O'Donnell v. Tristar Esperanza Properties, LLC (In Re Tristar Esperanza Properties, LLC) ( 2013 )


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  •                                                          FILED
    1                                                       MAR 08 2013
    2                                                    SUSAN M SPRAUL, CLERK
    U.S. BKCY. APP. PANEL
    OF THE NINTH CIRCUIT
    3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
    4                            OF THE NINTH CIRCUIT
    5   In re:                        )
    )       BAP No.    CC-12-1340-KlPaDu
    6   TRISTAR ESPERANZA PROPERTIES, )
    LLC, a California Limited     )       Bk. No.    SA 11-21095-TA
    7   Liability Company,            )
    )       Adv. No.   SA 12-01041-TA
    8             Debtor.             )
    ______________________________)
    9                                 )
    JANE O’DONNELL; PENSCO TRUST )
    10   COMPANY, a New Hampshire      )
    Company,*                     )
    11                                 )
    Appellants,         )
    12                                 )
    v.                            )       OPINION
    13                                 )
    TRISTAR ESPERANZA PROPERTIES, )
    14   LLC, a California Limited     )
    Liability Company,            )
    15                                 )
    Appellee.           )
    16   ______________________________)
    17                  Argued and Submitted on February 22, 2013
    at Pasadena, California
    18
    Filed – March 8, 2013
    19
    Appeal from the United States Bankruptcy Court
    20                   for the Central District of California
    21            Honorable Theodor Albert, Bankruptcy Judge, Presiding
    22   Before:    KLEIN,** PAPPAS, and DUNN, Bankruptcy Judges.
    23
    __________________
    24
    * The caption is revised to reflect Jane O’Donnell as lead
    25   appellant and real party in interest. Pensco Trust Company is
    not separately represented and has not appeared in its own right.
    26
    ** Hon. Christopher M. Klein, Chief Judge, U.S. Bankruptcy
    27   Court, Eastern District of California, sitting by designation.
    28
    1   KLEIN, Bankruptcy Judge:
    2
    3        This is a mandatory subordination case.    The “damages”
    4   clause of 
    11 U.S.C. § 510
    (b) mandates subordination of claims for
    5   “damages arising from the purchase or sale” of a security of the
    6   debtor.   The bankruptcy court concluded that § 510(b) mandatory
    7   subordination applies to the claim of appellant, who withdrew as
    8   a member of the debtor limited liability company (“LLC”) and
    9   obtained a judgment valuing her equity interest after the LLC did
    10   not honor a provision in its operating agreement requiring buy-
    11   back of the withdrawing member’s interest.
    12        We agree with the bankruptcy court that permitting a former
    13   equity holder to recover the value of an equity-based claim on a
    14   par with general unsecured creditors is the sort of bootstrapping
    15   that § 510(b) mandatory subordination is designed to prevent.
    16   Rejecting appellant’s argument that “damages arising from the
    17   purchase or sale” of a security does not encompass contract-based
    18   awards to withdrawing LLC members, we AFFIRM.
    19                                  FACTS
    20        The debtor, Tristar Esperanza Properties, LLC, is a
    21   California limited liability company whose sole asset is real
    22   property in Orange County, California.   Tristar’s organic
    23   governing document is in the form of an operating agreement.
    24        Appellant Jane O’Donnell acquired a membership interest in
    25   Tristar (about 14 percent) in 2005 by means of a $100,000 capital
    26   contribution made through her investment retirement account with
    27   appellant Pensco Trust Company, which entity is content to be
    28   represented by O’Donnell and has not appeared in its own right.
    2
    1        In 2008, O’Donnell invoked the Tristar operating agreement’s
    2   withdrawal provision by giving written notice of such intent.
    3        Under the buy-back provision in the Tristar operating
    4   agreement, the notice of withdrawal triggered a process in which
    5   Tristar and the withdrawing member would use best efforts to
    6   agree upon the fair market value of the subject interest.
    7        Tristar paid O’Donnell $60,000 on account and, jointly with
    8   O’Donnell, retained an appraiser who determined that the fair
    9   market value of O’Donnell’s interest was $399,918 ($305/sq.ft.)
    10   as of the time of her withdrawal.    Tristar contends that this
    11   value is “absurd” because it was not adjusted to reflect $2.69
    12   million in secured debt against its sole asset, which, if
    13   counted, would have reduced the recovery by about $377,000.
    14        After Tristar declined to accept the valuation, O’Donnell
    15   initiated an arbitration that concluded in 2010 with a
    16   determination that Tristar was bound by the $399,918 value.
    17        The arbitrator awarded O’Donnell damages of $399,918, less
    18   the $60,000 that Tristar had already paid.
