entity. See In re THC Fin.

Corp., 679 F.2d 784, 786 (9th Cir. 1982) (rejecting the idea

that “the relative equitable position of a defrauded

stockholder should be enhanced” merely because a

stockholder’s claim involves an affiliate).

IN RE DEL BIAGGIO 15

Those concerns are clearly implicated in Freeman’s case.

As an investor in an affiliate of Del Biaggio, Freeman

bargained for increased risk in exchange for an expectation in

the profits of Holdings as he himself admits. Del Biaggio’s

creditors made no such gamble. Allowing Freeman to stand

on par with Del Biaggio’s creditors “would give [Freeman]

the best of both worlds—the right to share in profits if

[Holdings] succeeded and the right to repayment as a creditor

[of Del Biaggio] if it failed.” In re VF Brands, Inc., 275 B.R.

725, 728 (Bankr. D. Del. 2002). It was precisely that kind of

inequity that Congress meant § 510(b) to eliminate. See

Tristar, 782 F.3d at 496 (“Congress sought to subordinate

claims . . . that unfairly shift to creditors risks associated with

stock ownership.”); see also Telegroup, 281 F.3d at 142

(“Congress enacted § 510(b) to prevent disappointed

shareholders from recovering their investment loss by using

fraud and other securities claims to bootstrap their way to

parity with general unsecured creditors in a bankruptcy

proceeding.”).4

4

The BAP in Kahn also observed that in drafting § 510(b), Congress

relied on an influential law review article by John J. Slain and Homer

Kripke that discusses only corporate bankruptcy. See Kahn, 523 B.R. at

183; see also John J. 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) (“Slain and Kripke”); H.R. Rep. No.

95–595, at 195–96 (1977). Congress may well have crafted § 510(b) with

Slain and Kripke’s policy rationales in mind. See Betacom, 240 F.3d at

829 (discussing Congress’s apparent reliance on Slaine and Kripke’s

article). But there is no question that the text of § 510(b) reaches further

than Slain and Kripke’s precise concerns. Indeed, as the Second Circuit

has observed, “Slain and Kripke did not propose subordinating claims

arising from the purchase or sale of securities of the debtor’s affiliate, and

therefore had no occasion to consider how or whether the rationales they

offered might bear upon the subordination of such securities.” See In re

16 IN RE DEL BIAGGIO

2

Freeman also argues that his claim cannot be subordinated

since his investment in Holdings provided no equity upon

which Del Biaggio’s creditors could rely. But courts are

otherwise agreed that the equity cushion rationale is the less

important of the two, and actually unnecessary for § 510(b)

to apply in the affiliate scenario. See In re Lehman Bros. Inc.,

808 F.3d 942, 949 (2d Cir. 2015) (observing the risk-

allocation rationale is “more integral” than the equity-cushion

rationale and “serves as an effective rationalization for

subordination in those circumstances when an affiliate’s

securities provided the basis for the claim”); see also

SeaQuest Diving, 579 F.3d at 421; Med Diversified, 461 F.3d

at 259; Geneva Steel, 281 F.3d at 1180 n.3. That conclusion

makes sense. In the context of claims “arising from”

securities transactions involving a debtor’s affiliate, the

equity-cushion rationale will almost always remain

unfulfilled, since creditors of the parent do not rely on the

equity contributed by the affiliate’s investors as the basis for

extending credit. Refusing to apply § 510(b) in such cases

would render the statute basically inapplicable to claims

involving the securities of an affiliate—a result that Congress

itself has foreclosed through the statutory text. See Lehman

Bros., 808 F.3d at 950 (noting that the text of § 510(b)

indicates that “Congress has already determined” that the

risk-allocation rationale “is strong enough to warrant

subordination of claims arising out of transactions in affiliate

Lehman Bros. Inc., 808 F.3d 942, 949 n.8 (2d Cir. 2015). Our analysis of

§ 510(b) convinces us that the presence or absence of a debtor’s corporate

status makes no difference. Freeman presents the quintessential case of

an investor trying to recoup a bad investment ahead of those who assumed

no such risks.

IN RE DEL BIAGGIO 17

securities”); see also RadLAX Gateway Hotel, LLC v.

Amalgamated Bank, 132 S.Ct. 2065, 2073 (2012) (observing

that a “generalized statutory purpose” cannot override a

statute’s text).

Because we conclude that Freeman’s claim is one “arising

from” his purchase of securities and that § 510(b) is not

limited to corporate debtors, we conclude that Freeman’s

claim must be subordinated.

