Free Bankruptcy Appeal - District Court of Delaware - Delaware

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UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re:
U.S. WIRELESS LOCATION TECHNOLOGIES, INC. AND WIRELESS LOCATION SERVICES, INC.,

) ) ) ) )
)

Chapter 11

Case No. 01-10262 (CSS) (Jointly Administered)

Debtors.

) )

THE LIQUIDATING TRUST OF U.S. )
WIRELESS LOCA nON TECHNOLOGIES, )

INC. AND WIRELESS LOCATION )
Plaintiff,
vs.
MATI

SERVICES, INC., )
) ) ) ) ) ) )
)

Adv. Proc. No. 07-51413 (CSS)

WAX,

Defendant.

NOTICE OF APPEAL
Mati Wax, the defendant (the "Defendant") in the above-captioned
adversary proceeding, by and through his undersigned counsel, hereby gives notice,
pursuant to 28 U.S.C. § 158(a) and Rules 8001 and 8002 of

the Federal Rules of

Banptcy Procedure (the "Bankptcy Rules"), of its appeal to the United States
District Court for the District of Delaware from the final order of

the United States

Banptcy Court for the District of

Delaware entitled Order (Adv. Proc. Docket No. 27)

(the "Order"), which order was dated and entered on April 9, 2008 and the related
Opinion (Adv. Proc. Docket No. 26) (the "Opinion"), which was dated and entered on

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April

9, 2008. A copy of

the Order and the Opinion are attached as Exhibits 1 and 2,

respectively.

Pursuant to Bankptcy Rule 8004, the Defendant hereby requests that the
Clerk of the Bankptcy Court provide notice to counsel of record for the interested
parties. The parties to the judgment appealed from and the names, addresses and
telephone numbers of their respective counsel are as follows:

Counsel to Defendant Mati Wax

Counsel for Plaintiff, The Liquidating
Trust of

U.S. Wireless Corporation, Inc.,

LEVINE & BAKER LLP Richard E. Levine (CA Bar No. 88729) One Maritime Plaza, Suite 400 San Francisco, CA 94111
Telephone: (415) 391-8177

Facsimile: (415) 391-8488 rlevineØj
and PACHULSKI STANG ZIEHL & JONES LLP Laura Davis Jones (Bar No. 2436) Kenneth H. Brown (CA Bar No. 110345) Curtis A. Hehn (Bar No. 4264) 919 North Market Street, 1 ih Floor P.O. Box 8705

Wireless Location Technologies, Inc., and Wireless Location Services, Inc. KLEHR, HARRISON, HARVEY, BRANZBURG & ELLERS LLP Richard M. Beck Chrstopher A. Ward 919 Market Street, Suite 1000 Wilmington, DE 19801
Telephone: 302.426.9193
Facsimile: 302.426.9193

rbeckØjk1ehr.com cwardØjklehr.com

Wilmington, DE 19899-8705
Telephone: (302) 652-4100

Facsimile: (302) 652-4400 IjonesØjpszjlaw.com kbrownØjpszjlaw.com
chehnØjpszj law. com

United States Trustee Mark S. Kenney the U.S. Trustee Office of 844 King Street Suite 2207, Lockbox 35 Wilmington, DE 19801
Telephone: 302-573-6491

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Dated: April 16, 2008

LEVINE & BAKER LLP Richard E. Levine (CA Bar No. 88729) One Maritime Plaza, Suite 400 San Francisco, CA 94111
Telephone: (415) 391-8177

Facsimile: (415) 391-8488
and

ura Davis Jones Bar No. 2436)

Kenneth H. Brown (CA Bar No. 110345) Curtis A. Hehn (Bar No. 4264) 919 North Market Street, 1 ih Floor P.O. Box 8705 Wilmington, DE 19899-8705
Telephone: (302) 652-4100

Facsimile: (302) 652-4400
Counsel for Defendant Mati Wax

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EXHIBIT 1

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE
In re:
u.s. WIRELESS CORPORATION, INC., WIRELESS LOCATION TECHNOLOGIES, INC., AND WIRELESS LOCATION SERVICES, INC.,

) Chapter 11
)

) Case No. 01-10262
) through 01-10264 (CSS)

) )

)

Debtors.
THE LIQUIDATING TRUST OF U.S. WIRELESS COPRORATION, INC., WIRELESS LOCATION TECHNOLOGIES, INC., AND WIRELESS LOCATION SERVICES, INC.,

)

)
)

) ) ) )
)

Plaintiff,
v.
MATI

)
)

) Adv. Proc. No.07-51413(CSS)
)

WAX,

)

)

Defendant.
ORDER

)

For the reasons set forth in the Court's opinion of this date the Court

grants the Plaintiff's motion for summary judgment and denies the Defendant's

motion for summary judgment.

Clfri), ¡fL
Christopher S. Sontchi United States Bankuptcy Judge
Dated: April 9, 2008

Date 4- / -L)lr

Docket#L

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EXHIBIT 2

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

Inre:
u.s. WIRELESS CORPORATION, INC., WIRELESS LOCATION TECHNOLOGIES, INC., AND WIRELESS LOCATION SERVICES, INC.,

) Chapter 11
)

) Case No. 01-10262
) through 01-10264 (CSS)

) ) ) ) ) ) ) ) ) ) ) ) )

Debtors.
THE LIQUIDATING TRUST OF U.S. WIRELESS COPRORATION, INC., WIRELESS LOCATION TECHNOLOGIES, INC., AND WIRELESS LOCATION SERVICES, INC.,

Plaintiff,
v.
MATI

) Adv. Proc. No.07-51413(CSS)
)

WAX,

) ) )

Defendant.

OPINIONl
KLEHR, HARRISON, HARVEY LEVINE & BAKER LLP Richard E. Levine BRANZBURG & ELLERS LLP
Richard M. Beck

Christopher A. Ward 919 Market Street, Suite 1000
Wilmington, DE 19801

One Maritime Plaza, Suite 400 San Francisco, CA 94111
PACHULSKI STANG ZIEHL & JONES LLP
Laura Davis Jones

Counsel for Plaintiff, The Kenneth H. Brown Liquidating Trust of U.S. Curtis A. Hehn
Wireless Corporation, Inc., P.O. Box 8705
Wireless Location Technologies, Wilmington, DE 19899-8705

Inc., and Wireless Location Services, Inc.

Counsel for Defendant, Mati Wax

1 This Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal
Rule of Bankrptcy Procedure 7052.

Date 4-1-br
Docket # 6Jh .

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Dated: April

9, 2008

Sontchi, J. (tfÄ-)' I-ft

INTRODUCTION
Before the Court is an action to subordinate a claim brought by Mati Wax,

a former employee of the Debtors. The Liquidating Trust initiated this adversary

proceeding because it believes that a portion of Mr. Wax's claim is for damages

arising from the purchase and sale of a security and, thus, must be subordinated

under section 510(b) of the Bankruptcy Code. For the reasons set forth below,
the Court agrees with The Liquidating Trust and grants summary judgment in its
favor.

JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.se. § 1334.

Venue of this proceeding is proper in this district pursuant to 28 U.S.e. §§ 1408
and 1409. This is a core proceeding pursuant to 28 U.se. §§ 157(b)(2)(A), (B), (K)

and (0).

