(CN) — The Ninth Circuit ruled Monday that a co-owner of the Nashville Predators hockey team must get in line behind other creditors with his $38 million claim against his former partner’s bankruptcy estate.
In 2007, David Freeman partnered with William Del Biaggio III, a former co-owner of the San Jose Sharks, to purchase the Nashville Predators, a National Hockey League team.
Del Biaggio represented that he had $70 million to fund his share of the investment, in addition to valuable connections in the NHL and considerable experience with professional hockey teams.
He also offered to fund player salaries to the extent they exceeded budget projections to ensure the retention of desirable players.
But months later, Del Biaggio revealed that he had embezzled the funds to make his initial $25 million outlay, and never had the personal funds to make the investments he had promised.
Del Biaggio was eventually convicted of misappropriating funds from investors he had advised. He received an eight-year prison sentence and was ordered to pay more than $67.4 million in restitution.
In 2008, he filed Chapter 11 bankruptcy in California with debts exceeding assets by $35 million. He listed his stake in the Nashville Predators as his biggest asset at $23.5 million.
Freeman filed a claim against Del Biaggio’s estate for $38 million, but the bankruptcy court ruled that his claim is subordinate to that of Del Biaggio’s general unsecured creditors because they are related to the “purchase or sale of securities.”
A federal judge ruled in 2013 that Freeman’s claim against his former partner’s bankruptcy estate takes a back seat to those of other creditors.
“Freeman purchased Common Units, executed a promissory note, and paid additional monies to Predators Holdings, LLC, all in the expectation of profiting from the investment,” U.S. District Judge Yvonne Rogers said at the time. “The risks he assumed in accepting what turned out to be misrepresentations and falsehoods by Del Biaggio were no different, essentially, from the risks any investor takes in a business venture. His injury is the same as any investor who has fallen prey to securities fraud or similar fraudulent inducements to invest.”
On Monday, the Ninth Circuit upheld Judge Rogers’ ruling, finding that Freeman’s claim against Del Biaggio “was properly subordinated to other claims senior or equal to it.”
“As an investor in an affiliate of Del Biaggio, Freeman bargained for increased risk in exchange for an expectation in the profits of Holdings as he himself admits. Del Biaggio’s creditors made no such gamble,” Judge Diarmuid O’Scannlain wrote for a three-judge panel. “Allowing Freeman to stand on par with Del Biaggio’s creditors ‘would give [Freeman] the best of both worlds—the right to share in profits if [Holdings] succeeded and the right to repayment as a creditor [of Del Biaggio] if it failed.'”
The appeals court also found that federal bankruptcy law at issue is not limited to corporate debtors, but also applies to individuals.
“Congress included within § 510(b)’s ambit claims arising from the purchase of the securities of ‘an affiliate of the debtor,'” O’Scannlain wrote. “Congress recognized what our pre-Bankruptcy Code precedent already had—namely, that the fairness concerns underlying the risk-allocation rationale apply whether the investor’s profit expectation is directed at the debtor or at an associated entity.” (Emphasis in original.)
In June, Freeman and Commodore Trust sued Predators Holdings LLC and team co-owner Thomas Cigarran, claiming Freeman kept the franchise in town and wasn’t repaid for his efforts.
Freeman said in the lawsuit that he “saved professional hockey in Nashville” in 2007 by organizing investors and putting up $36 million in capital while the team was entertaining sale offers that year, including one from a would-be buyer that planned to move the franchise to Canada for the 2008-2009 season.
The Predators called Freeman’s complaint a “meritless and inappropriate court filing” and said the allegations “should be resolved by the NHL as mandated by the NHL Constitution, to which all owners, including Freeman, are bound.”
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