In Re Linn Energy, LLC

Appellee's BRIEF

S.D. Tex.November 18, 2017

KE 50306306.1 Civil Action No. 6:17-cv-00051 (Bankruptcy Case No. 16-60040) IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF TEXAS VICTORIA DIVISION In re: LINN ENERGY, LLC, et al., Debtors. DANA FRENCH, as representative of the Estate of Clarence J. “Peter” Bennett, Appellant, v. REORGANIZED BERRY DEBTORS and REORGANIZED LINN DEBTORS, Appellees. Appeal from the United States Bankruptcy Court for the Southern District of Texas The Honorable David R. Jones, Chief Judge REORGANIZED LINN DEBTORS’ RESPONSE IN OPPOSITION TO APPELLANT’S OPENING BRIEF Stephen E. Hessler (pro hac vice pending) KIRKLAND & ELLIS LLP and KIRKLAND & ELLIS INTERNATIONAL LLP 601 Lexington Avenue New York, New York 10022 Telephone:(212) 446-4800 Facsimile: (212) 446-4900 stephen.hessler@kirkland.com Anna Rotman (TX Bar No. 24046761) Jamie Alan Aycock (TX Bar No. 24050241) Mark Holden (TX Bar No. 24092531) KIRKLAND & ELLIS LLP and KIRKLAND & ELLIS INTERNATIONAL LLP 609 Main Street, Suite 4500 Houston, Texas 77002 Telephone:(713) 836-3600 Facsimile: (713) 836-3601 anna.rotman@kirkland.com jamie.aycock@kirkland.com mark.holden@kirkland.com Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 1 of 55 KE 50306306.1 Patricia B. Tomasco (TX Bar No. 01797600) Matthew D. Cavenaugh (TX Bar No. 24062656) Jennifer F. Wertz (TX Bar No. 24072822) JACKSON WALKER, LLP 1401 McKinney Street, Suite 1900 Houston, Texas 77010 Telephone:(713) 752-4200 Facsimile: (713) 752-4221 ptomasco@jw.com mcavenaugh@jw.com jwertz@jw.com Attorneys for Appellees Reorganized Linn Debtors Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 2 of 55 i KE 50306306.1 CORPORATE DISCLOSURE STATEMENT Pursuant to Rule 7.1 of the Federal Rules of Civil Procedure, Appellees Reorganized Linn Debtors, by and through its undersigned counsel, certify that Reorganized Linn Debtors have parent corporations as follows: • LINN Energy, Inc. • LINN Energy Holdco LLC: 100% owned by LINN Energy, Inc. at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. • LINN Energy Holdco II LLC: 100% owned by LINN Energy Holdco LLC at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. • LINN Energy Holdings, LLC: 100% owned by LINN Holdco II LLC at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. • LINN Operating, LLC: 100% owned by LINN Holdco II LLC at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. • LINN Marketing, LLC: 100% owned by LINN Holdco II LLC at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. • Blue Mountain Midstream LLC: 100% owned by LINN Holdco II LLC at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. • LINN Midwest Energy LLC: 100% owned by LINN Energy Holdings, LLC at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. • Roan Holdco LLC: 100% owned by LINN Energy Holdings, LLC at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. • Roan Resources LLC: 50% owned by Roan Holdco LLC at the address JPMorgan Chase Tower, 600 Travis, Houston, Texas 77002. Appellees Reorganized Linn Debtors know of no publicly held corporation that owns ten percent or more of its issued and outstanding common stock. Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 3 of 55 ii KE 50306306.1 TABLE OF CONTENTS Page Corporate Disclosure Statement ................................................................................ i I. ISSUES PRESENTED AND STANDARD OF REVIEW ......................... 1 A. Standard of Review ............................................................................... 1 B. Issues Presented ..................................................................................... 2 II. STATEMENT OF THE CASE .................................................................... 3 A. C.J. Berry’s Will and Testamentary Trust ............................................ 4 B. The 1949 Agreement ............................................................................. 5 C. The 1986 Settlement Agreement and 1986 Declaration of Trust ......... 6 D. Linn Energy’s Acquisition of Berry Petroleum ..................................10 E. The Bennett Estate’s Claims Against Linn Energy and LinnCo ........10 F. Prepetition Litigation ...........................................................................11 G. Debtors’ Objections and the Bankruptcy Court’s Ruling ...................12 III. SUMMARY OF THE ARGUMENT .........................................................13 IV. ARGUMENT ................................................................................................14 A. This Court Should Affirm the Bankruptcy Court’s Subordination Because Bennett’s Claims for Deemed Dividend Payments Seek Damages That Arise from the Linn-Berry Transactions, Which Involve the Purchase or Sale of a Security. ......15 1. All parties agree that Bennett’s claims are for “damages.” ......15 2. The Linn-Berry Transactions involved “securities.” ................15 a. The Deemed Dividend Payments fall within the broad residual category because they share the hallmarks of a security. ...................................................18 Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 4 of 55 iii KE 50306306.1 b. The Deemed Dividend Payments are not comparable to any the excluded categories in Section 101(49)(B). ........................................................20 c. Bennett has not identified any characteristics that would disqualify the Deemed Dividend Payments as securities. ....................................................................21 3. The exchange of outstanding shares in the Linn-Berry Transaction was a “purchase or sale” of a security. .................24 4. Bennett’s claims “arise from” the Linn-Berry Transaction. ...............................................................................26 B. Bennett’s Claims Seek Damages That Also Arise From the Stock Bequest by C.J. Berry, Which Likewise Constitutes a Purchase or Sale of a Security. ............................................................30 1. The bequest of Berry stock involved “securities.” ...................30 2. The bequest of Berry stock was a “purchase or sale” of a security. .....................................................................................32 3. Bennett’s claims “arise from” the stock bequest. .....................34 C. In Addition, Bennett’s Claims Arise from the Rescission of a Purchase or Sale of a Security Because They Seek Deemed Dividend Payments Created When Shares Were Retired. ..................36 1. The 1986 settlement was a “rescission” of a purchase or sale of securities. .......................................................................37 2. Bennett’s claims “arise from” the 1986 settlement. .................38 D. The Bankruptcy Court Acted Well Within Its Discretion in Subordinating Bennett’s Claims Without Additional Discovery Based on Bennett’s Own Allegations. ................................................39 1. Discovery was not necessary to satisfy due process because subordination was appropriate even if Bennett’s allegations were assumed to be true. ........................................39 Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 5 of 55 iv KE 50306306.1 2. Bennett has never identified a single disputed issue of material fact that bears on the propriety of subordination. .......40 V. CONCLUSION ............................................................................................42 Certificate of Compliance with Rule 8015(a)(7)(B) ................................................44 Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 6 of 55 v KE 50306306.1 TABLE OF AUTHORITIES Page(s) Cases 9029 Gateway S. Joint Venture v. Eller Media Co., 159 S.W.3d 183 (Tex. App.—El Paso 2004, no pet.) ........................................ 36 In re Am. Hous. Found., 735 F.3d at 155 ............................................................................................. 28, 38 In re Am. Housing Found., 785 F.3d 143 (5th Cir. 2015) .......................................................................passim In re Betacom of Phoenix, Inc., 240 F.3d 823 (9th Cir. 2001) .......................................................................passim In re Bufkin Bros., Inc., 757 F.2d 1573 (5th Cir. 1985) .............................................................................. 1 Carrieri v. Job.com Inc., 393 F.3d 508 (5th Cir. 2004) ................................................................................ 1 In re Caviata Attached Homes, LLC, 481 B.R. 34 (Bankr. App. 9th Cir. 2012) ........................................................... 39 City of Westland Police and Fire Ret. System v. MetLife, Inc., 129 F. Supp. 3d 48 (S.D.N.Y. 2015) .................................................................. 23 Clark v. Johnson, 202 F.3d 760 (5th Cir. 2000) ................................................................................ 2 In re Cloud, 214 F.3d 1350 (5th Cir. 2000) ............................................................................ 38 Crosby v. Louisiana Health Serv. & Indem. Co., 647 F.3d 258 (5th Cir. 2011) ............................................................................ 1, 2 In re Deep Marine Holdings, Inc., 2011 WL 160595 (Bankr. S.D. Tex. Jan. 19, 2011) ............................... 25, 26, 27 Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329 (2d Cir. 2011) .............................................................................. 20 Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 7 of 55 vi KE 50306306.1 In re Geneva Steel Co., 260 B.R. 517 (10th Cir. B.A.P. 2001), aff’d, 281 F.3d 1173 (10th Cir. 2002) ...................................................................................................... 38, 39 In re Geneva Steel Co., 281 F.3d 1173 (10th Cir. 2002) .................................................................... 24, 32 Huang v. EZCorp, Inc., 2016 WL 6092717 (W.D. Tex. Oct. 18, 2016) ................................................... 21 Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985) ............................................................................................ 21 In re Lehman Bros. Holdings Inc., 2017 WL 1718438 .............................................................................................. 