Dana French v. Linn Energy, L.L.C.
18-40369
| 5th Cir. | Sep 3, 2019Background
- Clarence Bennett held two related interests in Berry: (1) a life interest in 37.5% of dividends from 250 shares (B Group deemed-dividend entitlement) and (2) outright ownership of 31.5 BHC shares as a C Group member.
- In 1986 BHC merged into BPC; VHC’s shares were retired and BPC created the Victory Trust to pay B Group "deemed dividends"—payments tied to dividends VHC would have received, but not actual shareholder dividends.
- From 1986–2013 Bennett (later sole B Group survivor) received deemed-dividend payments; after a 2013 stock-for-stock exchange with Linn/Berry those payments stopped.
- Bennett’s estate sued Linn and Berry for nearly $10 million in unpaid deemed dividends and related tort/contract claims; Linn/Berry (Debtors) filed bankruptcy and sought subordination of the Estate’s claims under 11 U.S.C. § 510(b).
- Bankruptcy court subordinated the Estate’s claims; the district court affirmed, and the Estate appealed to the Fifth Circuit, challenging (inter alia) the § 510(b) subordination and the denial of discovery.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Estate's remedies are "damages" under § 510(b) | Estate: claims are contract/tort recoveries for unpaid debt, not damages tied to equity investment | Debtors: claims seek damages (fraud, breach, contract) and thus fall within § 510(b)'s "damages" language | Held: Claims are damages for § 510(b) purposes (so § 510(b) applies) |
| Whether the deemed-dividend interest is a "security" | Estate: interest lacks hallmark features of securities (nontransferable, no voting, life interest) and fits exclusion categories | Debtors: interest functions like equity (tied to firm success) and fits the residual definition of "security" | Held: Deemed-dividend interest is a "security" under the residual clause of § 101(49) |
| Whether the claims "arise from" purchase or sale of a security | Estate: claims do not arise from a securities transaction; they are ordinary payment claims | Debtors: claims are causally linked to securities transactions (1931 bequest, 1986 retirement, 2013 exchange) | Held: Claims arise from securities transactions (broad nexus; 2013 deal is focal), so § 510(b) subordination required |
| Whether bankruptcy court abused discretion by denying discovery / violating due process | Estate: denial prevented factual development essential to § 510(b) analysis | Debtors: legal issues predominate; court assumed Estate's facts and additional discovery would not change legal ruling | Held: No abuse of discretion; discovery denial reasonable and did not violate due process |
Key Cases Cited
- In re SeaQuest Diving, LP, 579 F.3d 411 (5th Cir.) (interpreting § 510(b) "arising from" and policy rationale)
- In re Am. Hous. Found., 785 F.3d 143 (5th Cir.) (§ 510(b) damages and post-issuance conduct fall within scope)
- Lehman Bros. Holdings Inc. v. Integrated Res., 855 F.3d 459 (2d Cir.) (define "security" by risk/benefit expectations tied to firm success)
- In re Telegroup, Inc., 281 F.3d 133 (3d Cir.) (broad causal nexus for "arise from" and subordination where claims stem from stock purchase)
- Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985) (discussing traditional shareholder incident rights and that form does not control characterization)