Opinion
Case No: 6:21-cv-1665-PGB
2022-07-09
IN RE: UNIVERSAL TOWERS CONSTRUCTION, INC. Universal Towers Investimentos E Participacoes, LTDA, Appellant, v. Constrazza International, Inc., Appellee.
Attorneys for Appellant, Universal Towers Investimentos E Participacoes, LTDA, Andrew V. Layen, Esq., Baker & Hostetler LLP, Orlando, Florida 32801. Attorneys for Appellee, Constrazza International Construction, Inc., Eric N. Assouline, Esq., Assouline & Berlowe, P.A., Miami, FL 33131, Peter E. Berlowe, Esq., Assouline & Berlowe, P.A., Miami, FL 33131 Attorneys for Debtor, Universal Towers Construction, Inc., Christopher R. Thompson, Esq., Burr & Forman, P.A., Orlando, FL 32801
Attorneys for Appellant, Universal Towers Investimentos E Participacoes, LTDA, Andrew V. Layen, Esq., Baker & Hostetler LLP, Orlando, Florida 32801.
Attorneys for Appellee, Constrazza International Construction, Inc., Eric N. Assouline, Esq., Assouline & Berlowe, P.A., Miami, FL 33131, Peter E. Berlowe, Esq., Assouline & Berlowe, P.A., Miami, FL 33131
Attorneys for Debtor, Universal Towers Construction, Inc., Christopher R. Thompson, Esq., Burr & Forman, P.A., Orlando, FL 32801
ORDER
PAUL G. BYRON, UNITED STATES DISTRICT JUDGE
The instant appeal is the latest battle in a longstanding feud between Appellant Universal Towers Investimentos E Participacoes, LTDA ("Universal Towers "), the sole remaining shareholder of Universal Towers Construction, Inc. (the "Debtor "), and Appellee Constrazza International, Inc. ("Constrazza "), a former shareholder.
Specifically, Universal Towers appeals two rulings issued by the United States Bankruptcy Court, Middle District of Florida (the "Bankruptcy Court "), in two related proceedings. First, in the Debtor's bankruptcy proceeding, the Bankruptcy Court issued an Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor. (Doc. 10-2). Second, in the related adversary proceeding, the Bankruptcy Court issued an Opinion Granting Summary Judgment in Favor of Constrazza and Against Universal Towers as well as an accompanying Order of Final Judgment. (Docs. 9-2, 9-14). Accordingly, the following causes are before the Court:
1. Universal Tower's respective initial briefs (Docs. 18, 22), Constrazza's responses in opposition (Docs. 21, 26), and Universal Tower's replies thereto (Docs. 23, 27); and
2. Constrazza's Renewed Motion to Dismiss the Appeal of the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor (Doc. 16 (the "Motion to Dismiss ")) and Universal Tower's response in opposition (Doc. 17).
After reviewing the entirety of the record, including the briefs filed by all parties, the Court, for the reasons set forth below: grants Constrazza's Motion to Dismiss; affirms, in the alternative, the Bankruptcy Court's Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor; and dismisses as moot Universal Towers’ appeal of the Bankruptcy Court's Opinion Granting Summary Judgment in Favor of Constrazza and Against Universal Towers and the accompanying Order of Final Judgment.
I. BACKGROUND
A. The State Court Action
At the Debtor's formation on May 18, 1998, its original shareholders were Constrazza and Joao Arcanjo Ribeiro ("Ribeiro "), a Brazilian citizen and the owner of Universal Towers. (Doc. 14-2, pp. 4–8). Thereafter, Ribeiro was convicted for numerous crimes, and on January 16, 2009, the First Federal Court of Mato Grasso, Brazil, appointed Francisco F. Bomfim ("Bomfim ") as judicial administrator of Ribeiro's assets, which included the authority to manage the Debtor's affairs on behalf of Universal Towers. (Id. at pp. 5, 8). Over the years, Bomfim and Constrazza had multiple disputes concerning the Debtor's management, culminating in Bomfim's dilution of Constrazza's 35 percent ownership interest in the Debtor to approximately three percent through a series of unauthorized debt conversion agreements on April 15, 2015. (Id. at pp. 8–11, 14).
On September 4, 2015, Constrazza initiated an action against Bomfim and the Debtor in the Ninth Judicial Circuit in and for Orange County, Florida (the "State Court "), seeking judicial dissolution of the Debtor. (Id. at pp. 2, 11). In response, on November 12, 2015, the Debtor elected to purchase Constrazza's shares pursuant to section 607.1436(1) of the Florida Code. (Id. at pp. 3, 11). Constrazza then filed an Amended Complaint, dropping the petition for judicial dissolution of the Debtor, and adding claims for breach of fiduciary duty as to Bomfim in his individual capacity (Count I), declaratory relief as to Bomfim, Universal Towers, the Debtor, and other involved parties (Counts II, III, IV, V, and VI), and judicial appointment of a provisional receivership, custodianship, or provisional director as to the Debtor (Count VII). (Id. at p. 3).
"In a proceeding under [section] 607.1430(1)(b) [of the Florida Code], the corporation may elect or, if it fails to elect, one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares. An election pursuant to this section shall be irrevocable unless the court determines that it is equitable to set aside or modify the election." Fla. Stat. § 607.1436(1). Section 607.1430(1)(b) of the Florida Code governs an action for judicial dissolution of a corporation brought by a shareholder.
On March 13, 2020, after a four-day bench trial, the State Court issued an Order of Final Judgment. (Id. at pp. 2, 25). As a preliminary matter, the State Court held that Constrazza could not extinguish its petition for judicial dissolution by filing the Amended Complaint under section 607.1436(2) of the Florida Code, and it proceeded to determine the fair value of Constrazza's shares to facilitate the Debtor's election under section 607.1436(4) of the same. (Id. at pp. 12–13). However, the State Court also held that Bomfim committed "a myriad of violations of the shareholder agreement, [b]y-laws and [preexisting] loan agreements," listing those violations as follows:
"After an election has been filed by the corporation or one or more shareholders, the proceeding under [section] 607.1430(1)(b) [of the Florida Code] may not be discontinued or settled, nor may the petitioning shareholder sell or otherwise dispose of his or her shares, unless the court determines that it would be equitable to the corporation and the shareholders, other than the petitioner, to permit such discontinuance, settlement, sale, or other disposition." Fla. Stat. § 607.1436(2).
"If, within 60 days after the filing of the first election, the parties reach agreement as to the fair value and terms of the purchase of the petitioner's shares, the court shall enter an order directing the purchase of the petitioner's shares upon the terms and conditions agreed to by the parties." Fla. Stat. § 607.1436(3).
"If the parties are unable to reach an agreement as provided for in subsection (3), the court ... shall ... determine the fair value of the petitioner's shares as of the day before the date on which the petition under [section] 607.1430 [of the Florida Code] was filed or as of such other date as the court deems appropriate under the circumstances." Fla. Stat. § 607.1436(4).