26 In re Lehman Bros. Holdings Inc., 519 B.R. 47 (Bankr. S.D.N.Y. 2014), aff’d, 548 B.R. 663 (S.D.N.Y. 2016), aff’d, 855 F.3d 459 (2d Cir. 2017) ......................................... 25 In re Lehman Bros. Holdings Inc., 855 F.3d 459 (2d Cir. 2017) ......................................................................... 18, 19 In re Lehman Bros. Inc., 519 B.R. 434 (S.D.N.Y. 2014), aff’d, 808 F.3d 942 (2d Cir. 2015) ................... 17 LinnCo, LLC v. Clarence J. Bennett, Case No. 1:14-CV-01881-KJM-EPG ........................................................... 11, 12 In re Med Diversified, Inc., 461 F.3d 251 (2d Cir. 2006) ......................................................................... 25, 27 Newton Nat’l Bank v. Newbegin, 74 F. 135 (8th Cir. 1896) .................................................................................... 13 Rockstone Capital LLC v. Metal, 508 B.R. 552 (E.D.N.Y. 2014) ........................................................................... 39 In re SeaQuest Diving, LP, 579 F.3d 411 (5th Cir. 2009) .......................................................................passim In re Telegroup, Inc., 281 F.3d 133 (3d Cir. 2002) ......................................................................... 24, 27 Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 8 of 55 vii KE 50306306.1 In re Touch Am. Holdings, Inc., 381 B.R. 95 (Bankr. D. Del. 2008) ............................................................... 16, 30 Trans–Spec Truck Serv., Inc. v. Caterpillar Inc., 524 F.3d 315 (1st Cir. 2008) ............................................................................... 40 In re Tristar Esperanza Properties, LLC, 782 F.3d 492 (9th Cir. 2015) .............................................................................. 33 Tyner v. Nicholson (In re Nicholson), 435 B.R. 622 (9th Cir. BAP 2010) ..................................................................... 39 United States v. Grant, 114 F.3d 323 (1st Cir. 1997) ............................................................................... 39 In re Walnut Equipment Leasing Co., 1999 WL 1271762 (Bankr. E.D. Pa. 1999) .................................................. 16, 30 In re WorldCom, Inc., 2006 WL 3782712 (Bankr. S.D.N.Y. Dec. 21, 2006) ........................................ 19 Zizza v. Pappalardo (In re Zizza), 500 B.R. 288 (1st Cir. BAP 2013) ...................................................................... 39 Statutes 11 U.S.C. § 101(43) ................................................................................................. 32 11 U.S.C. § 101(49)(A)(ii) ................................................................................. 15, 30 11 U.S.C. § 101(49)(A)(xii), (B)(vi)........................................................................ 20 11 U.S.C. § 101(49)(A)(xiv) ........................................................................ 17, 20, 23 11 U.S.C. § 510(b) ............................................................................................passim DEL. CODE tit. 8, § 151 ............................................................................................. 22 U.C.C § 1-201(29) ................................................................................................... 33 Rules FED. R. BANKR. P. 7012 ........................................................................................... 38 Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 9 of 55 viii KE 50306306.1 FED. R. BANKR. P. 7056 ........................................................................................... 38 FED. R. BANKR. P. 8015(a)(7)(B) ............................................................................. 43 FED. R. BANKR. P. 9014 ..................................................................................... 38-39 FED. R. CIV. P. 12 ............................................................................................... 38, 40 Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 10 of 55 KE 50306306.1 I. ISSUES PRESENTED AND STANDARD OF REVIEW A. Standard of Review “The court reviews the bankruptcy court’s findings of fact for clear error and its conclusions of law de novo.” In re Am. Housing Found., 785 F.3d 143, 151 (5th Cir. 2015). Under the clear error standard, this Court may reverse the Bankruptcy Court’s factual findings only where the Court has a “definite and firm conviction that a mistake has been made.” Id. Only when a bankruptcy court’s “finding of fact is premised on an improper legal standard, or a proper standard improperly applied, that finding is reviewed de novo.” Carrieri v. Job.com Inc., 393 F.3d 508, 517 (5th Cir. 2004). The Fifth Circuit has applied the de novo standard in reviewing a bankruptcy court’s determination that subordination was mandatory under Section 510(b). In re SeaQuest Diving, LP, 579 F.3d 411, 425-26 (5th Cir. 2009). When reviewing mixed questions of law and fact, the Court must defer to the factual determinations of the Bankruptcy Court, but “must independently determine the ultimate legal conclusion adopted by the bankruptcy judge on the basis of the facts found.” In re Bufkin Bros., Inc., 757 F.2d 1573, 1577–78 (5th Cir. 1985). “A court’s decision to limit discovery is reviewed for abuse of discretion.” Crosby v. Louisiana Health Serv. & Indem. Co., 647 F.3d 258, 261–62 (5th Cir. 2011). “Although a court is afforded broad discretion when deciding discovery matters, the court abuses its discretion when its decision is based on an erroneous Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 11 of 55 2 KE 50306306.1 view of the law.” Id. The abuse of discretion standard has also been applied to the review of an underlying court’s decision to grant or deny an evidentiary hearing. Clark v. Johnson, 202 F.3d 760, 765–66 (5th Cir. 2000) (applying abuse of discretion standard to district court’s denial of discovery and evidentiary hearing). B. Issues Presented This appeal presents three issues for this Court’s review: 1. Whether the Bankruptcy Court properly subordinated Bennett’s claims seeking payments that were made as if Bennett received dividends on shares before the merger but that were no longer made following the merger where 11 U.S.C. § 510(b) requires subordination of claims for damages arising from a purchase or sale of securities (de novo). 2. Alternatively, whether the Bankruptcy Court properly subordinated Bennett’s claims seeking payments that were created by agreement when certain shares were retired where 11 U.S.C. § 510(b) requires subordination of claims for damages arising from the rescission of a purchase or sale of securities (de novo). 3. Whether the Bankruptcy Court acted within its discretion in subordinating Bennett’s claims as a matter of law without allowing additional discovery where Bennett failed to identify any disputed material facts related to subordination under 11 U.S.C. § 510(b) (abuse of discretion). Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 12 of 55 3 KE 50306306.1 II. STATEMENT OF THE CASE The Bankruptcy Court subordinated certain claims brought by Dana French, as personal representative of the Estate of Clarence J. “Peter” Bennett (“Bennett”). The subordinated claims are based on alleged torts and breaches of contract by which Bennett seeks payments that were made as if he received dividends on certain shares that no longer exist (“Deemed Dividend Payments”). (Dkt. 8-2, AR02216-18.) Bennett’s underlying interest was bequeathed in 1931 by C.J. Berry who provided as part of his will that 37.5 percent of the dividends on certain shares were to be divided among a group of life beneficiaries, of whom Mr. Bennett was the last survivor. (Id., AR01956-57.) When these shares were retired as part of a settlement agreement in 1986, a Declaration of Trust provided that the Deemed Dividend Payments would still be made as if the shares still existed. (Id., AR01957-58, AR1995-2014, AR02143.) Because the shares no longer existed at the time of the transactions by which Linn Energy acquired Berry Petroleum Company (BPC), the shares were not exchanged for new shares, and following the transactions, the Deemed Dividend Payments were no longer made. (Id., AR01960, AR02144.) The Reorganized Linn Debtors1 objected to Bennett’s claims, among other reasons, on the ground that they should be subordinated under 11 U.S.C. § 510(b) 1 This includes LINN Energy, Inc.; LINN Energy Holdco LLC; LINN Energy Holdco II LLC; LINN Energy Holdings, LLC; LINN Operating, LLC; LINN Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 13 of 55 4 KE 50306306.1 because they are for damages arising from a purchase or sale of securities or rescission of a purchase or sale of securities. (Id., AR01918-2205; Dkt. 9-1, AR01319-1335.) The Bankruptcy Court allowed Bennett to amend a portion of his claims related to alleged misrepresentation and breach of fiduciary duty but sustained the objection as to all other claims. (Dkt. 8-2, AR02216-18.) Bennett argues on appeal that the Bankruptcy Court erred in subordinating these claims and also argues that the Bankruptcy Court acted outside its discretion by not allowing additional discovery before ruling. A. C.J. Berry’s Will and Testamentary Trust The “Last Will and Testament of C.J. Berry” dated March 25, 1927 (the “Will”), was probated by a “Decree of Ratable Distribution” entered by the court on September 29, 1931. (Dkt. 8-2, AR01977) The Decree devised the property of Clarence J. Berry to a number of persons and established a testamentary trust (the “C.J. Berry Trust”), to which was contributed as its corpus 250 shares of the capital stock of the Berry Holding Company (as later converted and exchanged, the “Stock”). (Id.) From this trust corpus, 37.5 percent of the trust income, which was derived from dividends on the Stock, was to be distributed on a semi-annual basis among a Marketing, LLC; Blue Mountain Midstream LLC; LINN Midwest Energy LLC; Roan Holdco LLC; and Roan Resources LLC. Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 14 of 55 5 KE 50306306.1 group of beneficiaries and, after the death of such beneficiaries, to a second group of beneficiaries, for as long as such people should live (collectively, the “Life Beneficiaries”). (Id.) The second group of beneficiaries includes Mr. Bennett and certain other Berry family members. (Id., AR01977-78.) All members of the first group and the second group of beneficiaries are now deceased. (Id., AR01979-81.) The trust provided that upon the death of any Life Beneficiary, his or her share would be divided equally amongst the surviving Life Beneficiaries. (Id.) At the time of the Linn-Berry Transactions (as defined below), Mr. Bennett was the only surviving member of the Life Beneficiaries. (Id., AR01981.) Thus, for any dividend income received from the trust corpus, Mr. Bennett would receive the full 37.5 percent share. (Id., AR01979-81.) B. The 1949 Agreement In 1949, the then-remaining trust corpus, specifically, the Stock, was distributed to the parties named in the Will and in the C.J. Berry Trust (the “Distributees”). (Id., AR01979.) The distributed Stock included a legend stating that the Stock would remain subject to an equitable charge obligating the Distributees of the Stock to pay the portion of the income attributable to the Stock, i.e., the dividends when declared, to the surviving Life Beneficiaries under the C.J. Berry Trust, including Mr. Bennett. (Id.) Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 15 of 55 6 KE 50306306.1 In an untitled agreement dated March 29, 1949 (the “1949 Agreement”) between Berry Holding Company and certain Distributees, including Mr. Bennett, Berry Holding Company agreed to administer and make the dividend payments to the Life Beneficiaries on behalf of the Distributees, as required by the Will and C.J. Berry Trust. (Id.) Nothing in the 1949 Agreement obligated Berry Holding Company to make any payments until and unless Berry Holding Company actually issued dividends with respect to the Stock, however. (Id.) C. The 1986 Settlement Agreement and 1986 Declaration of Trust In April 1985, Victory Oil Company acquired approximately 10.6 percent of the capital stock of Berry Holding Company (the “Victory Shares”). (Id., AR01923.) The Victory Shares were owned by Victory Holding Company and the Crail Fund (collectively, the “Victory Group”). (Id., AR01923.) The Victory Shares remained subject to the equitable charge, which had been noted on each share certificate by legend. (Id., AR01923.) Later that year, Berry Holding Company reorganized and became Berry Petroleum Company (“BPC”), a publicly traded company. (Id., AR01923, AR01978-81.) The Victory Shares were converted into 948,428 shares of the Class A capital stock of BPC at that time. (Id.) In December 1985, the Victory Group sued BPC, its officers, and others in the U.S. District Court for the Central District of California. (Id.) To resolve the Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 16 of 55 7 KE 50306306.1 lawsuit, Victory Group and BPC entered into a settlement agreement titled “Instrument for Settlement of Claims and Mutual Release” dated October 31, 1986 (“1986 Settlement Agreement”). (Id.) Pursuant to the terms of the 1986 Settlement Agreement, BPC assigned to Victory Holding: (a) a 5 percent overriding royalty interest in an oil and gas lease (the “Maxwell Royalty”); and (b) a parcel of improved real property in Napa, California in consideration for the Victory Shares and all other shares in BPC held by the Victory Group. Subject to the Settlement Agreement, the Victory Shares were surrendered to BPC and retired. Following the Settlement Agreement, the Victory Shares no longer existed. (Id., AR01924, AR01999.) In connection with the retirement of the Victory Shares, BPC (as both trustor and trustee) established a trust pursuant to the “Declaration of Trust” dated November 3, 1986 (the “1986 Declaration of Trust”). (Id., AR01978-79, AR01995- 2012.) One of the purposes of the 1986 Declaration of Trust was “to provide a means whereby the Victory Shares may be retired upon consummation of the Settlement and without prejudice to the rights of the Life Beneficiaries.” (Id., AR01998.) Because the Victory Shares were retired by BPC as part of the settlement (id., AR01999-2000), and no longer in existence, the 1986 Declaration of Trust provided for payment to the Life Beneficiaries upon declaration and payment of dividends by Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 17 of 55 8 KE 50306306.1 BPC, (Id., AR02001). The payment would equal the amount of dividends that would have been paid had the Victory Shares not been retired: When BERRY PETROLEUM declares and pays dividends on its capital stock, Trustee, in the discharge of its obligations under the 1949 Agreement, will separately calculate the amount of dividends attributable to the Equitable Charge that would have been paid to the Life Beneficiaries had the Victory Shares not been retired (the “Deemed Dividend Payment(s)”). (Id., AR02001.) The 1986 Declaration of Trust thus created an obligation to pay a Deemed Dividend Payment only when BPC declared and paid dividends. BPC placed the Maxwell Royalty as corpus into the trust to provide the cash flow necessary to make payments, if any, for the Deemed Dividend Payments. (Id., AR02001-02.) The trust established that the 20 percent of the Maxwell Royalty to be paid from the Victory Group was intended to cover a substantial portion of any Deemed Dividend Payments. (Id., AR02000.) The 1986 Declaration of Trust also made explicit that there was no obligation or guarantee for BPC to declare or pay dividends and that the trust did not create any such guarantee: The Deemed Dividend Payments will be made to the Life Beneficiaries only on the Vesting Dates described in Subparagraph 2 below. This Declaration of Trust is not intended to and shall not constitute a guarantee that BERRY PETROLEUM will continue to declare and pay dividends on its capital stock, and if such dividends are reduced or eliminated altogether in the future, payments to the Life Beneficiaries will correspondingly be reduced or eliminated. (Id., AR02002.) Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 18 of 55 9 KE 50306306.1 The 1986 Declaration of Trust gave the trustee wide latitude in interpreting the trust document and in making decisions under the document. The trustee was given the power to construe the 1986 Declaration of Trust, and the trustee’s reasonable construction was made binding: Trustee shall have the power to construe the Declaration of Trust after obtaining responsible legal advice, and the reasonable construction of the Declaration of Trust thus adopted shall be binding on all beneficiaries hereunder and other claimants to any trust property. (Id., AR02008.) Mr. Bennett did not object to the surrender and/or retirement of the Victory Shares. He did not object to the Settlement Agreement or the 1986 Declaration of Trust. Mr. Bennett accepted the Deemed Dividend Payments under the 1986 Declaration of Trust when dividends were issued on BPC capital stock. Neither the Settlement Agreement nor the 1986 Declaration of Trust have been amended or assigned away. Berry Petroleum Company, LLC (“Berry”) is now the successor party to the Settlement Agreement and the 1986 Declaration of Trust, and stands in the shoes of BPC as trustor and trustee. Under the 1986 Declaration of Trust, BPC was required to make a Deemed Dividend Payment only when BPC paid a dividend. BPC had no obligation to pay a dividend. (Id., AR02002.) Berry, as trustee, has the right to construe the 1986 Declaration of Trust reasonably, and such reasonable constructions are binding on Mr. Bennett. (Id., AR02008.) Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 19 of 55 10 KE 50306306.1 D. Linn Energy’s Acquisition of Berry Petroleum In December 2013, through a series of transactions (the “Linn-Berry Transactions”), Linn Energy acquired BPC as a wholly owned subsidiary. Through these transactions, BPC reorganized to become Berry. (Id., AR01926, AR02016- 2125; Dkt. 9-1, BR00012-14.) Pursuant to the Linn-Berry Transactions, Linn Energy agreed to exchange outstanding issued shares of BPC Class A and Class B Common Stock for common shares in LinnCo on a 1:1.68 ratio. (Dkt. 8-2, AR01980-81, AR02016-2125.) E. The Bennett Estate’s Claims Against Linn Energy and LinnCo Because the Victory Shares did not exist at the time of the Linn-Berry Transactions, neither the Victory Shares nor the Deemed Dividend Payment were converted into shares in Linn Energy or LinnCo. (Id., AR01960, AR02144.) Bennett asserts that either Linn Energy or LinnCo was required to pay Mr. Bennett a dividend based on LinnCo’s issuance of dividends. Bennett’s claims are based on breach of contract, intentional and negligent misrepresentation, financial elder abuse, and breach of fiduciary duty. (Id., AR01981-92.) While the acquisition was pending, LinnCo and Linn Energy sought the support of certain BPC shareholders, including Mr. Bennett. Based on a request from Mr. Bennett’s counsel, in-house counsel for LinnCo and Linn Energy wrote in an email to Mr. Bennett’s counsel: “While we are not obligated to carry over any Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 20 of 55 11 KE 50306306.1 restrictive legends under the merger agreement, we will agree to carry forward the Class B legends in order to secure Mr. Bennett’s voting agreement in a timely manner.” (Id., AR02127.) Bennett also bases the merits of his claims in part on a letter purportedly sent by a former employee of BPC. (Id., AR01986, AR02136-37.) Bennett asserts that this letter suggests that Mr. Bennett would be, after the merger, entitled to a certain amount of dividends based on LinnCo stock based on the 1986 Settlement Trust. (Id., AR002136-37.) The Reorganized Linn Debtors contend that this employee had no authority to bind Linn Energy, LinnCo, BPC, Berry, or the trustee. (Id., AR01927.) As support for this position, they have pointed to the fact that the letter itself does not purport to be a binding representation and presents itself only as an estimation that required verification by Linn. (Id., AR01927, AR02137.) In any event, they maintain this has no bearing on subordination. (Id.) F. Prepetition Litigation In November 2014, LinnCo and Linn Energy filed a complaint for declaratory relief in the United States District Court for the Eastern District of California, commencing the case LinnCo, LLC v. Clarence J. Bennett, Case No. 1:14-CV- 01881-KJM-EPG (the “Bennett Estate Action”). In December 2015, the Bennett