STATEMENT OF FACTS

I. Procedural Background
On August 29, 2001 ("Petition Date"), U.S. Wireless Company ("U.S.
Wireless") and two of its affilates (collectively, the "Debtors") filed voluntary

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petitions for relief under Chapter 11 of the Banruptcy Code.2 Under the

confirmed plan in these cases, the assets and liabilties of the Debtors were
consolidated and transferred to The Liquidating Trust of u.s. Wireless

Corporation, Inc., Wireless Location Technologies, Inc., and Wireless Location

Services, Inc. ("The Liquidating Trust" or "Plaintiff").3 Executive Sounding
Board Associates Inc. was appointed as Liquidating Agent ("Liquidating Agent")
for The Liquidating Trust and given the power to object to, liquidate, classify and satisfy all claims against the Debtors' estates and to prosecute all causes of action
on behalf of the Debtors' estates.4

This adversary proceeding was commenced when the Liquidating Agent
filed an Adversary Complaint ("Complaint") on behalf of the Plaintiff in May,

2007.5 Through the Complaint, the Plaintiff seeks to subordinate under section

510(b) of the Bankruptcy Code the unsecured claim of Mati Wax ("Wax" or
"Defendant") in the amount of approximately $2.7 milion.

6

In response to the Complaint, Wax fied an Answer.? The Plaintiff and the
Defendant subsequently agreed to and fied a Stipulation of Facts By and

2 Adversary Complaint, ii 6.
31d. at ii 10.
4 ld. at ii 11.

S (Docket Entry 1).

6 Complaint, ii 29 ("(T)he Liquidating Trust has brought this action to subordinate Wax's claims

relating (to the) Securities Award in the aggregate amount of $2,749,082.26 to all other general
unsecured creditors pursuant to Section 510(b) of the Bankruptcy Code.").

7 (Docket Entr 6). The Defendant raised various affrmative defenses in the Answer that this Court need not address in this Opinion.

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Between the Liquidating Trust of US Wireless Corp., et aI., and Mati Wax

("Stipulation").8 Shortly thereafter, the parties fied cross-motions for summary
judgment. 9 Briefing was completed in December, 2007, and the Court heard oral

argument on the parties' cross-motions for summary judgment in January, 2008.
This matter is now ripe for decision.
II. General Background

On July 17, 1996, Mati Wax accepted the position of Chief Technology

Officer of Labyrinth Communications Inc. ("Labyrinth"), a subsidiary of u.s.

Wireless.10 According to the letter agreement between Wax and Labyrinth, Wax
was to receive a salary of $100,000 per year and an equity package ("Equity
Package") consisting of five percent of the shares of Labyrinth (50,000 shares)

and 100,000 warrants of u.s. Wireless at $2.00.11 Wax also entered into an
employment agreement with Labyrinth, an option agreement with U.S. Wireless,

and a restricted stock agreement with Labyrinth.12 These agreements elaborated

on and further memorialized the initial letter agreement between Wax and
Labyrinth. On January 12, 1998, Wax's employment agreement was amended to
reflect the merger of Labyrinth together with and into U.S. Wireless.13 As part of

8 (Docket Entr 10).
9 (Docket Entries 14 and 18).

10 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et aI., and Mati Wax, iii (Exhibit A, p. 1).
11 ld.

121d. at iiii 2,3 and 4 (Exhibits B, C and D).
13 ld. at ii 8 (Exhibit H, p. 1).

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the amendment, Wax received U.S. Wireless common stock in exchange for his
Labyrinth stock,14

In 1999, a dispute arose between u.s. Wireless and Wax concerning Wax's

employment, and, as a result, U.s. Wireless terminated Wax's employment on or

about June 10, 1999,15 In connection with his termination, Wax fied a complaint

for breach of contract and breach of the implied covenant of good faith and fair

dealing against U.S. Wireless in the Superior Court of California in and for the

County of Contra Costa.16 The parties agreed to transfer the dispute to the
American Arbitration Association (" AAA Proceeding"),17 At the conclusion of
the AAA Proceeding, the arbitrator awarded Wax $2,775,416.26 of which
$26,333.00 was attributable to actual wages and expenses owed to Wax under his

employment agreement,8 The arbitrator based the remaining $2,749,082.26 of

damages on: (1) the loss of 91,707 unvested restricted shares lost by Wax as a
result of his termination; (2) 33,333 unvested stock options lost by Wax as a result

of his termination; (3) U.S. Wireless's failure to remove the transfer restrictions
pursuant to SEC Rule 144 on restricted shares owned by Wax; and (4) Wax's
claim regarding U.S. Wireless's failure to include him in a private offering of U.S.
141d. at ii 8 (Exhibit H, pp. 6-7).

15 Plaintif's Memorandum of Law in Support of Its Motion for Summary Judgment, p. 4.
16 Stipulation of Facts By and Between the Liquidatig Trust of US Wireless Corp., et aI., and Mati Wax, ii9 (Exhibit I, p. 2).
17 Plaintiff's Memorandum of Law in Support of Its Motion for Summary Judgment, p. 4.

18 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et aI., and Mati Wax, ii6 (Exhibit F, pp. 16-17).

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Wireless stock made available to all employees of the company.19 The arbitrator

based the amount of damages on the highest market price of the shares within a

reasonable time after Wax discovered the breach of the agreements by u.s.

Wireless.2o After the arbitration award but prior to the Petition Date, the
Superior Court of California, County of San Francisco, entered a judgment
confirming the award.21

LEGAL DISCUSSION

I. The Standard for Granting Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure, as made applicable to this
adversary proceeding by Rule 7056 of the Federal Rules of Bankruptcy

Procedure, states that a court should grant a summary judgment motion "if the
pleadings, the discovery and disclosure materials on fie, and any affidavits show
that there is no genuine issue as to any material fact and that the movant is

entitled to judgment as a matter of law."22 The burden of proving these two
elements rests on the party moving for summary judgment.

23 The fact that the

Plaintiff and Wax fied cross-motions for summary judgment does not alter the
Court's Rule 7056 analysis.
191d.

20ld. at ii 6 (Exhibit F, pp. 9,14.)
21 ld. at ii 13 (Exhibit M, p. 1).

22 Fed. R. Civ. P. 56(c); see e.g., Norfolk Southern Ry. Co. v. Basell USA Inc., 512 F.3d 86, 91 (3d Cir. 2008); Alcoa, Inc. v. U.S., 509 F.3d 173, 175 (3d Cir. 2007); and Pennsylvania Fedn of Sportsmen's Clubs, Inc. v. Kempthorne, 497 F.3d 337, 347 (3d Cir. 2007).

23 El v. Southeastern Pennsylvania Transp. Auth. (SEPTA), 479 F.3d 232, 237 (3d Cir. 2007) (quotig
Celotex Corp. v. Catrett, 477 U.S. 317 (1986)).

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The mere fact that both parties have fied motions for summary judgment does not constitute proper grounds for a decision that no genuine issues of material fact exist, but "the court must rule on each party1s motion on an

individual and separate basis, determinig, in each case, whether a
judgment may be entered in accordance with the Rule 56 standard."24

The material facts of this case are not in dispute. Thus, only an issue of law
remains.

25

II. Wax's Claim is Subject to Subordination Under Section 510(b) of the Bankruptcy Code.

In general, sections 501 through 510 of the Bankruptcy Code seek to allocate
fairly the assets of the debtor's estate among the parties with claims against it.