    19        The arbitration award was confirmed by a California superior
    20   court and reduced to judgment.   The abstract of judgment was
    21   recorded in Orange County in December 2010.
    22        Tristar filed its chapter 11 case in the Central District of
    23   California in August 2011 and filed this adversary proceeding
    24   against O’Donnell and Pensco Trust, alleging three claims for
    25   relief:   (1) mandatory subordination under § 510(b); (2)
    26   equitable subordination under § 510(c); and (3) avoidance of a
    27   preference under 
    11 U.S.C. § 547
    (b).
    28        The trial court disposed of all three claims for relief on
    3
    1   cross-motions for summary judgment.    The net result was that
    2   Tristar prevailed on the mandatory subordination count, while the
    3   other two counts were resolved against Tristar.
    4        With respect to mandatory subordination, the court reasoned
    5   that the scope of § 510(b) is broad and leaves little discretion
    6   where literal application is not demonstrably at odds with the
    7   intent of Congress.   It explained that § 510(b) is designed to
    8   prevent equity holders from diluting the recovery of creditors
    9   who deal with the debtor only on a credit basis with no
    10   expectation of sharing in the value of the enterprise and with an
    11   expectation of having rights senior to equity interests.
    12        In particular, the court rejected the argument that the
    13   confirmed arbitration award did not constitute a claim for
    14   “damages” within the meaning of the § 510(b) damages clause and
    15   emphasized that the arbitrator found that the debtor had breached
    16   its operating agreement.   Under these circumstances, the court
    17   concluded that such an award qualified as § 510(b) “damages.”
    18        This timely appeal, limited to the § 510(b) issue, ensued.
    19                              JURISDICTION
    20        Federal subject-matter jurisdiction exists under 28 U.S.C.
    21   § 1334(b).   The bankruptcy judge had authority to hear and
    22   determine the matter under 
    28 U.S.C. §§ 157
    (b)(2)(A) and (O); no
    23   party has questioned that authority.   We have jurisdiction under
    24   
    28 U.S.C. § 158
    (a)(1).
    25                                 ISSUES
    26        1) Whether a contractually-required buy-back of an LLC
    27   membership interest from a withdrawing member constitutes a
    28   “purchase or sale” of a “security” of the debtor within the
    4
    1   meaning of 
    11 U.S.C. § 510
    (b).
    2        2) Whether the appellants’ claim is for “damages” within the
    3   meaning of 
    11 U.S.C. § 510
    (b).
    4        3) Whether withdrawal as an LLC member prior to the
    5   bankruptcy filing renders 
    11 U.S.C. § 510
    (b) inapplicable.
    6        4) Whether judicial estoppel should be imposed.
    7                           STANDARD OF REVIEW
    8        We review summary judgment de novo.     Ghomeshi v. Sabban (In
    9   re Sabban), 
    600 F.3d 1219
    , 1221-22 (9th Cir. 2010); Bendon v.
    10   Reynolds (In re Reynolds), 
    479 B.R. 67
    , 71 (9th Cir. BAP 2012).
    11   De novo review permits an appellate court to substitute its
    12   judgment for that of the trial court.    Barclay v. Mackenzie (In
    13   re AFI Holding, Inc.), 
    525 F.3d 700
    , 702 (9th Cir. 2008).      We
    14   must determine whether, viewing the summary judgment evidence in
    15   the light most favorable to the non-moving party, any genuine
    16   issue of material fact remains for trial and whether Tristar was
    17   entitled to a § 510(b) mandatory subordination judgment as a
    18   matter of law.   Gill v. Stern (In re Stern), 
    345 F.3d 1036
    , 1040
    19   (9th Cir. 2003).
    20                               DISCUSSION
    21        This appeal requires construction of 
    11 U.S.C. § 510
    (b).
    22   After examining the applicable language of § 510(b), we tour the
    23   statute’s legislative history and policy objectives.    This
    24   inspection of the statute’s underpinnings confirms that the
    25   arbitration award falls in the zone of transactions requiring
    26   mandatory subordination under § 510(b).
    27        For us, this is a case of first impression in that we deal
    28   for the first time with the § 510(b) “damages” clause in the
    5
    1   context of an LLC and an arbitration stemming from the withdrawal
    2   provision of the LLC’s operating agreement.         The ultimate
    3   question is:   whether a judgment debt, based on a confirmed
    4   arbitration award enforcing a buy-back provision in the debtor
    5   LLC’s operating agreement, constitutes a claim “for damages
    6   arising from the purchase or sale of” a “security” of the debtor.
    7   
    11 U.S.C. § 510
    (b).   It does.