• "Bomfim repeatedly took major corporate action without unanimous consent and over Constrazza's expressed objection," including the execution of
the debt conversion agreements and the issuance of new stock under those agreements. (Id. at pp. 14–15).
• "Bomfim did not offer the new stock [issued] under the [d]ebt [c]onversion [a]greements to Constrazza and did not obtain Constrazza's written consent prior to the issuance of the new stock." (Id. at p. 15).
• Bomfim did not obtain written bank approval prior to the stock transfers. (Id. at p. 16).
• "The debt, which was the impetus for the conversion, [was] suspect," and "[t]he corporate minutes reflect[ed] repeated objections on the grounds that the underlying debt did not exist." (Id. ). And, relatedly, "Bomfim repeatedly engaged in transactions directly with entities controlled by himself." (Id. at pp. 15–16). "As justification for the debt restructuring, Bomfim maintained that [the Debtor] was ‘insolvent’ due to the principal and interest due on related party debts ... Yet, a careful review of the purported related party debt (all of which Bomfim controlled) undermines its validity.... [The Debtor] does not appear to have been truly insolvent. [The Debtor] was paying all of its operating expenses and was current in its payments to [its lender]. Indeed, as of December 31, 2014, [the Debtor] had accumulated over [eight million dollars] in cash and marketable securities. The auditors never raised the issue of insolvency and consistently issued only unmodified (clean) opinions." (Id. at pp. 16–17).
Thus, the State Court declared the debt conversion agreements "unauthorized and invalid," and it used the shareholder distribution percentage that existed prior to Bomfim's unauthorized execution of those agreements to determine the fair value of Constrazza's shares "as of the day before the date on which the petition for judicial dissolution was filed, September 3, 2015." (Id. at pp. 13–19, 21–22). The State Court then liquidated Constrazza's 35 percent ownership interest in the Debtor into a fixed debt of $135,857.54 per share, or $9,605,128.40 total, due within 10 days of the date of the Order of Final Judgment. (Id. ). It concluded: "Upon payment of the $9,605,128.40 required herein by [the Debtor] to [Constrazza], [the Debtor] shall be deemed to be the owner of [Constrazza's] [ ] shares ..." (Id. at p. 22). Turning to the Amended Complaint, the State Court remarked that its enforcement of the Debtor's election vitiated many of the issues raised therein. (Id. at pp. 19–20). For example, as to Counts II, III, IV, and V, the State Court reiterated that its Order of Final Judgment reversed the shares issued under the debt conversion agreements and the resulting dilution of Constrazza's ownership interest in the Debtor. (Id. at pp. 20–21). Additionally, as to Count VII, the State Court denied the request for a receiver, custodian, or provisional director as "unnecessary" because "[the Debtor] appears to be financially healthy" and because "[the Debtor] shall purchase Constrazza's shares at the ordered value," noting its "intent [for the Debtor's] shareholders go their separate ways as soon as possible after payment." (Id. at p. 21). However, as to Count I, the State Court provided a more detailed analysis, finding the evidence insufficient to hold Bomfim individually liable for breach of fiduciary duty:
See supra note 3.
"Upon determining the fair value of the shares, the court shall enter an order directing the purchase upon such terms and conditions as the court deems appropriate ..." Fla. Stat. § 607.1436(5).
"The entry of an order under subsection (3) or subsection (5) shall be subject to the provisions of subsection (8), and the order shall not be entered unless and until the award is determined by the court to be permitted under the provisions of subsection (8).... Upon entry of an order under subsection (3) or subsection (5), the court shall dismiss the petition to dissolve the corporation under [section] 607.1430(1)(b) [of the Florida Code] and the petitioning shareholder shall no longer have any rights or status as a shareholder of the corporation, except the right to receive the amounts awarded by the order of the court, which shall be enforceable in the same manner as any other judgment." Fla. Stat. § 607.1436(6).
"The purchase ordered pursuant to subsection (5) shall be made within 10 days after the date the order becomes final." Fla. Stat. § 607.1436(7).
"Any payment by the corporation pursuant to an order under subsection (3) or subsection (5) ... is subject to the provisions of [section] 607.06401 [of the Florida Code]," which governs distributions to shareholders. Fla. Stat. § 607.1436(8).
[Bomfim's] position as an officer and director of [the Debtor] was unenviable and was a result of the Brazilian Court's appointment to manage the affairs of [the Debtor] on behalf of [Universal Towers]. The relationship of the two shareholders at the time of the appointment was strained and did not improve with time.... [Bomfim's] actions, some of which were outside of what was permitted by the [s]hareholder [a]greement and [b]y-laws, appear to the Court to be an effort to keep [the Debtor] financially viable. The Court has concerns about the appearance of a conflict of interest and apparent self-dealing by [Bomfim]. Likewise, the Court finds the explanation of the drastic reduction of Constrazza's ownership interest by [Bomfim], the alleged motivation of that decision due to debt owed to entities controlled by [Bomfim], and the purported dire financial situation of [the Debtor] is not credible. This [O]rder of [Final Judgment] addresses the reduction of value to Constrazza's shares based on [Bomfim's] unilateral and unauthorized decisions. However, the evidence is insufficient to establish [Bomfim] is individually liable for breaching his fiduciary duties to [ ] shareholder Constrazza.
(Id. at p. 20).
Shortly after the Order of Final Judgment, on May 29, 2020, the State Court supplemented Constrazza's award with $2,067,515.41 in statutory prejudgment interest, for a total of $11,672,643.81. (Doc. 14-3). This sum remains outstanding.
B. The Bankruptcy Proceeding
On July 3, 2020, the Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code (Doc. 10-7), and Constrazza submitted two proofs of claim: its claim for $11,672,643.81, based on the State Court's Order of Final Judgment, and its unresolved claim for $5.5 million in legal fees (Doc. 10-2, pp. 1–3). On February 17, 2021, the Debtor sought mandatory subordination of Constrazza's claims pursuant to 11 U.S.C. § 510(b), which provides:
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 [ 11 U.S.C. §] 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, such claim has the same priority as common stock.
(Doc. 10-64). On July 2, 2021, Universal Towers joined the Debtor's request for mandatory subordination of Constrazza's claims. (Doc. 10-108).
