it please the court my name is lewis landau and i represent appellants bankruptcy debtors terence tom cowan's offer con with the court's permission i'd like to request three minutes for a bottle thank you this case concerns application a bankruptcy code section five ten b and mandatory subordination under the court's recent dell biagio decision to mr martin's four million dollar claim and the effective subordination in individuals bankruptcy case second and distinctly this case concerns the erroneous conversion of another otherwise eligible chapter thirteen case to chapter seven based on inherently inconsistent and conflicting findings concerning eligibility to file in view of the court's recent bill biagio decision this court should reverse the bankruptcy court's orders denying subordination and not only does hold that section five ten b applies to an individual bankruptcy case but the court expressly reviewed and disagreed with the very bankruptcy appellate panel decision published in this case thus as of counsel i am quite familiar with mandatory subordination my point is that in debbie i joe we were concerned as to whether it applies only to corporations or individuals different whereas here we have the question of whether there is a securities issuance issue at all arguably we have here a claim based on forged documents and the destruction of the shareholder records which would not be within the term issuance of securities would have not understood your honor and my looking at you when i look this way or this way this way the bankruptcy court below and bankruptcy appellate panel said no so they never really got to the meat of the issue that the issue under five ten b is causation and your honor went through that and very carefully and looked at the test market causation for five ten b to apply and you called it out this way you found the required nexus between the creditors damage claim and the purchase of securities because quote the creditors claim was really no claim at all for his investment in the affiliate and secondarily the creditors asserted injury is inseparable from his investment in the phillips i think those are excellent tests to pick up and apply to this situation and they do but counsel help me understand whether your position is that in this case police itself into section five ten b and the other causes of action all generated the four million dollars liability under the judgment mr barton didn't get his shares he claimed it was fraud he claimed it was breach of producer duty he claimed it was conversion and his his money damage claim was equivalent to getting the shares i put me that the the confirmation of that issue is the following finding set forth in the back opinion in august two thousand and twelve the state court initially ordered the department in june the state court reversed its decision to order restoration of the stock and instead awarded the value of the stuff that's to me causation that is inseparable from this from the issuance of the shares he had in fact he was supposed to get the shares under the first order and then the superior court modified monetized that same relief that to me is strike zone causation under the broad definition front was just five ten b even apply the letter brief from the appellee raised the causation issue and i believe that really any of these issues really in the first instance need to go back to the bankruptcy court let's remember if there's any factual issue here the bankruptcy court on a subordination claim needs to have a trial for factual issues this was decided based what it was effectively on summary judgment because the court found the section five ten doesn't apply remedy because you didn't need to reach that intel biagio and your honor recognized three different approaches to the remedy of what do we do one section five ten b applies what do we do with the claim again none of the courts below reached that issue because five ten b just didn't apply there's a lot of ways that that could work out if the case stays in chapter seven then the question is under section seven twenty six they have the bankruptcy code is the barton claim distributed basically at the same level as equity as ownership that could be the result and under the second circuit opinion which you're on a look at favorably i think that that would be the result on the other hand if the case we conversed in chapter thirteen and i got a chance to do a plan then it would probably be the same set up as they'll be audio because that was a plan in chapter eleven where the claim drops down under everyone else probably doesn't get paid moving on to conversion the conversion issue in regard to conversion the bankruptcy court erred in converting the case under section thirteen zero seven c by making inherently inconsistent findings that undermine the court's to tell you the circumstances analysis first i want to acknowledge the elephant the room which is the burden of proof coming here and asking for that to be reversed the standard of review is abuse of discretion and requires i convinced the court that the bankruptcy court applied an incorrect rule when it evaluated the totality of circumstances i recognize that's not often reversed however there was a mistake made here and it's involved in the inherently inconsistent findings where the bankruptcy court found that the debtors were eligible to file chapter thirteen because the barton claim was not subject to ready determination but then used the timing of the debt is filing to state that the debtors were manipulating the bankruptcy code by filing when they did so it's kind of damned if you do damned if you don't if we waited to file then we couldn't we weren't eligible for chapter thirteen and so that was the heart of the banker's court's manipulation finding i think that's an error of law and it's an error of law because when a debtor does something that the bankruptcy code allows the de to do that cannot become part of the bad faith amalgam of factors to determine for bedbug and there's a string of nice circuit cases that they would say that clearly but basically implement that rule it's the go case which is cited throughout the briefs where the court and i circuit didn't impose a substantial repayment requirement as a condition to a good faith of a chapter thirteen plan because the quote set forth with regard to chapter thirteen  