    8                                       I
    9        The Bankruptcy Code provides for three distinct forms of
    10   subordination:   (1) subordination by agreement; (2) mandatory
    11   subordination of certain claims related to a security; and
    12   (3) equitable subordination.     The first is a matter of contract;
    13   the second a matter of the nature of a transaction; and the third
    14   a matter of inequitable conduct.         We focus here on the second.
    15        Subordination demotes a claim from its nominal priority.           A
    16   subordinated claimant receives a distribution junior in priority
    17   to the nominal class.   4 COLLIER   ON   BANKRUPTCY ¶ 510.01 (Alan N.
    18   Resnick & Henry J. Sommer eds., 16th ed.) (“COLLIER”).
    19        As our primary task is to interpret § 510(b) de novo, we
    20   begin with its language:
    21           (b) For the purpose of distribution under this
    title, a claim arising from rescission of a purchase or
    22        sale of a security of the debtor or of an affiliate of
    the debtor, for damages arising from the purchase or
    23        sale of such a security, or for reimbursement or
    contribution allowed under section 502 on account of
    24        such a claim, shall be subordinated to all claims or
    interests that are senior to or equal the claim or
    25        interest represented by such security, except that if
    such security is common stock, such claim has the same
    26        priority as common stock.
    27   
    11 U.S.C. § 510
    (b) (emphasis supplied).
    28        Thus, § 510(b) contemplates three types of claims –
    6
    1   rescission, damages, and reimbursement/contribution –     that all
    2   have a nexus with the purchase or sale of a security.     Allen v.
    3   Geneva Steel Co. (In re Geneva Steel Co.), 
    281 F.3d 1173
    , 1177
    4   (10th Cir. 2002); see also COLLIER ¶ 510.04.    Only the damages
    5   clause is involved in this appeal.
    6                                        A
    7        At the threshold lies the question whether a membership
    8   interest in an LLC is a “security” as defined by Bankruptcy Code
    9   § 101(49).    
    11 U.S.C. § 101
    (49).
    10        That statutory definition of “security” does not provide a
    11   functional description.   Rather, it merely lists positive and
    12   negative examples.   There is a fifteen-item list of examples of
    13   securities.   
    11 U.S.C. § 101
    (49)(A).    And, there are seven
    14   examples of what is not a security.      
    11 U.S.C. § 101
    (49)(B).
    15   Neither list mentions a membership interest in an LLC.
    16        But, the omission of mention of a LLC membership interest
    17   from the examples of “security” at § 101(49)(A) is not fatal to
    18   the status of such an interest as a “security” because the
    19   operative verb at the beginning of the list is “includes”:      “The
    20   term ‘security’ – (A) includes —... .”     
    11 U.S.C. § 101
    (49)(A).
    21        Section 102 of the Bankruptcy Code provides a statutory rule
    22   of construction whereby the term “includes” is not restrictive.
    23   See 
    11 U.S.C. § 102
    (3) (“In this title — ... (3) ‘includes’ and
    24   ‘including’ are not limiting”).      Therefore, the statutory list of
    25   what is a “security” at § 101(49)(A) is non-exclusive.
    26        Since the fifteen-item list of what constitutes a “security”
    27   is non-exclusive, we look for an analogous entry on the list.      In
    28   this regard, the statute is express that the “interest of a
    7
    1   limited partner in a limited partnership” is a “security.”
    2   
    11 U.S.C. § 101
    (49)(A)(xiii).
    3        The similarities between the interest of a limited partner
    4   in a limited partnership and a membership interest in an LLC are
    5   substantial.   For example, each owns an interest in the
    6   enterprise and shares in net revenues and increases in value, and
    7   those who extend credit to the enterprise do so in the
    8   expectation that their claims will be paid before any
    9   distribution to limited partners or LLC members.
    10        It follows that, if the interest of a limited partner in a
    11   limited partnership is a “security” under the Bankruptcy Code,
    12   then the interest of a member in an LLC is also a “security” for
    13   purposes of the Bankruptcy Code.
    14        Accordingly, an interest of a member in an LLC is a
    15   “security,” the purchase or sale of which is vulnerable to
    16   § 510(b) mandatory subordination.
    17                                      B
    18        Appellants argue that the confirmed arbitration award is not
    19   “for damages” within the scope of § 510(b), but rather is a claim
    20   based on a judgment for “fixed debt.”   They further contend that,
    21   whatever the characterization of the claim may be, the right to
    22   payment did not arise from the purchase or sale of Tristar’s
    23   securities.    This necessitates a review of the meaning of
    24   § 510(b) in general and the damages clause in particular.