26

Section 510 furthers this goal by altering the priority of certain claims so that
certain claims are satisfied first.2 In particular, section 510(b) requires a court to

lower the priority of certain types of shareholder claims. It provides in relevant
part that:

For the purpose of distribution under this title, a claim... for damages
arising from the purchase or sale of such a security... 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. 28

24 Besso v. Cummins Intermountain, Inc., 885 F.Supp. 1516, 1520 (D. Wyo. 1995) (quoting 10A Charles A. Wright, Arthur R. Miler & Mary K. Kane, Federal Practice and Procedure, § 2720, at
23 (1983)).
25 SUPERV ALU, Inc. v. Board of

Trustees of Sw. Pa. and W. Md. Area Teamsters and Employers Pension

Fund, 500 F.3d 334, 340 (3d CIr. 2007) (liThe parties stipulated to the facts before the Arbitrator

and District Court, so only a question of law remains.").
264 COLLIER ON BANKRUPTCY ii 510.01.
271d.
2811 U.se. §510(b).

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The application of section 510(b) to Wax's claim presents three issues. The first

question is whether the Equity Package29 granted to Wax is a "security" as
defined by section 101(49) of the Bankuptcy Code. Secondly, the Court must

determine whether U.S. Wireless's grant of the Equity Package as a form of

Wax's compensation is a purchase or sale of a security. Finally, the Court must

determine if Wax's claim is for damages arising from a purchase or sale of a

security. As all of those questions are answered in the affrmative, the Court
must subordinate Wax's unsecured claim.

A. The Equity Package granted to Wax is a "security" as defined under
section 101(49) of the Bankruptcy Code.
Section 510(b) applies to "a claim... for damages arising from the purchase

or sale of such a security..." arid the term "security" is a defined term under the

Bankuptcy Code.3o As a portion of his compensation, Wax received an Equity
Package consisting of a five percent interest in Labyrinth31 and 100,000 U.S.

Wireless stock options at an exercise price of $2.00.32 Wax's Equity Package is a

security as defined by section 101(49) of the Bankuptcy Code because both stock

29 As described above, the term Equity Package consists of five percent of the shares of Labyrinth
(subsequently exchanged for shares of U.s. Wireless) and 100,000 warrants of U.s. Wireless stock

granted to Wax as compensation for his employment with U.S. Wireless. However, for simplicity and clarity, the Court wil also include in this term all of Wax's equity interests which form the basis for the portion of the claim which the Plaintiff seeks to subordinate.
3011 U.se. §101(49).

31 Pursuant to the parties' amended employment agreement, Wax's five percent interest in

Labyrinth was converted to u.s. Wireless common stock. Stipulation of Facts By and Between
the Liquidating Trust of US Wireless Corp., et aI., and Mati Wax, ii 8 (Exhibit H p. 6).
32 Stipulation of Facts By

and Between the Liquidating Trust of US Wireless Corp., et aI., and Mati

Wax, iiiii, 3 and 4 (Exhibits A, C and D).

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and the right to purchase a security, i.e., stock options, are included in the
definition.

33

B. U.S. Wireless's grant of the Equity Package as a form of Wax's compensation is a purchase or sale of a security.
Section 510(b) only applies to claims for damages that arise from the
purchase or sale of a security.34 Therefore, the question is whether U.S.

Wireless's grant of the Equity Package as a form of Wax's compensation is a
purchase or sale of a security.
The grant of stock or stock options as a form of compensation for

employment is not techncally the same as a purchase of a security in the open

market. However, courts interpreting section 510(b) have read the term
"purchase" broadly and have included within its scope grants of stock and stock
options as compensation.35 Therefore, under established law, the Equity Package

Wax received as a portion of his compensation, i.e., in exchange for his labor,
constitutes a purchase and sale of a security for the purpose of section 510(b) of

the Bankruptcy Code.
3311 u.se. §101(49)(A)(xv) ("The term 'security' includes... certificate of interest or participation

in, temporary or interim certiicate for, receipt for, or warrant or right to subscribe to or purchase or sell, a security..."); see also In re Enron Corp., 341 B.R. 141, 151 (Bankr. S.D.N.Y. 2006) ("(T)he

Court notes that stock options are specifically included withi the definition of securities
provided in section 101 (49) (A)

(xv), listed among fourteen other defined forms of securities.").

3411 u.se. §510(b)

35 In re Touch Am. Holdings, Inc., 381 B.R. 95, 104 (Bank. D. DeL. 2008) ("If these Claimants were
required to receive a portion of their compensation as options, that was a condition of

employment the Claimants wilingly accepted in return for their labor. These Claimants, thus,
'purchased' the stock options with their labor.") and In re Enron Corp., 341 B.R. at 151 (Bankr.
S.D.

N.Y. 2006) ("Whle it is true that the Claimants did not purchase the stock options on the open market, they nonetheless exchanged value for the options: here, their labor. Such exchange

falls under a broad reading of the term 'purchase."').

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c. Wax's claim is a claim for damages arising from the purchase or sale

of a security.

The Court has determined that Wax's Equity Package is a security and that
u.s. Wireless's grant of the Equity Package to Wax as a form of compensation is
a "purchase or sale of such a security" under section 510(b) of the Bankuptcy

Code.36 Section 510(b) requires the Court to subordinate claims for "damages
arising from the purchase or of such a security." Therefore, the only remaining

issue is whether Wax's claim is for damages "arising from the purchase or sale of

such a security," or, more specifically, whether Wax's claim is for damages
"(arising) from" u.s. Wireless's grant of the Equity Package to Wax.37 However,

before the Court can address that issue, it must address the threshold question of
whether the Court may subordinate Wax's claim despite the fact that his claim

arose after the purchase or sale of the Equity Package.
1. The Cour may subordinate Wax's claim under section 510(b)

of the Bankruptcy Code despite the fact that his claim arose after the initial grant of the Equity Package.
u.s. Wireless granted Wax the Equity Package in July of 1996, but the

arbitrator determined that U.S. Wireless did not breach Wax's employment
agreement until June of 1999. Therefore, the Court must decide whether Wax's

36 See, supra, pp. 8-9.

37 In their briefing, the parties spend a significant amount of time addressing whether or not Wax's claim is a final judgment. In Alta+Cast, the issue of whether the claimant's judgment was
final was not a concern, and it is not here either. In re Alta+Cast, LLC, 301 B.R. 150 (Bankr. D. DeL.

2003).

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claim can arise from the grant of the Equity Package even if the actions which led

to that claim occurred at later date.
The scope of the phrase II arises from" in section 510(b) was an issue of first
impression for the Thrd Circuit in Telegroup.38 In Telegroup, the claimants fied

proofs of claim in the bankruptcy case seeking damages for Telegroup's alleged
breach of its agreement to use best efforts to ensure that the claimants' stock was

registered and freely tradeable.39 The alleged breach occurred after the actual
purchase and sale of the security.40 Therefore, the issue before the Third Circuit
was whether a claim can "arise from" a purchase and sale of a security for

purposes of section 510(b) when the claim does not arise until after the actual
purchase and sale of the security.41

For the Third Circuit, the phrase "arises from the purchase and sale of a
security" implies some sort of nexus or causal connection between the claim and

the sale of the security.42 However, the Third Circuit determined that the phrase
is ambiguous because it mayor may not include claims which only arise after the
sale of the security.43 To resolve this ambiguity, the Third Circuit considered the

legislative history and policies underlying the enactment of section 510(b) and
found the phrase" arising from" not to be limited to claims that arise at the actual
38 Baroda Hill lnv., Ltd., v. Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 133, 137 (3d Cir. 2002).
391d. at 135.

4°ld.
41 ld. at 137.

421d. at 138.

431d.

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sale or purchase of a security.44 Rather, the phrase also includes claims that only

arise at a later time.45 Accordingly, under the Third Circuit's holding in
Telegroup, the Court may subordinate Wax's claim under section 510(b) of the
Bankuptcy Code despite the fact that his claim arose after the initial grant of the
Equity Package.46

2. The Court wil "look behind" Wax's state court judgment to
determine whether the Court must subordinate Wax's claim

under section 510(b) of the Bankruptcy Code.