IV

Freeman next argues that even assuming his claim is

subject to subordination, the bankruptcy court erred by

subordinating his claim to the unsecured claims of Del

Biaggio’s creditors. According to Freeman, only “other

interests in Holdings and claims against Holdings” are

actually senior or equal to his claim. He contends that

because his claims against Holdings are in a different priority

scheme than claims against Del Biaggio, there are no claims

to which his must be subordinated.

A

Kahn offered a similar reading of § 510(b)’s “senior to or

equal” language to conclude that the statute does not apply in

individual debtor cases. The BAP reasoned that this language

likely limits § 510(b) to corporate debtors because “[i]t is

axiomatic that a claim or interest based on stock may exist

only at a corporate level.” 523 B.R. at 183. Moreover, the

BAP observed that because other creditors with claims

against the individuals in Kahn could not “seek recovery as

creditors at the corporate level,” these creditors held no

claims senior to or equal to claims within the affiliate’s own

18 IN RE DEL BIAGGIO

priority scheme. Id. Like Freeman, the BAP in Kahn found

§ 510(b) inapplicable to individual debtors because an

individual debtor’s priority scheme cannot and does not

include claims involving affiliate securities.

We decline to endorse this reading of § 510(b). Courts

have differed in their readings as to the level of subordination

mandated by § 510(b)’s “senior to or equal” provision when

the qualifying claim involves affiliate securities. See Lehman

Bros., 808 F.3d at 950 & n.10 (collecting cases). Yet as the

Second Circuit has noted, “[e]very other court that has

applied § 510(b) to claims based on affiliate securities”—

with the exception of Kahn—“has required subordination.”

Lehman Bros., 808 F.3d at 950. There is good reason for that

consensus. As the district court in this case noted, reading

§ 510(b)’s “senior to or equal” language as requiring

subordination only when claims fall within the same priority

scheme would render the statute’s application to affiliates

meaningless, since claims against a debtor arising from the

purchase or sale of a security of the debtor’s affiliate will

almost never be included in the same priority scheme. Such

a reading simply cannot be squared with the plain language

of the statute. See Williams v. Taylor, 529 U.S. 362, 404

(2000) (explaining that it is a “cardinal principle of statutory

construction” that courts should “‘give effect, if possible, to

every clause and word of a statute’” (quoting United States v.

Menasche, 348 U.S. 528, 538–39 (1955)); see also In re

Lehman Bros. Inc., 519 B.R. 434, 450 (S.D.N.Y. 2014)

(observing that limiting § 510(b)’s “senior to or equal”

comparison to securities existing with the debtor’s capital

structure “would automatically exclude claims arising from

the purchase or sale of securities of an affiliate in derogation

of the plain language of the statute”). The question is not

whether § 510(b) requires subordination of claims involving

IN RE DEL BIAGGIO 19

affiliate securities in a debtor’s bankruptcy proceeding, but

how it does so.

B

Courts applying § 510(b)’s “senior to or equal” provision

to claims involving affiliate securities have endorsed one of

three approaches.

1

The first approach, employed by the bankruptcy court in

this case, reads § 510(b)’s “senior to or equal” provision as

requiring that a claim involving a security of the debtor’s

affiliate be subordinated below all claims actually included in

the debtor’s priority scheme, with the possible exception of

claims involving an affiliate’s common stock. See In re

Lernout & Hauspie Speech Prods., N.V., 264 B.R. 336, 341

(Bankr. D. Del. 2001) (considering an identical interpretation

of § 510(b)). Under this approach, Freeman’s claim would be

subordinated to all general unsecured claims against Del

Biaggio’s estate on the theory that shares issued by a

subsidiary create no claim to the assets of a parent. Although

the bankruptcy court did not so explain, this approach places

emphasis on § 510(b)’s mention of “such security” as the

provision’s interpretive touchstone. See § 510(b) (requiring

subordination of qualifying claims to other claims or interests

“senior to or equal the claim or interest represented by such

security”).

2

By contrast, a second approach employed by other courts

focuses not on the affiliate security at issue, but instead on the

20 IN RE DEL BIAGGIO

claim made against the debtor. In VF Brands, for instance,

the Delaware bankruptcy court acknowledged that

shareholders of a subsidiary are “not part of any priority

scheme of claims against the parent,” but concluded

nonetheless that claims involving an affiliate’s securities

could be incorporated into the parent’s priority scheme

because these claims are also general unsecured claims

against the debtor. 275 B.R. at 727. On this reading, claims

involving the securities of an affiliate are conceptualized as

general unsecured claims against the debtor, and subordinated

under § 510(b) because they are “equal [to]” other general

unsecured claims. Id.; see also Lehman Bros., 503 B.R. at

784–85 (adopting the approach endorsed in VF Brands).