Meanwhile, on March 25, 2021, the Bankruptcy Court authorized the Debtor's sale of a hotel property for $35.7 million—enough to pay all the Debtor's creditors, satisfy Constrazza's claims, and provide a distribution to Universal Towers. (Doc. 10-2, pp. 3–4; Doc. 10-104). The Bankruptcy Court also confirmed the Debtor's Plan of Liquidation (the "Plan "), which established a liquidating trust and divided creditors into two classes. (Doc. 10-103). Class 3A, consisting of "all Allowed General Unsecured Claims other than any Allowed Unsecured Claim of Constrazza," would receive full payment, plus interest, from the liquidating trust. (Id. at pp. 2–3). Class 3B, consisting of "all Allowed Unsecured Claims of Constrazza that are not Subordinated [ 11 U.S.C. §] 510(b) Claims," would receive full payment, plus interest, from the liquidating trust after satisfaction of the Class 3A claims. (Id. at p. 3). Consequently, under this Plan, if the Bankruptcy Court determined that Constrazza's claims were subject to mandatory subordination, then Constrazza would receive a distribution from the liquidating trust in pari passu with Universal Towers as a shareholder, in Class 4, on a 35 percent to 65 percent basis, instead of recovering the full amount of its claims as a Class 3B creditor.
On September 15, 2021, the Bankruptcy Court issued the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor, finding § 510(b) inapplicable because the Debtor's election to purchase Constrazza's shares, and the State Court's Order of Final Judgment enforcing that election, divested Constrazza of its ownership interest in the Debtor "as of September [3,] 2015, the date the [ ] State Court valued its equity interest," and gave Constrazza "a fixed debt obligation," a claim based on a statutory redemption scheme. (Doc. 10-2, pp. 6–7). It also chastised the Debtor's and Universal Towers’ apparently inequitable conduct:
Constrazza assumedly will receive a substantially greater return as an unsecured creditor than to split the remaining sales proceed with [Universal Towers] on a 35 [percent to] 65 [percent] basis. Given all other creditors will receive payment in full, only [Universal Towers] benefits by subordinating Constrazza's claims to Class 4....
Based on [Universal Towers’] and [the Debtor's] concerted actions, Constrazza lost the potential for any upside or profit in September 2015, years before this bankruptcy case was filed....
[The Debtor] and [Universal Towers] ask this Court to ignore the parties’ litigation for the last five years and their misconduct amply found by the Florida State Court effectively preventing Constrazza from any meaningful participation in the Debtor's operations and unjustifiably reducing Constrazza's equity ownership percentage. Now, after this litigation concluded, [Universal Towers] and the Debtor's shenanigans are exposed, and this bankruptcy case was filed, they brazenly ask this Court of equity to limit Constrazza recovery by forcing it back into a shareholder status under § 510(b).
[Universal Towers] again assisted by the Debtor attempts to increase its recovery by diluting the value of Constrazza's distribution. This is not fair, equitable, or required by the Bankruptcy Code. [Universal Towers] is treating the subordination provisions of § 510(b) as a sword to increase its recovery, not to do what the statute intends—to ensure unsecured creditors get paid before shareholders
try to ‘sneak in’ and get a higher priority distribution as an unsecured creditor. Here, all unsecured creditors will be paid in full before either Constrazza or [Universal Towers] gets paid....
And, although I do not reject the Debtor's standing to raise this subordination issue, I ask why they would. Even more I question the actions of the supposedly impartial and independent [l]iquidating [t]rustee continuing this argument solely to benefit [Universal Towers].
(Id. at pp. 4–8) (emphasis in original). Universal Towers now appeals this ruling.
C. The Adversary Proceeding
During the pendency of the Debtor's bankruptcy action, and prior to the Bankruptcy Court's issuance of the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor, Constrazza filed an adversary proceeding against the Debtor and Universal Towers, seeking: (1) a judgment declaring Constrazza's right to payment superior to Universal Towers’ right to payment; and (2) equitable subordination of Universal Towers’ equity position to the State Court Order of Final Judgment under 11 U.S.C. § 510(c). (Doc. 9-5). Section 510(c) provides:
Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may—(1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or (2) order that any lien securing such a subordinated claim be transferred to the estate.
Constrazza filed a Motion for Summary Judgment on February 26, 2021 (Doc. 9-6), and Universal Towers filed its response in opposition (Doc. 9-12), as well as its Answer and Affirmative Defenses (Doc. 9-11), on May 7, 2021.
On September 15, 2021, after issuing the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor in the bankruptcy proceeding, the Bankruptcy Court issued an alternative ruling in the adversary proceeding that granted summary judgment in favor of Constrazza. (Doc. 9-14). In a footnote, the Bankruptcy Court applied res judicata to the State Court Order of Final Judgment: "The Florida State Court judgment was a result of the same facts, occurrences, and transactions that are the basis of this Adversary Proceeding. The Defendants actively participated in the litigation; thus, the judgment of the Florida State Court is entitled to res judicata finality." (Id. at p. 6, n.24). It then reasoned:
[Universal Towers] was an insider. And, based on the findings of fact by the Florida State Court, [Universal Towers] has engaged in inequitable conduct. As the Honorable Keith A. Carsten stated in a lengthy written ruling, the dilution of Constrazza's ownership was ‘unauthorized and invalid for a myriad of violations of the shareholder agreement, [b]y-laws and [preexisting] loan agreement.’ [Universal Towers] has injured Constrazza, giving itself a clear unfair advantage by improperly reducing Constrazza's ownership from 35 [percent] to less than [three percent].
And the subordination of [Universal Towers’] claim is consistent with the Bankruptcy Code. During the five years between when Constrazza's equity interest became a fixed debt obligation (September 2015) and the bankruptcy petition date (July 2020), [Universal Towers] had all the potential upside. [Universal Towers] exercised exclusive control of [the Debtor] to the detriment of Constrazza's interest. Constrazza had no
ability to get current financial information or participate in the management of [the Debtor's] business. [Universal Towers] fought Constrazza at every step in its scorched earth litigation in Florida State Court, all to try to unfairly reduce Constrazza's interest to the benefit of [Universal Towers]. This is neither fair, equitable, or consistent with the principles of bankruptcy distribution that tries to equally distribute funds to similarly situated parties, not reward bad actors.
As an alternative to [the] ruling in the [bankruptcy proceeding] finding Constrazza's claims are allowed in Class 3B and are not subordinated under [ 11 U.S.C.] § 510(b), I now conclude that, even if Constrazza's claims are allowed in Class 4, Constrazza holds claims superior to [Universal Towers] under an equitable subordination theory under [ 11 U.S.C.] § 510(c).
(Id. at pp. 6–7) (quoting Doc. 14-2). Universal Towers now appeals this ruling, too.
D. Procedural History
Universal Towers’ appeals were originally filed in this Court on October 7, 2021, as two related actions: Case Nos. 6:21-cv-01665 (challenging the Bankruptcy Court's grant of summary judgment in favor of Constrazza in the adversary proceeding) and 6:21-cv-01666 (challenging the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor in the bankruptcy proceeding). Constrazza filed a Motion to Dismiss the latter appeal, and Universal Towers responded in opposition.
Because the Clerk of Court for the Bankruptcy Court filed the records for both appeals in Case No. 6:21-cv-01665, and given the related nature of the actions, the Court consolidated the cases, ordered the parties to resubmit the pending Motion to Dismiss and the accompanying response in opposition in Case No. 6:21-cv-01665, directed the parties to file all further briefings in Case No. 6:21-cv-01665, and closed Case No. 6:21-cv-1666. The parties did so, and all matters are now ripe for review.
