Defendant-appellant David Rombro appeals from a judgment entered in the United States District Court for the Eastern District of New York (Seybert, J.) affirming the order of the bankruptcy court *253 (Bernstein, Bankr, J.) granting summary judgment to plaintiff-appellee Michael Du-frayne, trustee of the Med Diversified, Inc. Creditors’ Trust, and subordinating Rom-bro’s claim against Med Diversified under 11 U.S.C. § 510(b), which mandates subordination of “a claim ... for damages arising from the purchase or sale of ... a security [of the debtor].” In this appeal we consider the sсope of section 510(b), specifically whether the statute requires subordination of the claim of a former executive employee of the debtor, when the claim is based on the debtor’s failure to issue its common stock to the executive in exchange for his stock in another company, as provided by a termination agreement. Because we agree with the lower courts’ conclusion that such a claim “arises from” the purchase of the debtor’s stock within the meaning and purpose of section 510(b), we affirm the judgment.
I. BACKGROUND
The relevant facts of this case are undisputed. In 2000 and 2001, Med Diversified, Inc. (then apparently known as “e-Med-Soft.com”) and David Rombro entered into executive employment agreements. Med Diversified first agreed to hire Rombro as President and COO of its pharmacy division, and subsequently agreed to hire Rombro as President and CEO of its health services and managеd care division. Later in 2001, however, due to certain disputes, the parties entered into a termination agreement. Therein, Med Diversified agreed to issue by January 2, 2002, 905,500 shares of its common stock to Rombro in exchange for Rombro’s 905,500 shares of PrimeRx stock. The termination agreement also provided that, except for the stock exchange and other minor payments, Med Diversified owed Rombro no other salary or benefits, and each party released any claims, other than breach of the agreement itself, arising out of Rom-bro’s employment or termination. The stock exchange failed to occur by January 2, 2002, however, and Rombro brought suit for breach of contract and fraudulent inducement.
Thereafter, on November 27, 2002, Med Diversified filed for relief under chapter 11 of the Bankruptcy Code, causing the automatic stay of Rombro’s lawsuit. On July 29, 2003, Rombro filed a timely proof of clаim against Med Diversified (“debtor”) for $926,540 (“Claim 661”), premised on Med Diversified’s alleged breach of the termination agreement by failing to issue to Rombro its common stock in exchange for his PrimeRx stock.
On November 12, 2004, Michael Du-frayne, trustee of the Med Diversified, Inc. Creditors’ Trust, filed a complaint against Rombro. Dufrayne subsequently moved for summary judgment, seeking a determination that Claim 661 is subject to mandatory subordination pursuant to section 510(b) of the Bankruptcy Code. The statute provides in pertinent part:
(b) For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debt- or, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock.
11 U.S.C. § 510(b) (emphasis added). Rombro filed a cross-motion for summary judgment, seeking a determination that Claim 661 was not subject to subordination but rather was a general unsecured claim for compensation which should share pari passu with the class of general unsecured creditors. Rombro argued for a literal *254 reading of “arising from” under section 510(b), requiring that the trustee show Rombro’s damages flow from the actual purchase or sale of the debtor’s security in order for Claim 661 to be subordinated. In Rombro’s view, his claim did not arise from damages flowing from the purchase or sale of debtor’s stock but from the purchase by the debtor of Rombro’s Prim-eRx stock, which in any event never occurred.
In a well-reasoned, unpublished decision dated February 23, 2005, the bankruptcy court (Bernstein,
Bankr. J.)
granted summary judgment to the trustee and subordinated Claim 661. Judge Bernstein determined, in accordance with case law broadly construing section 510(b), that “the claim need not flow directly from the securities transaction, but can be viewed as ‘arising from’ the transaction if the transaction is part of the causal link leading to the injury,” quoting
In re PT-1 Communications,
Rombro appealed the bankruptcy court’s order to the district court (Seybert, J.), which affirmed the order in an unpublished dеcision dated October 24, 2005. Judge Seybert likewise determined that section 510(b) is to be construed broadly because it is a remedial statute intended “to prevent shareholders from changing their claims into creditors’ claims.” Importantly, the district court concluded:
Section 510(b) covers [Rombro’s] Claim 661 despite the fact that [Rombro] never actually received any shares in Debtor. [Rombro] bargained for a position as shareholder and all its attendant benefits and risks, including Debtor’s inability to fulfill its contractual obligations with creditors and its shareholders. [Rombro] cannot expect to both reap a shareholder’s benefits when the Debtor was profitable and then avoid a shareholder’s risks by gaining creditor status when Debtor went bankrupt.
