IN RE SCHAEFER

Hon. JAMES S. STARZYNSKI, United States Bankruptcy Judge.

This matter comes before the Court on cross-motions for summary judgment. The plaintiff, United States Trustee, is represented by its attorney Leonard Martinez-Metzgar. Defendant is represented by its attorney Richard M. Leverick. Plaintiff filed its motion for partial summary judgment as to Count 1 of the Complaint and a Memorandum in Support thereof on September 9, 1997. Defendant filed its Counter-motion for summary judgment on February 5, 1999 and a Memorandum in Opposition to Trustees and in Support of Counter-Motion for Summary Judgment on the same day.

The Court had dismissed this adversary proceeding on August 29, 1997, and thr motion for summary judgment was filed after the case was dismissed, but while a motion for reconsideration was pending. The United States District Court for the District of New Mexico reversed the dismissal on November 5, 1998. On January 8, 1999 this Court fixed a deadline for defendant to file its response to the motion. Defendant timely filed its response.

Having reviewed the pleadings and supporting materials, and being otherwise fully advised, the Court finds that Plaintiffs motion is well taken and should be granted, and that Defendants motion is not well taken and should be denied. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B). This Memorandum Opinion constitutes the Courts findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

STANDARD FOR SUMMARY JUDGMENT

Summary judgment is governed by Bankruptcy Rule 7056, which adopts Federal Rule of Civil Procedure 56. Section (c) provides:

Judgment shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

In applying this standard, the Court examines the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment. Diamond Bar Cattle Company v. United States, 168 F.3d 1209, 1999WL88945, 2 (10th Cir. 1999 ) (citing Sundance Assocs., Inc. v. Reno, 139 F.3d 804, 807 (10th Cir. 1998)).

NATURE OF THIS CASE

This adversary proceeding was filed by the United States Trustee to subordinate under 11 U.S.C. § 510(b) various proofs of claim filed by limited partners of limited partnerships related to the debtors. These proofs of claim were assigned to the R. J. Schaefer Realty and Investment, Inc. Employees Profit Sharing Trust as part of a settlement of both a 1992 state court case and an adversary proceeding brought by the debtors against various parties and their attorneys.

LEGAL ISSUES

Section 510(b) of the Bankruptcy Code states:

For the purpose of distribution under this title, a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, the claim has the same priority as common stock.

Both plaintiff and defendant cite the case of In re Amarex,

78 B.R. 605 (W. D. Ok. 1987) as the applicable standard for interpreting section 510(b) of the code. That case differentiates claims relating to or based upon alleged violations of the securities laws (and which arise from the purchase and sale of those securities) from other claims such as mismanagement, continuing concealment of information, or fraud (and arising after the security was purchased). Id. at 609. It rejected the but for test applied by the bankruptcy court, which subordinated all claims of the holders because the claimants would have no claims against the debtor but for their purchase of the securities, and had the purchase not occurred they would not have the pendant common law claims. Id. at 608. Therefore, the rule of law is that a claim arising from the purchase or sale of a security is to be subordinated; other claims, such as fraud in the retention claims, see Robert J. Stark, Reexamining the Subordination of Investor Fraud Claims in Bankruptcy, 72 Am. Bankr. L. J. 497, 498 (Fall 1998), are not properly subordinated.

DISCUSSION

The obvious starting point for the Courts analysis is the proofs of claim. Appendix A to this memorandum is a detailed list of the relevant proofs of claim. Of these twenty-five claims, twenty-three provide no documentation of the claim other than the attachment of either one or more limited partnership subscription agreements or canceled checks that denote purchase of [number] shares of [name of] partnership. None make a claim for anything other than the investment in the partnership(s). All state as a basis for the claim goods sold. Claim 45 attaches canceled checks, but there is no notation on those checks that clarifies the nature of the debt, or, actually, even the existence of a debt. Claim 49 attaches no documentation whatsoever.

Both of these claims are objectionable; neither provide any documentation that supports the claims made.

Bankruptcy Rule 3001(f) states an evidentiary rule: A proof of claim executed and filed in accordance with the rules shall constitute prima facie evidence of the validity and amount of the claim. See e.g. Agricredit Corporation v. Harrison, 987 F.2d 677, 680 (10th Cir. 1993). Furthermore, a "proof of claim is the creditors statement as to the amount and character of the claim." Id. citing In re Padget, 119 B.R. 793, 797 (Bankr.D.Co. 1990) (emphasis added). Applying this rule, the Court must find that the twenty-three claims are based solely on the purchase of limited partnership interests.

