Official Committee of Unsecured Creditors of Legac v. Bryan et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
THE LEGACY ESTATE GROUP, No. 05-14659
Debtor(s).
______________________________________/
OFFICIAL CREDITORS COMMITTEE,
Plaintiff(s),
v. A.P. No. 06-1173
JOHN M. BRYAN, et al.,
Defendant(s).
_______________________________________/
Memorandum on Motion for Partial Summary Judgment
_________________
Claim # 146 filed by the John M. Bryan Trust alleges that on March 14, 2005, the debtor induced it
to forgive a claim against the debtor in the amount of $3,798,421.24 in exchange for a promissory note
executed by Connaught Capital Partners, LLC, the owner of the debtor. The claim alleges that the JMB
Trust agreed to accept the note due to fraudulent misrepresentations made by the debtor. On that basis, it
asserts a general unsecured claim even though it waived its claim and now holds Connaught’s note. Plaintiff
Official Creditors Committee seeks partial summary judgment declaring that to the extent the claim is allowed
Entered on Docket
November 02, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 06-01173 Doc# 133 Filed: 11/02/07 Entered: 11/02/07 13:34:02 Page 1 of
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at all it is subordinated pursuant to § 510(b) of the Bankruptcy Code.
Citing Stoumbos v. Kilimnik, 988 F.2d 949 (9th Cir. 1993), the JMB Trust argues that there is a
triable issue of fact as to its inequitable conduct. The flaw in this argument is that Stoumbos was a case
involving equitable subordination pursuant to § 510(c). Section 510(b), upon which plaintiff relies, provides
for mandatory subordination, as a matter of law, if the claim is based on rescission or damages arising from a
sale of a security of the debtor or an affiliate.
According to the claim, the JMB Trust agreed to accept a note of Connaught in exchange for its
claim against the debtor. Connaught is an affiliate pursuant to § 101(2)(A) of the Code. A note is a security
pursuant to § 101(49)(A)(i). The claim therefore arose from the purchase of a security of the debtor’s
affiliate and must be subordinated pursuant to § 510(b) regardless of whether the conduct of the JMB Trust
was inequitable.
For the foregoing reasons, the court will deem it without substantial controversy pursuant to FRCP
56(d) that claim #146, to the extent it is allowed at all, will be subordinated pursuant to § 510(b) of the
Bankruptcy Code. Counsel for plaintiff shall submit an appropriate form of order.
Dated: November 2, 2007
SAlan Jaroslovsky
U.S. Bankruptcy Judge
Case: 06-01173 Doc# 133 Filed: 11/02/07 Entered: 11/02/07 13:34:02 Page 2 of
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