Estate filed its first amended counterclaims (the “First Amended Counterclaim”) adding Berry as a counter-defendant and asserting six claims for relief: (a) “Breach Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 21 of 55 12 KE 50306306.1 of Merger Agreement-Against Linn,” (b) “Intentional Misrepresentation-Against Linn,” (c) “Negligent Misrepresentation-Against Linn,” (d) “Financial Elder Abuse- Against Linn,” (e) “Breach of Fiduciary Duty-Against Berry,” and (f) “Breach of Contract-Against Berry” (collectively, the “Claims”). (Id., AR01975-94.) As of Mr. Bennett’s death in June 2015, Bennett asserts that LinnCo owed him dividends in the aggregate amount of $9,301,903.35. (Dkt. 8-2, AR01949-1953.) G. Debtors’ Objections and the Bankruptcy Court’s Ruling On May 26, 2017, the Reorganized Linn Debtors objected to Bennett’s claims on the ground that (1) as written, they should be recharacterized as equity interests, and (2) the claims should be subordinated under Section 510(b) of the Bankruptcy Code. (Dkt. 8-2, AR01918-2137.) Bennett filed a response to the objection on July 17, 2017. (Id., AR02138-88.) The Reorganized Linn Debtors and Berry Petroleum Company, LLC separately filed reply briefs on September 22, 2017. (Id., AR02189- 2205; Dkt. 9-1, BR01319-35.) After oral argument, the Bankruptcy Court issued an order sustaining the objection in part. (Dkt. 8-2, AR02216-18.) In particular, the court ruled that Bennett was allowed to amend the portion of those claims regarding LinnCo’s and Linn Energy’s alleged misrepresentation and regarding Berry’s alleged breach of fiduciary duty. (Id., AR02217 at ¶ 2.) The order subordinated all other claims by Bennett pursuant to Section 510(b) of the Bankruptcy Code. (Id., AR02217 at ¶ 3.) Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 22 of 55 13 KE 50306306.1 III. SUMMARY OF THE ARGUMENT From 1948 until 2013 Bennett received payments exactly as if he were receiving dividends as a Berry shareholder. For more than 60 years, he enjoyed the “upside” of owning Berry. He owned a 37.5% equitable charge on certain Berry shares that were bequeathed to him by Berry’s famously generous founder, C.J. Berry. Bennett did not share his portion of Berry’s profits with Berry’s creditors— and rightfully so. In bankruptcy, however, as a matter of absolute priority, unless creditors are paid in full, equity and equity-like claims will not be paid. For this reason, for more than a century, courts have viewed with great suspicion all attempts to “lay aside the garb of a stockholder, on one pretense or another, and to assume the role of a creditor.” Newton Nat’l Bank v. Newbegin, 74 F. 135, 140 (8th Cir. 1896). Bennett claims he is owed certain “Deemed Dividend Payments”, payments that were distributed to Bennett exactly as if they were dividends being distributed to shareholders. The Bankruptcy Court did not need to resolve any factual issues to conclude that in these circumstances the claims brought by Bennett -- regardless of their merits -- are not simply plain-vanilla unsecured claims. The Bankruptcy Court did not need to look beyond Bennett’s proof of claim and the documents cited in the proof of claim to rule that the claims were properly subordinated to general unsecured claims under Section 510(b) of the Bankruptcy Code. Bennett’s claims are for damages arising from either the purchase or sale of a security or the rescission Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 23 of 55 14 KE 50306306.1 of the purchase or sale of a security. No additional discovery was needed for the Bankruptcy Court to rule on the objection because none of the factual disputes to which Bennett pointed were material to whether the claims should be subordinated. Because in substance the claims inherently fall within the reach of Section 510(b), Bennett focuses nearly half of his argument on process. But there are no material facts in dispute with respect to subordination. Neither discovery nor an evidentiary hearing were necessary because Bennett’s own allegations compel the conclusion that the claims are subject to mandatory subordination. IV. ARGUMENT There is no need for the Court to look beyond the proof of claim and the documents cited in the proof of claim to conclude that Bennett’s claims should be subordinated under Section 510(b) of the Bankruptcy Code. Section 510(b) of the Bankruptcy Code’s “distinct categories of claims” include: (A) “a claim for damages arising from the purchase or sale of a security of the debtor (the damages category)” and (B) “a claim arising from rescission of a purchase or sale of a security of the debtor (the rescission category).” SeaQuest, 579 F.3d at 418. Bennett’s own allegations show that his claims fall within both categories. Accordingly, the Court should affirm. Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 24 of 55 15 KE 50306306.1 A. This Court Should Affirm the Bankruptcy Court’s Subordination Because Bennett’s Claims for Deemed Dividend Payments Seek Damages That Arise from the Linn-Berry Transactions, Which Involve the Purchase or Sale of a Security. Bennett’s claims meet all three prongs of the test to determine whether they should be subordinated under the “damages category” because the claims (1) are for “damages,” (2) involve “securities,” and (3) “arise from” a “purchase or sale” having a nexus with those securities. In re Am. Hous. Found., 785 F.3d 143, 153–56 (5th Cir. 2015). 1. All parties agree that Bennett’s claims are for “damages.” The first prong of the test is not in dispute given that Bennett admits that “Appellant seeks damages arising out of a right to payment he was bequeathed in 1931.” (Dkt. 13 at 39.) Before the Bankruptcy Court Bennet similarly agreed that “it is undeniable that Creditor’s underlying claim seeks damages” and that “claims such as fraud or breach of contract”—like the breach of contract claim brought by Bennett—“may be subordinated.” (Id., AR02153.) 2. The Linn-Berry Transactions involved “securities.” First, there can be no dispute that because the Linn-Berry Transactions involved an exchange of stock, they involved “securities.” Specifically, the Linn- Berry Transactions were a stock-for-stock exchange in which Linn Energy agreed to exchange outstanding issued shares of BPC Class A and Class B Common Stock for common shares in LinnCo at a specified ratio. (Dkt. 8-2, AR01980-81, AR02016- Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 25 of 55 16 KE 50306306.1 2125.) As Bennett notes, the Bankruptcy Code defines the term “security” as including “stock.” (Dkt. 13 at 28–29 (citing 11 U.S.C. § 101(49)(A)(ii))). Accordingly, Bennett does not—and could not—dispute that the Linn-Berry Transactions involved “securities” as that term is defined for purposes of mandatory subordination. See 11 U.S.C. § 510(b). Instead, Bennett attempts to argue that this prong is nonetheless not met if the securities involved were not owned by Bennett. (Dkt. 13 at 36.) But the caselaw makes clear that Bennett need not have owned the “securities” at issue for the claims to be subordinated under Section 510(b). “[T]he language of § 510(b) does not limit its application to any particular type of claimant but, rather, focuses on the type of claim possessed.” In re Walnut Equipment Leasing Co., 1999 WL 1271762, *6 (Bankr. E.D. Pa. 1999); accord In re Betacom of Phoenix, Inc., 240 F.3d 823, 829 (9th Cir. 2001) (“Nothing in § 510(b)’s text requires a claimant to be a shareholder.”); In re Touch Am. Holdings, Inc., 381 B.R. 95, 104 (Bankr. D. Del. 2008) (“Section 510(b) is not limited to shareholder claims.”). For example, in Betacom, the Ninth Circuit affirmed the subordination of a claim for breach of a merger agreement for failure to convey shares, holding that subordination was proper even where claimant never received the rights and privileges of ownership of the debtor’s stock. 240 F.3d at 829. In so holding, the court rejected the claimant’s argument that only bona fide shareholders’ claims come within the ambit of the Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 26 of 55 17 KE 50306306.1 statute. Id. Accordingly, whether Bennett owned stock that was exchanged as part of the Linn-Berry transactions has no bearing on whether this prong of the test is met. Second, aside from the fact that the Linn-Berry Transactions involved securities in that they involved a transfer of stock, they also involved securities insofar as Bennett claims that following the Linn-Berry Transactions there exists an obligation to pay Deemed Dividend Payments that was not met. Because the Victory Shares did not exist at the time of the Linn-Berry Transactions, neither the Victory Shares nor the Deemed Dividend Payments were converted into shares in Linn Energy or LinnCo. (Id., AR01960, AR02144.) The parties agree that the Deemed Dividend Payments do not match any of the specific examples on either list of those interests included or excluded from the definition of “security” in the Bankruptcy Code. The relevant characteristics of the Deemed Dividend Payments are not in dispute, however, and demonstrate that they are covered by the residual clause of Section 101(49)(A)(xiv) and constitute a security. It is telling that in arguing that the Deemed Dividend Payments do not qualify as a “security”, Bennett does not point to any factual issues that must be resolved to determine whether the they constitute a security under the Bankruptcy Code. (Dkt. 13 at 27-33.) Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 27 of 55 18 KE 50306306.1 a. The Deemed Dividend Payments fall within the broad residual category because they share the hallmarks of a security. Beyond the specific examples of securities identified in the Bankruptcy Code, the “broad residual category” that is explicitly identified in Section 101(49)(A)(xiv) covers any “other claim or interest commonly known as ‘security.’” SeaQuest, 579 F.3d at 418; 11 U.S.C. § 101(49)(A)(xiv). In enacting Section 510(b) of the Bankruptcy Code, “Congress’s larger concern was the effort of disaffected stockholders to recapture their investments from the debtors, regardless of the exact nature of their claims.” SeaQuest, 579 F.3d at 421; see also In re Lehman Bros. Inc., 519 B.R. 434, 451 (S.D.N.Y. 2014) (“[W]hen a provision such as section 510(b) plainly incorporates a broad standard, textual analysis has a tendency to miss the forest for the trees.”), aff’d, 808 F.3d 942 (2d Cir. 2015) (internal quotation marks and citation omitted). The Deemed Dividend Payments are covered by the broad residual category for a security because Bennett had the very same benefits as shareholders with regard to whether a dividend would be declared or paid, which certainly gave him greater financial expectations than a creditor. Bennett argues that the “only tangential connection” between the Deemed Dividend Payments and a security is “the method by which such payments were to be calculated” because this was “based on the dividends declared by Berry.” (Dkt. 13 at 30-31.) But the “method” used to Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 28 of 55 19 KE 50306306.1 determine whether and what payments were to be made to Bennett demonstrates that just like a shareholder there was no guarantee that Bennett would be paid and just like a shareholder Bennett had the potential for receiving unlimited payments exactly as if he received dividends. Under the Bankruptcy Code, interests are securities if they “bear hallmarks of interests commonly known as securities.” In re Lehman Bros. Holdings Inc., 855 F.3d 459, 475 (2d Cir. 2017). As the Second Circuit has explained, “[o]n these occasions” when interests do “not perfectly match any of the specific examples in either list,” “it should be borne in mind that the interests specifically enumerated in subsection (A) do not exhaust the universe of securities within the meaning of the Bankruptcy Code.” In re Lehman Bros. Holdings Inc., 855 F.3d at 473. Indeed, the Fifth Circuit has stated that this category is a “broad residual category.” SeaQuest, 579 F.3d at 418. “The most important policy rationale behind Section 510(b) is that claims seeking to recover a portion of claimants’ equity investments should be subordinated.” In re Am. Hous. Found., 785 F.3d at 153 (alterations and internal quotation marks omitted). And where the claimant holds greater financial expectations than a creditor, as is the case here, courts interpreting the Bankruptcy Code hold that the claim is a “security” under Section 510(b). See In re WorldCom, Inc., 2006 WL 3782712, at *6 (Bankr. S.D.N.Y. Dec. 21, 2006) (“So long as the Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 29 of 55 20 KE 50306306.1 claimant’s interest enabled him to participate in the success of the enterprise and the distribution of profits, the claim will be subordinated pursuant to section 510(b).”); In re KIT digital, Inc., 497 B.R. 170, 183 (Bankr. S.D.N.Y. 2013), as corrected (Dec. 2, 2013) (subordinating certain claims under section 510(b) of the Bankruptcy Code after analyzing the “bundle of rights [the agreement] contained” and finding that the claimant had “the risks and rewards of equity ownership” where creditors could take solace that the debtors had no requirement to “use precious cash, if [the debtor’s] solvency or liquidity was in jeopardy”). Here, Bennett would only receive the Deemed Dividend Payments when Berry declared and paid dividends. Accordingly, Bennett had the same risk as shareholders that a dividend would not be declared or paid. There can be no question that Bennett had greater financial expectations than a creditor. Because the Deemed Dividend Payments share the “hallmarks” of securities, they fall into the broad residual category under Section 101(49)(A)(xiv) of the Bankruptcy Code. b. The Deemed Dividend Payments are not comparable to any the excluded categories in Section 101(49)(B). Bennett’s comparisons to items that are not included in the definition of security fall short. First, Bennett contends that the claims can be compared to “currency,” but does not provide any plausible explanation for this comparison. (Dkt. 13 29-30.) Just as the fact that a shareholder is paid dividends does not make Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 30 of 55 21 KE 50306306.1 his interest comparable to currency, nor does the mere fact that Bennett received “payments” make his interest comparable to currency. Second, Bennett attempts to compare the Deemed Dividend Payments to “an investment contract or certificate of interest or participation in a profit-sharing arrangement” of a kind that “is not required to be subject of a registration statement filed with the Securities and Exchange Commission.” (Dkt. 13 at 29-31 (citing 11 U.S.C. § 101(49)(A)(xii), (B)(vi)).) But profits and dividends are not the same thing. There was no agreement by Berry to share its profits with Bennett. Berry could earn profits without sharing them with Bennett. Just like a shareholder, Bennett would not share in those profits unless a dividend was declared and paid. c. Bennett has not identified any characteristics that would disqualify the Deemed Dividend Payments as securities. Bennett attempts to sidestep the real test for whether the Deemed Dividend Payments are covered by the residual category by focusing on irrelevant differences between the Deemed Dividend Payments and certain characteristics of stock identified in Landreth Timber Co. v. Landreth, 471 U.S. 681, 686 (1985). Aside from the fact that the relevant test is not whether the Deemed Dividend Payments share the primary hallmarks of stock, that case involved federal securities laws and cannot be used to “supplant” the relevant definition from the Bankruptcy Code. Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V., 651 F.3d 329, 339 n.4 (2d Cir. 2011). And even Landreth pointed out that “we wish to make clear here that Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 31 of 55 22 KE 50306306.1 these characteristics are those usually associated with common stock, . . . [v]arious types of preferred stock may have different characteristics.” Landreth, 471 U.S. at 686 n.2. Certainly, the Landreth discussion of common stock is not determinative of what constitutes a “security” under the Bankruptcy Code. In any event, none of the characteristics Bennett identified as distinguishing the Deemed Dividend Payments from common stock in Landreth disqualify the Deemed Dividend Payments from being securities. First, Bennett argues the Deemed Dividend Payments cannot be a security because they did not include voting rights (Dkt. 13 at 32), but non-voting securities—whether it be non-voting common stock, non-voting preferred stock, or any other non-voting security—are common. See, e.g., Huang v. EZCorp, Inc., 2016 WL 6092717, at *1 n.2 (W.D. Tex. Oct. 18, 2016) (noting that the company had “two classes of common stock, Class A Non- Voting Common Stock, which is publicly traded on the NASDAQ, and Class B Voting Stock, all of which is beneficially owned by [an individual]”); see also DEL. CODE tit. 8, § 151 (“Every corporation may issue 1 or more classes of stock . . . , any or all of which classes may be of stock with . . . voting powers, full or limited, or no voting powers.” (emphasis added)). Second, Bennett argues that he “did not have the same risk and benefit expectations that a shareholder would have had” because he “had a right to an income stream.” (Dkt. 13 at 32.) But Bennett’s argument completely ignores the Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 32 of 55 23 KE 50306306.1 facts of this case in that the 1986 Declaration of Trust explicitly disclaims any guarantee of payment: “This Declaration of Trust is not intended to and shall not constitute a guarantee that [Berry] will continue to declare and pay dividends on its capital stock, and if such dividends are reduced or eliminated altogether in the future, payments to the Life Beneficiaries will correspondingly be reduced or eliminated.” (Dkt. 8-2, AR02002.) Rather, because the stream of Deemed Dividend Payments was tied exactly to the dividends that Berry declared and paid, Bennett had similar risk and benefit expectations as shareholders. Third, Bennett argues that his interest is not a security on the grounds that he “did not ‘bargain’ for anything” but instead “consented to the retirement of shares” subject to the right to receive the Deemed Dividend Payments. (Dkt. 13 at 32.) But how Bennett received his interest in the Deemed Dividend Payments does not factor into whether his interest constitutes a security and Bennett has not cited any authority that suggests otherwise. Fourth, Bennett argues that the Deemed Dividend Payments are not a security because “[h]e had no right to redeem his right . . . for a sum certain, and his right to payment did not appreciate over time.” (Dkt. 13 at 32.) But there is no requirement that a security must be redeemable for a “sum certain” and and Bennett cites not authority as support. Further, the argument that the Deemed Dividend Payments differ materially from a stock on the ground that they could not be exchanged for a Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 33 of 55 24 KE 50306306.1 sum certain and did not appreciate is belied by the fact that one of the fundamental ways to value an equity security is the dividend discount model, which discounts the stream of future dividend payments to the present. See, e.g., City of Westland Police and Fire Ret. System v. MetLife, Inc., 129 F. Supp. 3d 48, 70 (S.D.N.Y. 2015) (noting that the dividend discount model is commonly used “to perform valuations of companies, their stock prices, and the like” (citing Mario Massari et al., The Valuation of Financial Companies (2014)). If Berry increased its dividend payments, then the value of the stream of Deemed Dividend Payments would increase, just as it would have for stock. There can be no question that the claims necessarily constitute a security under the broad residual category of Section 101(49)(A)(xiv). 3. The exchange of outstanding shares in the Linn-Berry Transaction was a “purchase or sale” of a security. Courts interpreting the statutory language of Section 510(b) of the Bankruptcy Code have consistently found that the provision should be interpreted broadly to include transactions other than just a purchase or sale. See, e.g., SeaQuest, 579 F.3d at 418. In SeaQuest, the Fifth Circuit thoroughly analyzed Section 510(b) of the Bankruptcy Code and the holdings of the Second, Third, Ninth, and Tenth Circuit Courts of Appeal. 