Plaintiffs motion is very straightforward. It argues 1) claims 40 through 64 are damage claims related to the purchase of securities from the debtors or debtors affiliate, 2) section 510(b) requires subordination, and 3) judgment should be entered as a matter of law.

The majority of defendants response to the motion for summary judgment focuses on the nature of the state court lawsuit filed in August, 1992 and its settlement. In that case various limited partners filed suit alleging actions or inactions of various parties both before and after the sale of the limited partnership interests, including negligent representation relating to the sale of the partnership interests, dissemination of a continuing flow of false information after the purchases, preparation of misleading and false financial statements to induce the plaintiffs to continue making capital contributions, mismanagement of the various limited partnerships, etc.

First, defendant argues that in the state court case any claims relating to the purchase or sale of a security were barred by the applicable statute of limitations.

Defendant does not actually say that this affirmative defense was decided in that case, nor does it attach any pleadings that rule on the defense.

It supports this argument with the affidavit of Robert J. Schaeffer (affidavit) that lists when various interests were purchased and steps the purchasers could or should have taken to discover the alleged fraud or securities law violation within two years. Presumably, defendants argument is that if there is no state law remedy relating to the purchase of securities, there can be no subordination under § 510(b). The Court does not need to examine the affidavit to ascertain dates of purchase, or make a ruling on the statute of limitations issue, because the Court finds that the existence of a state law remedy is irrelevant to an action under 510(b). Section 510(b) on its face does not limit itself to claims that could be brought in other courts, rather it limits itself to claim[s] arising from recission of a purchase or sale of a security, . . . for damages arising from the purchase or sale . . . or for reimbursement . . . on account of such a claim. The Court refuses to write into the statute a requirement that the claim also be actionable elsewhere. Alternatively, if the affidavit is setting forth dates for the purpose of implying there is a statute of limitations problem in the 510(b) action, the Court finds no limitation in the text of 510(b) or elsewhere in the Bankruptcy Code. Compare e.g. 11 U.S.C. § 546(a) (specific time limitations set out for commencement of actions under sections 544, 545, 547, 548 and 553).

Next, defendant argues that the settlement reached in the lawsuit concerned primarily the actions of third parties that took place after the sale of the partnership interests to the plaintiffs. The affidavit states:

Based on my knowledge of the Lawsuit and the attached pleadings, plus my participation in the settlement reached in the Lawsuit, it is clear to me that a settlement was reached on matters that occurred after the sale of securities to the Plaintiffs; matters that did not deal directly with the sale or purchase of securities but instead dealt with the operation of the relevant partnerships.

Presumably defendants argument is that because the settlement in the lawsuit focused on something other than the original sale of the securities, the proofs of claim should somehow be deemed to be amended to instead make a claim for what eventually was settled. The Court cannot do this. See Agricredit, 987 F.2d at 680 (Bankruptcy Court properly treats claim on its face absent amendment or supplementation.) The face of each proof of claim indicates that it is based on the sale of a security. The Court is further reluctant to deem the claims amended because, as the affidavit itself states, the settlement reached primarily involved the actions of third parties. All this statement does is bolster the fact that the only claim against the debtors was the original claim arising from the sale of a security.

Finally, defendant argues that the funds in the estate are the direct result of Robert J. Schaefer expending time and legal and accounting fees to recover funds from the Internal Revenue Service, and that therefore defendant (a related party) is not properly subordinated under section 510(c), as requested in Count 2 of the complaint. Because the Court finds that the claims should be subordinated under section 510(b), this argument does not need to be addressed and Defendants Motion for Summary Judgment as to Count 2 is denied as moot.

Therefore, for the reasons set forth above in this Memorandum Opinion the Court will enter orders 1) granting Plaintiffs Motion for Summary Judgment, except as it relates of Proofs of Claim 45 and 49, and 2) denying Defendants Motion for Summary Judgment on Count 1, and denying Defendants Motion for Summary Judgment on Count 2 as moot.

APPENDIX A