    25                                      1
    26        The starting point is the text of the statute.     Lamie v.
    27   United States Tr., 
    540 U.S. 526
    , 534 (2004).    Plain meaning
    28   should be conclusive, except when literal application will
    8
    1   produce a result demonstrably at odds with the intentions of its
    2   drafters.   United States v. Ron Pair Enters., Inc., 
    489 U.S. 235
    ,
    3   242 (1989); Snavely v. Miller (In re Miller), 
    397 F.3d 726
    , 730
    4   (9th Cir. 2005).   If the text of a statute is ambiguous, we
    5   resort to canons of construction, legislative history, and the
    6   statute’s purpose to discern Congress’s intent.              James v. City of
    7   Costa Mesa, 
    700 F.3d 394
    , 399 n.8 (9th Cir. 2012).
    8                                       2
    9        The language of § 510(b) provides that “damages” requiring
    10   subordination must arise from the purchase or sale of the
    11   debtor’s securities, but it does not otherwise purport to
    12   describe the nature of the claim for relief or the types of
    13   damages that may be recovered.
    14        “Damages” is not a defined term in the Bankruptcy Code, but
    15   it has a well-understood general definition in the law.                It
    16   generally means money “claimed by, or ordered to be paid to, a
    17   person as compensation for loss or injury.” BLACK’S LAW DICTIONARY,
    18   445 (9th ed. 2009) (“Damages”).
    19        The classic hornbook on damages likewise describes “damages”
    20   as “primarily how much can be recovered” on any basis for
    21   liability and as the preferred remedy over specific performance.
    22   Charles T. McCormick, HANDBOOK   OF THE   LAW   OF   DAMAGES § 1 (1935).
    23   Professor McCormick adds that an agreement to arbitrate all
    24   controversies arising from dealings under a contract empowers the
    25   arbitrator to determine all claims for damages, direct and
    26   consequential, from any breach of contract.              Id. at § 4.
    27        We perceive no ambiguity in the use of the term “damages” in
    28   § 510(b).   Nothing has been presented to us to suggest that the
    9
    1   term has a narrower or specialized meaning in § 510(b).
    2           In particular, we are not persuaded by the appellants’
    3   argument that § 510(b) “damages” connote some sort of actionable
    4   wrongdoing or malfeasance and not merely enforcing a contract
    5   term.    The decision they cite for the proposition merely held
    6   that simple recovery of principal due under the promissory note
    7   in question did not constitute § 510(b) “damages” even though a
    8   “note” may be within the Bankruptcy Code definition of a
    9   “security.”    In re Blondheim Real Estate, Inc., 
    91 B.R. 639
    , 640
    10   (Bankr. D.N.H. 1988).    We do not read that decision to narrow the
    11   meaning of “damages” and, in any event, are not persuaded that
    12   § 510(b) “damages” require wrongdoing or malfeasance.
    13                                      3
    14           Having concluded that § 510(b) “damages” include all forms
    15   of “damages” known to the law so long as they arise from the
    16   purchase or sale of a security of the debtor, the question
    17   becomes whether, on our facts, there are § 510(b) “damages.”
    18           O’Donnell acquired her membership interest in Tristar in
    19   exchange for cash.    This was the purchase of a security.   She
    20   later invoked the buy-back process established by the Tristar
    21   operating agreement for withdrawal by members from the LLC.       The
    22   subsequent disagreement over the purchase price determined by a
    23   jointly retained appraiser led to the arbitration proceedings.
    24           After considering the details of the parties’ course of
    25   conduct, including the applicable language of Tristar’s operating
    26   agreement, the arbitrator determined that Tristar was obligated
    27   to repurchase the appellants’ equity interest for the appraised
    28   price.    The arbitrator found that Tristar had breached the
    10
    1   operating agreement and awarded the appellants “damages”
    2   commensurate with the appraisal.       When Tristar still did not pay
    3   what was due, the appellants obtained a state-court judgment
    4   confirming the arbitration award.
    5        Given that the arbitration award was an order to pay money
    6   to the appellants as a matter of contractual right, and achieved
    7   the status of a judgment debt once the award was confirmed, the
    8   arbitration award and judgment qualify as § 510(b) “damages.”
    9        The record also shows the arbitrator concluded that Tristar
    10   breached both “the letter and spirit” of the Tristar operating
    11   agreement, and, for that reason, was bound by the appraiser’s
    12   determination.   It is immaterial that appellants did not style
    13   the arbitration demand as being for breach of contract, fraud, or
    14   any other wrongful conduct.   The purpose of the proceeding was to
    15   enforce a contract in circumstances in which Tristar’s
    16   recalcitrance constituted breach of contract.