579 F.3d at 421. The Fifth Circuit noted that “‘[w]hen an investor seeks pari passu treatment with the other creditors, he disregards the absolute priority rule, and attempts to establish a contrary principle that threatens to swallow Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 34 of 55 25 KE 50306306.1 up this fundamental rule of bankruptcy law.’” Id. at 421–22 (quoting Granite Partners, 208 B.R. at 344). The purpose behind the broad application is that a claim on account of equity cannot be bootstrapped to parity with unsecured creditors. See In re Telegroup, Inc., 281 F.3d 133, 142 (3d Cir. 2002) (“Congress enacted § 510(b) to prevent disappointed shareholders from recovering their investment loss by using fraud and other securities claims to bootstrap their way to parity with general unsecured creditors in a bankruptcy proceeding.”); see also In re Geneva Steel Co., 281 F.3d 1173, 1177 (10th Cir. 2002) (“[I]f a claim (usually alleging some sort of securities-related fraud or similar injury) falls within the reach of the statute, it is treated on an inferior or equal basis with the security from which the claim arose. That is, a fraud claim arising from the purchase or sale of a security is treated not as a general unsecured claim but rather as a claim below or equivalent to the rights afforded by the underlying security.”) (internal quotation marks and citations omitted). As a result of this interpretation, courts have interpreted Section 510(b) of the Bankruptcy Code to include damages beyond only those arising from actual purchases of a security. See, e.g., In re Deep Marine Holdings, Inc., 2011 WL 160595, at *6 (Bankr. S.D. Tex. Jan. 19, 2011) (noting that courts construe section 510(b) of the Bankruptcy Code “broadly to include more than claims arising from the actual purchase or sale of a security”). Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 35 of 55 26 KE 50306306.1 Here, a stock-for-stock exchange—which involves an exchange of value in a transaction involving securities—is without question a “purchase or sale” of securities within the meaning of Section 510(b). See In re Med Diversified, Inc., 461 F.3d 251, 254–55 (2d Cir. 2006) (holding that “a claim for damages based on the debtor’s failure to issue shares of its common stock in exchange for the claimant’s stock in another company” was subject to mandatory subordination, and noting that “a claimant need not be an actual shareholder for his claim to be covered by the statute”); cf. In re Lehman Bros. Holdings Inc., 519 B.R. 47, 60 (Bankr. S.D.N.Y. 2014) (“[C]ourts routinely have held that employees who received equity awards as part of their compensation purchased those securities with their labor.”), aff’d, 548 B.R. 663 (S.D.N.Y. 2016), aff’d, 855 F.3d 459 (2d Cir. 2017). 4. Bennett’s claims “arise from” the Linn-Berry Transaction. In implementing the broad interpretation of Section 510(b), the Fifth Circuit has stated that the third step for subordination—i.e., whether of a claim “arises from” the purchase or sale of a security— only requires “‘some nexus or causal relationship between the claim and the sale.’” In re Am. Hous. Found., 785 F.3d at 155 (quoting SeaQuest, 579 F.3d at 421.). That is, there must be some link between a securities transaction and the alleged injury. In re Lehman Bros. Holdings Inc., 2017 WL 1718438, at *12 (“A claim (no matter how it is characterized by the claimant) arises Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 36 of 55 27 KE 50306306.1 from a securities transaction so long as the transaction is part of the causal link leading to the alleged injury.”). And in particular, where claims are linked to an alleged injury resulting from an acquisition or merger, courts have held without hesitation that such claims satisfy the “arise from” analysis. For example, in Deep Marine Holdings, the Bankruptcy Court for the Southern District of Texas held that claims based on litigation for fraud, among other causes of action, were subordinated pursuant to section 510(b) of the Bankruptcy Code. 2011 WL 160595, at *6. Prior to debtor Deep Marine Technology Incorporated’s petition, former minority shareholders filed a lawsuit in the Delaware Court of Chancery. The minority shareholders filed claims on account of alleged fraud and alleged the majority shareholders had “confiscated” the minority shareholders’ shares in a merger, among others. Id. at *1. Because the claims were causally linked to the minority shareholders’ status as Deep Marine Technology Incorporated shareholders, the court found that “mandatory subordination [was] required.” Id. at *7.2 2 See also In re Betacom of Phoenix, Inc., 240 F.3d 823 (9th Cir. 2001) (holding that claims were subject to mandatory subordination pursuant to section 510(b) of the Bankruptcy Code where an equityholder claimed debtors “unlawfully converted [the equityholder’s] interest” by breaching a merger agreement and not delivering shares to the equityholder); In re Med Diversified, Inc., 461 F.3d 251, 253–56 (2d Cir. 2006) (holding that section 510(b) of the Bankruptcy Code requires subordination of the “claim of a former executive employee of the debtor, when the claim is based on the debtor’s failure to issue its common stock to the executive in exchange for his stock in another company, as provided by a Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 37 of 55 28 KE 50306306.1 There can be no serious dispute that the Fifth Circuit’s standard requiring “some nexus or causal relationship” exists between Bennett’s claims and the Linn- Berry Transaction. In re Am. Hous. Found., 785 F.3d at 155. There would not be any claims against Linn Energy or LinnCo if there had been no merger. Particularly revealing, each of the claims against Linn Energy or LinnCo in the First Amended Counterclaim assert as damages the amount of dividends purportedly owed from the date of the Linn-Berry Transaction in 2013 until Bennett’s death in 2015. (Dkt. 8- 2, AR01960-71.) The Berry Claim, which relates to the fifth and sixth Causes of Action, likewise meets this last prong. Bennett alleges that “Berry violated its fiduciary duty to Mr. Bennett as a Beneficiary of the Victory Trust by engaging and participating in an agreement and transaction” and that “Berry was responsible to make Deemed Dividend payments on the Victory Shares to Mr. Bennett” and “breached its obligations to Mr. Bennett.” (Dkt. 8-2, AR01969-71.) These claims fit squarely within the bounds of precedent for claims that have been subordinated. For example, the Fifth Circuit had “little difficulty finding” the required “nexus” where the claimant asserted that the debtor “breached its fiduciary duties by allowing the funds termination agreement”); In re Telegroup, Inc., 281 F.3d at 136 (“[A] claim for breach of a provision in a stock purchase agreement . . . ‘arises from’ the purchase of the stock for purposes of § 510(b), and therefore must be subordinated.”). Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 38 of 55 29 KE 50306306.1 he invested . . . to be commingled and misappropriated.” In re Am. Hous. Found., 735 F.3d at 155. The Fifth Circuit’s standard of “some nexus or causal relationship” clearly exists between the claims subordinated by the Bankruptcy Court and the Linn-Berry Transaction. Id. All of Bennett’s claims that were subordinated relate to the treatment of the Deemed Dividend Payments after the Linn-Berry Transactions. This creates the causal link: but for the Linn-Berry Transactions, Bennett would have no purported cause of action. Accordingly, the claims fall within the “arise from” language of section 510(b) of the Bankruptcy Code. The policy behind Section 510(b) of the Bankruptcy Code is to ensure that the absolute priority rule is not violated. In Chapter 11 cases, many creditors owed money by debtors will receive only a fraction of the face value of their claims. Bennett, who was paid Deemed Dividend Payments exactly as if he were a shareholder who received dividends, purports to be owed some of those payments and asks that his claims be treated pari passu with creditors. Assuming for the sake of argument that the Debtors owed Bennett any Deemed Dividend Payments, the Bankruptcy Code mandates that any claim on account of those unpaid Deemed Dividend Payments be subordinated to other creditors’ claims, such as claims for unpaid interest, principal, and general claim payments of creditors. Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 39 of 55 30 KE 50306306.1 Bennett should not be permitted to use this litigation to bootstrap his way to general unsecured status. Despite Bennett’s wishes for a full unsecured claim, because the Claims satisfy all of the prongs of the Fifth Circuit’s step-by-step subordination test, the Bankruptcy Court properly subordinated the Claims pursuant to Section 510(b) of the Bankruptcy Code, and this Court should affirm. B. Bennett’s Claims Seek Damages That Also Arise From the Stock Bequest by C.J. Berry, Which Likewise Constitutes a Purchase or Sale of a Security. The Bankruptcy Court’s subordination decision should be affirmed because Bennett’s claims for Deemed Dividend Payments also meet the criteria under 11 U.S.C. § 510(b) for subordination because they arise from the stock bequest by C.J. Berry. There is no question that the first two prongs are met because (1) Bennett agrees the claims are for damages (Dkt. 13 at 39), and (2) there is no question that the Berry stock constitutes a security. With regard to the third prong, the bequest qualifies as a purchase and the “arise from” requirement is met because Bennett’s claims, which seek to recover the very interest he was bequeathed, have the requisite a nexus or causal connection. 