Submitted November 9, 2016 Pasadena, California
from the Ninth Circuit Bankruptcy Appellate Panel Nos.
14-1021, 14-1060, 14-1020, 14-1041, 14-1061, 14-1062 Taylor,
Dunn, and Kirscher, Bankruptcy Judges, Presiding Argued and
R. Landau (argued), Calabasas, California, for Appellants.
Patrick C. McGarrigle (argued) and Michael J. Kenney,
McGarrigle Kenney & Zampiello APC, Chatsworth,
California, for Appellees.
Before: Diarmuid F. O'Scannlain, Ferdinand F. Fernandez,
and Johnnie B. Rawlinson, Circuit Judges.
appeal from the Bankruptcy Appellate Panel, the panel
affirmed (1) the bankruptcy court's decision that a
creditor's claims were not subordinated and (2) the
bankruptcy court's conversion of the debtors' Chapter
13 bankruptcy proceedings to Chapter 7 proceedings.
U.S.C. § 510(b) requires that claims for damages arising
from the purchase or sale of a security of the debtor or an
affiliate of the debtor be subordinated to certain other
claims or interests. Disagreeing with the BAP, and following
Liquidating Tr. Comm. of the Del Biaggio Liquidating Tr.
v. Freeman (In re Del Biaggio), 834 F.3d 1003 (9th Cir.
2016), the panel held that § 510(b) applies when debtors
are individuals. Nevertheless, the panel agreed with the
bankruptcy court that the creditor's claims did not arise
out of a purchase or sale of securities, but rather were
based upon a judgment entered against the debtors on account
of their actions in fraudulently converting the
panel held that the bankruptcy court did not clearly err when
it found bad faith and did not abuse its discretion when it
converted the debtors' Chapter 13 proceedings to Chapter
in part, Judge Rawlinson agreed with the majority that the
bankruptcy court acted within its discretion when it
converted the proceedings from Chapter 13 to Chapter 7. She
also joined the majority's conclusion that 11 U.S.C.
§ 510(b) applies to debtors who are individuals. Judge
Rawlinson dissented from the conclusion of the majority that
§ 510(b) was inapplicable because the creditor's
claims did not arise from a purchase or sale of securities.
FERNANDEZ, Circuit Judge.
David Khan and Terrance Alexander Tomkow (collectively
"Debtors") appeal the judgment of the Bankruptcy
Appellate Panel of the Ninth Circuit ("BAP"), which
affirmed the decision of the bankruptcy court that the claim
of Kenneth Barton was not subordinated pursuant to the
provisions of 11 U.S.C. § 510(b),  and
converted the Debtors' Chapter 13 bankruptcy
proceedings to Chapter 7 proceedings. We affirm the
decision of the bankruptcy court.
2013, Barton obtained a Superior Court of the State of
California ("Superior Court") judgment against the
Debtors and RPost International, Ltd. ("RIL") for
conversion, fraud, breach of fiduciary duty, and violation of
California Business and Professions Code Section 17200, based
upon Barton's allegations that the Debtors fraudulently
converted his 6, 016, 500 shares of common stock in RIL.
Superior Court found that after Barton and the Debtors
founded RIL, they each received an initial distribution of
RIL stock in 2001. The consideration for the stock "was
stated to be unreimbursed expenses and compensation."
suffering a stroke, Barton took leave from RIL. Thereafter,
the Debtors cancelled Barton's shares of stock and
returned them to the RIL treasury in June or July of 2009.
The Superior Court held that the Debtors fraudulently
converted Barton's stock in 2009 and determined that they
had forged corporate resolutions in an attempt to support
their fraud and either "misplaced or destroyed" the
shareholder registry, which was "the best evidence of
the issuance of [the] stock." The Superior Court then
ruled that Barton should recover damages and that his 6, 016,
500 shares should be reinstated. After further hearings, the
Superior Court determined Barton should, instead, receive the
value of the converted stock. Therefore, it fixed damages for
the conversion at $3, 850, 560, based upon the value of the
RIL stock as of June 30, 2009, the date of conversion, which
was $0.64 per share. After adjustments, a judgment including
$3, 840, 060 for the converted shares was entered in
days before the Superior Court intended to determine the
value of the RIL stock for the award of compensatory and
punitive damages, each of the Debtors had separately filed a
Chapter 13 petition for bankruptcy. At the § 341
(creditors meeting) hearing, the Debtors did not give
meaningful information regarding their companies'
business transactions, stock valuation, and settlements. And,
in their Chapter 13 Schedules, they each reported their RIL
stock as having a $0 value and listed Barton's conversion
judgment as having a value of only $100, 000 with a
"[remainder] unliquidated; pending [the Superior Court]
proceedings." Neither Debtor filed amended schedules or
an amended Plan that included the full value of the judgment
after it was rendered.
filed a proof of claim in each case and the Debtors objected.
