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March 23, 2004.


The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge


Appellant Brian Weissmann appeals a December 17, 2002 order of the bankruptcy court requiring that Weissmann's claim against Debtor Pre-Press Graphics Company ("Pre-Press" or "Debtor") be subordinated to the claims of unsecured creditors pursuant to 11 U.S.C. § 510(b). Weissmann's claim is based on an Illinois state court judgment. In that state action, Weissmann, a shareholder and former director of Pre-Press, alleged that his fellow directors engaged in stockholder oppression and breach of fiduciary duty when they removed him from his position on the board and secretly issued additional stock which significantly diluted his ownership interest in Debtor. Weissmann prevailed in that action and the state court ordered that Debtor purchase Weissmann's shares for $1,383,350. Without appealing the state court's ruling or complying with the judgment, on March 4, 2002, Pre-Press declared voluntary Chapter 11 bankruptcy. Weissmann filed his claim (based on the state court judgment) before the bankruptcy court, over objections from both Debtor and MAN Capital Corporation (collectively "Appellees"), Debtor's largest creditor. Appellees argued that Weissmann's claim is subject to mandatory subordination Page 2 under § 510(b) because it arises from the purchase or sale of Debtor's securities. The bankruptcy court agreed and Weissmann appealed to this court. For the reasons set forth here, the decision of the bankruptcy court is affirmed.


  Both sides agree on the factual issues relevant to this appeal and raise strictly legal arguments regarding the proper scope of 11 U.S.C. § 510(b). The court will nonetheless provide a brief factual background to place the legal dispute in context.

  In 1989, Weissmann and Robert Beevers founded Pre-Press and served as the company's initial shareholders and directors, each holding a 50 percent interest in the company. (Weissmann v. Pre-Press Graphics Co., 00 CH 13071 (Feb. 1, 2002) (hereinafter "Illinois Judgment"), Exhibit H to Brief of Appellant Brian Weissmann (hereinafter "Appellant Br."), at 1.) Pre-Press provides printing and pre-press services to advertising agencies and commercial clients, such as converting an image into a digital format before reproducing it on a printing press. (Id.) Initially, Weissmann provided Pre-Press with most of its business contacts and sales expertise, while Beevers contributed his financial background and resources. (Id.) In 1992, both Beevers and Weissmann reduced their ownership interest in Pre-Press to 45 percent each, transferring the remaining 10 percent of the company's stock to two new shareholders, Shirlee Kay-Myers and Albert Myers.*fn1 (Id. at 2.) After the transfer, Weissmann remained one of the two primary shareholders in Pre-Press. (Id.)

  On January 1, 1998, Pre-Press adopted a Shareholder's Agreement which placed restrictions on the transfer of shares and included a non-competition provision for shareholders. Page 3 (Id.) At that point, Weissmann and Beevers each held 37.9 percent of the shares. The remaining shares were divided among six additional shareholders.*fn2 (Id.)

  During 1997 and 1998; Pre-Press entered negotiations with Schawk Incorporated, a publicly traded pre-press company, regarding a possible sale of Pre-Press to Schawk. (Id.) In October 1998, Schawk provided a letter of intent to purchase all of Pre-Press' stock for $13 million on a "debt-free basis" or, in the alternative, to purchase the stock of any tendering shareholder at a prorated price. (Id. at 3.) Weissmann was in favor of accepting the offer, but the remaining shareholders rejected the proposal. (Id.) Weissmann then offered to sell his stock to Pre-Press for $5.5 million but the shareholders rejected his offer as well. (Id.) Weissmann still wanted to sell his stock to Schawk in accordance with the October 1998 letter of intent, but the Pre-Press stockholders prevented the sale by exercising their right of first refusal.*fn3 (Id.)

  On December 1, 1998, Pre-Press and Weissmann executed a stock repurchase agreement ("Repurchase Agreement"). (Id.) Pursuant to that agreement, Pre-Press was to purchase Weissmann's 37.9 percent interest in the company (500 shares) for the sum of $4,725,000 ($9,450 per share), subject to a financing contingency. (Id.) The financing contingency required Pre-Press "to make every effort possible or necessary to obtain financing." (Id. at 6.) The Repurchase Agreement also required Pre-Press to make a down payment to Weissmann of $100,000 that was not contingent on Pre-Press' obtaining financing. (Id. at 5.) As for Weissmann's involvement with the company, the agreement provided that he would continue to serve as a director for two years. He was released, however, from the non-competition provisions of the Shareholders' Agreement, and was therefore free to work for, and become a shareholder of, Schawk. Accordingly, Page 4 Weissmann left Pre-Press the day he executed the Repurchase Agreement and became an employee of Schawk. Pre-Press, in turn, named three additional company directors. (Id. at 3, 11.)