1. The bequest of Berry stock involved “securities.” Bennett agrees that his claims seek Deemed Dividend Payments, which are “damages arising out of a right to payment he was bequeathed in 1931” as part of the bequest of stock by C.J. Berry. (Dkt. 13 at 39, 11-13.) Because this bequest Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 40 of 55 31 KE 50306306.1 “involved” securities, there is no question that the first prong of the subordination test is met. First, because the Berry stock that was bequeathed constitutes a “security” under the Bankruptcy Code, 11 U.S.C. § 101(49)(a)(ii) (quoted in Dkt. 13 at 28), the first prong of the test for subordination is met. Subordination under 11 U.S.C. § 510(b) does not require that Bennett must have owned Berry stock or any securities for this prong to be met. “[T]he language of § 510(b) does not limit its application to any particular type of claimant but, rather, focuses on the type of claim possessed.” In re Walnut Equipment Leasing Co., 1999 WL 1271762, *6 (Bankr. E.D. Pa. 1999); accord In re Betacom of Phoenix, Inc., 240 F.3d 823, 829 (9th Cir. 2001) (“Nothing in § 510(b)’s text requires a claimant to be a shareholder.”); In re Touch Am. Holdings, Inc., 381 B.R. 95, 104 (Bankr. D. Del. 2008) (“Section 510(b) is not limited to shareholder claims.”). For example, in Betacom, the Ninth Circuit affirmed the subordination of a claim for breach of a merger agreement for failure to convey shares, holding that subordination was proper even where claimant never received the rights and privileges of ownership of the debtor’s stock. 240 F.3d at 829. In so holding, the court rejected the claimant’s argument that only bona fide shareholders’ claims come within the ambit of the statute. Id. Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 41 of 55 32 KE 50306306.1 Second, the first prong of the test for subordination also is met because the Deemed Dividend Payments that Bennett seeks themselves constitute a security. See supra Section IV.A.2. 2. The bequest of Berry stock was a “purchase or sale” of a security. Bennett argues that the second prong of the test is not met because the interest on which the claims are based was “bequeathed -- not sold”. (Dkt. 13 at 35.) But the only authority Bennett cites as support -- Black’s Law Dictionary -- directly contradicts Bennett’s position. Id. at 34-35. As quoted in Bennett’s brief, “purchase” is defined broadly to include “[t]he acquisition of an interest in real or personal property by sale, discount, negotiation, mortgage, pledge, lien, issue, reissue, gift, or any other voluntary transaction.” Id. at 34 (quoting PURCHASE, Black’s Law Dictionary (10th ed. 2014)). Moreover, “gift” is defined as: “1. The voluntary transfer of property to another without compensation. 2. A thing so transferred.” GIFT, Black’s Law Dictionary (10th ed. 2014) (emphasis added). There is no reasonable dispute that the terms “gift” and “any other voluntary transaction” cover a bequest. Black’s Law Dictionary, the authority on which Bennett relies, defines a “bequest” as a specific type of gift or voluntary transaction that is given by will: “1. The act of giving property (usu. personal property or money) by will. 2. The money or other property that a person arranges to give to someone or an organization upon death; esp., Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 42 of 55 33 KE 50306306.1 property (usu. personal property or money) disposed of in a will.” BEQUEST, Black’s Law Dictionary (10th ed. 2014) (emphasis added). Setting aside Black’s Law Dictionary, the only authority Bennett cites for the claim that the Berry bequest does not constitute a purchase or sale, the Bankruptcy Code and relevant caselaw separately make clear that a bequest qualifies as a purchase or sale. First, although the Bankruptcy Code does not define the term “purchase,” it defines a “purchaser” as a “transferee of a voluntary transfer, and includes immediate or mediate transferee of such transferee.” 11 U.S.C. § 101(43) (emphasis added). “This definition encompasses all voluntary transferees, including transferees by gift or by sale.” Geneva Steel, 260 B.R. at 254 (emphasis added; internal quotations omitted); see also Frankun . Int’l Wireless Commc’ns Holdings, Inc. (In re Int’l Wireless Commc’ns Holdings, Inc.), 68 Fed. Appx. 275, 277 (3d Cir. 2003) (“Th[e Bankruptcy Code’s] low bar easily makes F&W a purchaser of IWCH shares”; rejecting argument that claimant “did not ‘purchase’ the shares and that it simply ‘agreed to receive IWCH stock.’”). The Bankruptcy Code’s definition is based upon the definitions of “purchase” and “purchaser” found in the Uniform Commercial Code. 2 COLLIER ON BANKRUPTCY 101.43 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). Thus, Section 1-201(29) of the Uniform Commercial Code, like Black’s Law Dictionary, defines “purchase” broadly as “taking by ale, discount, negotiation, mortgage, pledge, lien, security Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 43 of 55 34 KE 50306306.1 interest, issue or re-issue, gift, or any other voluntary transaction creating an interest in property.” U.C.C. § 1-201(29) (emphasis added). The Berry bequest squarely qualifies as a “purchase” for purposes of subordination under Section 510(b). 3. Bennett’s claims “arise from” the stock bequest. In making the mistaken argument that the claims do not arise from retirement of the Victory shares, Bennett admits that he “seeks damages arising out of a right to payment he was bequeathed in 1931.” (Dkt. 13 at 39.) This should settle any question whether his claims satisfy the third prong of the subordination test because they “arise from” the stock bequest. As discussed above, the Fifth Circuit, consistent with other circuits that adopt “a broad reading” of Section 510(b), instructs that for a claim to “arise from” the purchase or sale of a security, all that is required is “some nexus or causal relationship” between the claim and the purchase or sale. See Am. Housing Found., 785 F.3d at 154-55; see also In re Tristar Esperanza Properties, LLC, 782 F.3d 492, 497 (9th Cir. 2015) (noting that “arising out of” are words of much broader significance than “caused by” and “are ordinarily understood to mean ‘originating from,’ ‘having its origin in,’ ‘growing out of’ or ‘flowing’ from’ . . . .”) (internal quotations omitted). Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 44 of 55 35 KE 50306306.1 Here, each of Bennett’s tort and breach of contract claims has the required “nexus” or “causal relationship” to the Berry bequest. Bennett purportedly was given a 37.5% equitable charge from the stock that was bequested--the Deemed Dividend Payments. Each of Bennett’s tort and breach of contract claims is directly connected to the Berry bequest because Bennett seeks to recover the very interest he received as a result of the bequest. To be clear, it does not matter that the alleged conduct that forms the basis for the asserted torts and breaches of contract took place long after the bequest. “‘[T]he circuit courts agree that a claim arising from the purchase or sale of a security can include a claim predicated on post-issuance conduct’--i.e., conduct after the issuance of the security--‘such as breach of contract.’” Am. Housing Found., 785 F.3d at 154 (quoting SeaQuest, 579 F.3d at 421). Indeed, the Fifth Circuit has made clear that a subordinated claim may “arise from” a securities transaction that occurred decades earlier. Id. at 155 (sufficient nexus between the claimant’s claims for, among other things, breach of a guaranty agreement, fraud, and breach of fiduciary duty, with his purchase of limited partnership interests that was made approximately 30 years earlier); see also Energy Conversion Devices, 528 B.R. at 704 (“§ 510(b) [applies] to claims based on acts or omissions that occurred well after the claimant purchased his stock in the debtor.”). Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 45 of 55 36 KE 50306306.1 Further, the fact that Bennett seeks to recover Deemed Dividend Payments-- payments that Bennett received exactly as if he were a shareholder--weighs in favor of finding that his claims arise from the purchase or sale of a security. The fact that he enjoyed this “upside potential” rather than the “relative safety of a fixed return” provides the “most important policy rationale” for why his claims should be subordinated. Seaquest, 579 F.3d at 421. Unlike a creditor who may only expect repayment of a fixed debt, Bennett enjoyed the “upside potential” of dividend payments exactly as if he owned stock for over 60 years. It would be unfair and unjust for Bennett now to be allowed to stand in line with creditors. Id.; see also In re Betacom of Phoenix, Inc., 240 F.3d 823, 829 (9th Cir. 2001) (“Shareholders expect to take more risk than creditors in return for the right to participate in firm profits. The creditor only expects repayment of a fixed debt.”). C. In Addition, Bennett’s Claims Arise from the Rescission of a Purchase or Sale of a Security Because They Seek Deemed Dividend Payments Created When Shares Were Retired. The first two prongs of the “rescission” category for subordination are also met because: (1) Bennett agrees the claims are for damages (Dkt. 13 at 39), and (2) for the reasons discussed above, both the stock that was retire and the Deemed Dividend Payments that Bennett seeks both separately satisfy the requirement that the claims involve “securities”, see supra Section IV.A.2. The third prong of the test for subordination is met because the Deemed Dividend Payments--the very Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 46 of 55 37 KE 50306306.1 interest Bennett’s claims seek to vindicate--were created when shares were retired, which amounts to rescission. 1. The 1986 settlement was a “rescission” of a purchase or sale of securities. The relevant statutory language for the rescission category requires that the claims “aris[e] from [the] rescission of a purchase or sale of a security of the debtor.” 11 U.S.C. § 510(b). The only relevant difference from the damages category is the term “rescission.” See id. While the term “rescission” is not defined in the Bankruptcy Code, the Fifth Circuit has held squarely that rescission includes situations in which, by “mutual agreement,” the parties “undo” an equity interest. SeaQuest, 579 F.3d at 415–16, 420 (rescission occurred pursuant to settlement agreement that provided that “S&J would no longer be a member of SeaQuest . . . SeaQuest would pay S&J an amount that is the equivalent of what would have been called priority return under the partnership agreement had S&J not rescinded its partnership interest in that entity”). The Fifth Circuit also cited with approval one court’s interpretation that rescission “is a general undoing of an agreement.” 9029 Gateway S. Joint Venture v. Eller Media Co., 159 S.W.3d 183, 186 (Tex. App.