The opinion of the court was delivered by: WAYNE ANDERSEN, District Judge
MEMORANDUM OPINION AND ORDER
This case is before the Court on Appellants' appeal from a
decision rendered by the United States Bankruptcy Court for the
Northern District of Illinois. For the following reasons, the
decision of the Bankruptcy Court is affirmed.
Prior to the December 17, 2002 filing of the Debtor Conseco,
Inc.'s bankruptcy cases, Plaintiffs filed class action lawsuits
against the Debtors and certain individual defendants in the
United States District Court for the Southern District of Indiana
for securities fraud relating to the purchase or sale of Conseco common stock. The parties to that
litigation reached a settlement pursuant to which the Plaintiffs
released all of their claims against the Debtors, the individual
defendants, and the underwriter defendants in exchange for
payments totaling $120 million. The settlement agreement was
memorialized in a written contract, titled Stipulation of
Settlement, signed and executed by the parties, including the
Debtors, on May 21, 2002.
On August 7, 2002, the Indiana District Court approved the
Stipulation of Settlement pursuant to an Order and Final
Judgment. As of December 17, 2002, at the time of the filing of
the Debtors' bankruptcy cases, Plaintiffs had not received full
payment pursuant to the Judgment and Stipulation of Settlement.
Plaintiffs sought to recover such payment by filing: 1) proofs of
claim and interests for over $25 million plus interest against
certain Debtors, respectively; and 2) an adversary proceeding
against every Debtor.
The Debtors and Plaintiffs agreed to a mediation of the claims,
adversary proceeding, and other related matters before Magistrate
Judge V. Sue Shields in the United States District Court for the
Southern District of Indiana. As a result of the mediation, the
Debtors and Plaintiffs agreed that Plaintiffs' claim would be
treated as an unsecured Class 8A claim in the reduced amount of
$17 million. Plaintiffs agreed to refrain from asserting their
interest in the Settlement fund. This compromise was subsequently
memorialized by a written agreement that was approved by the
Indiana District Court on May 19, 2003. The order approving that
agreement also preserved the Holding Company Committee's
("Committee") right to object to the classification of the
Plaintiffs asserted a general unsecured claim against the
Debtors in the bankruptcy case. By doing so, Plaintiffs sought to
share in the plan distribution to Class 8A Creditors, who are
expected to receive approximately 26.8% of their claims under the Holding
Company Debtors' confirmed plan or reorganization, while holders
of common stock shall receive nothing under such plan. The
Committee objected to the classification of the Plaintiffs'
claim, asserting that the claim must be subordinated to the
claims of other unsecured creditors pursuant to Section 510(b) of
the Bankruptcy Code, 11 U.S.C. § 510(b). On August 20, 2003, the
Bankruptcy Court sustained the Committee's objection, ruling that
Plaintiffs' claim arose from the purchase or sale of a security
and must, therefore, be subordinated pursuant to § 510(b).
Plaintiffs have appealed the Bankruptcy Court's decision.
At issue in this bankruptcy appeal is whether Plaintiffs' claim
"arises" from the purchase or sale of Conseco common stock. The
Bankruptcy Court sustained the objection of the Committee to
Plaintiffs' claim and held that § 510(b), which requires the
subordination of a claim for "damages arising from the purchase
or sale of . . . a security" of the debtor, mandates the
subordination of that claim to the level of Conseco common stock.
On appeal, Plaintiffs argue that the existence of the
Settlement Agreement, purportedly under the principles of
novation, has transformed the claim into one that does not
"arise" from the purchase or sale of a security.
The United States District Courts have jurisdiction over
appeals from final judgments and final orders in bankruptcy cases
pursuant to 28 U.S.C. § 158(a). We review the factual findings of
the Bankruptcy court for clear error, but review questions of law
de novo. F.R.Bankr.P. 8013; In re Rivinius, Inc.,
977 F.2d 1171, 1175 (7th Cir. 1992). Thus, there is no presumption of
correctness as to the Bankruptcy Court's conclusions of law. In re Luria
Steel and Trading Corp., 189 B.R. 418, 420 (N.D. Ill. 1995).
I. The Plain Language Of Section 510(b), Congressional
Intent And Case Law Require That Plaintiffs' Claim Be
In their appeal, Plaintiffs argue: (a) that the Settlement
Agreement and the accompanying judgment, purportedly through the
principles of novation, have removed the claim from the scope of
the statute; and (b) that § 510(b) does not ...