Wax argues that in order for the Court to determine whether it must
subordinate his claim under section 510(b) the Court need only look to the order

entered by the California Superior Court, i.e., once the Californa Superior Court
entered the judgment, it became a fixed debt obligation of u.s. Wireless and Wax

is entitled to general unsecured status.47 The Plaintiff disagrees. It argues that
the Court must consider the nature of the underlying allegations Wax raised at
state court when applying section 510(b), i.e., the Court must "look behind" the
judgment.48 Thus, as yet another threshold issue, the Court must determine

whether or not it may "look behind" Wax's judgment to the nature of the claims
leading to it.
44 ld. at 141-142.
451d.

46 On a related note, Wax never received certain portions of the Equity Package, e.g., due to the
various vesting dates. Ths is not a bar to the subordination of Wax's entie claim under section 510(b) of the Bankruptcy Code. See In re Betacom of Phoenix, Inc., 240 F.3d 823, 829-830 (9th Cir.
2001).

47 Brief in Support of Defendant Mati Wax's Motion for Summary Judgment, pp. 13, 17.

48 Plaintiff's Response Brief in Opposition to Defendant's Cross-Motion for Summary Judgment,

pp.I-2.

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In the context of section 510(b) subordination, two Supreme Court cases

are cited for the proposition known as "looking behind" or "looking beyond" a
judgment: Brown v. Felsen and Archer v. Warner.49 In Brown, Brown asserted a
claim against Felsen in state court to recover money that Felsen allegedly obtain

by fraud.5o The parties settled the case by stipulation that required Felsen to pay
Brown a sum of money.

51 The stipulation did not indicate that Brown's claim

was based on Felsen's fraud.

52 Felsen failed to make the payments to Brown and
53 Brown,

subsequently filed bankruptcy and sought to discharge Brown's claim.

however, moved to have the bankruptcy court determine that his claim was a
debt for money obtained by fraud.

54 The bankruptcy court disagreed with
55 The district court

Brown and found that the debt was based on the stipulation.

and Tenth Circuit affirmed this decision.

56 The Supreme Court reversed the

lower courts and held that the bankruptcy court should have looked beyond the
stipulation to determine whether the debt arose from fraud.57

49 Brown v. Felsen, 442 U.s. 127 (1979); and Archer v. Warner, 538 u.s. 314 (2003).

50 Brown, 442 U.s. at 128.

511d. 521d. 531d.
54 ld. at 129. 55 ld. at 130.

561d.

571d. at 138-39.

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Similarly, in Archer v. Warner, the Archers sued the Warners alleging fraud
in connection with a sale of a business.

58 As part of a settlement between the

parties, the Archers released the Warners from all fraud allegations in exchange

for a promissory note and a cash payment. 59 The Warners failed to pay on the
note, the Archers sued in state court for payment, and the Warners filed for

bankruptcy. 60 The Archers fied a claim based on the note and argued that the
note was non-dischargeable under section 523 (a) (2)

(A) of the Bankruptcy Code

as a debt based on fraud.

61 The lower courts found the debt dischargeable

because the settlement replaced the original debt with a new debt, and only the
original debt was based on fraud.

62 The Supreme Court reversed the lower

courts and found that the" settlement agreement and releases may have worked
a kind of novation, but that fact does not bar the Archers from showing that the

settlement debt arose out of 'false pretenses, a false representation, or actual
fraud,' and consequently is nondischargeable."63 In other words, the Archers

could argue that if the court looked behind the settlement agreement it would

see that the claim is based on false pretenses, a false representation, or actual
fraud.

58 Archer v. Warner, 538 u.s. at 317.

591d.

6°ld. at 317-18.
61 ld. at 318.

621d.
63 ld. at 323.

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Citing Brown and Archer, Courts addressing section 510(b) subordination

have "looked behind" judgments.64 In American Wagering, Inc., the court stated:

The parties agree that it is appropriate for this Panel to look behind (the
claimant's) district court judgment, and to examine the underlying facts in

determinng whether (the claimant's) claim should be subordinated
(under section 510(b)). This accord rests on solid grounds. In construing other provisions of the bankruptcy code, the United States Supreme Court
has found it appropriate to look behind the disposition (whether by

judgment or settlement) of underlying prepetition proceedings between a
creditor and the debtor.65

Furthermore, in Alta+Cast, without citing Brown or Archer, this Court
looked behind a judgment and subordinated a claim under section 510(b).66 In
Alta+Cast, the claimant and debtor were parties to an employment agreement. 67

The claimant received an equity interest in the debtor, and a clause in the

employment agreement required the debtor (i.e., the employer) to repurchase the

claimant's equity interest if the debtor terminated the claimant for cause.68 The

claimant subsequently brought an action in district court asserting that the

64 See American Wagering, Inc., v. Racusin, (In re American Wagering, Inc.), 326 B.R. 449, 452-53

(B.A.P. 9th Cir. 2005) rev'd on other grounds 465 F.3d 1048 opinion withdrawn and superseded on

rehearing 493 F.3d 1067; see also Weissmann v. Pre-Press Graphics Co., Inc. (In re Pre-Press Graphics Co., lnc.), 307 B.R. 65, 72-73 (N.D. Il. 2004). 65 In re American Wagering, Inc. 326 B.R. at 452. See also In re Pre-Press Graphics Co., Inc., 307 B.R. at 73 ("Given the broad definition of 'claim' and the Supreme Court's wilingness to look to the

substance of claims in assessing whether they are nondischargeable in bankruptcy due to fraud, the court finds that for purposes of § 510(b), (the claimant's) 'claim' should be determined according to the substance of his state court claims and not limited to the type of relief granted by
the state court.").

66 In re Alta+Cast, LLC, 301 B.R. 150, 154-55 (Bankr. D. DeL. 2003).
67 ld. at 152.

681d. at 153, n.3.

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debtor breached the employment agreement. 69 When the debtor filed for
bankruptcy the claimant obtained relief from the automatic stay to pursue his
district court action.7o The district court jury found in favor of the claimant and
required the debtor to repurchase the claimant's equity interest. 71 The debtor

subsequently moved to subordinate the claimant's claim under both sections
510(a) and (b) of the Bankruptcy Court.72 The debtor argued that the court must
subordinate the claimant's claim under section 510(b) because the claim was for

damages stemming from the debtor's breach of the equity repurchase
agreement. 73 In response, the claimant argued that his claim did not stem from
the equity repurchase agreement, but from the breach of the parties' employment
agreement. 74 The court in Alta+Cast examined the jury verdict and found that it

was based on the debtor's failure to repurchase the claimant's equity interest. 75
Accordingly, the court subordinated the claimant's claim under section 510(b).6

The United States District Court for the District of Delaware recently dealt
with section 510(b) subordination in Cybersight. 77 In Cybersight, the claimant

entered into an agreement with debtor in which the claimant purchased a 1.5%
69 ld. at 152.

7°ld.
71 ld. at 153.
72 ld.

73 ld. at 154.

741d. at 154-55.
75 ld. at 155.

761d.

77 Burtch v. Gannon, (In re Cybersight LLC), 2004 WL 2713098, *1(D.DeL. Nov. 17, 2004).

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interest in the debtor and was appointed vice president of finance and
administration, secretary and treasurer. Subsequently, the debtor terminated the
claimant's employment. 78 This termination triggered a clause in the parties'
agreement which required the debtor to purchase the claimant's interest in the

debtor.79 The agreement required the purchase price to equal the fair value of
the interest. 80 The parties entered into arbitration to settle on a purchase price.