    17                                      C
    18        The next question is whether the appellants’ claim arises
    19   from the “purchase or sale” of Tristar’s securities.
    20                                   1
    21        Section 510(b) is limited to claims “arising from the
    22   purchase or sale of” a debtor’s securities.      What constitutes
    23   “arising from” has been considered and found ambiguous by the
    24   Second, Third, Fifth, Ninth, and Tenth Circuits.1      No circuit has
    25
    26        1
    Ninth Circuit cases on the scope of § 510(b) mandatory
    subordination are: Racusin v. Am. Wagering, Inc. (In re Am.
    27
    Wagering, Inc.), 
    493 F.3d 1067
    , 1073 (9th Cir. 2007) (rescission
    28   of a purchase or sale of a security of debtor); Am. Broad. Sys.,
    (continued...)
    11
    1   taken a contrary view.
    2        The factual scenarios in which investor claims have arisen
    3   from the purchase or sale of a debtor’s securities are diverse.
    4   The LLC membership interest in this appeal is a new wrinkle.
    5        The appellants characterize their claim as an ordinary debt
    6   obligation.   They emphasize that O’Donnell withdrew as a member
    7   well before the bankruptcy proceedings, shed her equity status,
    8   and thereafter became a general creditor of the debtor.    Although
    9   appellants argue that the claim is not one “stemming from alleged
    10   fraud or wrongdoing relating to the purchase or sale of a
    11   security,” the weight of precedent has applied a broader
    12   construction of the “arising from” language.
    13        The ambiguity in § 510(b) permits competing narrow and broad
    14   interpretations.   A narrow reading would require that the injury
    15   flow from the actual purchase or sale.   A broad reading would
    16   require that the purchase or sale be part of a causal link even
    17   though the injury may flow from a subsequent event.   Fair
    18   arguments support each view.   An influential case adopting the
    19   broad view is In re Granite Partners, L.P., 
    208 B.R. 332
    , 339
    20
    21
    1
    (...continued)
    22   Inc. v. Nugent (In re Betacom of Phoenix, Inc.), 
    240 F.3d 823
    ,
    828 (9th Cir. 2001) (failure to deliver stock pursuant to merger
    23   agreement). Other circuits have addressed § 510(b): SeaQuest
    24   Diving, LP v. S&J Diving, Inc.(In re SeaQuest Diving, LP), 
    579 F.3d 411
    , 419 (5th Cir. 2009) (rescission arising from post-
    25   issuance conduct); Rombro v. Dufrayne (In re Med Diversified,
    Inc.), 
    461 F.3d 251
    , 258-59 (2d Cir. 2006) (exchange of stock
    26   provision in termination agreement); Baroda Hill Invs., Ltd. v.
    Telegroup, Inc. (In re Telegroup, Inc.), 
    281 F.3d 133
    , 144 (3d
    27
    Cir. 2002) (provision in stock purchase agreement to use best
    28   efforts to register stock); Geneva Steel, 
    281 F.3d at 1178
     (10th
    Cir.) (fraudulent retention).
    12
    1   (Bankr. S.D.N.Y. 1997).
    2        The Ninth Circuit favors the broad view and has expressed
    3   its approval of the Granite Partners analysis.    Betacom, 
    240 F.3d 4
       at 828, citing with approval, Granite Partners, 
    208 B.R. at 333
    .
    5   It has concluded that § 510's legislative history does not reveal
    6   an intent to tie mandatory subordination exclusively to
    7   securities fraud claims.   Id. at 829.   Accordingly, we apply the
    8   broad view as the law of the circuit.
    9        We now turn to the legislative history.
    10                                     2
    11        In drafting § 510(b), Congress relied on an influential
    12   article by John J. Slain and Homer Kripke:    John J. Slain & Homer
    13   Kripke, The Interface Between Securities Regulation and
    14   Bankruptcy — Allocating the Risk of Illegal Securities Issuance
    15   Between Securityholders and the Issuer’s Creditors, 48 N.Y.U. L.
    16   REV. 261 (1973) (“Slain and Kripke”).    The House Committee Report
    17   contains an extended discussion of Slain and Kripke in connection
    18   with § 510(b).   H.R. Rep. No. 95-595, 1st Sess., at 194-96
    19   (1977), reprinted in 1978 U.S.C.C.A.N. at 6154-56 (“House
    20   Report”), cited with approval, Betacom, 
    240 F.3d at 829
    .
