One of the bedrock principles of Chapter 11 of the Bankruptcy Code is the absolute priority rule, which provides that with respect to a dissenting class of unsecured claims, unless that class receives payment in full, no creditor of lesser priority or shareholder may receive any distribution under a Chapter 11 plan. To ensure that shareholders cannot elevate their priority status as equity owners to the priority level of unsecured creditors, Congress enacted §510(b) of the Bankruptcy Code.1 Under §510(b), a fraud claim by a purchaser of stock in a corporation that subsequently files a petition for relief under the Bankruptcy Code must be subordinated to general unsecured creditors.
Specifically, §510(b) provides:
