In re Betacom of Phoenix, Inc.
| Decision Date | 24 September 1998 |
| Docket Number | Adversary No. 96-786.,Bankruptcy No. 95-4510 PHX RGM,CIV. No. 97-2484 PHX BMV |
| Parties | In re BETACOM OF PHOENIX, INC., an Arizona Corp. & affiliates, Debtor. F. Patrick NUGENT and Anita Nugent, Defendants-Appellants, v. AMERICAN BROADCASTING SYSTEM, INC., a Delaware Corporation and affiliates, Beta Communications, Inc., an Arizona Corporation and affiliates, and Betacom of Phoenix, Inc., an Arizona Corporation, Plaintiffs-Appellees. |
| Court | U.S. District Court — District of Arizona |
James E. Cross, Phoenix, AZ, for Debtor.
Michael Evan Gottfried, Phoenix, AZ, for Defendants-Appellants.
James E. Cross, Paul Sala, Joseph K. Brinig, Jr., Phoenix, AZ, for Plaintiffs-Appellees.
This is an appeal by Defendants F. Patrick and Anita Nugent ("Nugents") from an order of the bankruptcy judge: Granting Debtors' Motion for Summary Judgment in Part and Denying Nugents' Cross-Motion for Summary Judgment ("Order").
The Order, filed September 30, 1997, concerned the application of section 510(b) of the Bankruptcy Code ("the Code"), which provides, in pertinent part, that claims for damages "arising from the purchase or sale" of a security of the debtor shall be subordinated. 11 U.S.C. § 510(b). The bankruptcy court, the Honorable Robert G. Mooreman presiding, found the language of section 510(b) plain, granting the debtors' motion for summary judgment in part, and subordinating the Nugents' claim for damages arising out of the alleged breach of an Agreement and Plan of Merger ("Agreement") and a subsequent Amendment thereto (collectively "Merger Agreements"). The Nugents thereafter appealed Judge Mooreman's decision to this Court.
Betacom of Phoenix, Inc. ("BP"), Beta Communications, Inc. ("BCI"), and American Broadcasting Systems, Inc. ("ABS") (collectively, the "Debtors"), filed individual voluntary Chapter 11 Bankruptcy petitions in 1995. BP and BCI filed on May 26, 1995 and ABS filed on May 31, 1995. The separate cases are under joint administration pursuant to the bankruptcy court's orders.
The Nugents initiated a civil action in the United States District Court, District of Arizona, in 1992 against ABS, BP, and BCI, CIV 92-1298 PHX BMV. On December 6, 1995, the bankruptcy court lifted the automatic stay to allow the Nugents to liquidate their claims against the Debtors in the district court civil action. In the Fourth Amended Complaint, which was before the district court at the time of the bankruptcy court's decision, the Nugents set forth seven counts upon which they sought relief. In general, these claims encompass: 1) breach of contract claims arising out of an alleged oral consultancy agreement; 2) breach of contract claims arising out of the Merger Agreements; 3) various fraud claims; and 4) a breach of fiduciary duty claim resulting in a constructive trust.
On October 4, 1996, the Debtors filed an Adversary Proceeding against the Nugents in the bankruptcy court. The Debtors sought a determination that the claims asserted by the Nugents are equity interests in ABS, or are subject to mandatory subordination pursuant to 11 U.S.C. § 510(b). The bankruptcy court granted the Debtor's motion in part, holding that section 510(b) applied broadly to claims arising out of, or referenced in an agreement to purchase or sell securities. The bankruptcy court did not grant the Debtors' motion with respect to the alleged oral consultancy agreement, stating:
The Court is unable to determine . . . whether these claims are related to the Merger Agreements and the purchase or sale of the Debtor\'s securities, or if they are claims which are sufficiently independent of the Merger Agreements such that, if they are related, the relationship could only be seen as incidental.
Order at 8. Subsequent to the bankruptcy judge's order that is the subject of this appeal, the Nugents filed a Fifth Amended Complaint in the civil action before the district court.
The underlying relationships of the parties are as follows: In 1991, the Nugents owned 80% of the issued shares in BCI. BCI owned all of the issued and outstanding shares of BP. BP owned Spanish language radio stations KVVA-AM and KVVA-FM. On May 24, 1991, the Nugents and ABS entered into the original Agreement. The parties entered a superseding Amendment thereto dated September 6, 1992 and allegedly executed it on February 6, 1992. Under the Merger Agreements, ABS was to acquire BCI in exchange for both stock in ABS and cash. The cash was to be paid to BCI shareholders as soon as practical following an initial public offering. Pursuant to the Merger Agreements, the ABS stock was to be issued to BCI shareholders upon the conclusion of an audit specified in the Merger Agreements and a 45 day escrow period. The audit was not performed.