  On December 31, 1998, Pre-Press paid the first $25,000 of the $100,000 down payment. The company failed, however, to pay the remaining $75,000 due on January 31, 1999. (Id. at 5) Pre-Press did make substantial efforts to obtain financing for the Repurchase Agreement, but was unable to do so. (Id. at 3-4.) In or about July 1999, Schawk sent another letter of intent to Pre-Press, this time offering to purchase the company's assets related to the pre-press business for $6,500,000 on a debt-free basis. (Id. at 4.) If Pre-Press had accepted the terms of the offer, it would have retained its commercial printing business, which made up 40 percent of its total revenue. (Id.) As with the earlier offer, the shareholders rejected the July 1999 letter of intent. (Id.)

  In February 2000, Pre-Press was in need of capital and, as a result, authorized the issuance of additional shares of stock to certain shareholders. Beevers purchased an additional 6,500 shares at $106.14 per share, increasing his percentage ownership of Pre-Press from 37.9 percent to 87 percent. (Id.) Pre-Press did not give Weissmann the opportunity to purchase more shares and, in fact, deliberately hid from Weissmann the fact that it was issuing additional stock. (Id.) As a result, Weissmann's ownership interest was reduced from 37.9 percent to 6.29 percent. (Id.) Shortly thereafter, Weissmann made a demand to inspect certain corporate records. His request was denied. (Id.)

  Notwithstanding the Repurchase Agreement, which released Weissmann from his covenant not to compete and assured that he would be re-elected as a director of Pre-Press through 2000, Weissmann was asked to resign as a director in July 2000 because of his conflicting employment with Schawk. (Id.) The company called a shareholder's meeting for the express purpose of removing Weissmann as a director, but he resigned his position in August 2000 before the shareholders effected the removal themselves. (Id.) Page 5

  On September 6, 2000, Weissmann filed a lawsuit in the Circuit Court of Cook County alleging minority shareholder oppression, breach of fiduciary duty by certain directors and shareholders, and breach of the Repurchase Agreement. (Id. at 5.) The court determined that Pre-Press committed both shareholder oppression and breach of fiduciary duty — claims the court found "inextricably intertwined" — by the following acts: (1) demanding in July 1999 that Weissmann resign as a director; (2) conducting secret capital transactions in 2000 which resulted in the reduction of Weissmann's ownership interest; and (3) deciding to accept a share valuation of $106.14 per share despite receiving offers ranging from $2,000 to more than $9,000 as a per share price. (Id. at 7, 12, 15-16.) The Circuit Court found that Pre-Press did not breach the "best efforts" clause of the Repurchase Agreement by failing to obtain financing, but it did breach that agreement by failing to pay Weissmann the $75,000 "additional down payment" it owed him. (Id. at 7.)

  As a remedy for the shareholder oppression and breach of fiduciary duty, the court ordered Pre-Press to repurchase Weissmann's 500 shares at "fair value," which the court determined was $1,383,350. The court subtracted from that amount the $25,000 partial down payment Weissmann had already received from the company and, if paid, the additional $75,000 down payment awarded for Pre-Press' breach of the Repurchase Agreement. (Id. at 19-24.) The court also awarded Weissmann $10,000 for Pre-Press' refusal to allow Weissmann to examine the corporate records in violation of the Illinois Business Corporation Act, 805 ILCS 5/7.75. (Id. at 24.)

  The Circuit Court entered this judgment on February 1, 2002. (Id.) Although Pre-Press had the opportunity to appeal the decision within thirty days, it opted not to do so. Instead, on March 4, 2002, Pre-Press filed a voluntary Chapter 11 bankruptcy case in the Northern District of Illinois. (Voluntary Petition, Ex. B to Appellant Br.) Any opportunity for Pre-Press to appeal the state court judgment has now passed and the judgment is final. Page 6

  On May 16, 2002, Weissmann filed a proof of claim against the Debtor's estate in the amount of $1,365,000.*fn4(Proof of Claim, Ex. I to Appellant Br.) On September 30, 2002, Pre-Press filed its proposed plan of reorganization, placing Weissmann's claim in a class that is subordinate to the claims of unsecured creditors. (Plan of Reorganization, Ex. J to Appellant Br.) Consistent with that proposed plan, on October 15, 2002, the Debtor and its largest creditor, MAN Capital Corporation ("MAN Capital"), filed objections to Weissmann's claim on the grounds that it arises from the sale of securities and, thus, must be subordinated under § 510(b) of the Bankruptcy Code.

  The bankruptcy court considered the objections and, in an oral ruling on December 17, 2002, found in favor of Debtor and MAN Capital. The court determined that Weissmann's "theory and causes of action were merged in the state court judgment." (Transcript of Bankruptcy Court Proceedings in the Pre-Press Bankruptcy Case, ("Bankruptcy Decision"), Exhibit E to Appellant Br., at 51.) Weissmann's "claim" under the Bankruptcy Code, the court held, consists of what he received from the Illinois judgment — i.e., the forced repurchase of his shares. In the bankruptcy court's view, such a claim is "inextricably intertwined with [Weissmann's] shareholder status" and, thus, fits within § 510(b) and must be subordinated to the claims of unsecured creditors. (Id. at 51 — 52.)


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