In re Lenco, Inc.
Decision Date | 05 July 1990 |
Docket Number | Bankruptcy No. 89-10317-BSS. |
Parties | In re LENCO, INC., Debtor. |
Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Eastern District of Missouri |
Karen L. Handorf, Cynthia Caldwell Weglicki, Samuel Teitelman, Trial Attys., U.S. Dept. of Labor, Office of the Sol., Plan Benefits Sec. Div., Washington, D.C.
Norman W. Pressman, St. Louis, Mo., for Unsecured Creditors Committee.
Pursuant to section 510(b) of the Bankruptcy Code, the Unsecured Creditors Committee (the "Committee") filed a motion to subordinate the claim of the United States Department of Labor (the "DOL"), which it brought on behalf of the Lenco, Incorporated Employees' Stock Ownership Plan and Trust (the "ESOP")1. The DOL argues that because its claim is related to the ESOP's subsequent purchase of Lenco stock from a third party rather than an original issuance of the stock, it may not be subordinated pursuant to In re Amarex, 78 B.R. 605 (W.D.Ok.1987). Additionally, the DOL argues that because its cause of action is based upon several alleged violations of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001-1371, rather than state or federal securities laws, it does not concern section 510(b) and cannot be subordinated pursuant to that section.
This Court has jurisdiction over the subject matter of the proceeding pursuant to 28 U.S.C. §§ 151, 157, 1334 and Local Rule 29 of the United States District Court for the Eastern District of Missouri. The Parties have stipulated that this is a "core proceeding" which the Court may hear and enter appropriate judgments pursuant to 28 U.S.C. § 157(b)(2)(O).
The facts in this case are the subject of a stipulation between the parties. On January 24, 1984, Jerry Ford offered to purchase all of the outstanding stock of Lenco, the debtor, for $10,000,000.00. This sale was subsequently approved by Lenco's board of directors (the "Board") at a special meeting. In an effort to finance the sale to Mr. Ford, Lenco obtained a $5,250,000.00 loan from UnibancTrust Company (the "Unibanc Loan"). In order to allow him to acquire the stock owned by the ESOP2, Lenco loaned Mr. Ford $1,530,000.00 of the Unibanc Loan proceeds. Lenco used the remaining proceeds of the Unibanc Loan to repurchase 228,285 shares of its stock at approximately $19.10 per share.3 These shares were retired as treasury shares. In addition to the $1,530,000.00 loaned to him by Lenco, Mr. Ford contributed $75,000 of his personal funds and obtained a $1,700,000.00 loan from Exchange Financial Services ("Exchange"), the parent of Jackson Exchange Bank. With these funds Mr. Ford purchased, for approximately $19.10 per share, 113,721 shares of Lenco stock from various individuals and 170,619 shares of stock from the ESOP on April 5, 1984. On that same day, Mr. Ford was elected Chairman of the Board and Chief Executive Officer, and the ESOP committee, acting under the direction of Mr. Ford, appointed Paul A. Mueller, Jr. as interim trustee of the ESOP.
On April 6, 1984, Mr. Ford sold 178,019 shares of Lenco stock to the ESOP at $19.10 per share, for a total purchase price of $3,399,389.95. Mr. Ford used the proceeds from this sale to repay the $1,700,000 Exchange loan in full, repay $690,000 of the $1,530,000 loaned by Lenco, and to repurchase shares from other individual shareholders. The latter transaction gave Mr. Ford control of the majority of Lenco's outstanding shares. At the time of this transaction, newly-appointed trustee Mr. Mueller acted on behalf of the ESOP. The ESOP's fiduciaries did not obtain a valuation of the Lenco stock prior to the ESOP's April 6 purchase and the parties stipulate that the ESOP's purchase of that stock from Mr. Ford was for more than adequate consideration under applicable law and would subject Lenco to liability resulting in a distribution to the ESOP absent the subordination of the claim.
The Committee agrees that the DOL has a valid claim for an uncertain amount. However, through its Motion to Subordinate Claims of the Department of Labor, the Committee argues that the DOL claim should be subordinated to the claims of all other unsecured creditors pursuant to 11 U.S.C. § 510(b). More specifically, the Committee contends that because the DOL's claim arises directly from the purchase of a security of the debtor, it must be subordinated under this statute. The DOL first argues that following the result reached in In re Amarex, 78 B.R. 605 (W.D.Ok.1987), its claim may not be subordinated because it is derived from a subsequent rather than original issuance of stock. Second, the DOL argues that because its claim alleges only a violation of the ERISA provisions and does not relate to the purchase or sale of the debtor's securities, section 510 is inapplicable.
Section 510(b) of the Bankruptcy Code states in pertinent part:
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