plan that rule gets carried forward into other night circuit cases i think appears in the court's blenheim decision as well where the court basically said chapter twenty s are not expressly prohibited by the code so let's not use bad faith to throw them out just because they're chapter twenty that's the rule i'm asking to be imposed here the debtors were eligible to file when they did that can't at the same time be a manipulation of the code and i would submit your eyes that once the inconsistent finding is removed from the totality of circumstances us the court should not as the back did find that oh well there's all these other circumstances that still result in a finding of bad faith it's kind of pulling out the key ingredient of a stew or chicken taking the chicken out of chicken soup is  still chicken soup i think that determination needs to be first made by the bankruptcy court once the finding is pulled out the bankruptcy court does the weighing and whether the remaining factors are sufficient so on those grounds owners  three grounds for granting the disposition of the subordination objection one that the claim was not of mr barton was not for damages based on the purchase itself security secondly that the prongs  associate under better com including the dissimilar risks and expectations between shareholders and creditors and the other pronk that there be some equity cushion were not present and thirdly that the facts of this case there are no other equity creditors scheduled scheduled in either of these bankruptcies in fact the only creditors as your honour's can see our credit card companies may be totaling fourteen thousand dollars with respect to mr khan and example in tristar bay to come see qwest orange county nursery where there are actual shareholders in existence at the time of the petition filing who are seeking to get compensation and head of other creditors  it were stolen through fraud forgery destruction of records i thought it affirmative agreement like in all the cases i just listed where the shareholder is still a shareholder and is actively involved in a transaction involving those shares it's apples and oranges that's number one number two if the five ten b is going to be rewritten so that all the claim has to do is involve the value of shares then you've got to put a line through per rising out of the purchase and sale of securi five ten b applies it says damages for claims arising out of the purchase in sale so is there a purchase and sale transaction at issue in the barton claim it hasn't been asserted by the appellant because there is no purchases tel transaction is not a person sale agreement there is not a term sheet there's not an m o you there is nothing so we don't meet that threshold specific language so let's hear your honour's point well should the arising out of language capture this type of case allegedly jump ahead i mean if we're going to look at the standard let's look at all of the standard there is no profit participation by mr barton whatsoever number one number two when his shares were stolen all the stood to gain all know it is but it is framed by the language arising out of a purchase and sale of security if the legislature meant to mean arising out of mere ownership of security that would be one thing but that's not the language they use and so  arising out of has to be tested by purchase and sale that the opponent cannot assert that this is a purchase health transaction like in every other case and respectfully i like adobe i should sit in because it does a number of things even though it discusses the arising o language it didn't need to reach it because mr freeman admitted it was a five ten b transaction it did arise out of sales security he was a shareholder that was admitted he was trying to make a claim his investment an equity upside all of those facts make it clear that this case mr barton's old and cold cold claim for his stolen shares has no correlation to a case where the claimant actually concedes five ten b applie and i think it just me it would make bad law to convert the language saying arising out of purchase and sale security means every transaction that ever involves shares or just any anything involving shares because in the legislature should just say that a transaction  do i understand correctly that your claim in bankruptcy is based on the judgment out of the state court which found a value of three point something million dollars is that what is the basis of your claim that the basis of mr barton's claim your honor in the bankruptcy is his judgment that was an opening for for damages and when there was a reference opponent's argument that mr barton's claims for fraud in the issuance of security that that is a complete falsehood if not even in the complaint mr barton's claim was that his shares were stolen by fraud it's not a securities claim it's not a fraudulent inducement claim the way it court well the his damages relate to the value of the shares as of the date they were fixed which was two thousand and nine june i mean we can have a discussion about the value of the shares separate distinct from trying to convert that claim into one for a right that arose out of a purchase and sale transaction where all the other cases actually have purchase and sale transactions at issue the trial court struggled as this mammoth record reflects struggled with how to value privately owned shares and so kind of throwing up his hands he said well i can't figure out how to value it so i'm going to return restore them except the problem here honor is that the debtors transferred all the assets out of our post international ltd prior to the trial and effectively die invested any value in the company by the time we went to trial so that as the judge went through it in the punitive damages phase november two thousand and twelve he said it would be equitable to restore it so by the time the petition was filed and i think that's a touchstone at the time of the petition the trial court had already rescinded its ruling that it was going to restore the shares and said i'm just going to award damages and right when the case was submitted for decision two days earlier than they filed bankruptcy so with the damages that you refer to they stop the finding of fraud in this in your case the damages were based on finding a fraud and filing of conversion that there were other