United States District Court, S.D. New York
September 29, 2014
In re: GENERAL MARITIME CORPORATION, Debtor.
GENERAL MARITIME CORPORATION, Appellee. DONALD C. MARRO, Appellant,
OPINION AND ORDER
EDGARDO RAMOS, District Judge.
Donald Marro ("Appellant"), proceeding pro se, appeals from an order of the United States Bankruptcy Court for the Southern District of New York (the "Disallowance Order") that expunged an $81, 250 claim he filed in the underlying Chapter 11 bankruptcy proceeding. Doc. 1. The reorganized debtors-in-possession, General Maritime Corporation and certain of its subsidiaries (collectively, "Appellees"),  objected to a series of claims, including Appellant's, on the grounds that the claims were subject to mandatory subordination under the Bankruptcy Code and consequently would not receive distributions under the applicable reorganization plan. The Disallowance Order, issued after a hearing, overruled Appellant's response to Appellees' objections and expunged the claims. Bankr. Doc. 996. For the reasons set forth below, the Bankruptcy Court's order is AFFIRMED.
Appellees filed for Chapter 11 bankruptcy protection on November 17, 2011. Bankr. Doc. 1. At the time, Appellant held $50, 000 worth of Appellees' Senior Notes. See Bankr. Doc. 988, Annex 1 (the "Proof of Claim"). Pursuant to the reorganization plan, Appellees were to distribute cash, equity and warrants to the Senior Notes Indenture Trustee. See Bankr. Doc. 755 ("Plan") at 17, 46. This distribution was to be passed on to the noteholders and would serve as full satisfaction of their claims. See id. at 25, 46. Appellant acknowledges having received his distribution from the Trustee. See Doc. 16 at 11:14-15 ("I had already received a distribution for the bonds."). Nevertheless, Appellant filed a proof of claim for $81, 250: $50, 000 for the principal amount of the notes and $31, 250 for "opportunity costs" and other damages. See Proof of Claim. These damages are, at various points in Appellant's papers, attributed to fraudulent inducement, fraudulent retention, breach of contract (the bond indenture), and breach of fiduciary duty by Appellees. See, e.g., Proof of Claim; Bankr. Doc. 980 at 4 of 43; Doc. 9 ("Appellant's Br.") at 2 of 17.
On April 15, 2013, Appellees filed an objection seeking to expunge a number of claims, including Appellant's. Bankr. Doc. 974. Appellees' position was that the claims were subject to mandatory subordination under section 510(b) of the Bankruptcy Code and would therefore not receive distributions under the Plan. See id. Appellant filed a response to the objection on May 6, 2013, and Appellees replied on June 4, 2013. Bankr. Docs. 980, 988. The Bankruptcy Court held a hearing on June 6, 2013. See Bankr. Doc. 998 ("Bankr. Tr."). During the proceedings, the Bankruptcy Court noted that general unsecured creditors had received distributions ranging from 1.88 to 0.75 percent. Bankr. Tr. at 6:24-7:1. After discussing the court's prior decisions in In re Enron Corp., 341 B.R. 141 (Bankr. S.D.N.Y. 2006), and In re WorldCom, Inc., 329 B.R. 10 (Bankr. S.D.N.Y. 2005), the court concluded that the principles articulated in those cases "merely apply" to Appellant's claim. Bankr. Tr. at 7:9-8:18. In other words, according to the Bankruptcy Court, the same principles that required subordination of the claims at issue in Enron and WorldCom operated to compel subordination here. The court therefore sustained Appellees' objection, overruled Appellant's response, and expunged Appellant's claim. Id. at 8:18-21. The Disallowance Order was issued the following day. Bankr. Doc. 996. This appeal followed. Doc. 1.
A. Standard of Review of Bankruptcy Court Judgments
This Court has jurisdiction to hear appeals from decisions of a bankruptcy court pursuant to 28 U.S.C. § 158(a), which provides in relevant part that "[t]he district courts of the United States shall have jurisdiction to hear appeals... from final judgments, orders, and decrees;... [and, ] with leave of the court, from other interlocutory orders and decrees... of bankruptcy judges." 28 U.S.C. § 158(a)(1), (3). A district court generally reviews the findings of fact of a bankruptcy court under a "clearly erroneous" standard, see Fed.R.Bankr.P. 8013, but conclusions of law are reviewed de novo. See, e.g., Shugrue v. Air Line Pilots Assoc., Int'l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 988-89 (2d Cir. 1990); Nova v. Premier Operations, Ltd. (In re Premier Operations), 294 B.R. 213, 217 (S.D.N.Y. 2003).
B. Appellant's Pro Se Status
Because Appellant is proceeding pro se, his submissions "must be construed liberally and interpreted to raise the strongest arguments that they suggest. '" Triestman v. Fed. Bureau of Prisons, 470 F.3d 471, 474 (2d Cir. 2006) (per curiam) (emphasis in original) (quoting Pabon v. Wright, 459 F.3d 241, 248 (2d Cir. 2006))).
C. The Bankruptcy Court Properly Subordinated and Expunged Appellant's Claim
As noted, Appellant does not contest that he received his pro rata distribution under the Plan. Because that distribution served as full satisfaction of the noteholders' claims, the $50, 000 portion of Appellant's claim - representing the face value of his notes - was properly expunged.
The focus of the instant appeal is on the $31, 250 residual portion of Appellant's claim, which the Bankruptcy Court expunged on the grounds that (1) the claim is subject to mandatory subordination under section 510(b) of the Bankruptcy Code, and (2) since general unsecured creditors were not paid in full on their claims, there would be no money available to pay any subordinated claims.