    21        Confronting the historical problem of investors recovering
    22   fraud claims pari passu with general creditors in bankruptcy
    23   cases, Slain and Kripke emphasized the dissimilar expectations of
    24   investors and creditors.   They recognized that both creditors and
    25   investors “accept the risk of enterprise failure.”    Slain and
    26   Kripke at 286.   The two constituent risks, however, are based on
    27   different assumptions.    In the event of insolvency, the creditor
    28   expects higher priority vis-a-vis the investor, but, unlike the
    13
    1   investor, does not expect to participate in the profits of the
    2   enterprise.   House Report at 194-96; Betacom, 240 B.R. at 830-31.
    3        The Ninth Circuit takes these dissimilar expectations into
    4   account in setting a standard for mandatory subordination because
    5   it is unfair to shift all of the risk to creditors who extend
    6   credit in reliance on the cushion of investment provided by the
    7   shareholders.   Betacom, 
    240 F.3d at 829-31
    .
    8        Section 510(b) was spawned by uncertainty under prior law
    9   whether claims relating to securities transactions should enjoy
    10   an equal footing with the claims of general unsecured creditors:
    11   a “difficult policy question” in business bankruptcy concerns the
    12   relative status of a security holder who seeks to rescind a
    13   purchase of securities or to sue for damages based on such a
    14   purchase and wants to be treated as a general unsecured creditor.
    15   House Report, at 195.
    16        Embracing the Slain and Kripke analysis, Congress explicitly
    17   resolved the dilemma in favor of subordination when it enacted
    18   § 510(b).   It was persuaded that it was appropriate to focus on
    19   the risk of insolvency as well as the risk of unlawful issuance
    20   of the debtor’s securities.    Id. at 196.   The intent was to
    21   subordinate the distribution priority of rescission claims to all
    22   claims that are senior to the claim or interest on which the
    23   rescission claims are based.   Id.
    24        Although Congress focused on rescission claims, it enacted
    25   more comprehensive language.   The Ninth Circuit has described how
    26   the scope of § 510(b) has gradually expanded to include claims
    27   based on contract law and other actions.     Am. Wagering, Inc., 493
    28   F.3d at 1072.   Beyond the realm of rescission and investor fraud
    14
    1   claims, there is judicial consensus that the phrase “arising
    2   from” in § 510(b) should be construed broadly to encompass claims
    3   other than fraud claims, such as claims for breach of contract.
    4   Id. (collecting cases); Betacom, 
    240 F.3d at 828-29
    .
    5        The broad interpretation of § 510(b) was cemented into the
    6   law of the Ninth Circuit in Betacom.      There, shareholders of the
    7   debtor, who were to receive their shares through a merger
    8   agreement entered into between the debtor and another entity,
    9   brought a pre-petition action against the debtor for the debtor’s
    10   failure to deliver the stock as required by the merger agreement.
    11   Betacom, 
    240 F.3d at 826
    .    The court held the claim should be
    12   subordinated under § 510(b).   Id. at 832.
    13        Central to the Betacom court’s analysis was a careful
    14   consideration of the rationales identified in the legislative
    15   history.   The Ninth Circuit explained that there are two main
    16   rationales for mandatory subordination: “(1) the dissimilar risk
    17   and return expectations of shareholders and creditors; and (2)
    18   the reliance of creditors on the equity cushion provided by
    19   shareholder investment.”    Id. at 830.   As to the reliance
    20   rationale, the court proposed, without deciding the issue, that
    21   creditors of a distressed enterprise be presumed to have relied
    22   upon each prior investment in equity and junior debt, subject to
    23   rebuttal to the extent that the investor can prove nonreliance.
    24   Id. at 831 n.3.
    25        The Betacom precedent dictates that we reject the
    26   appellants’ argument that, to be subordinated, their claim must
    27   sound in fraud or some sort of actionable wrongdoing.     We cannot
    28   ignore the Ninth Circuit’s reasoning in Betacom that nothing in
    15
    1   the Slain and Kripke analysis suggests that Congress’s concern
    2   with creditor expectations and equitable risk allocation was
    3   limited to cases of debtor fraud.     Id. at 829.
    4         Likewise, in Am. Wagering, the Ninth Circuit looked
    5   favorably upon a linking test requiring a nexus or causal
    6   relationship between the claim and the purchase or sale of the
    7   securities.   Am. Wagering, 
    493 F.3d at 1072
    .   In its view, this
    8   test showed that courts were concerned with claims that tried to
    9   recharacterize what would otherwise be subordinated securities.
    10   
    Id.
       Bootstrapping to a higher status in the bankruptcy
    11   distribution scheme is blocked by § 510(b).