number of causes of actions your honor conversion intentional breach finish a duty and fraud and those damages flowed from the value of the shares as a person and as of the conversion date pardon me in june two thousand and nine and that's the other point is that in all the cases that talk about five ten b you know if we go back to the cyber site case even american wagering the value of the shares are fixed there is no upside and so we look at five ten b not in a vacuum just well we have to have subordination if there was a purchase to sell transaction we look at the other question there is no indication that personal credit card companies that the handful of them in the in the schedules issued credit to the debtors in reliance on equity cushion we don't have any common shareholders preferred shareholders there are no scheduled equity participants so even if even if all this were pushed aside we said what we're going to mandate subordination subordinate to what and that was judge judge brand's position what do we subordinating to fourteen thousand dollars in credit cards for and for with non security it's not security holders if that's what it's about you know it's i don't think it's appropriate but that's that's as far as it would go i guess that the other issue that was kind of misinterpreted by the  valid the only decision cited in the appellate brief was careering and it didn't make a blanket holding about the issue that if you subordinate it must be a deal that must be disallowed in that case in the fifth circuit the underlying shareholders again were shareholders in this five ten b case the court determined that their claims were not right we don't have an issue here we have a state court judgement with specific findings and damages awarded no indication whatsoever that mr barton's claims should be barton's claim i just one last point on that subject under california law officers and directors of the corporation are personally liable for their fraud person liable for the theft of shares that point has been under budget by the court below on the subject of subordination considered all all the facts and the law and each of those points for correctly have that there was no purchase of security and issue here that the two factors underbid a common not satisfied by by the moving party appellant and that the fs specific facts of this case with no equity holders and we if you credit card companies is not the case where there is a prior to zation of mr barton's claim below anybody now with respect to conversion of the case it can number of points number one the trial court the bankruptcy court had a number of facts before it it determined that the debtors were both misstatement but the baptize that the record we pointed out in the record that the debtors had a history of providing misleading and incomplete information that was sufficient from the bankruptcy courts viewpoint to go ahead and proceed with bad faith again some comments on the policy factors that were raised by the i believe that the policy of the policies behind application of section five to be don't apply here affiliate type circumstances affiliate cases so the second policy doesn't even come into come into play and trying to shoehorn it into this really doesn't fit and i think that was part of why the courts below found the way that they did because they were trying to apply to circumstances that don't work the expectation of upside is an interesting one because that was argued from the standpoint again of the individual debtor of course it doesn't work when we're looking at expectation of upside visa be the individual debtor and again  about that that policy factors evaluated in these affiliate cases by looking at the expectation of upside in the corporate affiliate where the stock is and if you have equity then of course you're looking at the upside of having equity versus having a clay did that applied the test in del biagio which i think is very helpful where it was found that the creditors asserted injury is inseparable from his investment in the affiliate that's what we have here it's a share case the money damages arise because he didn't get his shares it's inseparable they're probably cases where it is separable but this one isn't and so so what do we may i ask what what do we do then with the judgment out the superior court that was clearly a judgment based on the finding of fraud and an award of damages how does that fit into your analysis of the question is it is the causation established under section five ten b again the court below never got there they didn't like applying five ten b in these circumstances i think that world has changed after dell biagio if that argument if in the bank in in the bankruptcy proceedings is the judgment that came out of the states a period corps understood which was a judgment of finding a fraud in an  award of damages what is your response to that though they say that's what this claim is and i agree with that that's what it is and that claim arises under the statute five ten b from the purchaser sale of securities as broadly interpreted under the long line of ninth circuit cases and when that claim is put through the machine of section five ten b the question is what's the remedy what's the treatment of that claim in this bankruptcy case and i submit your honor what i'll argue below want to drops back down is that if this case stays in chapter seven which it shouldn't based on the other issue but if it stays in chapter seven the creditors claim should be disallowed because it's not a creditor claim it's the equivalent of an equity interest under the second circuit saleman decision and so it may be allowed as an interest a quibbling to the debtor down at the bottom rung of the latter if it stays in chapter thirteen then that claim will drop down below unsecured creditors under the chapter thirteen plan which i'll propose when we're back in thirteen and you are in that respect i need to address this issue of that there are no other creditors in the case mr mcgarrigle knows that that's wrong there were millions of dollars of proof of claim filed down below all of that happened in the chapter seven case which is of course after all of this so i think again this proves why we need a reversal and for it to go back down to be evaluated under all of these new facts and circumstances unless your honour's have any