Finding some of the statutory language to be “ambiguous,” the Fifth Circuit prescribed policies to follow when deciding whether a claim is really an interest in securities to be subordinated under Section 510(b).
In her September 3 opinion, Circuit Judge Edith Brown Clement dealt with a set of facts beginning with a trust created 90 years ago, compounded by several complex corporate restructurings in recent years. Fundamentally, the erstwhile creditor had a right to receive payments if the debtor was paying dividends to shareholders. Judge Clement referred to the creditor’s claim as based on a right to receive “deemed dividends.”
Chief Bankruptcy Judge David R. Jones of Houston subordinated the claim under Section 510(b) and was upheld in district court. Judge Clement affirmed a second time, saying that the case dealt with payments “which are not quite dividends but which certainly look a lot like dividends.”
Section 510(b) subordinates “a claim . . . for damages arising from the purchase or sale of . . . a security . . . .” Judge Clement said that the policy goals of the section “are clear, but applying the statute is more complex.” Circuit courts agree, she said, that “the ‘arising from’ language is ambiguous.”
Because ambiguity makes a “check-the-box approach . . . is impossible,” Judge Clement said that “the policy rationales behind Section 510(b) must always guide its interpretation and application to particular facts.”
Judge Clement first confronted “damages,” a word not defined in the Bankruptcy Code. It connotes “some recovery other than a simple recovery of an unpaid debt,” like a claim for fraud or breach of contract. [Emphasis in original.] “All agree,” she said, that the creditor was seeking damages.
Next, Judge Clement analyzed whether the claim was based on a “security,” a word with a long definition in Section 101(49). The definition includes a so-called residual clause characterizing a security as including an “interest commonly known as a ‘security.’” Section 101(49)(A)(xiv).
Judge Clement concluded that the right to receive “deemed” dividends was a security under the residual clause, because it allowed the creditor to “participate in the success of the enterprise” where the “upside . . . was theoretically limitless.” Conversely, she said, the creditor risked receiving nothing at all is the company went bankrupt.
Last, Judge Clement asked whether the claim arose from the purchase or sale of a security.
A transaction with the creditor a few years before bankruptcy, exhibiting some hallmarks of a purchase or sale, had a “nexus or causal relationship” with the creditor’s claim.
“Finally,” Judge Clement said, the right to receive deemed dividends was “more like an investor’s interest than a creditor’s interest.” Because “arising from” is ambiguous, she concluded that the “policy goals of the statute” supported subordination.
Finding some of the statutory language to be “ambiguous,” the Fifth Circuit prescribed policies to follow when deciding whether a claim is really an interest in securities to be subordinated under Section 510(b).
In her September 3 opinion, Circuit Judge Edith Brown Clement dealt with a set of facts beginning with a trust created 90 years ago, compounded by several complex corporate restructurings in recent years. Fundamentally, the erstwhile creditor had a right to receive payments if the debtor was paying dividends to shareholders. Judge Clement referred to the creditor’s claim as based on a right to receive “deemed dividends.”
Chief Bankruptcy Judge David R. Jones of Houston subordinated the claim under Section 510(b) and was upheld in district court. Judge Clement affirmed a second time, saying that the case dealt with payments “which are not quite dividends but which certainly look a lot like dividends.”
Section 510(b) subordinates “a claim . . . for damages arising from the purchase or sale of . . . a security . . . .” Judge Clement said that the policy goals of the section “are clear, but applying the statute is more complex.” Circuit courts agree, she said, that “the ‘arising from’ language is ambiguous.”
Because ambiguity makes a “check-the-box approach . . . is impossible,” Judge Clement said that “the policy rationales behind Section 510(b) must always guide its interpretation and application to particular facts.”
Judge Clement first confronted “damages,” a word not defined in the Bankruptcy Code. It connotes “some recovery other than a simple recovery of an unpaid debt,” like a claim for fraud or breach of contract. [Emphasis in original.] “All agree,” she said, that the creditor was seeking damages.