81

The arbitrator ruled that the debtor was obligated to pay $1,290,746.19, plus

interest, to the claimant.82 Prior to the filng of the bankruptcy, a state court
entered the arbitration award as a judgment. 83 The debtor did not make any
payments on the judgment. 84 The debtor then fied bankruptcy, and, claimant
filed a proof of claim in the amount of the arbitration award.85 The trustee in the
case moved to subordinate this claim under section 510(b) of the Bankruptcy

Code.86 The bankruptcy court declined to subordinate the claim under section
510(b) and the District Court affirmed this decision.87

781d.

791d.

8°ld.
811d.
L

821d. 831d.
84 ld.

851d.

861d.
871d. at pp. *1-2.

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Wax's relies heavily on Cybersight for the argument that the Court cannot

"look behind" his judgment. 88 However, Cybersight does not support this
conclusion.89 As stated above, the claimant in Cybersight held an equity interest

in the debtor, a dispute developed over the value of that equity interest, and the
claimant obtained a prepetition judgment. 90 The Cybersight claimant did not

make the argument that the court could not "look behind" the claimant's state
court judgment.

91 Nevertheless, the court stated that it "evaluated (the

claimant's 1 former equity interest and determined that it has been converted into

a fixed debt obligation."92 Therefore, to a certain extent, the Cybersight court did

"look behind" the claimant's state court judgment. However, when the courts in
American Wagering, Inc., Pre-Press Graphics and Alta+Cast looked behind their

respective judgments, the courts' focus was on the nature of the dispute leading
to the judgment. In Cybersight, the analysis focused on the claimant's prior

equity interest, not the nature of the dispute leading to the claimant's state court
judgment.

93 To the extent Cybersight stands for the proposition cited by Wax,

88 Brief in Support of Defendant Mati Wax's Motion for Summary Judgment, p. 8.
89 In re Cybersight LLC, 2004 WL 2713098, *4, n.2 (D. DeL. Nov. 17, 2004).
90ld. at pp. *1-2.
91 ld. at p. *4, n.2.

921d. 931d.

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however, the Court respectfully disagrees and follow American Wagering, Inc.,

Pre-Press Graphics and Alta+Cast.94

Moreover, if courts were to apply section 510(b) without looking behind

the judgment, the section would be rendered inoperative. For example, assume
that Wax did not sue U.S. Wireless pre-petition, but filed a claim in bankruptcy

alleging fraud or other ilegality in the issuance of U.S. Wireless stock. As
discussed in Telegroup, when Congress enacted section 510(b), it relied heavily on

a law review article written by Professors Slain and Kripke.95 In their article,

Professors Slain and Kripke argued that shareholder claims alleging fraud or
other ilegality in connection with the issuance of stock should be subordinated
to the claims of general unsecured creditors. 96 Congress's reliance on this article
suggests that it "considered claims alleging fraud or other ilegality in the

issuance of securities to be at the core of claims that' aris( e 1 from the purchase or

sale of ... a security' for purposes of § 510(b)."97 Therefore, if Wax fied a claim

94 In the Third Circuit there "is no such thing as the law of the district" and, thus, the decision of a distrct
court is not binding on a bankrptcy court. In re Raphael, 238 B.R. 69, 77 (D.N. 1. 1999) (quoting

Threadgil v. Armstrong World Indus., Inc., 928 F.2d 1366,1371, (3d Cir. 1991)). See also United States v. Goldberg, 67 F.3d 1092, 1102 (3d Cir.1995) (Unpublished opinions "cannot constitute precedential authority.")
95 In re Telegroup, Inc., 281 F.3d at 139.
96 John J. Slain and Homer Kripke, The Interface Between Securities Regulation and Bankruptcy-

Allocating the Risk of Ilegal Securities Issuance Between Securityholders and the Issuer's Creditors, 48
N.Y.U. L.REV. 261 (1973).
971d. at 140.

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alleging fraud or other ilegality in the issuance of u.s. Wireless's stock, there is

no question that the Court would subordinate it under section 510(b).98
However, now assume Wax sued on this hypothetical claim prepetition

and the claim followed the exact same tract as Wax's actual claim, i.e.,

arbitration, arbitration award in Wax's favor, entry of a state court judgment
confirming the order, and, finally, entry of a proof of claim for the amount of the

award. Under Wax's interpretation of section 510(b), this Court could not
subordinate this hypothetical claim. Thus, this reading leads to a situation

where, based solely on the timing of events rather than the substance of the
claim, a court cannot subordinate the very type of claim Congress intended to
subordinate when it enacted section 510(b).99

Accordingly, the Court wil "look behind" Wax's state court judgment
and examine the nature of the proceedings leading to that judgment in order to

determine whether this Court must subordinate Wax's claim under section
510(b) of the Bankruptcy Code.

3. For purposes of section 510(b) of the Bankruptcy Code, there

is a material difference between claims based on fixed debt obligations and claims based on a judgment.
Wax also argues that, for purposes of section 510(b) of the Bankruptcy

Code, the Court must treat his judgment as it would treat a claim based on a

981d. ("(C)laims alleging ilegality in the issuance of securities fall squarely within the intended scope of § 510(b)...").
991d.

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fixed debt obligation.100 Courts traditionally have not subjected claims based on
a fixed debt obligation to section 510(b) subordination.

101 For example, in

Montgomery Ward Holding COrp.,102 the debtor exercised its rights under a

stockholders' agreement to purchase Montgomery Ward stock from the claimant

in exchange for cash and a promissory note.103 The debtor agreed to repay the
promissory in installments.104 However, the debtor fied for bankruptcy before it

paid any of the installments.105 These unpaid installments formed the basis of
the claimant's proof of claim, which the Debtor then moved to subordinate under
section 510(b).106

The Montgomery Ward court framed the issue before it in this way: "(t)he

critical inquiry here is whether a claim based solely on the nonpayment of a
promissory note issued by a debtor to consummate the repurchase of its own

100 Brief in Support of Defendant Mati Wax's Motion for Summary Judgment, p. 15.

101 Offcial Comm. of Unsecured Creditors v. American Capital Fin. Servs., Inc. (In re Mobile Tool Intern.
lnc.), 306 B.R. 778, 782 (Bankr. D. DeL. 2004) ("Thus, the Thrd Circuit did not alter the long-

standing principle that section 510(b) does not apply to instances when separate debt notes are actually issued in exchange for the stock.").
102 The Court in Montgomery Ward Holding Corp. limited section 510(b) subordination to claims
which directly concern the stock transaction itself. See Montgomery Ward Holding Corp., v.

Schoeberl (In re Montgomery Ward Holding Corp.), 272 B.R. 836, 842 (Bankr. D. DeL. 2001). That view

has since been overruled in the Third Circuit. See In re Telegroup, Inc., 281 F.3d at 142. However, Montgomery Ward Holding Corp. is stil good law for the proposition that section 510(b)
subordination is not proper when the claim is based on a fixed debt obligation. See In re Mobile

Tool Intern., Inc. 306 B.R. at 780 ("Claims based on a debtor's note are not subject to section 510(b)

subordination because such claims are only for the recovery of an unpaid debt.").
103 In re Montgomery Ward Holding Corp., 272 B.R. at 839.
104 ld.

105 ld.

106 ld. at 839-40.