Section 510(b) provides as follows:
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 debtor, 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). "Security" is defined to include, inter alia, notes, bonds and debentures. Id. § 101(49)(A)(i), (iv)-(v). By the plain terms of the statute, then, the Senior Notes are subject to subordination under section 510(b); the only question is whether Appellant's damages claim "arises from" his purchase of them. The clear consensus in the case law is that it does.
Because fraudulent inducement, by definition, describes misconduct that occurred at the time a security was purchased, the statute on its face applies to any such claim. The fraudulent inducement element of Appellant's claim was therefore properly expunged because any resultant damages clearly "arise from" Appellant's purchase of the notes. See Spirnak v. Motors Liquidation Co. GUC Trust (In re Motor Liquidation Co.), No. 11 Civ. 7893 (DLC), 2012 WL 398640, at *3 (S.D.N.Y. Feb. 7, 2012) ("[I]n chapter 11 liquidation proceedings, claims alleging fraud or other violations of law in the issuance of debtor's securities' must be subordinated to the claims of general creditors." (quoting Rombro v. Dufrayne (In re Med Diversified, Inc.), 461 F.3d 251, 256 (2d Cir. 2006))); see also Baroda Hill Invs., Ltd. v. Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 133, 140 (3d Cir. 2002) (noting that "claims alleging illegality in the issuance of securities fall squarely within the intended scope of § 510(b)").
The remaining theories of recovery - fraudulent retention, breach of fiduciary duty, and breach of contract - pertain to post-acquisition conduct on the part of Appellees. However, the outcome under section 510(b) is the same.
In expunging Appellant's claim, the Bankruptcy Court correctly observed that courts interpret section 510(b) broadly, citing Enron and WorldCom. See Bankr. Tr. at 7:9-24; see also Enron, 341 B.R. at 153-54 ("[T]he majority of courts in recent years that have confronted related issues concerning the scope of section 510(b) have concluded that the phrase arising from' should be read broadly to encompass claims, such as claims for breach of contract, even more indirectly related to the purchase or sale of a security."); id. at 157 ("Recognizing then, the weight of precedent favoring the subordination of fraudulent retention claims, and the absence of persuasive precedent upholding the contrary position, the ambiguity vel non of the statutory text is ultimately irrelevant."). In arriving at this broad interpretation, courts generally require a showing of "some nexus or causal relationship" between the original purchase and the asserted claim. Telegroup, 281 F.3d at 138; see also Enron, 341 B.R. at 152 (adopting the standard set forth in Telegroup ).
As the Enron court observed, courts have consistently subordinated fraudulent retention claims. See In re Lehman Bros. Inc., No. 14 Civ. 1742 (SAS), 2014 WL 4393419, at *4 (S.D.N.Y. Sept. 5, 2014) ("[S]ection 510(b) has been applied broadly to subordinate claims arising in a variety of contexts, such as claims based on fraudulent retention...."); see also WorldCom, 329 B.R. at 15 ("The purported distinction between a stockholder damage claim in respect of the purchase or sale of a security, on the one hand, and a damage claim in respect of retention of the security, on the other, is entirely illusory and must be rejected as a matter of law."); Allen v. Geneva Steel Co. (In re Geneva Steel Co.), 260 B.R. 517, 523 (B.A.P. 10th Cir. 2001) ("Allen contends that there must be a causal connection between the purchase or sale of the securities and the damages alleged. We do not necessarily disagree with this argument but instead conclude that such a connection exists where the holder of securities alleges post-investment fraud."), aff'd, 281 F.3d 1173 (10th Cir. 2002).
While not every breach of contract claim is subject to mandatory subordination, the key again is whether the requisite nexus is present to tie the specific claim at issue to the claimant's initial purchase of his securities. See Enron, 341 B.R. at 162 ("[I]f the subordinated securities claim and the breach of contract claim relate to the same transaction and describe the same pattern of events and facts, but differ only in the source of the obligation, duty, or right, then the breach of contract claim will be subordinated."). Here, there can be little doubt that this nexus exists. Indeed, in the proceedings below, Appellant himself described his claim as "a hybrid of fraudulent inducement, fraudulent retention and breach of contract, " arguing that "[e]ither these [indenture] provisions were breached, or were never intended to be honored (fraudulent inducement), or were intended to be honored when the indenture was issued but subsequently ignored by insiders..., thus giving rise to fraudulent retention." Bankr. Doc. 980 at 4 of 43. The claim is thus, by Appellant's own admission, clearly rooted in a single set of operative factual allegations regarding insider dealings, and the fact that Appellant alternatively styles Appellees' alleged malfeasance as fraud or as breach of the bond indenture cannot remove the claim from the reach of section 510(b).
Because there can be no question that Appellant's notes are "securities" within the meaning of the Bankruptcy Code, and because Appellant is attempting to assert claims for damages that "arise from" his purchase of those securities, the $31, 250 portion of his claim is subject to mandatory subordination under section 510(b) of the Bankruptcy Code. Since general unsecured creditors did not receive payment in full on their claims, it necessarily follows that no assets remained for distribution in satisfaction of any subordinated claims. The Disallowance Order thus properly expunged Appellant's claim in its entirety.
For the reasons set forth above, the Bankruptcy Court's June 7, 2013 Order is AFFIRMED. The Clerk of the Court is respectfully directed to docket this decision, mail a copy to Appellant, and close the case.
It is SO ORDERED.