Pensco Trust Co. v. Tristar Esperanza Properties, LLC
782 F.3d 492
| 9th Cir. | 2015Background
- O’Donnell bought about 15% of Tristar Esperanza Properties LLC in 2005 for $100,000.
- In 2008 O’Donnell withdrew; Tristar elected to repurchase her membership interest under the operating agreement.
- Arbitrator ruled in O’Donnell’s favor in 2010, awarding damages (totaling $410,472.68, including fees and interest).
- Tristar failed to pay the award; O’Donnell obtained a state-court judgment for $415,937.68 plus interest.
- Tristar filed Chapter 11 in 2011; O’Donnell asserted a claim based on the state-court judgment and sought subordination under § 510(b) and (c) or avoidance as a preference.
- Bankruptcy court granted Tristar summary judgment on § 510(b); BAP affirmed subordination, holding the claim is rooted in equity and subject to mandatory subordination.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does O’Donnell’s claim arise from the purchase or sale of a security? | O’Donnell argues the claim is a fixed debt, not arising from a sale of securities. | Tristar contends the claim arises from an equity transaction and thus falls within § 510(b). | Yes; the claim arises from the purchase/sale of a security. |
| Does the damages claim fall within § 510(b) as damages arising from purchase or sale of a security? | Damages are a fixed, admitted debt, not damages arising from sale of a security. | Damages arising from breach tied to sale of a security fall within § 510(b). | Yes; damages tied to the equity transaction are subject to subordination. |
Key Cases Cited
- In re SeaQuest Diving, LP, 579 F.3d 411 (5th Cir. 2009) (broad interpretation of ‘arises from’ (security linked))
- In re Med Diversified, Inc., 461 F.3d 251 (2d Cir. 2006) (broad interpretation of § 510(b) damages)
- In re Telegroup, Inc., 281 F.3d 133 (3d Cir. 2002) (nexus test for arising from a security transaction)
- In re American Wagering, Inc., 493 F.3d 1067 (2d Cir. 2007) (conversion of equity into debt may be subject to subordination)
- Betacom of Phx., Inc., 240 F.3d 829 (9th Cir. 2001) (equity-position claim subject to subordination)
- In re Bugna, 33 F.3d 1054 (9th Cir. 1994) (prior authority on § 510(b) linkage to securities)