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stock is one for damages 'arising from' the purchase or sale of its securities."107

The debtor argued that the claimant's status as a former shareholder somehow

differentiated the claimant from other noteholders and general unsecured
creditors.108 The Court was "not persuaded that the Note1s origin as payment for
stock is relevant under § 510(b)." 109

Likewise, in Mobile Tool International, the claimants exchanged their equity

interests for a separate debt instrument pre-petition.11o The Bankruptcy Court

did not subordinate the claimants' claim because, in the Court's opinion, "(w)hen
the (claimants) received the promissory notes, they removed the variable nature

of their investment and placed themselves in the position of general creditors.
Their claims are not the type which section 510(b) mandates be subordinated."m
Wax attempts to draw an analogy between himself and the claimants in
Mobile Tool International.112 To support this argument, he again relies heavily on
Cybersight. In Cybersight, the court states that "there is no material difference

between the exchange of a promissory note for equity interests, which has been
held not to be subject to Section 510(b) and the judgment (the claimant) received
in this case."113 The Cybersight court further stated that, "(i)n both instances, the

1071d. at 841.
108 ld. at 845.

1091d.

110 In re Mobile Tool Intern. Inc., 306 B.R. at 779.

11 ld. at 782.

11 Brief in Support of Defendant Mati Wax's Motion for Summary Judgment, p. 15.
11 In re Cybersight LLC, 2004 WL 2713098, *4 (D. DeL. Nov. 17,2004) (internal citations omitted).

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claimants (in both Mobile Tool International and Cybersight), pre-petition, were no

longer able to participate in the benefits and risks associated with being equity

holders of the debtors, and therefore, Section 510(b) did not require
subordination."114 Therefore, according to Wax, this Court should treat his claim

as it would treat a claimant who exchanges his or her equity interest for a
promissory note.

A comparison of Alta+Cast to Mobile Tool International demonstrates,
however, that claims based on a fixed debt instrument are treated differently
from claims based on a judgment debt. In both Alta+Cast and Mobile Tool

International, the debtor agreed pre-petition to repurchase the claimant's equity

interest,15 In Mobile Tool International, the debtor issued notes to the claimant

when the debtor repurchased the claimant's equity interest.116 In Alta+Cast,

however, the claimant sued the debtor for breach of the parties' employment

agreement and the district court jury concluded in a special verdict that the
claimant "was terminated by the Debtor... for just cause or failure to perform,

(and) pursuant to the terms of the Employment Agreement.. the Debtor was
obligated to repurchase (the claimant's) ownership interest.. (for) $2,260,000

114 ld.

11 In re Mobile Tool Intern., Inc., 306 B.R. at 779 ("(T)he Individual Defendants and the Debtors

entered into a Stockholder Agreement wherein the Debtors agreed, upon notice, to repurchase
the Class B Common Stock in the Debtors' company which had been purchased by the Individual

Defendants."); In re Alta-Cast, LLC, 301 B.R. at 153 n.3 ("Section 10(b) of the Employment

Agreement provided that if Hays' employment were terminated for cause, the Debtor would
repurchase Hays' membership interest in the Debtor.").
116 In re Mobile Tool Intern., Inc., 306 B.R. at 779.

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plus interest from the date of termination."117 In Alta+Cast, the Court
subordinated the claimant's claim under section 510(b).118 However, in Mobile

Tool International the Court did not,19 Chief Judge Walrath decided both cases
and in Mobile Tool International she stated:

Once again, the facts in Alta+Cast are distinguishable from this case
because no separate debt instrument was issued and the claimant did not change his status from owner to creditor.
The fundamental concept in the cases cited by the Plaintiffs (which
included Alta+Cast) is that the nexus or causal connection required to

employ section 510(b) exists where stock is retained by the claimant.

When the stock is exchanged and a separate debt instrument is issued by the debtor, however, the claimant is converted from an owner of stock to a
creditor. Such is the case here.120

Wax argues that there is no basis for this distinction between claims based

on a fixed debt obligation and claims based on a money judgment.l2 However,
section 101(5) of the Bankruptcy Code defines "claim" in relevant part as a "right

to payment whether or not such right is reduced to judgment... ."122 This
indicates that a claim exists before a judgment is entered.123 Therefore, Wax's claim is

not simply a fixed debt obligations arising from the state court judgment. Rather

is the claim he asserted against U.S. Wireless at state court and upon which the

117 In re Alta+Cast, LLC, 301 B.R. at 152-53.
118Id. at 155.
119 In re Mobile Tool Intern., Inc., 306 B.R. at 782.
120 ld. at 781.

121 Brief in Support of Defendant Mati Wax's Motion for Summary Judgment, p. 15.
12211 u.se. §101(5).
123 See In re Pre-Press Graphics Co., Inc., 307 B.R. at 71.

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arbitrator based Wax's recovery. Under section 101(5) of the Bankruptcy Code,

Wax's claim is not altered by the state court judgment. Conversely, when a

claimant exchanges his or her equity interest for a fixed debt obligation the
equitable nature of the claim is extinguished.124 The Court wil continue to

follow this distinction between claims based on a fixed debt obligation and
claims based on a judgment arising from an equity interest.
Wax also cites to American Wagering, Inc. to support the proposition that

his claim is properly treated as a claim based on a separate debt instrument.125 In
American Wagering, Inc., the debtor hired the claimant as a financial advisor in

connection with the debtor's IPO.126 The terms of the agreement between the
parties called for the claimant's compensation "to be valued on the basis of the
debtors

i share price upon completion of the IPO, the contract did not provide for

that compensation in the form of shares."127 The debtor sued the claimant in

district court over the employment agreement and the claimant filed a
counterclaim.

128 The district court found for the claimant and awarded the

claimant damages of $2,310,000.129 The debtor subsequently fied bankuptcy,

124 In re Mobile Tool Intern., Inc. 306 B.R. at 781; and The Consolidated FGH Liquidating Trust v.
Marler (In re The Consolidated FGH Liquidating Trust), 2007 WL 2955952, *4 (S.D. Miss. Oct. 2, 2007).
125 Brief in Support of Defendant Mati Wax's Motion for Summary Judgment, pp.15-16.
126 Racusin v. American Wagering, Inc., (In re American Wagering, lnc.), 493 F.3d 1067, 1069 (9th Cir.

2007).

127 ld. at 1072 (emphasis in original).
128Id. at 1070.
1291d.

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the claimant filed a claim based on the district court judgment, and the debtor
sought to subordinate under section 510(b).130

The Ninth Circuit declined to subordinate the claim.l3 The Ninth Circuit
reasoned that 510(b) did not apply because the claimant never agreed, intended, or

ever became an equity holder; his compensation was simply valued by the share
price.132 Wax cites to American Wagering, Inc. as case, analogous to his, in which

the court decided not to subordinate a claim under section 510(b),133 However,
Wax misreads one critical fact in American Wagering. Wax states that the claimant
in American Wagering stood to receive, "4.5 % of the company's valuation upon an
initial public offering, all but $150,000 of

which was to be paid in the debtor's common

stoCk."134 This is simply an incorrect reading of the case. Unlike Wax, the
claimant in American Wagering did not contract to become an equity holder.135

Therefore, American Wagering, Inc., is not analogous to Wax's case and does not
130ld.
131 ld. at 1069.

132 ld. at 1073 (emphasis added).

133 Brief in Support of Defendant Mati Wax's Motion for Summary Judgment, pp. 15-16.
134 Id. at p. 16 (emphasis added).
135 In re American Wagering, Inc. 493 F.3d at 1071 ("The origial ...contract, which promised (the

claimant) 4% of the final evaluation' of the IPO, only gave him the monetary value of the shares of stock, not the stock itself. (The debtor) never upheld its end of the contract, resulting in a lawsuit for breach seeking damages based on the value of the stock. (The claimant) received that money judgment and initiated legal action to receive it long before the bankruptcy proceeding at issue here commenced. (The claimant) thus sought all along what was promised by the contract-

the monetary value of the stock, rather than the stock itself-and the distrct court, after some
direction from this Court, effectuated the contractual remedy as welL. Accordingly, his claim in the bankuptcy proceeding is more aki to that of a creditor than an investor and subordinating his claim as "arising from the purchase or sale" of stock would not serve the underlying purposes
of subordination under section 510(b).").

