Carrieri v. Jobs.Com Inc.

Decision Date07 December 2004
Docket NumberNo. 03-11268.,03-11268.
PartiesJohn CARRIERI, Anthony Carrieri, Steven M. Elliot, Dave Sergeant, Michael Slentz, and Sean Slentz, Appellants, v. JOBS.COM INC., Kania Trust, and Arthur J. Kania, Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Gerald P. Urbach (argued), Russell Wade Mills, Jennifer Lee Duncan, Hiersche, Hayward, Drakeley & Urbach, Addison, TX, for Appellants.

Stacy R. Obenhaus, Deirdre B. Ruckman (argued), Gardere Wynne Sewell, Dallas, TX, for Inc.

Keith Miles Aurzada (argued), Akin, Gump, Strauss, Hauer & Feld, Dallas, TX, for Kania Trust and Kania.

Appeal from the United States District Court for the Northern District of Texas.

Before WIENER and PRADO, Circuit Judges, and LITTLE*, District Judge.

LITTLE, District Judge:

This appeal centers upon the interpretation of § 101(16)(C) of the Bankruptcy Code. That provision states that "equity security" means "warrant or right, other than a right to convert, to purchase, sell, or subscribe to a share, security, or interest...." 11 U.S.C. § 101(16)(C) (2000). This appeal requires us to decide issues of apparent first impression in this circuit.1 The primary issues to be determined are whether the proofs of claims of a group of equity holders that include shares of stock (with a redemption provision) and warrants (with a repurchase provision) are properly characterized as "equity securities" instead of "claims" under § 101(5) and whether these proofs of claims could also give rise to "claims" independent of the equity interests. The district court held that the proofs of claims of the equity holders were "equity securities" under § 101(16)(C), not "claims", that the documents that gave rise to them did not also contain independent "claims", and affirmed the bankruptcy court's order sustaining the objection to these proofs of claims. For the reasons that follow, we AFFIRM.


This is an appeal from the final judgment of the district court affirming the order of the bankruptcy court disallowing the claims of equity holders in the, Inc., Chapter 11 proceeding. See Carrieri v., Inc., 301 B.R. 187, 194-95 (N.D.Tex.2003). The Appellants are the equity holders, John Carrieri, Anthony Carrieri, Steven M. Elliot, Dave Sergeant, Michael Slentz, and Sean Slentz ("Carrieri Group"). The Appellees are the Debtor,, Inc. ("Debtor" or ""), and Arthur J. Kania and the Kania Trust ("Kania Appellees"). The Kania Appellees are preferred equity holders who, investing in after the Carrieri Group, bargained for a higher liquidation preference and whose interests would be adversely affected if we were to reverse the district court.2

We adopt, in relevant part, the bankruptcy court's description of the factual and procedural background. See In re, Inc., 283 B.R. 209, 211-12 (Bankr.N.D.Tex.2002). The Carrieri Group originally owned the old "" domain name, intellectual property, and other assets, including nearly all of the company's capital stock, which it transferred in a merger to Opportunity Network, Inc. n/k/a on 22 March1999. Under the terms of the Merger Agreement that resulted in the Debtor's creation, the Carrieri Group stockholders had to surrender all their shares of old stock and, in exchange, the Debtor issued new C-1 Preferred Stock ("C-1 Stock") and warrants to each member of the Carrieri Group. As part of the Merger Agreement, the new company issued a Second Amended and Restated Articles of Incorporation ("SARAI") providing that the C-1 Stock and warrants were subject to the terms and conditions of the Statement of Designation, Preferences and Rights of Series C-1 Preferred Stock of Opportunity Network, Inc. ("Statement") (collectively, the "Rights Documents"). The Rights Documents stated that they were issued under authority provided by the Texas Business Corporation Act (TBCA) and the warrants were to be construed and governed by Texas law. The C-1 Stock Rights Documents contain, inter alia, a redemption provision requiring the Debtor to redeem the C-1 Stock under certain conditions. Specifically, the "Redemption" provision provided that:

[a]t any time and from time to time after March 22, 2001, upon receipt of written demand from any holder of shares of Series C-1 Preferred Stock, the Corporation, to the extent it has legally available funds therefor, shall redeem the whole or any part of such holder's shares of Series C-1 Preferred Stock at a per share redemption price equal to $4.00 (the "C-1 Redemption Price").