They argued that the claims should be mandatorily
subordinated under § 510(b), which, they said, would
render the claim unenforceable and subject to disallowance
under § 502(b)(1). The Debtors also filed separate
actions for mandatory subordination and disallowance on the
same grounds as those alleged in their objections. The
bankruptcy court dismissed the separate actions after the
parties litigated the claim objections to resolution because
the same result would apply to those actions.
had filed separate motions to convert each case to Chapter 7,
arguing that the Debtors acted in bad faith, which was cause
to convert under § 1307(c).
hearing, the bankruptcy court ruled on the Debtors' claim
objections based on subordination and disallowance and on
Barton's motions to convert. It held that Barton's
claims were not subject to subordination because they were
not "for damages arising from the purchase or sale of .
. . a security." § 510(b). Rather, the bankruptcy
court determined that Barton's claims were based upon the
Superior Court judgment for fraud and conversion. The
bankruptcy court did not specifically address the
disallowance issue, but did dismiss the Debtors' separate
objections related to that issue. Finally, the court granted
Barton's motions to convert. As to each of the Debtors,
it found that "the timing of the filing was intended to
defeat the state court action . . . [because] it was likely
that there was going to be an award of damages that would
have put these Debtors outside a Chapter 13." It also
found that the Debtors manipulated the bankruptcy process and
concealed assets. The Debtors then appealed to the BAP.
affirmed the bankruptcy court's subordination
determination, but on different grounds. It determined that
§ 510(b) did not "apply in an individual debtor
case." Khan I, 523 B.R. at 183. The BAP also
affirmed the bankruptcy court's refusal to disallow
Barton's claims because they were not subject to
subordination and, even if they were, "there [was] no
basis for claims disallowance under § 502(b)(1)."
Id. at 182. Lastly, the BAP held that the bankruptcy
court did not abuse its discretion when it found bad faith
and converted the cases from Chapter 13 proceedings to
Chapter 7 proceedings. Id. at 185-87. These appeals
AND STANDARDS OF REVIEW
jurisdiction pursuant to 28 U.S.C. § 158(d)(1).
review decisions of the BAP de novo." Aalfs v. Wirum
(In re Straightline Invs., Inc.), 525 F.3d 870, 876 (9th
Cir. 2008). "This court independently reviews the
bankruptcy court's rulings on appeal from the BAP."
Miller v. Cardinale (In re DeVille), 361 F.3d 539,
547 (9th Cir. 2004). "'Because we are in as good a
position as the BAP to review bankruptcy court rulings, we
independently examine the bankruptcy court's decision,
reviewing the bankruptcy court's interpretation of the
Bankruptcy Code de novo and its factual findings for clear
error.'" Id. "[We] accept findings of
fact made by the bankruptcy court unless [those] findings
leave the definite and firm conviction that a mistake has
been committed by the bankruptcy judge." Aalfs,
525 F.3d at 876 (internal quotation marks omitted).
review for abuse of discretion the bankruptcy court's
ultimate decisions . . . to convert [the cases] from Chapter
13 to Chapter 7." Rosson v. Fitzgerald (In re
Rosson), 545 F.3d 764, 771 (9th Cir. 2008). A court
abuses its discretion when it makes "a factual finding
that was illogical, implausible, or without support in
inferences that may be drawn from the facts in the
record." United States v. Hinkson, 585 F.3d
1247, 1263 (9th Cir. 2009) (en banc). We "review the
bankruptcy court's finding of bad faith for clear
error." Leavitt v. Soto (In re Leavitt), 171
F.3d 1219, 1222-23 (9th Cir. 1999).
first consider the Debtors' assertion that the bankruptcy
court and the BAP erred when they determined that §
510(b) did not apply. Thereafter, we will consider their
argument that those courts should not have determined that
the conversion of their proceedings from Chapter 13 to
Chapter 7 was appropriate.
Subordination of Barton's Claims
510(b) requires that claims for damages "arising from
the purchase or sale" of a "security of the debtor
or of an affiliate of the debtor" shall be subordinated
to certain other claims or interests. As already noted, the
bankruptcy court determined that the section did not apply
because Barton's claims did not arise from the purchase
or sale of a security. The BAP affirmed the bankruptcy court
on the basis that the section did not apply because the
Debtors were individuals. See Khan I, 523 B.R. at
183-84. However, after the BAP ruled, we held that §
510(b) does apply when debtors are individuals and in doing
so we specifically disagreed with Khan I. See
Liquidating Tr. Comm. of the Del Biaggio Liquidating Tr. v.
Freeman (In re Del ...