In In re Lehman Brothers Inc., two creditors recently made an unsuccessful attempt to infuse Section 510(b) of the Bankruptcy Code with ambiguity and avoid the subordination of their claims. In re Lehman Brothers, Inc., 2014 WL 288571 (Bankr. S.D.N.Y. Jan 27, 2014). Section 510(b) provides that a creditor’s claim shall be subordinated to other claims when the creditor’s claim (1) arises from rescission of a purchase or sale of a security of the debtor or of the debtor’s affiliates, or (2) is for damages or reimbursement or contribution arising from the purchase or sale of such a security. In this case, both creditors asserted claims against the debtor based on transactions relating to bonds issued by Lehman Brothers Holding, Inc. (“LBHI”), an affiliate of the debtor. The first creditor asserted a claim based on the debtor’s breach of a contract to execute an order for the sale of LBHI bonds. The second creditor, an underwriter of LBHI bonds, asserted reimbursement and contribution claims based on agreements between the second creditor and the debtor as co-underwriters in a public offering of LBHI bonds.
When the trustee moved to subordinate these claims, both creditors argued that Section 510(b) only mandates subordination when claims are based on the securities themselves—i.e., if the claims sought to recover amounts invested in the LBHI bonds. This argument was supported, according to the creditors, by the legislative history of Section 510(b). The court refused to consult legislative history, however, because it found the statutory language unambiguous. As a result, the court relied solely on the statute’s plain language and on binding precedent that broadly construed Section 510(b). Under the court’s analysis, the plain language included claims for damages or reimbursement relating to the purchase or sale of securities of an affiliate—which is what the creditors’ claims were here. The court therefore subordinated the two creditors’ claims to the claims of the debtor’s general unsecured creditors.