2008 Chapter 11 Open Forum: Year In Review

subordinate those claims under section 510(b). Over the former officers' and directors' objections, the bankruptcy court held that, because the gist of the ERISA claims were, in effect, claims to recover damages for lost value of the stock, under a broad reading the Bankruptcy Code, the indemnification claims could be considered to "arise from" the purchase of stock for the purpose of subordinating the claims under section 510(b).

• In re S.W. Fla. Heart Group, P.A., 384 B.R. 311 (Bankr. M.D. Fla. Jan. 2008)
• (Paskay, J.) Section 502(h) claims were not governed by section 502(h) for distribution purposes. The distribution agent appointed under a confirmed chapter 11 plan commenced a preference action against three insider doctors to avoid compensation paid to them in excess of their ordinary salaries. The defendants settled the dispute, and, as part of the settlement, the distribution agent consented to the allowance of their claims under section 502(h). Because the settlement itself did not determine what distributions should be made for those claims, the doctors filed motions asking the court to determine the priority of those claims. By the terms of the confirmed plan, the doctors' claims could be treated under two possible classes. The first possibility (Class 3) was a class comprised of general, non-insider, unsecured claims. The second possibility (Class 5B) was a class comprised of insider subordinated claims. The plan explicitly named the doctors as holders of potential Class 5B claims. Because the court found the plan to be clear and unambiguous, and because section 502(h) itself deals only with allowance of claims without regard to claim distributions, the court determined that the claims must be treated under Class 5B for the purposes of distributions.
• In re NationsRent, Inc., 371 B.R. 83 (Bankr. D. Del. Jan. 2008) (Gross, J.)

Make-whole claims issued as part of a pre-petition merger transaction were immune from subordination. A liquidating trust, born out of a confirmed plan, sought to make distributions to a class of general unsecured creditors. Two groups of the liquidating trust beneficiaries objected to the proposed distributions, arguing that their claims deserved better treatment (i.e., a higher rate of distribution) than other trust beneficiaries' claims. The first group consisted of former shareholders of entities acquired by the debtors through a series of pre-petition mergers. Those shareholders sold their stock to the debtors in exchange for cash, promissory notes, and additional deferred consideration based on the debtors' stock value three years after the merger ("make-whole claims"). The court concluded that these make-whole claims were not damages arising in connection with the sale or purchase of the debtors' stock. Instead, they were nothing more than claims for deferred payments and, thus, immune from subordination. And under the terms of an indenture agreement, those make-whole claims took priority over the sellers' promissory notes. Accordingly, the court concluded that the make-whole claims were senior in priority to the notes but pari passu with the other trust beneficiaries' claims.

The second group of objecting creditors were assignees of deficiency claims previously held by secured lenders. Theyargued that their claims were entitled to greater distributions than the other trust beneficiaries' claims because they were deficiencies of purchase money obligations. The court noted that a post-petition settlement agreement between the debtors and the lenders, effectively replacing the pre-petition financing agreements, created new rights for