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support the proposition that a court should treat claims based on a judgment in
the same way as claims based on a separate debt instrument.
4. Section 510(b) Subordination Analysis of Wax's Claim

Having addressed whether the Court may "look behind" Wax's state

court judgment, the Court now turns to the actual analysis, which is easily
performed. In the complaint fied by Wax against U.S. Wireless in the Superior

Court of California, Wax alleged breach of contract and breach of the implied
covenant of good faith and fair dealing.136 In his breach of contract claim, Wax
alleged that as a direct and proximate cause of u.s. Wireless's breach of the

employment agreement between the parties Wax suffered damages "including
but not limited to the loss of wages and benefits, including his rights pursuant to

the stock option agreement, the restricted stock agreement and the private
placement opportunity for (U.S. Wireless) employees."137 In Wax's claim for

breach of the implied covenant of good faith and fair dealing, Wax alleged that

U.s. Wireless "terminated his employment... in whole or in part to prevent the
vesting of options for shares of (U.S. Wireless) stock, to prevent the removal of

restrictions on restricted (U.S. Wireless) stock, and to deprive (Wax) of his

136 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et aI., and
Mati Wax, ii9 (Exhibit I, iiii 12-20).

137 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et aI., and Mati Wax, ii9 (Exhibit I, ii 15).

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opportunity to participate... In the Spring 1999 private placement of (U.S.
Wireless) stock."138

Wax further alleged that these actions violated the implied covenant of
good faith and fair dealing and, as a result, Wax suffered the following damages:
"lost wages... (lost) value of the options and restricted stock which would have
vested... plus the spread between the purchase price of the stock offered in the

Spring 1999 private placement and the market price of such stock... ."139 Wax
alleged that the damages for each cause of action exceeded $750,000.140

Turning to the arbitrator's award, we see that the arbitrator found that
u.s. Wireless breached the employment agreement between u.S. Wireless and Wax.141 This finding required the arbitrator to determine the value of the stock

and various other equity interests Wax would have received if U.S. Wireless had

not breached the employment agreement. The damages Wax received were
based on this determination.
Furthermore, Wax fails to argue why the damages awarded to him do not

arise from the purchase and sale of a security. As stated above, Wax simply

138 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et aI., and
Mati Wax, ii9 (Exhibit I, ii 18).

139 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et aI., and
Mati Wax, ii9 (Exhibit I, iiii 19-20).

140 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et aI., and
Mati Wax, ii9 (Exhibit I, pp. 6-7).

141 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et aI., and
Mati Wax, ii6 (Exhibit F, p. 1).

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argues that because his arbitration award was reduced to judgment the Court is
precluded from considering the nature of his state court claims.

Based on the claims asserted by Wax at state court and upon which the

arbitrator based Wax's recovery, it is clear that Wax's claim is for damages
arising from the purchase or sale of the Equity Package. Accordingly, the Court
is required to subordinate Wax's claim, except for the unsecured wage claim in
the amount of $26,330.00, under section 510(b) of the Bankruptcy Code.

CONCLUSION

For the foregoing reasons, the Court grants the Plaintiff's motion for
summary judgment and denies the Defendant's motion for summary judgment.

An order wil be issued.

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UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE

In re:

U.S. WIRELESS LOCATION TECHNOLOGIES, INC. AND WIRELESS LOCATION SERVICES, INC.,
Debtors.

) ) ) ) ) ) ) )

Chapter 11

Case No. 01-10262 (CSS) (Jointly Administered)

THE LIQUIDATING TRUST OF U.S. )
WIRELESS LOCATION TECHNOLOGIES, )

INC. AND WIRELESS LOCATION )

SERVICES, INC., )
Plaintiff,
vs.

Adv. Proc. No. 07-51413 (CSS)

MATI WAX,
Defendant.

) ) ) ) ) )
) )

CERTIFICATE OF SERVICE
I, Curtis A. Hehn, hereby certify that on the 16th day of April, 2008, I caused a
copy of

the following document(s) to be served on the individuals on the attached service list(s)

in the manner indicated:

NOTICE OF APPEAL

55072-001\DOCS DE:133381.4

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U.S. Wireless Location Technologies, Inc.

U.S. Wireless Location, et aI. (The Liquidating Trust of v. Mati Wax); Adv. No. 07-51413 Service List
Document No. 136666

04 - Hand Delivery

Hand Delivery The Honorable Chrstopher S. Sontchi United States Bankptcy Court for the District of Delaware 824 North Market Street, 5th Floor

Wilmington, DE 19899
Hand Delivery Richard M. Beck, Esquire

Klehr, Harrson, Harvey,
Branzburg & Ellers LLP

919 Market Street, Suite 1000 Wilmington, DE 19801
Hand Delivery
Chrstopher A. Ward, Esquire

Klehr, Harrson, Harvey,
Branzburg & Ellers LLP

919 Market Street, Suite 1000 Wilmington, DE 19801
Hand Delivery Mark S. Kenney, Esquire the U.S. Trustee Office of 844 King Street Suite 2207, Lockbox 35
Wilmington, DE 19801

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) Chapter 11 ) U.S. WIRELESS CORPORATION, INC., ) Case No. 01-10262 WIRELESS LOCATION ) through 01-10264 (CSS) TECHNOLOGIES, INC., AND WIRELESS ) LOCATION SERVICES, INC., ) ) Debtors. ) __________________________________________) THE LIQUIDATING TRUST OF U.S. ) WIRELESS COPRORATION, INC., ) WIRELESS LOCATION ) TECHNOLOGIES, INC., AND WIRELESS ) LOCATION SERVICES, INC., ) ) Plaintiff, ) ) v. ) Adv. Proc. No.07-51413(CSS) ) MATI WAX, ) ) Defendant. ) ORDER For the reasons set forth in the Court's opinion of this date the Court grants the Plaintiff's motion for summary judgment and denies the Defendant's motion for summary judgment. In re:

_____________________________ Christopher S. Sontchi United States Bankruptcy Judge Dated: April 9, 2008

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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE ) Chapter 11 ) U.S. WIRELESS CORPORATION, INC., ) Case No. 01-10262 WIRELESS LOCATION ) through 01-10264 (CSS) TECHNOLOGIES, INC., AND WIRELESS ) LOCATION SERVICES, INC., ) ) Debtors. ) __________________________________________) THE LIQUIDATING TRUST OF U.S. ) WIRELESS COPRORATION, INC., ) WIRELESS LOCATION ) TECHNOLOGIES, INC., AND WIRELESS ) LOCATION SERVICES, INC., ) ) Plaintiff, ) ) v. ) Adv. Proc. No.07-51413(CSS) ) MATI WAX, ) ) Defendant. ) OPINION 1 KLEHR, HARRISON, HARVEY BRANZBURG & ELLERS LLP Richard M. Beck Christopher A. Ward 919 Market Street, Suite 1000 Wilmington, DE 19801 LEVINE & BAKER LLP Richard E. Levine One Maritime Plaza, Suite 400 San Francisco, CA 94111 In re:

