In re Tristar Esperanza Properties

Under 11 U.S.C. § 510(b), a claim for a monetary judgment against a debtor must be subordinated to senior claims if it is for damages arising from, or rescission of, the purchase or sale of a security of the debtor.

Jane O’Donnell purchased a membership interest in Tristar Esperanza Properties, LLC (“Tristar”). Tristar elected to repurchase O’Donnell’s interest when O’Donnell later wished to withdraw from Tristar. The parties proceeded to arbitration because they could not agree on a valuation of O’Donnell’s interest. The arbitrator awarded $410,472.68 in O’Donnell’s favor, and a judgment of $415,937.68 was later entered against Tristar when it refused to pay O’Donnell for her membership interest. Tristar filed for bankruptcy and O’Donnell filed a claim against Tristar seeking to recover her judgment. Tristar subsequently filed a proceeding to subordinate O’Donnell’s claim under 11 U.S.C. § 510(b). The bankruptcy court granted Tristar’s summary judgment on its § 510(b) claim, and the Bankruptcy Appellate Panel (“BAP”) affirmed. On appeal, the Ninth Circuit reviewed the judgment based on the language of § 510(b). Under § 510(b), a claim for a monetary judgment against a debtor must be subordinated to senior claims if it is for damages arising from, or rescission of, the purchase or sale of a security of the debtor. O’Donnell argues that her claim is not one for “damages arising from the purchase or sale of a security.” However, O’Donnell made a claim that Tristar never paid her for her interest, so her claim was one for damages. Additionally, her claim originated because Tristar breached provisions regarding repurchasing her interest, so her claim comes from the purchase or sale of a security of the debtor. The panel therefore found that BAP was correct in subordinating O’Donnell’s claim against Tristar because her claim was one for “damages arising from the purchase or sale of the security.” AFFIRMED.