    12         Applying the two rationales underlying § 510(b) to the facts
    13   presented here, we conclude that the appellants’ claim is subject
    14   to mandatory subordination.    O’Donnell was in fact an equity
    15   holder before she withdrew.    During her tenure as a member of
    16   Tristar, she enjoyed the potential for profit based on the value
    17   of real estate.   In fact, she enjoyed a considerable return:     she
    18   contributed $100,000 initially and received an arbitration award
    19   for nearly $400,000.   The confirmed arbitration award is directly
    20   linked to her ownership of a membership interest in the debtor;
    21   indeed, it is nothing other than her cashing out her equity (at a
    22   value that the debtor insists is highly inflated).
    23         The second rationale for subordinating investor claims is
    24   the reliance of creditors on the so-called “equity cushion”
    25   created by an investor’s contribution of capital.    We presume
    26   that creditors relied on this equity cushion in deciding to
    27   extend credit to the debtor.   By withdrawing as a member and
    28   liquidating her interest, O’Donnell altered the Tristar balance
    16
    1   sheet by extracting or, more appropriately, attempting to extract
    2   her initial contribution.   This would effectively deflate the
    3   equity cushion to which trade creditors and the like would look
    4   in recovering their claims for fixed debt.    The creditors of
    5   Tristar, by virtue of their status, were never to enjoy the
    6   returns of increased value.
    7        The appellants have not attempted to rebut the presumption
    8   that creditors of Tristar relied on O’Donnell’s contribution as a
    9   source of recovery.   As such, the second rationale is also
    10   applicable.   But even if appellants had argued that there was a
    11   lack of reliance, the presence of merely one of the dual
    12   rationales is sufficient.   Waltzer v. Nisselson (In re MarketXT
    13   Holdings Corp.), 
    346 Fed. Appx. 744
    , 746 (2d Cir. 2009).
    14        We hold that § 510(b) is sufficiently broad to encompass a
    15   claim that arose from the withdrawal of a member from an LLC,
    16   which withdrawal triggered a repurchasing process whereby the
    17   debtor-issuer was to buy back the interest from the investor.
    18                                   II
    19        The appellants, urging that the withdrawal from the LLC and
    20   the fixing of the claim before bankruptcy should prevent
    21   mandatory subordination, brand their claim as a “fixed debt.”
    22   This is a familiar strategy for equity holders (current or
    23   former) in the bankruptcy arena.     The appellants assert that
    24   O’Donnell traded the risks and rewards of an equity holder for
    25   the risks and rewards of a general creditor.
    26        To be sure, the appellants are “creditors” who have “claims”
    27   against Tristar.   A “creditor” includes anyone who holds a
    28   “claim” against the debtor that arose before the order for
    17
    1   relief.    
    11 U.S.C. § 101
    (10)(A).
    2        The judgment confirming the arbitration award requiring the
    3   debtor to pay the fair market value of the former membership
    4   interest is a “claim.”   See 
    11 U.S.C. § 101
    (5).
    5        The purpose of subordination, however, is to adjust the
    6   place in line of certain claims in the bankruptcy distribution
    7   scheme.    Bankruptcy policy affords a priority to general
    8   creditors that is superior to equity interests.    As Professors
    9   Slain and Kripke explained in their seminal article, appropriate
    10   allocations of risk among general creditors and equity-type
    11   creditors should reflect the dissimilar risks regarding
    12   enterprise insolvency those creditors undertake.   Granite
    13   Partners, 
    208 B.R. at 336
    .
    14        Whatever might be said of a transformation of equity into
    15   debt in a transaction that is old and cold and that has long been
    16   treated as part of the enterprise’s debt structure, this is not
    17   such a case.   Rather, the buy-back transaction was a disputed
    18   issue until shortly before the chapter 11 case was filed and was,
    19   doubtless, a material factor in the need for chapter 11 relief.
    20   The dispute over the buy-back amount and the chapter 11 filing
    21   were sufficiently proximate in time to warrant the conclusion
    22   that this is an effort by equity to capture paper (and arguably
    23   mythical) profits via a judgment for money damages.
    24        Treating an equity investor on a par with unsecured
    25   creditors disregards the principles underlying the absolute
    26   priority rule in a manner that undermines this basic bankruptcy
    27   concept.   Granite Partners, 
    208 B.R. at 344
    ; 11 U.S.C.
    28   § 1129(b)(2)(B)(ii).
    18
    1        The appellants’ argument that they extricated themselves
    2   from the equity position before the bankruptcy filing does not
    3   necessarily militate against the application of mandatory
    4   subordination.   The Bankruptcy Code definition of “security”
    5   extends far beyond holders of stock.   
    11 U.S.C. § 101
    (49)(A).
