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ANCHORAGE POLICE & FIRE v. OFFICIAL COMM. OF UNSEC. CRED.

June 24, 2004.

ANCHORAGE POLICE & FIRE RETIREMENT SYSTEM AND THE STATE OF LOUISIANA FIREFIGHTERS' RETIREMENT SYSTEM, Chapter 11 Appellants,
v.
OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF THE HOLDING COMPANY DEBTORS, Appellees. In re: CONSECO, INC., et al., Debtors.



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.

BACKGROUND

  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' claim.

  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.

  DISCUSSION

  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 Subordinated

  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 ...


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