PACHULSKI STANG ZIEHL & JONES LLP Laura Davis Jones Counsel for Plaintiff, The Kenneth H. Brown Liquidating Trust of U.S. Curtis A. Hehn Wireless Corporation, Inc., P.O. Box 8705 Wireless Location Technologies, Wilmington, DE 19899-8705 Inc., and Wireless Location Services, Inc. Counsel for Defendant, Mati Wax
1 This Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

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Dated: April 9, 2008

Sontchi, J._____________

INTRODUCTION Before the Court is an action to subordinate a claim brought by Mati Wax, a former employee of the Debtors. The Liquidating Trust initiated this adversary proceeding because it believes that a portion of Mr. Wax's claim is for damages arising from the purchase and sale of a security and, thus, must be subordinated under section 510(b) of the Bankruptcy Code. For the reasons set forth below, the Court agrees with The Liquidating Trust and grants summary judgment in its favor. JURISDICTION This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. Venue of this proceeding is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A), (B), (K) and (O). STATEMENT OF FACTS I. Procedural Background On August 29, 2001 ("Petition Date"), U.S. Wireless Company ("U.S. Wireless") and two of its affiliates (collectively, the "Debtors") filed voluntary

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petitions for relief under Chapter 11 of the Bankruptcy Code. 2

Under the

confirmed plan in these cases, the assets and liabilities of the Debtors were consolidated and transferred to The Liquidating Trust of U.S. Wireless Corporation, Inc., Wireless Location Technologies, Inc., and Wireless Location Services, Inc. ("The Liquidating Trust" or "Plaintiff"). 3 Executive Sounding

Board Associates Inc. was appointed as Liquidating Agent ("Liquidating Agent") for The Liquidating Trust and given the power to object to, liquidate, classify and satisfy all claims against the Debtors' estates and to prosecute all causes of action on behalf of the Debtors' estates. 4 This adversary proceeding was commenced when the Liquidating Agent filed an Adversary Complaint ("Complaint") on behalf of the Plaintiff in May, 2007. 5 Through the Complaint, the Plaintiff seeks to subordinate under section 510(b) of the Bankruptcy Code the unsecured claim of Mati Wax ("Wax" or "Defendant") in the amount of approximately $2.7 million. 6 In response to the Complaint, Wax filed an Answer. 7 The Plaintiff and the Defendant subsequently agreed to and filed a Stipulation of Facts By and

2 3 4 5 6

Adversary Complaint, ¶ 6. Id. at ¶ 10. Id. at ¶ 11. [Docket Entry 1].

Complaint, ¶ 29 ("[T]he Liquidating Trust has brought this action to subordinate Wax's claims relating [to the] Securities Award in the aggregate amount of $2,749,082.26 to all other general unsecured creditors pursuant to Section 510(b) of the Bankruptcy Code."). [Docket Entry 6]. The Defendant raised various affirmative defenses in the Answer that this Court need not address in this Opinion.

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Between the Liquidating Trust of US Wireless Corp., et al., and Mati Wax ("Stipulation"). 8 Shortly thereafter, the parties filed cross-motions for summary judgment. 9 Briefing was completed in December, 2007, and the Court heard oral argument on the parties' cross-motions for summary judgment in January, 2008. This matter is now ripe for decision. II. General Background On July 17, 1996, Mati Wax accepted the position of Chief Technology Officer of Labyrinth Communications Inc. ("Labyrinth"), a subsidiary of U.S. Wireless. 10 According to the letter agreement between Wax and Labyrinth, Wax was to receive a salary of $100,000 per year and an equity package ("Equity Package") consisting of five percent of the shares of Labyrinth (50,000 shares) and 100,000 warrants of U.S. Wireless at $2.00. 11 Wax also entered into an

employment agreement with Labyrinth, an option agreement with U.S. Wireless, and a restricted stock agreement with Labyrinth. 12 These agreements elaborated on and further memorialized the initial letter agreement between Wax and Labyrinth. On January 12, 1998, Wax's employment agreement was amended to reflect the merger of Labyrinth together with and into U.S. Wireless. 13 As part of

8 9

[Docket Entry 10]. [Docket Entries 14 and 18].

10 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et al., and Mati Wax, ¶1 (Exhibit A, p. 1). 11 12 13

Id. Id. at ¶¶ 2, 3 and 4 (Exhibits B, C and D). Id. at ¶ 8 (Exhibit H, p. 1).

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the amendment, Wax received U.S. Wireless common stock in exchange for his Labyrinth stock. 14 In 1999, a dispute arose between U.S. Wireless and Wax concerning Wax's employment, and, as a result, U.S. Wireless terminated Wax's employment on or about June 10, 1999. 15 In connection with his termination, Wax filed a complaint for breach of contract and breach of the implied covenant of good faith and fair dealing against U.S. Wireless in the Superior Court of California in and for the County of Contra Costa. 16 The parties agreed to transfer the dispute to the

American Arbitration Association ("AAA Proceeding"). 17 At the conclusion of the AAA Proceeding, the arbitrator awarded Wax $2,775,416.26 of which $26,333.00 was attributable to actual wages and expenses owed to Wax under his employment agreement. 18 The arbitrator based the remaining $2,749,082.26 of damages on: (1) the loss of 91,707 unvested restricted shares lost by Wax as a result of his termination; (2) 33,333 unvested stock options lost by Wax as a result of his termination; (3) U.S. Wireless's failure to remove the transfer restrictions pursuant to SEC Rule 144 on restricted shares owned by Wax; and (4) Wax's claim regarding U.S. Wireless's failure to include him in a private offering of U.S.

14 15 16

Id. at ¶ 8 (Exhibit H, pp. 6-7). Plaintiff's Memorandum of Law in Support of Its Motion for Summary Judgment, p. 4.

Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et al., and Mati Wax, ¶9 (Exhibit I, p. 2).
17

Plaintiff's Memorandum of Law in Support of Its Motion for Summary Judgment, p. 4.

18 Stipulation of Facts By and Between the Liquidating Trust of US Wireless Corp., et al., and Mati Wax, ¶6 (Exhibit F, pp. 16-17).

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Wireless stock made available to all employees of the company. 19 The arbitrator based the amount of damages on the highest market price of the shares within a reasonable time after Wax discovered the breach of the agreements by U.S. Wireless. 20 After the arbitration award but prior to the Petition Date, the

Superior Court of California, County of San Francisco, entered a judgment confirming the award. 21 LEGAL DISCUSSION I. The Standard for Granting Summary Judgment Rule 56 of the Federal Rules of Civil Procedure, as made applicable to this adversary proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, states that a court should grant a summary judgment motion "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." 22 The burden of proving these two elements rests on the party moving for summary judgment. 23 The fact that the Plaintiff and Wax filed cross-motions for summary judgment does not alter the Court's Rule 7056 analysis.
19 20 21 22

Id. Id. at ¶ 6 (Exhibit F, pp. 9, 14.) Id. at ¶ 13 (Exhibit M, p. 1).

Fed. R. Civ. P. 56(c); see e.g., Norfolk Southern Ry. Co. v. Basell USA Inc., 512 F.3d 86, 91 (3d Cir. 2008); Alcoa, Inc. v. U.S., 509 F.3d 173, 175 (3d Cir. 2007); and Pennsylvania Fed'n of Sportsmen's Clubs, Inc. v. Kempthorne, 497 F.3d 337, 347 (3d Cir. 2007).
23 El v. Southeastern Pennsylvania Transp. Auth. (SEPTA), 479 F.3d 232, 237 (3d Cir. 2007) (quoting Celotex Corp. v. Catrett, 477 U.S. 317 (1986)).

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The mere fact that both parties have filed motions for summary judgment does not constitute proper grounds for a decision