II. STANDARD OF REVIEW
This Court has jurisdiction over these appeals from the final orders of the Bankruptcy Court pursuant to 28 U.S.C. § 158. The issues presented are questions of law and are reviewed de novo . In re Coady , 588 F.3d 1312, 1315 (11th Cir. 2009) (per curiam).
III. ISSUES ON APPEAL
There are three issues on appeal. The first is whether Universal Towers has standing to appeal the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor. The second is whether the Bankruptcy Court erred in finding that Constrazza's claims were not subject to mandatory subordination under 11 U.S.C. § 510(b). The third is whether the Bankruptcy Court erred in equitably subordinating Universal Towers’ recovery to Constrazza's claims under 11 U.S.C. § 510(c).
IV. DISCUSSION
The Court addresses each issue on appeal in turn. Ultimately, the Court finds that: Universal Towers lacks standing to appeal the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor; and the Bankruptcy Court did not err in finding that Constrazza's claims were not subject to mandatory subordination under 11 U.S.C. § 510(b). Consequently, the Court further finds that Universal Towers’ appeal of the Bankruptcy Court's equitable subordination of its recovery to Constrazza's claims under 11 U.S.C. § 510(c) is moot. A. Standing
As a threshold matter, in its Motion to Dismiss, Constrazza argues that Universal Towers lacks standing to initiate subordination proceedings under 11 U.S.C. § 510(b). (Doc. 16). However, the proper inquiry here is whether Universal Towers has standing to appeal the Bankruptcy Court's Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor under the "person aggrieved doctrine." Thus, in its response to the Motion to Dismiss, Universal Towers contends that it is a "person aggrieved" because the "practical effect" of the Bankruptcy Court's decision is a substantial reduction in Universal Towers’ recovery as a Class 4 shareholder. (Doc. 17, pp. 9–10).
Constrazza, realizing that its Motion to Dismiss misunderstands the question before the Court, raises the standing issue again in its brief. In doing so, Constrazza concedes that Universal Towers is a "person aggrieved" because "if any portion of the payment of the surplus will not be made to [Universal Towers] in Class 4 until Constrazza is paid its claim in Class 3B[,] the [Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor] will directly harm [Universal Towers] financially." (Doc. 26, p. 13). Nevertheless, Constrazza asserts that Universal Towers lacks standing on policy grounds. (Id. at pp. 12–15).
In reply, Universal Towers insists that "it is hard to imagine a more fundamental ‘interest the Bankruptcy Code seeks to protect or regulate’ than a[n] ... equity holder's interest in receiving distributions from the res of the bankruptcy estate." (Doc. 27, p. 9). Universal Towers also posits that shareholders have standing where, as here, "there are sufficient funds to pay creditors and the equity holders are entitled to distributions from the bankruptcy estate." (Id. at p. 10).
The person aggrieved doctrine limits the right to appeal a bankruptcy court order to persons "directly and adversely affected pecuniarily by the order." In re Westwood Cmty. Two Ass'n, Inc. , 293 F.3d 1332, 1335 (11th Cir. 2002) (quoting In re Troutman Enters., Inc. , 286 F.3d 359, 364 (6th Cir. 2002) ). In other words, to have standing to appeal a bankruptcy order, the individual must have "a financial stake in the order being appealed," meaning "that [the] order diminishes their property, increases their burdens or impairs their rights." Id. (internal quotations omitted). Importantly, under this doctrine, "[s]hareholders may not appeal a bankruptcy court decision where they assert only a derivative interest. This rule, which applies to even a sole shareholder, recognizes that corporations are entities separate from their shareholders in contradistinction with partnerships or other unincorporated associations." In re AFY , 733 F.3d 791, 793 (8th Cir. 2013) (internal quotations and citations omitted). An exception exists if the shareholder "can demonstrate a ‘direct, personal interest’ in the cause of action." In re Troutman Enters. , 286 F.3d at 364 (quoting Franchise Tax Bd. of Cal. v. Alcan Aluminium Ltd. , 493 U.S. 331, 336, 110 S.Ct. 661, 107 L.Ed.2d 696 (1990) ).
There is a smattering of case law granting shareholders standing "if [they] can show a reasonable possibility of a surplus after satisfying all priority and general unsecured claims." In re Patriot Co. , 311 B.R. 71, 74 (B.A.P. 8th Cir. 2004) ; see also In re Keystone Mine Mgmt. II , BAP No. EC-15-1202, 2016 WL 7189824, at *6 (B.A.P. 9th Cir. Dec. 2, 2016). But the Eighth Circuit has dismissed these cases as "unpersuasive outliers," ruling that "the possible solvency of [the debtor's] estate does not give the [shareholders] standing." In re AFY , 734 F.3d 810, 823 (8th Cir. 2013). The Eighth Circuit stated: "Under the shareholder standing rule, appellants do not have standing because the interest they assert is indirect and derivative of [the debtor]. Any ‘surplus would belong to [the debtor] and not to appellants, its shareholders. [The debtor], through its officers and directors, will decide whether to retain the capital or distribute it to shareholders.’ " Id. (quoting In re Cent. Ice Cream Co. , 62 B.R. 357, 359–60 (N.D. Ill. 1986) ).
Additionally, this Circuit recognizes that "[t]he person aggrieved standard was developed as an answer to the argument that the failure to limit who can appeal a bankruptcy court's order would cause ‘bankruptcy litigation to become mired in endless appeals brought by the myriad of parties who are indirectly affected by every bankruptcy court order.’ " In re Ernie Haire Ford, Inc. , 764 F.3d 1321, 1326 (11th Cir. 2014) (quoting Kane v Johns-Manville Corp. , 843 F.2d 636, 642 (2d Cir. 1988) ). "Since the purpose of adopting this heightened standard was to ensure that the goals of bankruptcy were not derailed by a flood of appeals, it only makes sense to exclude appeals from those parties who do not suffer a direct harm to interests the Bankruptcy Code seeks to protect or regulate—that is, appeals that do not further the goals of bankruptcy." Id. Thus, "a person is not ‘aggrieved’ when the interest harmed by a court order are not interests the Bankruptcy Code seeks to protect or regulate." Id.