The parties have submitted contradictory evidence on the following points: 1) Whether the closing agreement was ever executed by all of the parties and whether it was ever delivered as signed by the Nugents; 2) whether the date and time for a closing date was ever agreed to; 3) whether the Nugents delivered their signed original Deed of Release and Reconveyance, releasing their security interest in assets of BCI; 4) whether the Debtors lied to the Federal Communications Commission ("FCC") to effectuate the transfer of licenses; 5) whether the Debtors filed a Certificate of Merger not signed by anyone on behalf of BCI with the Delaware Secretary of State; 6) whether the Debtors issued stock for the Nugents' benefit; and 7) whether the Debtors wrongfully took possession of the assets of BCI.
The Nugents point to ABS's failure to comply with their requests to review the business records both before and after the commencement of the civil court action as explanation for their slow realization that the Merger Agreements did not close, rather they now assert in the Fifth Amended Complaint that the assets of BP and BCI were converted by ABS. At the very least, the civil court record reveals that ABS's abuse of the discovery process has resulted in over $17,000 in sanctions.
The first issue this Court must decide is: under section 510(b) does the language "arising from the purchase or sale of a security" require an actual purchase or sale of securities? For the reasons stated below, this Court concludes that subordination under section 510(b) does not apply unless there is an actual purchase or sale of securities. The second issue this Court must decide is whether under Federal Rule of Civil Procedure 56(c) there is a genuine issue of material fact as to whether or not the Merger Agreements did close which would preclude summary judgment in this case? Again, for the reasons stated below this Court concludes that there are genuine issues of material fact so as to preclude summary judgment.
Section 510(b) of the Code mandates subordination of damage claims "arising from the purchase or sale" of a security of the debtor. 11 U.S.C. § 510(b). The bankruptcy court found the language of section 510(b) plain. In making its determination, the court found three situations in which the language applied: "1) to any claim arising out of an attempt to rescind a sale or purchase of a security of the debtor; 2) to any claim arising from damages surrounding a sale or purchase of a security of the debtor; or 3)to any claim for reimbursement or contribution under section 502 on account of such a security of the debtor." Order at 6. In construing the "arising from" language found in the statute itself, the bankruptcy court based its holding upon the premise that "a claim which is related to, or referenced in, the purchase or sale transaction may be subordinated depending upon the circumstances involved and the importance of the action giving rise to the claim and whether the claim is sufficiently independent of the purchase or sale." Id. at 7. The court went on to hold that "the merger of the sic BCI into ABS and the Agreement between the parties to surrender BCI stock in return for stock in ABS and for other cash is a purchase or sale of securities of the Debtor." Id. at 7-8.
This Court reviews de novo the bankruptcy court's legal conclusions and mixed questions of law and fact. In re Lee, 179 B.R. 149, 155 (9th Cir. BAP 1995). Factual determinations should not be disturbed unless they are "clearly erroneous." In re Itule, 114 B.R. 206, 209 (9th Cir. BAP 1990).
"The starting point in every case involving construction of a statute is the language itself." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). As an initial matter, the plain meaning of section 510(b) will be enforced according to its terms when the statute is clear and unambiguous on its face. Patterson v. Shumate, 504 U.S. 753, 759, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992). "Ambiguity exists when a statute is capable of being understood in two or more different senses by reasonably well-informed persons. . . ." 2A Norman J. Singer, Sutherland Statutory Construction § 45.02, at 5 (5th ed.1992 rev.). Where ambiguity does exist, a court must attempt to discern the legislature's intent.
The plain meaning of section 510(b) mandates that a claim must arise from the actual purchase or sale of a security. Something "arises" when it springs up or originates from a source. Black's Law Dictionary 108 (6th ed.1990); see also Webster's Third New International Dictionary 117 (unabridged ed.1976) (defining "arising" as the point in time when a thing comes into being from a specified source). In contrast, application of section 510(b) to a claim that "arises from" an agreement to purchase or sell securities where the agreement is not consummated effectively eviscerates the purchase or sale requirement as dictated by the plain meaning of the statute. Therefore, this Court holds that section 510(b) requires the actual purchase or sale of securities before a claim arising...
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