460 B.R. 633
Bankr. S.D.N.Y.2011Background
- CIT seeks to subordinate Tyco's claim under 11 U.S.C. § 510(b) as damages arising from the sale of a security related to the spinoff.
- Tyco asserts the claim is for breach of contract and should not be subordinated given the statute's purpose and intent.
- CIT Nevada was acquired by Tyco's subsidiary, leading to net operating losses (TCH NOLs) that were intended to be used post-spinoff.
- The 2002 spinoff involved upstream and Delaware mergers and an IPO, after which Tyco no longer held CIT shares.
- The Tax Agreement required Tyco indemnification and also provided for Tyco to be paid a value based on the benefits from TCH NOLs, with an arbitration clause.
- The court analyzes whether the Tyco Claim, arising from rejecting the Tax Agreement, is sufficiently linked to the securities sale to warrant § 510(b) subordination.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Tyco Claim 'arises from' the sale of a security under § 510(b). | Tyco argues the claim stems from the securities transaction via the Tax Agreement. | CIT contends the claim is a contract-based damages claim tied to the IPO. | No, not sufficient to subordinate; not a direct securities-derived damages claim. |
| Whether equity-risk/creditor-risk analysis supports subordination. | Tyco argues the claim implicates equity-like risk post-spinoff. | CIT asserts Tyco retained equity-risk characteristics via the Tax Agreement. | Not subordinated; Tyco did not bargain for equity profits. |
| Whether equity-cushion/policy supports subordination for this interaffiliate tax agreement. | Tyco asserts an equity cushion justification applies. | CIT contends no meaningful equity contribution exists here. | No meaningful equity cushion; claim remains outside § 510(b). |
Key Cases Cited
- In re Med Diversified, 461 F.3d 251 (2d Cir. 2006) (subordinates when claimant assumes equity-like risks and rewards)
- In re Telegroup, Inc., 281 F.3d 133 (3d Cir. 2002) (equity investors' claims subordinated to protect creditors)
- In re Betacom of Phoenix, Inc., 240 F.3d 823 (9th Cir. 2001) (investor expectations vs. creditor claims; subordination)
- In re NationsRent, Inc., 381 B.R. 83 (Bankr. D. Del. 2008) (Make-Whole claims not subordinated as securities damages)
- In re American Wagering, Inc., 493 F.3d 1067 (9th Cir. 2007) (equity-like risk not present; IPO-related compensation not equity)
- In re MarketXT Holdings Corp., 346 F. App’x 744 (2d Cir. 2009) (summary order applying Med Diversified policy)