O'Donnell v. Tristar Esperanza Properties, LLC (In Re Tristar Esperanza Properties, LLC)
488 B.R. 394
| 9th Cir. BAP | 2013Background
- Tristar Esperanza Properties LLC owns a single Orange County, CA real property asset; its operating agreement governs member withdrawals.
- Jane O’Donnell acquired ~14% membership in 2005 via Pensco Trust Company, which is represented by O’Donnell and did not appear separately.
- O’Donnell gave notice to withdraw under the LLC’s buy-back provision in 2008; Tristar paid $60,000 and joint appraisers valued her interest at $399,918.
- Arbitration (2010) held Tristar must buy back the interest at the appraised value; judgment followed; amount was abstracted in Orange County (Dec. 2010).
- Chapter 11 filed by Tristar in Aug. 2011; this adversary seeks (i) mandatory subordination under §510(b), (ii) equitable subordination under §510(c), and (iii) avoidance of a pre-petition preference under §547; the bankruptcy court granted summary judgment on §510(b) in favor of Tristar and against O’Donnell and Pensco.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the buy-back of an LLC member’s interest is a purchase or sale of a security under §510(b). | O’Donnell contends the claim is not a purchase/sale of a security. | Tristar argues the member interest is a security and the buy-back constitutes a purchase/sale. | Yes; LLC member interests are securities and the buy-back falls within §510(b). |
| Whether the arbitration-award-based claim qualifies as damages under §510(b). | O’Donnell argues the claim is a fixed debt, not damages arising from a sale of securities. | Tristar asserts the award enforces a contract term and is damages arising from the sale of a security. | Yes; the award constitutes §510(b) damages. |
| Whether withdrawal of an LLC member before bankruptcy precludes §510(b) application. | N/A (not a separate argument in the record besides the broader interpretation). | A broad interpretation of §510(b) applies; withdrawal can give rise to subordinated damages. | No; §510(b) applies to claims arising from such withdrawals. |
| Whether judicial estoppel bars Tristar from asserting §510(b) damages. | Argue inconsistent statements in arbitration estop Tristar. | No clearly inconsistent position with gain or unfair advantage shown. | Rejected; no material inconsistency or advantage shown. |
Key Cases Cited
- In re Am. Wagering, Inc., 493 F.3d 1067 (9th Cir. 2007) (broad view of §510(b) damages encompasses contract-based claims)
- Betacom of Phoenix, Inc. v. Barasch, 240 F.3d 823 (9th Cir. 2001) (two rationales for subordination; reliance on equity cushion; rejects fraud-only view)
- Lamie v. United States Tr., 540 U.S. 526 (U.S. 2004) (plain meaning with canons of construction for ambiguous statutes)
- New Hampshire v. Maine, 532 U.S. 742 (U.S. 2001) (estoppel requires clearly inconsistent position and unfair advantage)
- United States v. Ron Pair Enters., Inc., 489 U.S. 235 (U.S. 1989) (further statutory interpretation principles cited in analysis)