(Emphases in the original.) Rombro again appealed the adverse judgment.
II. DISCUSSION
“Review of an order of a district court issued in its capacity as an appellate court is plenary.”
In re DeTrano,
The question before us is whether a claim for damages based on the debtor’s failure to issue shares of its common stock in exchange for the claimant’s stock in another company, pursuаnt to a termination agreement, is “a claim ... for damages arising from the purchase or sale of ... a security [of the debtor]” within the meaning of section 510(b). Facing similar questions, the Third Circuit subordinated claims when the debtor breached a contractual obligation to use best efforts to register the claimants’ stock,
In re Telegroup, Inc.,
Rombro primarily raises three arguments against the mandatory subordination of his claim: (1) the phrase “arising from” in section 510(b) is unambiguous and plainly applies only to claims stemming directly from a purchase, sale, or rescission of the debtor’s security, none of which occurred here; (2) the exchange of Rom-bro’s shares of PrimeRx stock for debtor’s stock was not a “purchase” but rather a severance payment arrangement — a debt owed him — and therefore thе district court erred in concluding Rombro was a purchaser, transferee, or holder of debtor’s common stock within the meaning of the statute; and (3) the policy rationales for subordination do not apply to Rombro’s claim. The trustee responds, in sum, that claims “arising from” the purchase of a security covered by section 510(b) include claims that are predicated on the failure to issue stock, relying on case law broadly interpreting the statute, particularly the analogous case of Worldwide Direct.
We begin with Rombro’s argument regarding the statutory text because “[the] first step in interpreting a statute is to determine whether the language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case.”
Robinson v. Shell Oil Co.,
Because the phrase “arising from” is ambiguous as applied to the claims in this case, we must “look outside the text of the statute to determine its intended meaning.”
Stichting Ter Behartiging Van de Belangen Van Oudaandeelhouders in Het Kapitaal Van Saybolt International B.V. v. Schreiber,
In enacting section 510(b), Congress focused on the problem of claims alleging fraud or other violations of law in the issuance of the debtоr’s securities.
See
House Report at 194 (“A difficult policy question to be resolved in a business bankruptcy concerns the relative status of a security holder who seeks to rescind his purchase of securities or to sue for damages based on such a purchase: Should he be treated as a general unsecured creditor based on his tort claim for rescission, or should his claim be subordinated?”). In their seminal article, Slain and Kripke argued compellingly for mandatory subordination because the bankruptcy courts’ favorable treatment of shareholder fraud claims provided “investors a windfall by giving them an opportunity to reap the benefits of a profitable entity and by allowing them to share with creditors in the event the enterprise was forced to reorganize or liquidate.”
In re PT-1 Commc’ns,
“Section 510(b) thus represents a Congressional judgment that, as between shareholders and general unsecured creditors, it is shareholders who should bear the risk of illegality in the issuance of stock in the еvent the issuer enters bankruptcy.”
In re Telegroup,
Because there are only two rationales for mandatory subordination expressly or implicitly adopted by the Congress that enacted section 510(b), we conform our interpretation of the statute to require subordination here only if Rombro (1) took on the risk and return expectations of a shareholder, rather than a creditor, or (2) seeks to recover a contribution to the equity pool presumably relied upon by creditors in deciding whether to extend credit to the debtor. We conclude that Rombro took on the risk and return expectations of a shareholder when he agreed to exchange securities in PrimeRx and employment claims for the shares of the debtor, and that his resulting claim for damages therefore must be subordinated.
Rombro argues, to the contrary, that there is no difference between the debtor’s promise to purchase his PrimeRx stock with debtor’s own stock and the promise to make a cash severance payment to him. There is an important difference, however, on which our decision depends: Rombro bargained not for cash but to bеcome a stockholder in the debtor. Once he entered a binding agreement obligating him to purchase shares of the debtor in return
for
his shares
of
PrimeRx, and to forego the significant cash compensation to which he otherwise was due upon termination, he became bound by the choice he made to trade the relative safety of cash compensation for the upside potential of shareholder status — the very choice highlighted by Slain and Kripke. Rombro thus “had the
*257
potential
benefit of the proceeds of the enterprise deriving from ownership of the securities.”
