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The Ninth Circuit reversed, holding that breach of contract claims may be subordinated under 510(b) if there is ”some nexus or causal relationship between the claim and the purchase of the securities.” Here, neither of the two primary reasons for subordinating a claim under ' 510 was applicable. They are: '1) dissimilar risk and return expectations of creditors and shareholders; and 2) the reliance of creditors on the equity cushion provided by shareholder investment.' Further, the court found that the plain language of the statute demonstrates its inapplicability to the circumstances here. The employee's damages did not arise from the rescission of a purchase or sale of a security of the debtor. His 'claim arises from the fact that the value of the stock on the date of the public offering was simply the basis for calculating his compensation. He has never been a shareholder, has never attempted to recover an investment loss and ' has only sought to collect compensation owed for services he performed pursuant to a contract that the debtor breached.'

Judgment Based on Stock Value Not Subject to Subordination

The Ninth Circuit has ruled that where the value of a judgment against a bankrupt company is based on the company's stock price, the claim is not one for damages arising from the purchase or sale of a security subject to subordination under ' 510(b). Racusin v. American Wagering Inc. (In re American Wagering Inc.), No. 05-15969 Oct. 6).

The debt in question stemmed from an employment contract dispute that was litigated to judgment in federal district court. The court ultimately awarded the plaintiff $2.31 million, which reflected the value of the employer's stock when plaintiff could have first sold it, plus $150,000. A few days later, the employer filed a Chapter 11 petition. The debtor sought to subordinate the employee's claim under ' 510(b) as arising from the purchase or sale of a security. The bankruptcy court ruled for the employee, but the BAP reversed.

The Ninth Circuit reversed, holding that breach of contract claims may be subordinated under 510(b) if there is ”some nexus or causal relationship between the claim and the purchase of the securities.” Here, neither of the two primary reasons for subordinating a claim under ' 510 was applicable. They are: '1) dissimilar risk and return expectations of creditors and shareholders; and 2) the reliance of creditors on the equity cushion provided by shareholder investment.' Further, the court found that the plain language of the statute demonstrates its inapplicability to the circumstances here. The employee's damages did not arise from the rescission of a purchase or sale of a security of the debtor. His 'claim arises from the fact that the value of the stock on the date of the public offering was simply the basis for calculating his compensation. He has never been a shareholder, has never attempted to recover an investment loss and ' has only sought to collect compensation owed for services he performed pursuant to a contract that the debtor breached.'