—El Paso 2004, no pet.) (cited in SeaQuest, 579 F.3d at 419). Here, Victory and BPC entered into a Settlement and Release pursuant to which BPC retired all of the Victory Shares. (Dkt. 8-2, AR01978 at ¶ 18.) At the same time, BPC executed the Declaration of Trust, the purpose of which was to Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 47 of 55 38 KE 50306306.1 “provide a means whereby the Victory Shares may be retired” (id., AR01998 at Art. I, § D(iii)), and pursuant to which Bennett was to receive the “same dividend income . . . that [he] would have received had the Victory Shares remained as issued . . .” (id. at Art. II, § B(1)). Thus, there is a direct nexus between these transactions, pursuant to which securities (i.e., the Victory Shares) were rescinded, and the claims against the Debtors, which is based upon Debtors’ alleged breach of the contracts governing these very same transactions. The claims are therefore subject to mandatory subordination under Section 510(b). See SeaQuest, 579 F.3d 425 (subordinating claim for unpaid damages arising from rescission of LP and LLC interests pursuant to a settlement agreement, since the debt would not exist but for the rescission of claimant’s equity investment in the debtor). 2. Bennett’s claims “arise from” the 1986 settlement. As discussed above, the “arise from” language in Section 510(b) must be interpreted expansively in accordance with Congress’ broad remedial intent. Here, Bennett’s claims “arise from” the 1986 settlement for similar reasons that they “arise from” the Linn-Berry Transactions: but for the 1986 settlement, Bennett never would have asserted any entitlement to Deemed Dividend Payments, and on his own terms there would be no claims for him to pursue. Moreover, the 1986 settlement created the very interest Bennett seeks to vindicate through the claims. As the Fifth Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 48 of 55 39 KE 50306306.1 Circuit has made clear, all that is required is “some nexus or causal relationship” between the claims and the 1986 settlement. In re Am. Hous. Found., 735 F.3d at 155. That standard is amply met here. D. The Bankruptcy Court Acted Well Within Its Discretion in Subordinating Bennett’s Claims Without Additional Discovery Based on Bennett’s Own Allegations. 1. Discovery was not necessary to satisfy due process because subordination was appropriate even if Bennett’s allegations were assumed to be true. Rule 9014 gives the Bankruptcy Court discretion to apply any of the rules of Part VII, including 12(b), 12(d), or 56(f) made applicable by Rule 7012 and Rule 7056.3 And in particular, bankruptcy courts can rule on subordination following a non-evidentiary hearing. In re Geneva Steel Co., 260 B.R. 517, 520 (10th Cir. B.A.P. 2001), aff’d, 281 F.3d 1173 (10th Cir. 2002). An evidentiary hearing is not necessary unless there are disputed material issues of fact. And, just as with all other discovery rulings, the decision is completely within the discretion of the Bankruptcy Court.4 Decisions not to hold an evidentiary hearing are common and have been 3 See FED. R. BANKR. P. 9014(c) (“The court may at any stage in a particular matter direct that one or more of the other rules in Part VII shall apply.”); see also In re Cloud, 214 F.3d 1350 (5th Cir. 2000) (“Although Rule 9014 does not explicitly provide for the application of Federal Rule of Bankruptcy 7012 (which wholly incorporates Federal Rule of Civil Procedure 12(b)-(h)), Rule 9014 does state that a bankruptcy court ‘may at any stage in a particular matter direct that one or more of the other Rules in Part VII shall apply.’”). 4 See, e.g., In re Caviata Attached Homes, LLC, 481 B.R. 34, 45–46 (Bankr. App. 9th Cir. 2012) (“Consequently the factual issues were not disputed as required Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 49 of 55 40 KE 50306306.1 upheld repeatedly on appeal.5 In any event, “[w]here a party raises the subordination issue in an objection to [a] claim, the court may treat the motion to subordinate as a motion for summary judgment, as if it had been filed in an adversary proceeding.” In re Geneva Steel Co., 260 B.R. at 525 n.6. 2. Bennett has never identified a single disputed issue of material fact that bears on the propriety of subordination. There are no disputed issues of material fact relevant to the determination of whether the Claims are subject to mandatory subordination under the Bankruptcy Code. Each of the allegedly disputed issues of material fact that Bennett identifies on appeal relates solely to the question of Berry’s and Linn’s liability on the claims. (See Dkt. 13 at 40-42, 53.) For the sake of the subordination analysis, liability may under Rule 9014(d). ‘Where the . . . core facts are not disputed, the bankruptcy court is authorized to determine contested matters . . . on the pleadings and arguments of the parties, drawing necessary inferences from the record.’” (quoting Tyner v. Nicholson (In re Nicholson), 435 B.R. 622, 636 (9th Cir. BAP 2010)); see also FED. R. BANKR. P. 9014(d) and accompanying Adv. Comm. Note. (“Subdivision (d) is added to clarify that if the motion cannot be decided without resolving a disputed material issue of fact, an evidentiary hearing must be held . . . .”). 5 Rockstone Capital LLC v. Metal, 508 B.R. 552, 558 (E.D.N.Y. 2014) (“[T]he Bankruptcy Court has the discretion to decide an issue without holding an evidentiary hearing.”); Zizza v. Pappalardo (In re Zizza), 500 B.R. 288, 294 (1st Cir. BAP 2013) (“[T]he question is not whether we would opt to convene a testimonial hearing in the circumstances, but whether the trial court abused its discretion in not doing so.” (citing United States v. Grant, 114 F.3d 323, 326 (1st Cir. 1997)). Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 50 of 55 41 KE 50306306.1 be assumed. As shown above, as a matter of law Bennett’s claims were required to be subordinated based on Bennett’s own allegations and legal pleadings. Bennett complains that there should have been discovery before the Court rules on the Reorganized Linn Debtors’ Objection. But this complaint rings hollow because the Bankruptcy Court could, and did, resolve the Debtors’ Objection in their favor without going beyond Bennett’s proof of claim and the documents cited therein.6 Assuming every allegation Bennett has made in his claims to be true does not change that the Bankruptcy Court was required to subordinate those claims for damages that arise from a purchase or sale of a security or the rescission of a purchase or sale of s security. Bennett has never identified any factual allegations that, if true, would negate subordination. Rather, Bennett’s extensive citations to the transcript of the oral argument before the Bankruptcy Court make clear that Bennett sought to obtain discovery and to put on evidence regarding the merits of the claims. (Dkt. 13 at 47-53.) Under these circumstances, there is no question that it was not an abuse of discretion for the Bankruptcy Court to subordinate the claims without additional discovery or an evidentiary hearing. 6 See Trans–Spec Truck Serv., Inc. v. Caterpillar Inc., 524 F.3d 315, 321 (1st Cir. 2008) (“When . . . a complaint’s factual allegations are expressly linked to—and admittedly dependent upon—a document (the authenticity of which is not challenged), that document effectively merges into the pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6).” (citation omitted)). Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 51 of 55 42 KE 50306306.1 V. CONCLUSION Here, the Bankruptcy Court subordinated Bennett’s claims for Deemed Dividend Payments that allegedly should have been made to Bennett based upon the Debtors’ earnings. From 1949 through 2013, Bennett expected to, and did, share in profits exactly as a shareholder, to the exclusion of creditors. However, the nature of his interest subjected him to the flipside risk of insolvency, which unfortunately came to pass. Now, after decades enjoying the upside potential of an equity holder, Bennett seeks to reverse positions and be treated like a creditor. The purpose of Section 510(b) is to ensure that such gamesmanship is not allowed. Bennett’s opening brief makes clear that there is no issue for which additional discovery or an evidentiary hearing would change the conclusion with regard to subordination. The subordinated claims themselves establish that Bennett should not be allowed to now stand in line as though Mr. Bennett had been a creditor all these years with no upside potential. Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 52 of 55 43 KE 50306306.1 Dated: November 13, 2017 /s/ Anna Rotman Anna Rotman (TX Bar No. 24046761) Jamie Alan Aycock (TX Bar No. 24050241) Mark Holden (TX Bar No. 24092531) KIRKLAND & ELLIS LLP and KIRKLAND & ELLIS INTERNATIONAL LLP 609 Main Street, Suite 4500 Houston, Texas 77002 Telephone:(713) 836-3600 Facsimile: (713) 836-3601 anna.rotman@kirkland.com jamie.aycock@kirkland.com mark.holden@kirkland.com Stephen E. Hessler (pro hac vice pending) KIRKLAND & ELLIS LLP and KIRKLAND & ELLIS INTERNATIONAL LLP 601 Lexington Avenue New York, New York 10022 Telephone:(212) 446-4800 Facsimile: (212) 446-4900 stephen.hessler@kirkland.com Patricia B. Tomasco (TX Bar No. 01797600) Matthew D. Cavenaugh (TX Bar No. 24062656) Jennifer F. Wertz (TX Bar No. 24072822) JACKSON WALKER, LLP 1401 McKinney Street, Suite 1900 Houston, Texas 77010 Telephone:(713) 752-4200 Facsimile: (713) 752-4221 ptomasco@jw.com mcavenaugh@jw.com jwertz@jw.com Attorneys for Appellees Reorganized Linn Debtors Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 53 of 55 KE 50306306.1 CERTIFICATE OF SERVICE I certify that on November 18, 2017, I filed the above document using the the Electronic Case Filing System for the Southern District of Texas, which automatically sends notice and a copy of the filing to all counsel of record. /s/ Anna Rotman Anna Rotman Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 54 of 55 KE 50306306.1 CERTIFICATE OF COMPLIANCE WITH RULE 8015(A)(7)(B) I certify that this brief complies with the type-volume limitation of Rule 8015(a)(7)(B) because this brief contains 10,184 words, excluding the parts of the brief exempted by Rule 8015(a)(7)(B)(iii). /s/ Anna Rotman Anna Rotman Case 6:17-cv-00051 Document 30 Filed in TXSD on 11/18/17 Page 55 of 55