Unlike the first approach that focuses on the affiliate security,

this approach focuses on “the claim or interest represented by

such security.” § 510(b) (emphasis added). Like the first

approach, however, this approach also mandates

subordination of Freeman’s claim. On this reading,

Freeman’s claim would be considered a general unsecured

claim on par with other general unsecured claims against Del

Biaggio’s estate. Because Freeman’s claim involves affiliate

securities, however, § 510(b) mandates subordination of his

claim to these other unsecured claims, since they are “equal

[to]” Freeman’s.

3

A third approach applying § 510(b)’s “senior to or equal”

provision to claims involving affiliate securities has recently

been endorsed by the Second Circuit. In Lehman Brothers,

former underwriters of unsecured notes issued by Lehman

Brothers Holdings, an affiliate of Lehman Brothers, Inc.

(LBI), brought claims for contribution against LBI’s bankrupt

estate. 808 F.3d at 945. The underwriters admitted that their

IN RE DEL BIAGGIO 21

claims against LBI fell under the “affiliate” provision of

§ 510(b). Id. Relying on Kahn, however, the underwriters

asserted that there were no claims senior to or equal to their

claim, arguing that claims involving an affiliate can be

subordinated in a debtor’s bankruptcy proceeding “only when

claims also could be made in that proceeding based on

ownership of the affiliate’s securities.” Id. The Second

Circuit disagreed and found the underwriters’ claims were

properly subordinated. In so deciding, the Court held:

[I]n the affiliate securities context, ‘the claim

or interest represented by such security’

means a claim or interest of the same type as

the affiliate security. Claims arising from

securities of a debtor’s affiliate should be

subordinated in the debtor’s bankruptcy

proceeding to all claims or interests senior or

equal to claims in the bankruptcy proceeding

that are of the same type as the underlying

securities (generally, secured debt, unsecured

debt, common stock, etc.; and in some

circumstances potentially a narrower sub-

category).

Id. at 946. Like the two approaches described above, the

Second Circuit’s approach reads § 510(b)’s “senior to or

equal” provision as requiring subordination of claims

involving affiliate securities in a debtor’s bankruptcy. But

the approach employed by the Second Circuit arrives at this

conclusion by reasoning that § 510(b) requires

“superimpos[ing] the capital structure of the affiliate onto that

of the debtor.” Id. at 950. The court concluded that this

reading of § 510(b) was the most consistent with § 510(b)’s

directive that a claim involving qualifying securities be

22 IN RE DEL BIAGGIO

subordinated to all claims senior to or equal to those

“represented by” an affiliate security. Id. at 944–46.

We note that Lehman Brothers expressly distinguished

Kahn as a case concerning only § 510(b)’s application to

individual debtors. See id. at 950 n.11. But like the other

approaches applying § 510(b) to claims involving affiliate

securities, the Second Circuit’s reading of § 510(b)’s “senior

to or equal” provision is irreconcilable with the reading of the

statute offered by Kahn and Freeman. In Kahn, the BAP said

it would be nonsensical to apply § 510(b) to individual

debtors because claims based on affiliate securities are by

definition outside the priority scheme in an individual debt

case. 523 B.R. at 183. But the court in Lehman Brothers

concluded that claims involving affiliate securities can indeed

be subordinated in a debtor’s bankruptcy notwithstanding

varying priority schemes, and that the affiliate’s capital

structure should be “superimpose[d]” on the structure of the

debtor to determine the correct level of priority. 808 F.3d at

946, 950. Moreover, as with the other two approaches,

applying the Second Circuit’s approach in Freeman’s case

requires subordination of his claim below that of Del

Biaggio’s unsecured creditors. Although equity interests in

Holdings lie outside the priority scheme governing Del

Biaggio’s bankruptcy, under this approach Freeman’s claim

would be treated as if it arose from equity interests in Del

Biaggio other than common stock. Under the confirmed

bankruptcy plan, this “type” of interest is considered junior to

the claims of Del Biaggio’s unsecured creditors, and

accordingly subordinated under § 510(b).

IN RE DEL BIAGGIO 23

C

We agree with the Second Circuit that of the three

approaches, Lehman Brothers is likely the best interpretation

of § 510(b)’s “senior to or equal” provision as it applies to

claims involving affiliate securities. For the purposes of this

appeal, however, we need not adopt a definitive reading of

this portion of the statute. Because under any legitimate

reading of § 510(b), the claims of Del Biaggio’s general

unsecured creditors are “senior to or equal [to]” Freeman’s

claim, his claim was rightly subordinated to the claims of Del

Biaggio’s creditors.

V

The bankruptcy court properly subordinated Freeman’s

claim under § 510(b). Fittingly, the order of the district court

affirming that judgment is also

AFFIRMED.