(CN) – A Nashville Predators co-owner’s $38 million claim against his former partner’s bankruptcy estate takes a back seat to those of other creditors, a federal judge ruled.
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 professional hockey team.
Del Biaggio represented that he had $70 million to fund his share of the investment, in addition to valuable connections in the National Hockey League 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.”
“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. “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.”
Congress enacted the relevant bankruptcy statute to ensure that a security holder who seeks to claim damages against a debtor based on that purchase is not treated the same as a general unsecured creditor who did not bargain for the same kind of risk – or profit potential.
Rogers continued: “To permit him to claim against the bankruptcy estate on a par with other unsecured creditors of Del Biaggio who did not have a collaborative venture, in spite of his position as an investor in Del Biaggio’s affiliate company, would work the precise unfairness section 510(b) was meant to address”
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