SARAI, Art. 4.11(a), 10 R.2029; Statement, ¶ 5(a), 9 R. 1695 (the "C-1 Stock Rights").3 In order to exercise the C-1 Stock Rights, the stock certificate must be returned to the Debtor by mail not less than 30 days nor more than 60 days prior to the requested date of redemption (after 22 March 2001). See SARAI, Art. 4.11(e), 10 R.2029-30; Statement, ¶ 5(b), 9 R. 1696. Each holder must also send a Redemption Notice to the Debtor stating the date on which such redemption is requested to take place, the number of shares to be redeemed, and the consideration payable with respect to such redemption, along with the C-1 Stock certificate "duly endorsed or assigned to the corporation or in blank." SARAI, Art. 4.11(e), 10 R.2029-30; Statement, ¶ 5(b), 9 R. 1696. On 21 January 2000, the SARAI ranked the Carrieri Group's C-1 Stock as junior to other preferred stock in the event of liquidation, including that of the Kania Appellees. See SARAI, at Art. 3.1, 10 R.2013.

In addition to the C-1 Stock, the Carrieri Group also received warrants4 for the purchase of additional preferred stock of the Debtor as part of the merger. Each member of the Carrieri Group received warrants to acquire a specific number of shares of Series C-2 Preferred Stock ("C-2 Warrants") and Series C-3 Preferred Stock ("C-3 Warrants") (collectively, "Warrants")5 at specified prices per share. Additionally, under the Warrant Rights Documents (which are separate from the C-1 Stock Rights Documents), the Debtor agreed to repurchase the Warrants at an agreed price if it had "legally available funds" at the time of the demand.6 Specifically, the "Repurchase" provision, which is identical for each Warrantholder, provides that:

[a]t any time and from time to time after March 19, 2002, upon receipt of written demand from any Warrantholder of this Stock Warrant, the Company, to the extent it has legally available funds therefor, shall purchase the whole or any part of such Warrantholder's Stock Warrant at a purchase price equal to $6.00 per share of Series C-2 Preferred Stock for which this Stock Warrant is then exercisable, provided that the Company shall have no such purchase obligation with respect to the Stock Warrant if it has closed an IPO on or before such date.

Series C-2 Preferred Stock Warrant, ¶ 5, 10 R. 1705 (the "Warrant Rights"). To exercise the Warrant Rights, the Warrantholder must surrender the Warrant, a completed Exercise Agreement (attached to each Warrant), and pay the Debtor the Exercise Price. Id. ¶ 1, 10 R. 1703. The Warrant Rights were exercisable for five years from the date of execution, 22 March 1999, and expired on 22 March 2004. Id. ¶ 2, 10 R. 1704. The Warrants stated that they shall be construed in accordance with and governed by the laws of the State of Texas. Id. ¶ 14, 10 R. 1710. Although the Warrant Rights Documents does not specifically mention rankings or liquidation preferences, it states that in the event the Company makes a distribution to the C-2 Stock holders, the Warrantholders shall be entitled to a proportionate share of any such distribution as though the Warrantholder was the holder of Series C-2 Preferred Stock or Common Stock. Id. ¶ 6(c), 10 R. 1706. As with the C-1 Stock, the SARAI also ranked the Series E Preferred Stock, including that of the Kania Appellees, as senior to the Series C Preferred Stock and the Common Stock and to any other class or series of stock ranking with respect to any distributions or liquidation. See SARAI, at Art. 3.1, 10 R.2013.

Each member of the Carrieri Group made a written demand for redemption of the C-1 Stock on or about 20 February 2001, requesting a redemption date of either 22 or 23 March 2001, and returned his stock certificate to The Debtor rejected all these demands in writing as defective, stating that the Rights Documents set forth the requirements that must be satisfied before a C-1 Stock holder may exercise its redemption rights. None of the Carrieri Group members complied with the preliminary endorsement requirement when their first redemption demand was made and, therefore, the Debtor returned their redemption letters and C-1 Stock certificates.

The Debtor filed a voluntary Chapter 11 petition on 15 March 2001 ("Petition Date"). The Petition Date occurred just a few days before the specified redemption dates (22 or 23 March 2001). On 21 July 2001, each Carrieri Group member filed unsecured claims against the Debtor ("Carrieri Claims") in the bankruptcy proceeding in "unknown amounts" arising from the C-1 Stock, the Warrants, and the Rights Documents, prompting objections by Through letters dated 19 March 2002, the Carrieri Group made (i) a demand on the Debtor for repurchase of the C-2 and C-3 Warrants; and (ii) a second redemption demand of the C-1 Stock. In response to the second redemption demand, the C-1 Stock certificates were again returned by the Debtor, even though they had been duly endorsed as required.

On 10 September 2002, after hearing evidence and testimony regarding the claims objection of the Debtor, the bankruptcy court disallowed the Carrieri Claims. See In re, Inc., 283 B.R. 209, 222 (Bankr.N.D.Tex.2002). The bankruptcy court first determined that the C-1 Stock Right was an "equity security" under 11 U.S.C. § 101(16)(A) of the ...

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