In this convoluted case, the Debtor (joined by Universal Towers) evidently sought to subordinate Constrazza's claims for the sole benefit of Universal Towers, to maximize Universal Towers’ distribution from the liquidating trust. Indeed, the Bankruptcy Court aptly observed that "only [Universal Towers] benefits by subordinating Constrazza's claims to Class 4." (Doc. 10-2, p. 4). But this observation does not confer standing upon Universal Towers. The injury caused by the Bankruptcy Court's Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor—a four-million-dollar reduction in Universal Towers’ distribution from the liquidating trust—is derivative of Universal Towers’ ownership interest in the Debtor. (Doc. 17, p. 2 n.2; Doc. 27, p. 5). Put another way, Universal Towers’ claim to a distribution from the liquidating trust in Class 4 derives from its status as a shareholder of the Debtor and, therefore, the effect of the Bankruptcy Court's decision on that distribution is not independent of Universal Towers’ ownership interest in the Debtor. Thus, contrary to Universal Towers’ contention and Constrazza's concession, Universal Towers lacks a "direct, personal interest" and, consequently, is not a "person aggrieved" for the purposes of standing.
"Standing is a doctrine that stems directly from Article III's case or controversy requirement, and thus it implicates our subject matter jurisdiction. In fact, standing is perhaps the most important jurisdictional doctrine, and, as with any jurisdictional requisite, we are powerless to hear a case when it is lacking." Bochese v. Town of Ponce Inlet , 405 F.3d 964, 974–75 (11th Cir. 2005) (internal citations and quotations omitted). " ‘A necessary corollary to the concept that a federal court is powerless to act without jurisdiction is the equally unremarkable principle that a court should inquire into whether it has subject matter jurisdiction at the earliest possible stage in the proceedings. Indeed, it is well settled that a federal court is obligated to inquire into subject matter jurisdiction sua sponte whenever it may be lacking.’ ... Accordingly, we are obliged to consider questions of standing regardless of whether the parties have raised them." Id. (quoting Univ. of S. Ala. v. Am. Tobacco Co. , 168 F.3d 405, 410 (11th Cir. 1999) ).
The Court also agrees with the Eighth Circuit's characterization of the case law supporting shareholder standing in the event of a surplus as "unpersuasive outliers." In re AFY , 734 F.3d at 823. Furthermore, applying the Eighth Circuit's logic to this case, any surplus belongs to the liquidating trust, and the liquidating trustee will make a distribution to Universal Towers, as the sole remaining shareholder, in accordance with the Plan's terms. See id. Again, Universal Towers does not have standing because its interest is indirect and derivative of its status as a shareholder of the Debtor.
Lastly, policy considerations weigh against a finding that Universal Towers satisfies the "person aggrieved" standard. While Chapter 11 of the Bankruptcy Code offers some protections to shareholders, "the two ‘recognized’ policies, or objectives, are ‘preserving going concerns and maximizing property available to satisfy creditors.’ " In re Am. Cap. Equip., LLC , 688 F.3d 145, 156–57 (3d Cir. 2012) (quoting Bank of Am. Nat'l Tr. & Sav. Ass'n v. 203 N. LaSalle St. P'ship , 526 U.S. 434, 453, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999) ); see Begier v. I.R.S. , 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) ("Equality of distribution among creditors is a central policy of the Bankruptcy Code."); Kuehner v. Irving Tr. Co. , 299 U.S. 445, 451, 57 S.Ct. 298, 81 L.Ed. 340 (1937) ("[T]he object of bankruptcy laws is the equitable distribution of the debtor's assets amongst his creditors."); Corp. Assets, Inc. v. Paloian , 368 F.3d 761, 767 (7th Cir. 2004) ("A central purpose of bankruptcy ... is to maximize creditor recovery."); In re Gandy , 299 F.3d 489, 495 (5th Cir. 2002) (describing the purpose of the Bankruptcy Code as "centralized resolution of purely bankruptcy issues, the need to protect creditors and reorganizing debtors from piecemeal litigation, and the undisputed power of a bankruptcy court to enforce its own orders"). "More generally, the Bankruptcy Code's objectives include: ... ‘the expeditious liquidation and distribution of the bankruptcy estate to its creditors,’ and achieving fundamental fairness and justice." In re Am. Cap. Equip. , 688 F.3d at 157 (first quoting Integrated Sols., Inc. v. Serv. Support Specialties , 124 F.3d 487, 489 (3d Cir. 1997), and then citing In re Kaiser Aluminum Corp. , 456 F.3d 328, 339–43 (3d Cir. 2006) ).
More specifically, "[ 11 U.S.C. §] 510(b) serves to effectuate one of the general principles of corporate and bankruptcy law: that creditors are entitled to be paid ahead of shareholders in the distribution of corporate assets." In re Am. Wagering, Inc. , 493 F.3d 1067, 1071 (9th Cir. 2007). "The principles behind corporate and bankruptcy laws generally do not favor shifting the risk of loss from shareholders to creditors, even if the shareholders are blameless. One of the primary purposes of [§] 510(b), therefore, is to prevent disappointed shareholders, sometimes the victims of corporate fraud, from recouping their investment in parity with unsecured creditors." Id. at 1071–72. "There are two main rationales for mandatory subordination [under § 510(b) ]: 1) the dissimilar risk and return expectations of shareholders and creditors; and 2) the reliance of creditors on the equity cushion provided by shareholder investment." In re Betacom of Phx., Inc. , 240 F.3d 823, 830 (9th Cir. 2001) ; see In re Elieff , 637 B.R. 612, 625 (B.A.P. 9th Cir. 2022) ("The undisputed purpose of § 510(b) is to prevent an existing or former equity investor from sharing [pari passu ] with the estate's creditors based on the attempted or consummated transmutation of its investment from equity to debt whether consensually or by a court ruling.").
Here, Universal Towers does not contest the fundamental fairness of the bankruptcy proceedings but rather quibbles over the amount of its distribution from the liquidating trust—which is not an interest that "the Bankruptcy Code seeks to protect or regulate." In re Ernie Haire Ford , 764 F.3d at 1326. Generally, because the Plan relegates Constrazza's claims to Class 3B, after payment of all other creditors in Class 3A, this appeal does not implicate Chapter 11's recognized policy of equitable distribution among and satisfaction of the Debtor's creditors. And because the Plan pays all the Debtor's other creditors before paying Constrazza or Universal Towers, the specific risk mitigated by § 510(b) —that a shareholder will try to obtain a distribution with higher priority as a creditor, to the creditors’ disadvantage—is not present here. Universal Towers’ attempt to, as the Bankruptcy Court put it, use " § 510(b) as a sword to increase its recovery," at Constrazza's expense, not only manipulates that provision but also offends the Bankruptcy Code's interest in "expeditious liquidation and distribution" and a just, orderly process. In re Am. Cap. Equip. , 688 F.3d at 157 (internal quotations omitted); (Doc. 10-2, pp. 7–8). Accordingly, the Court finds that Universal Towers lacks standing to appeal the Bankruptcy Court's Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor.
