Ltc of William Del Biaggio III v. David Freeman
834 F.3d 1003
| 9th Cir. | 2016Background
- In 2007 Craig Leipold sold the Nashville Predators to a group including Freeman and investor William Del Biaggio; ownership flowed through Predators Holdings, LLC ("Holdings").
- Freeman purchased 31 Common Units and made a $5 million subordinated loan to Holdings; Forecheck (controlled by Del Biaggio) purchased Series A Units giving Del Biaggio ~27% voting control of Holdings.
- Del Biaggio misrepresented his financing, later embezzled client funds, and filed Chapter 11; Freeman alleges reliance on Del Biaggio’s fraud caused losses totaling $38,632,075 and filed an unsecured claim in Del Biaggio’s bankruptcy.
- The Liquidating Trust Committee moved to subordinate and disallow Freeman’s claim under 11 U.S.C. § 510(b); the bankruptcy court granted summary judgment for the Committee, the district court affirmed, and Freeman appealed to the Ninth Circuit.
- The bankruptcy and district courts treated Holdings as an affiliate of Del Biaggio and concluded Freeman’s damages claim "arose from" his purchase of affiliate securities and thus was mandatorily subordinated under § 510(b).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 510(b) applies to Freeman’s damages claim against an individual debtor for fraud tied to purchase of affiliate securities | Freeman: his claim does not "arise from" the purchase/sale of securities of the debtor or its affiliate and § 510(b) should not apply | Committee/Del Biaggio: Freeman’s claim flows from his Holdings investment in an affiliate and § 510(b) mandates subordination | Held: § 510(b) applies; Freeman’s claim "arises from" his purchase of Holdings securities and is subordinated |
| Whether § 510(b) is limited to corporate debtors or excludes individual debtors | Freeman: statute’s purposes and structure show it was meant for corporate reorganizations, not individuals | Committee: text covers securities of an affiliate regardless of debtor’s corporate status; purposes (risk-allocation) support application here | Held: § 510(b) is not limited to corporate debtors; applies to individual debtors in this context |
| Scope of the statutory phrase "arising from" (causal nexus required) | Freeman: narrower reading should exclude his claim | Committee: broad "arising from" reading applies; need only some nexus between claim and purchase | Held: Ninth Circuit adopts broad reading—"arising from" covers claims that originate in or flow from the securities purchase |
| To which claims must an affiliate-related § 510(b) claim be subordinated (what means "senior to or equal") | Freeman: his claim should only be subordinated within Holdings’ priority scheme; no equivalent senior claims exist against Del Biaggio | Committee: claims against Del Biaggio’s estate (e.g., general unsecured creditors) are senior/equal for § 510(b) purposes and require subordination | Held: under any legitimate reading (including Lehman Bros. approach), Freeman’s claim is subordinated to Del Biaggio’s general unsecured creditors |
Key Cases Cited
- In re Tristar Esperanza Props., LLC, 782 F.3d 492 (9th Cir. 2015) (broad reading of § 510(b) "arising from" language; LLC interests are securities)
- In re Betacom of Phoenix, Inc., 240 F.3d 823 (9th Cir. 2001) (§ 510(b) subordination is mandatory; rationale: shareholders’ risk–return and creditor reliance on equity cushion)
- In re American Wagering, Inc., 493 F.3d 1067 (9th Cir. 2007) ("some nexus" test for § 510(b) and discussion of when claims are not subordinable)
- In re Telegroup, Inc., 281 F.3d 133 (3d Cir. 2002) (absolute priority rule context and § 510(b) interpretation)
- In re Lehman Bros. Inc., 808 F.3d 942 (2d Cir. 2015) (endorses superimposing affiliate capital structure onto debtor to determine which claims are senior/equal under § 510(b))
- RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065 (2012) (general principle that statutory purpose cannot override clear statutory text)