In re Betacom,
In reaching this conclusion, we are influenced by what appears to be the uniform determination of courts presented with similar claims that those who conclude the bargain to become investors or shareholders should be treated as such.
1
Thus, as the Ninth Circuit explained when subordinating claims of individuals who allegedly did not receive the shares they were due and never had an opportunity to share in the benefits of ownership, “[e]ven if an investor never receives her promised shares, she entered into the investment with greater financial expectations than the creditor. The creditor can only recoup her investment; the investor expects to participate in firm profits.”
In re Betacom,
To be sure, it could be argued that ... appellants’ claims [should not be subordinated] because the claims seek compensation for a risk that appellants did not assume---- In particular, although claimants, as equity investors, assumed the risk of business failure, they did not assume the risk that [the debtor]’s stock would not be publicly tradeable.... This objection to subordinating appellants’ claims, however, proves too much, as it would apply equally to shareholders’ claims for fraud in the issuance ... [which] nonetheless fall squarely within the intended sсope of § 510(b).
Id. at 142-43.
Helpful too is the recent and extraordinarily thorough decision in
In re Enron,
in which the bankruptcy court considered whether to subordinate claims by employees for damages they allegedly suffered when, due to the debtor’s fraud, they chose not to exercise stock options immediately when they vested but to hold onto the options with hopes for future higher returns.
See
In reaching our conclusion, we once again “heed the observation made many years ago by the Eighth Circuit: ‘When a corporation becomes bankrupt, the temptation to lay aside the garb of a stockholder, on one pretense or another, and to assume the role of a creditor, is vеry strong, and all attempts of that kind should be viewed with suspicion.’ ”
Matter of Stirling Homex Corp.,
We note, however, our equal concern for guarding against attempts by a bankruptcy debtor to clothe a general creditor in the garb of a shareholder, which Rombro argues is the case here. Indeed, unlike the
In re Telegroup
claimants, who had received unregistered stock,
Courts responding to similar arguments have concluded that a claimant need not be an actual shareholder for his claim to be covered by the statute.
See In re PT-1 Commc’ns,
The fact that the debtor here never issued its shares to Rombro, hоwever, calls into question the applicability of the second rationale for mandatory subordination put forth by Slain and Kripke and adopted by the Congress that enacted section 510(b)' — the equity cushion concept. By refusing to take ownership of Rombro’s PrimeRx shares, Med Diversified ensured
*259
that no potential creditor could have relied on Med Diversified’s position in PrimeRx in deciding whether to extend a loan. Because the equity cushion cоncept is “only one part of the broader judgment concerning risk allocation,”
In re Enron,
In conclusion, we interpret section 510(b) broadly to require subordination of the claim at issue. In doing so, however, we acknowledge the outer boundaries of the statute’s text and purpose. “Nothing in our rationale would require the subordination of a claim simply because the identity of the claimant happens to be a shareholder [or one who completed a bargain to become a shareholder], where the claim lacks any causal relationship to the purchase or sale of stock and when subordinating the claim[] would not further the policies underlying § 510(b).... ”
In re Telegroup,
III. CONCLUSION
For the reasons stated above, we conclude that section 510’s mandatory subordination of claims “arising from the purchase or sale of [a security of the debtor]” requires subordination of Rombro’s claim. We therefore Affirm the judgment of the district court.
Notes
. We also find a measure of support in the fact that Congress did not elect to address this trend in the courts, leaving section 510(b) unchanged by the recent bankruptcy reform legislation, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, 119 Stat. 23 (2005).
. Rombro’s precise claim for damages was $926,540, and although he apparently never explained how he calculated this amount, see Prelim. Pre-Conference Statement with Respect to Action Against David Rombro (Bankr.E.D.N.Y. Jan. 19, 2005), at 2 n. 1, it is clear that the claim is based on the debtor’s failure to deliver 905,500 shares by January 2, 2002.