B. Mandatory Subordination Under 11 U.S.C. § 510(b)
Even setting aside the standing issue, Universal Towers’ appeal of the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor lacks merit. Universal Towers argues that 11 U.S.C. § 510(b) applies to Constrazza's claims because: (1) pursuant to the State Court's Order of Final Judgment and Florida law, "Constrazza still owns its shares of [the Debtor] because [the Debtor] never made the buyback payment"; (2) under either the narrow, disfavored interpretation of § 510(b) or the broad, preferred reading of the statute, subordination of Constrazza's claims is appropriate; and (3) "the Bankruptcy Court's findings of inequitable conduct are incorrect and irrelevant for purposes of [§] 510(b)." (Doc. 22, pp. 14–16, 29–34). The Court analyzes each argument below.
1. The Effect of the State Court's Order of Final Judgment & Section 607.1436 of the Florida Code
Universal Towers argues that, under the State Court's Order of Final Judgment, Constrazza is still a shareholder of the Debtor: "[T]he State Court [Order of Final] Judgment provided that Constrazza's shares in [the Debtor] would be converted to treasury shares ([i.e. ], extinguished) when [the Debtor] made a payment of $11,672.643.81 to Constrazza. It is undisputed that payment never happened ..." (Id. at pp. 29–30). This argument defies common sense; as the Bankruptcy Court stated, by September 2015, "Constrazza ‘no longer enjoyed the primary benefit of ownership: the potential for unlimited profits.’ " (Doc. 10-2, pp. 6–7) (quoting In re Mobile Tool Int'l, Inc. , 306 B.R. 778, 782 (Bankr. D. Del. 2004) ). But Universal Towers’ argument also runs afoul of the State Court's Order of Final Judgment, which not only expressed the State Court's intent for the parties to "go their separate ways as soon as possible after payment" but also stringently adhered to section 607.1436 of the Florida Code. (Doc. 14-2, p. 21). And, under that section, Constrazza did not retain shareholder status after the issuance of the State Court's Order of Final Judgment.
Arriving at this conclusion requires the Court to reconcile two apparently conflicting provisions of section 607.1436. The first provision, subsection (6), provides:
The entry of an order under subsection (3) or subsection (5) shall be subject to the provisions of subsection (8), and the order shall not be entered unless and until the award is determined by the court to be permitted under the provisions of subsection (8).... Upon entry of an order under subsection (3) or subsection (5), the court shall dismiss the petition to dissolve the corporation under [section] 607.1430(1)(b) [of the Florida Code] and the petitioning shareholder shall no longer have any rights or status as a shareholder of the corporation, except the right to receive the amounts awarded by the order of the court, which shall be enforceable in the same manner as any other judgment.
See supra note 1. Section 607.1430(1)(b) of the Florida Code governs an action for judicial dissolution of a corporation brought by a shareholder.
FLA. STAT. § 607.1436(6). Here, pursuant to subsection (5), the State Court "determin[ed] the fair value of [Constrazza's] shares" and "enter[ed] an [Order of Final Judgment] directing the purchase upon such terms and conditions as [it] deem[ed] appropriate." FLA. STAT. § 607.1436(5) ; (see id. at pp. 12–19, 21–22). Accordingly, the last sentence of subsection (6) indicates that, as of the State Court's Order of Final Judgment, Constrazza ceased to "have any rights or status as a shareholder of [the Debtor], except the right to receive the amounts awarded by the [Order of Final Judgment]." FLA. STAT. § 607.1436(6).
However, the first sentence of subsection (6) subjects the State Court's Order of Final Judgment to subsection (8), the second provision at issue. Subsection (8) provides: "Any payment by the corporation pursuant to an order under subsection (3) or subsection (5), is subject to the provisions of [section] 607.06401 [of the Florida Code]." FLA. STAT. § 607.1436(8). Section 607.06401, in turn, "forbids distributions by the corporation to shareholders if those distributions would render the corporation insolvent" and thereby "maintains the fundamental tenet of corporate law that creditors’ claims on corporate assets are superior to claims of shareholders." Cox Enters., Inc. v. Pension Benefit Guar. Corp. , 666 F.3d 697, 701–03, 707 (11th Cir. 2012) ; see FLA. STAT. § 607.06401(3). Thus, at first glance, subsection (8) implies that Constrazza remains a shareholder until the Debtor pays the sum owed under the State Court's Order of Final Judgment, contradicting the plain language of subsection (6).
In Cox , the Eleventh Circuit examined "whether [ section] 607.1436 [of the Florida Code] forbids the distributions of corporate assets made pursuant to a repurchase order [under subsection (5) of the same] when doing so would give a former shareholder priority over a corporation's other creditors and render the corporation insolvent." 666 F.3d at 699, 704. It determined that "the district court erred by directing the distribution of [corporate] assets to [the former shareholder] without deciding whether this distribution complied with [ section] 607.06401 [of the Florida Code]." Id.
In reaching this determination, the Eleventh Circuit addressed the former shareholder's argument that subsection (8) of section 607.1436 (and, consequently, the incorporated section 607.06401 ) did not apply because subsection (6) of section 607.1436 terminated its shareholder status. Id. at 706. The Eleventh Circuit "reject[ed] [the former shareholder's] construction ... because it would render subsection (8) inapplicable in any case" and "[gave] meaning to both subsections (6) and (8) by recognizing [its] continued status as a shareholder for purposes of [ section 607.06401 ] but construing subsection (6) to eliminate other rights [it] held as a shareholder." Id. "Thus, the petitioning shareholder may enforce the repurchase order only to the extent allowed by subsection (8)." Id. at 707.
In other words, the Cox court ruled that, upon entry of a repurchase order under subsection (5) of section 607.1436, the former shareholder loses all its shareholder rights under subsection (6). However, the former shareholder is still considered a shareholder for a limited purpose under subsection (8) of section 607.1436 : assessing whether a payment to that former shareholder, as directed under subsection (5) of section 607.1436, would violate section 607.04601, the prohibition of distributions to shareholders where insolvency would occur. If such a payment would render the corporation insolvent, then the former shareholder cannot enforce the judgment entered under subsection (5) of section 607.1436.
Here, because the Debtor's other creditors have priority over Constrazza under the Plan, there is no threat to "the fundamental tenet of corporate law" that section 607.0461 of the Florida Code seeks to protect. Id. at 702. And because the Debtor is already in the process of a Chapter 11 liquidation, a payment to Constrazza will not "render" it insolvent, particularly as the liquidating trust has sufficient funds to pay all the Debtor's creditors, satisfy Constrazza's claims, and make a distribution to Universal Towers. Id. at 703. Therefore, because the limited purpose of subsection (8) of section 607.1436 does not apply, and because subsection (6) of the same "eliminate[d] other rights [Constrazza] held as a shareholder," Constrazza is not a shareholder of the Debtor under Florida law. Id. at 706–07.
