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* The Liquidating Trust of U.S. Wireless Corp. v. Wax (In re U.S. Wireless Corp.), 384 B.R. 713 (Bankr. D. Del. Apr. 2008) (Sontchi, J.)
Court looked behind arbitration award to determine that claim against the estate was for damages arising from the purchase of securities and was thus subject to subordination.
A former officer of the debtor obtained an arbitration award finding that the debtor had wrongfully terminated his employment (pre-petition), depriving the officer of his opportunity to appreciate the rising value of the debtor's stock. The award was later confirmed by a final judgment. When the liquidating trust (created under the terms of the debtor's confirmed plan) commenced this action to subordinate the officer's claim, the former officer responded that the court could not look behind his claim now that it had been reduced to final judgment. The court disagreed.
First, the court found that compensation falls within the definition of a "purchase." Next, the court recognized that the compensation package, which included stock and stock options, fell within the definition of a "security" under section 101(49). Third, the court recognized that it must "look behind" the judgment to determine whether the original claim was for "damages arising from the purchase of securities." Because the arbitration award based the officer's damages on the value he would have received had his options vested before his termination, the court concluded that his claim was, in fact, one for damages arising from the purchase of securities and thus subject to equitable subordination under section 510(b).
* Azabu Liquidating Trust v. Beecher, Ltd. (In re Azabu Tatemono K.K.), 383 B.R. 738 (Bankr. D. Haw. Mar. 2008) (Faris, J.)
Marshaling is available to junior lien holders under Hawaiian law and cannot be blocked.
In this case, the bankruptcy court predicted that Hawaiian courts would recognize the marshaling doctrine if: (1) it is invoked by a junior secured or lien creditor; (2) the debtor has two distinct funds available for satisfaction of its secured debt; and (3) the operation of the doctrine would work no inequity upon the debtor or certain third parties. In this case the debtor sold all of its assets, leaving a number of lien holders fighting over the proceeds. A judgment lien holder asserted its lien on the debtor's hotel. The hotel was one of many assets serving as collateral for the senior lien holder's debt. The judgment lien holder sought to invoke the marshaling doctrine to force the senior lien holder to satisfy its claim with non-hotel proceeds first. The liquidating trust (another junior lien holder) moved to block the judgment lien holder's use of marshaling, claiming that the doctrine would allow full payment to the judgment lien holder at the expense of the liquidating trust, which was created by the debtor's liquidating plan.
If ever faced with this issue, said the bankruptcy court, Hawaiian courts would follow the "proportionality approach." Under this approach, all remaining proceeds after retiring the senior lien are lumped together and then apportioned among all junior lien holders according to the comparative value of collateral securing the junior claims (and apparently without regard to priority among junior lien holders). Said the court, "The proportionality approach protects both junior liens from the senior creditor's unbridled discretion and from each other, and provides for a neutral, fair, easily administered rule." Who said liquidating the estate had to be difficult?