    6   The text of § 510(b) does not require that a subordinated
    7   claimant be a shareholder.   Betacom, 
    240 F.3d at 829
    .    What
    8   matters is the type of claim, not the type of claimant.    
    Id.
    9        In short, the claim is so firmly rooted in O’Donnell’s
    10   equity status that subordination is mandatory.
    11                                   III
    12        Finally, we reject the arguments that the appellee is barred
    13   by principles of judicial estoppel from asserting that the claim
    14   is for § 510(b) “damages” and that Tristar filed for bankruptcy
    15   as a bad faith collateral attack on the arbitration award.
    16                                   A
    17        The appellants posit that Tristar’s statement in the
    18   arbitration that it “still owes O’Donnell money to complete the
    19   liquidation of her membership interest” should now estop Tristar
    20   from asserting that the claim is for § 510(b) “damages.”
    21        This is an assertion of the form of the equitable doctrine
    22   of judicial estoppel known as the estoppel of inconsistent
    23   positions, which prevents one from gaining advantage by taking
    24   one position and later seeking to reap another advantage from an
    25   inconsistent position.   New Hampshire v. Maine, 
    532 U.S. 742
    ,
    26   749-51 (2001); United States v. Ibrahim, 
    522 F.3d 1003
    , 1009 (9th
    27   Cir. 2008); Hamilton v. State Farm Fire & Cas. Co., 
    270 F.3d 778
    ,
    28   782-85 (9th Cir. 2001); Alary Corp. v. Sims (In re Associated
    19
    1   Vintage Grp., Inc.), 
    283 B.R. 549
    , 565-67 (9th Cir. BAP 2002).
    2        While there are not inflexible prerequisites for judicial
    3   estoppel, the Supreme Court has emphasized the importance of a
    4   “clearly inconsistent” position, coupled with acceptance of the
    5   first position in circumstances that would create the perception
    6   that one of the tribunals was misled, plus some form of unfair
    7   advantage or detriment.   New Hampshire v. Maine, 
    532 U.S. at
    750-
    8   51; Alary Corp., 
    283 B.R. at 566
    .
    9        The appellants claim that Tristar is “playing fast and loose
    10   with the courts” by admitting a debt obligation in one instance,
    11   and later arguing that the obligation is one for “damages.”
    12   There are two flaws in this argument.
    13        The first flaw is that there is no material inconsistency
    14   between the concession that something remains to be paid to
    15   complete the liquidation of the membership interest and the
    16   assertion that whatever sum is owed to liquidate that interest
    17   constitutes § 510(b) “damages.”    This amounts to missing the
    18   forest for the trees; here, “damages” refers to a forest, not a
    19   single tree.
    20        Second, and independently fatal, is the absence of any
    21   advantage that was gained by Tristar in the earlier arbitration
    22   on account of the putatively inconsistent statement.   New
    23   Hampshire v. Maine, 
    532 U.S. at 750-51
    .
    24        We perceive no material inconsistency between an admission
    25   that a debt is owed and claiming that the debt owed is one for
    26   § 510(b) “damages.”   Nothing suggests that the appellee gained
    27   any advantage by the first statement.   Nor do we perceive an
    28   unfair advantage or unfair detriment.   Hence, we reject the
    20
    1   appellants’ argument based on judicial estoppel.
    2                                      B
    3        We also reject the appellants’ claim -- first raised in the
    4   reply brief -- that the appellee filed its chapter 11 case with
    5   the sole intent of avoiding paying the remainder of the value of
    6   O’Donnell’s membership interest.       Debtors have numerous motives
    7   for filing a bankruptcy case.    The goal of the federal bankruptcy
    8   laws is the adjustment of the debtor-creditor relationship.      The
    9   resulting adjustment -- in this case subordination -- may not be
    10   welcomed by the appellants.    But it is certainly permitted.
    11        Nor is chapter 11 an impermissible collateral attack on the
    12   validity of a state court judgment.      The amount that is owed is
    13   not questioned.   The issue is priority and terms of payment.
    14        Hence, there is no genuine issue of material fact that there
    15   was an arbitration award, confirmed by judgment, for that amount.
    16                                 CONCLUSION
    17        The bankruptcy court correctly granted summary judgment in
    18   favor of the appellee on its § 510(b) claim.      There is no genuine
    19   issue of material fact and the appellee is entitled to judgment
    20   as a matter of law.   The appellants’ right to payment, based on a
    21   confirmed arbitration award valuing the membership interest in
    22   the LLC, constitutes a claim for damages arising from the sale of
    23   the appellee’s securities that is subject to mandatory
    24   subordination by virtue of § 510(b).       We AFFIRM.
    25
    26
    27
    28
    21