2. The Approaches to Mandatory Subordination Under 11 U.S.C. § 510(b)
Next, Universal Towers briefly argues that the Bankruptcy Court incorrectly applied the "snapshot in time" approach, which only subordinates a claim under 11 U.S.C. § 510(b) "that directly concerns the stock transaction itself, [i.e. ], the actual purchase and sale of the debtor's security must give rise to the contested claim." In re Montgomery Ward Holding Corp. , 272 B.R. 836, 841 (Bankr. D. Del. 2001) (emphasis in original) (holding that "a claim based solely on the nonpayment of a promissory note issued by a debtor to consummate the repurchase of its own stock" is not subject to mandatory subordination) declined to follow by In re Telegroup, Inc. , 281 F.3d 133 (3d Cir. 2002) ; see also In re Mobile Tool Int'l , 306 B.R. at 780–82 (stating that the Third Circuit's decision in In re Telegroup "did not alter the long-standing principle that [§] 510(b) does not apply to instances when separate debt notes are actually issued in exchange for the stock" and finding that the former shareholders "divested themselves of all forms of ownership when they sold the securities back to the [d]ebtors and accepted notes in exchange"). Universal Towers asserts that "Constrazza remained a shareholder of [the Debtor] throughout the bankruptcy [proceeding]," unlike In re Montgomery Ward and In re Mobile Tool Int'l , wherein "the former shareholder had fully divested itself of all equity interests in the debtor in exchange for a promissory note." (Doc. 22, pp. 29–30).
For the reasons provided in Section IV.B.1, Constrazza is not a shareholder under the State Court's Order of Final Judgment or Florida law. Further, the Court agrees with the Bankruptcy Court's "snapshot in time" analysis: Constrazza's claim is based on a statutory redemption scheme which, like a claim based on a promissory note, is a fixed debt obligation because the State Court Order of Final Judgment liquidated Constrazza's ownership interest in the Debtor as of September 3, 2015, and, therefore, "Constrazza lost the potential for any upside or profit" as of that date. (Doc. 10-2, pp. 6–7).
In fact, Universal Towers dedicates most of its brief to urging the Court to avoid the "snapshot in time" approach. (Doc. 22, pp. 18–33). Instead, it endorses the "arising from" approach, arguing that "there is no question that Constrazza's claim is for damages ‘arising from’ its purchase of [the Debtor's] stock" because the State Court's Order of Final Judgment "merely value[d] Constrazza's shares in [the Debtor] and directed [the Debtor] to buyback those shares." (Id. at p. 31).
Under this approach, "[t]he critical question for purposes of § 510(b) ... is not whether the claim is debt or equity at the time of the petition, but rather whether the claim arises from the purchase or sale of a security. The claim must be subordinated if there is a sufficient ‘nexus or causal relationship between the claim and the purchase or sale of securities.’ " In re Tristar Esperanza Props., LLC , 782 F.3d 492, 497 (9th Cir. 2015) (quoting In re Am. Wagering, Inc. , 493 F.3d 1067, 1072 (9th Cir. 2007) ) (emphasis in original); see also In re Caprock Oil Tools, Inc. , 585 B.R. 823 (Bankr. S.D. Tex. 2018) (subordinating a former shareholder's claim under § 510(b) because it "arose from" the debtor's election to redeem his shares pursuant to the shareholder agreement); In re RTI Holding Co. , Case No. 20-21456, 2021 WL 3409802 (Bankr. D. Del. Aug. 4, 2021) (finding that dissenting shareholders’ claims under the Georgia Corporate Code were subject to § 510(b) because those claims "arose from" their "status as shareholders").
In re Tristar is illustrative. In that case, a former shareholder filed a claim based on her state court judgment against the debtor, a limited liability company, for its breach of the operating agreement's provisions regarding repurchase of her membership interest. 782 F.3d at 494. The Ninth Circuit held that the former shareholder's claim was subject to subordination because it "originate[d] from the failed sale of her membership interest," emphasizing the policy goals of § 510(b) :
Nothing suggests that Congress intended to distinguish claims based on judgments or other fixed debts from unliquidated claims arising from the same wrong. Rather, Congress sought to subordinate claims, whether liquidated or not, that unfairly shift to creditors risks associated with stock ownership....
Our straightforward reading of the "arises from" language in § 510(b) comports with congressional intent. As we have said, "there are two main rationales for mandatory subordination: 1) the dissimilar risk and return expectations of shareholders and creditors; and 2) the reliance of creditors on the equity cushion provided by shareholder investment." [ In re ] Betacom , 240 F.3d at 830. Although [the former shareholder] did not enjoy the benefits of equity ownership on the date of the petition, she bargained for an equity position and thus embraced the risks that position entails.... And [her] investment was a part of [the LLC's] equity cushion on which creditors would have relied in choosing to extend credit.
Id. at 496–98.
Despite this expansive view of § 510(b), the Ninth Circuit reached the opposite conclusion two years later. There, a former shareholder filed claims based on his state court judgment against the limited liability company and the debtors, other shareholders of the limited liability company, for the fraudulent conversion of his shares. In re Khan , 846 F.3d 1058, 1061–62 (9th Cir. 2017). The Ninth Circuit held that the former shareholder's claim was not subject to subordination because:
[his] claims against the [d]ebtors do not arise from his purchase of [the limited liability company's] securities [in 2001]. Rather, they are based upon the judgment entered against the [d]ebtors by the [state court] on account of their actions many years later (2009) when they fraudulently converted [his] stock.... The value of the securities at the date of conversion was the measuring stick.
Id. at 1064–65. The Ninth Circuit recognized "[other] cases [that] bespeak a broad interpretation of ‘arising from’ " but stated "there is a limit to the reach of § 510(b), which stops short of encompassing every transaction that touches on or involves stock in a corporation." Id. at 1064. The Ninth Circuit again relied on the policy goals of § 510(b) to bolster its decision:
Moreover, the oft-quoted rationales for the § 510(b) subordination requirement do not apply here. Primarily, the separate wrongdoing of the [d]ebtors had no connection to the purchase or sale of [the former shareholder's] shares of stock in [the limited company]; nor did the judgments against the [d]ebtors that form the basis for [his] bankruptcy claims arise from a purchase or sale. In any event, the risk that those who purchase or sell stock (investors in a corporation) assume and expect to take is not that the shares themselves will later be stolen outright by other individuals. Nor, to the extent it applies at all, does the equity cushion rationale affect our decision here. Even if the [d]ebtors’ creditors did, somehow, rely upon the equity contributed by [the limited liability company's] investors, that does not touch upon the separate torts committed by the [d]ebtors in this case.
Id. at 1065.
The Court finds the instant case more analogous to In re Khan than to In re Tristar . Unlike the In re Tristar former shareholder, who voluntarily exercised her right to withdraw from the limited liability company, the Debtor, at Bomfim's (and Universal Towers’) direction, improperly diluted Constrazza's ownership interest from 35 percent to approximately three percent. See 782 F.3d at 494. Thus, like the In re Khan former shareholder, Constrazza's claim does not arise from its purchase of the Debtor's securities in 1998 but rather is based upon the Order of Final Judgment entered by the State Court against the Debtor many years later for its conduct in 2015, when, at Bomfim's (and Universal Towers’) direction, it issued the unauthorized debt conversion agreements and thereby reduced Constrazza's ownership interest. See 846 F.3d at 1064–65. The State Court's Order of Final Judgment merely used the distribution percentage that existed prior to the dilution, and the fair value of Constrazza's shares as of the day before the date on which the petition for judicial dissolution was filed, as "measuring stick[s]." See id. at 1065.
Under the most comprehensive reading of § 510(b), the dilution of Constrazza's ownership interest in the Debtor might be a sufficient nexus to Constrazza's purchase of shares in the Debtor. See In re Tristar , 782 F.3d at 497. Reasonable minds may differ on the reach of this ambiguous statutory language, but, sensibly, there must be a limit to § 510(b) that "stops short of encompassing every transaction that touches on or involves stock in a corporation." In re Khan , 846 F.3d at 1064 ; see In re Telegroup , 281 F.3d at 144 n.2 ("[I]n enacting § 510(b), Congress did not intend to subordinate every claim brought by a shareholder, regardless of the nature of the claim.... Nothing in our rationale would require the subordination of a claim simply because the identity of the claimant happens to be a shareholder, where the claim lacks any causal relationship to the purchase or sale of stock and when subordinating the claims would not further the policies underlying § 510(b), which was intended to prevent shareholders from recovering their equity investment in parity with general unsecured creditors.").
Crucially, all reasonable minds seem to agree that the touchstone of the § 510(b) analysis is the statute's policy goals. And, here, the rationales for subordination do not apply. First, in purchasing shares of the Debtor, Constrazza did not assume or expect a risk that the Debtor, directed by Bomfim (and Universal Towers), would dilute its ownership interest with a series of debt conversion agreements in violation of the shareholder agreement, by-laws, and preexisting loan agreements. See In re Khan , 846 F.3d at 1065. Second, because all the Debtor's creditors receive full satisfaction of their claims in Class 3A, before Constrazza receives any payment in Class 3B, there is no danger to the equity cushion. See id. That is, because Constrazza's claims are already subordinated to all the Debtor's creditors under the Plan, there is simply no need to further subordinate Constrazza's claims to Class 4.
Universal Towers contends that this outcome "encourages equity holders to race to the courthouse" "on the eve of bankruptcy," "like Constrazza did here." (Doc. 22, pp. 25–26; Doc. 27, pp. 11–12). Universal Towers also admits that "this bankruptcy case is rare in that creditors are being fully repaid and money is being returned to equity holders," but it asserts that "[§] 510(b) does not say it only applies where creditors remain unpaid[,] [a]nd the Court should not create such a requirement in the statute." (Doc. 27, pp. 12–13).
First, Constrazza initiated its action in the State Court on September 4, 2015, long before the Debtor filed its voluntary petition under Chapter 11 of the Bankruptcy Code on July 3, 2020. This appeal hardly presents the "race to the courthouse" scenario that Universal Towers fears. Second, given the highly contextual nature of the § 510(b) inquiry and the unique circumstances of this appeal, the Court doubts that its decision here will spark that dreaded shareholder sprint. Nor does the Court believe its decision reads any requirement into the statute. Indeed, the Court believes its decision faithfully adheres to the plain language and frequently acknowledged purposes of § 510(b).
Thus, the Court finds that, under either approach to mandatory subordination, Constrazza's claims are not subject to § 510(b).
3. The Bankruptcy Court's Findings of Inequity
Finally, Universal Towers argues that the Bankruptcy Court refused to subordinate Constrazza's claims under 11 U.S.C. § 510(b) in part because of Universal Towers’ and the Debtor's "shenanigans" and "misconduct amply found by the Florida State Court." (Doc. 22, pp. 33–34) (quoting Doc. 10-2, p. 7). Universal Towers asserts that "the State Court did not make any findings regarding ‘inequitable conduct’ " and "whether a party acted inequitably is completely irrelevant for purposes of [§] 510(b)," citing In re Enron Corp. , 341 B.R. 141 (Bankr. S.D.N.Y. 2006) for the latter proposition. (Id. ).
In re Enron stated that "[§] 510(b) is not an equitable doctrine," meaning the mandatory subordination analysis does not "weigh[ ] and balanc[e] competing normative concerns" but rather "look[s] only to objective economic conditions." Id. at 169–70. The Bankruptcy Court denied the request to subordinate Constrazza's claims because, objectively, § 510(b) did not apply. (Doc. 10-2). That is, it did not rearrange the priority scheme established by the Bankruptcy Code on the basis of who was more or less "deserving" of a larger recovery from the liquidating trust; it concluded that Constrazza's claims did not require subordination under the "snapshot in time" approach to § 510(b) and, as further justification for its decision, remarked that subordination of Constrazza's claims would not "do what the statute intends." (Id. at p. 8). As discussed at length in Section IV.B.2, it is common—and, arguably, required—for a court to evaluate the policy goals of § 510(b) when conducting the mandatory subordination analysis.
Nor does the Bankruptcy Court's characterization of Universal Towers’ behavior appear unduly harsh or unfair. It is true that the State Court deemed the evidence insufficient to find Bomfim individually liable for breach of fiduciary duty, but it did not laud his management of the Debtor, either. (Doc. 14-2). And the State Court, while sympathizing with Bomfim's predicament, also expressed "concerns about the appearance of a conflict of interest and apparent self-dealing" and suspicion about his "explanation of the drastic reduction of Constrazza's ownership interest ..., the alleged motivation of that decision due to the debt owed to entities controlled by [him], and the purported dire financial situation of [the Debtor]." (Id. at p. 20). Thus, the Bankruptcy Court's comments are not a basis for reversal and/or remand.
C. Equitable Subordination Under 11 U.S.C. § 510(c)
For the reasons provided above, the Court does not need to address the merits of the Bankruptcy Court's Opinion Granting Summary Judgment in Favor of Constrazza and Against Universal Towers and the accompanying Order of Final Judgment, issued in the related adversary proceeding. That ruling, expressly entered in the alternative to the Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor, merely achieves the same result under a different statutory provision.
V. CONCLUSION
For the foregoing reason, it is ORDERED AND ADJUDGED as follows:
1. Constrazza's Motion to Dismiss (Doc. 16) is GRANTED .
2. Alternatively, the appeal of the Bankruptcy Court's Order Allowing Claims of Constrazza as a Class 3B Unsecured Creditor, issued in the bankruptcy proceeding, is DISMISSED .
3. The appeal of the Bankruptcy Court's Opinion Granting Summary Judgment in Favor of Constrazza and the accompanying Order of Final Judgment, issued in the related adversary proceeding, is DISMISSED as moot .
4. The Clerk of Court is DIRECTED to close the file.
DONE AND ORDERED in Orlando, Florida on July 9, 2022.