F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

I N R E Z A F A R D A

V I D K H A

N , Debtor
,

Zafar David Khan
, Appellant
,

v

.

K E N N E T H B A

R T O N ; T H O M

A S B U R K E ; N A N C Y K. C U

R R Y , Chapter 13 Trustee, A ppellees. N o. 15-60002

B AP No. 14-1021

I N R E T E R R A N C E A L E X

A N D E R T O M K O W , Debtor
,

T E R R A N C E A L E X

A N D E R T O M K

O W , Appellant
,

v

.

K E N N E T H B A

R T O N , A

ppellee. N o. 15-60003

B AP No. 14-1060I N R E K H A N 2

I N R E T E R R A N C E A L E X

A N D E R T O M K O W , Debtor
,

T E R R A N C E A L E X

A N D E R T O M K

O W , Appellant
,

v

.

K E N N E T H B A

R T O N , A

ppellee

. N o. 15-60004

B AP No. 14-1020

I N R E Z A F A R D A

V I D K H A

N , Debtor
,

Z A F A R D A

V I D K H A

N , Appellant
,

v

.

K E N N E T H B A

R T O N , A

ppellee. N o. 15-60005

B AP No. 14-1041I N R E K H A N 3

I N R E T E R R A N C E A L E X

A N D E R T O M K O W , Debtor
,

T E R R A N C E A L E X

A N D E R T O M K

O W , Appellant
,

v

.

K E N N E T H B A

R T O N , A

ppellee. N o. 15-60006

B AP No. 14-1061

I N R E Z A F A R D A

V I D K H A

N , Debtor
,

Z A F A R D A

V I D K H A

N , Appellant
,

v

.

K E N N E T H B A

R T O N , A

ppellee. N o. 15-60007

B AP No. 14-1062

OPI NI ON

Appeal from the Ninth Circuit B ankruptcy

Appellate Panel Tay lor, Dunn, and Kirscher, B ankruptcy J udg es, Presiding

Arg u ed and Submitted November 9, 2016

Pasadena, CaliforniaI N R E K H A N 4

F iled J anuary 23, 2017

B efore: Diarmuid F

. O’Scannlain, F erdinand F . F ernandez
, and J ohnnie B . Rawlinson, Circuit J u d g es.
Opinion by

J udg e F ernandez ; Partial Concurrence and Partial Dissent by

J udg e Rawlinson

SUMMARY *

Bankruptcy

On appe a l from the B ankruptcy Appellate Panel, the panel affirmed (1) the bankruptcy court’s decision that a creditor’s claims were no t s u b ordinated and (2) the b a nkruptcy c ourt’s c onversion of the debtors’ Chapter 1 3 bankruptcy

proceeding s to Chapter 7 proceeding s.

11 U.S.C. § 510(b) requires that c laims for damag e s arising f rom the purchase or sale of a security of the debtor o r

an affiliate of the debtor be subordinated t o certain other claims or interests. Disag reeing w ith the B AP, 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 § 5 10(b) applies when de b t o r s a re i n d i viduals. Nevertheless, the panel ag reed w ith the bankruptcy court that the creditor’s claims did not arise out o f

a purchase or sale o f securities, but rather were based upon a

* T h is su m m ary co n stitu

tes n o p art o f th e o pin io n o f th e co u rt. It h as b een p rep ared b y

co u rt staf

f f o r th e co n v en i en ce o f

th e read er.I N R E K H A N 5
judg ment entered a g ainst the debtors on a c c o u nt of their actions in fraudulently converting the creditor’s stock.

T h e panel held that the b ankruptcy court did not c l e a r l y
err when it found bad faith a nd did not abuse its discret ion

w h e n i t converted the debtors’ Chapter 13 proceeding s to Chapter 7 proceeding s.
Concurring in part, J u dg e Rawlinson ag reed wit h t h e majority that the bankruptcy court acted within its discretion when it converted the proce e d i ng s from Chapter 1 3 to Chapter 7. She also joined the majority ’s con c lusion that 11 U.S.C. § 5 10(b) a

pplies to debtors who are i n d i v i duals. J udg e 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.

COUNSEL

L ewis R. L andau (arg ued), Calabasas, California, for Appellants.

Patrick C. McGarrig le (arg ued) and Michael J

. K enney , McGarrig le K enney & Z ampiell o APC, Chatsworth, California, for Appellees.I N R E K H A N 6

OP INION

F ERNANDEZ , Circuit J udg e:

Z afar D avid Khan and T errance Alex a nder Tomkow (collectiv e l y “Debtors”) appeal the judg ment 1 of the B an k r u p t cy Appellate Panel of the Ninth Circuit ( “B AP”), which a ffirmed the decision of the bankruptcy court that the claim of Kenneth B arton was not subordinated pursuant to the provisions of 11 U.S.C. § 510 ( b )
, 2 and converted 3 the Debtors’ Chapter 13 bankruptcy proceeding s 4 t o Chapter 7 proceeding s. 5 W e affirm the d ecision of the bankruptcy court.

B ACKGROUND

I n 2013, B arton obtained a Superior Court of the State o f California (“Superior Court”) judg ment a ga i nst the Debtors and RPost I nternational, L td. (“RI L ”) for conversion, fraud, breach of fiduciary duty
, and violation of California B usiness and Professions Code Section 1 7200, based upon B arto n’s al leg ations that the Debtors fraudulently converted his 6,016,500 shares of common stock in RI L

.

1 Kh a n v. Ba rto n , (

In re Kh a n

) (“ Kh a n I ”), 5 2 3 B .R. 1 7 5
, 1 7 8 (B .A .P

. 9 th Cir. 2 0 1 4).

2 Hereaf ter all ref eren ces to sectio n n

u m b ers are to sectio n s o f T itle 1 1 o f th e Un ited States Co d e, u n less o th erw ise in d icated

.

3 S ee § 1 3 0 7(c).

4 § § 1 3 0 1

– 1 3 3 0

.

5 § § 7 0 1

– 7 8 4

.I N R E K H A N 7

The Superior Cour t f

o u nd that after B arton and the Debtors f

ounded RI L
, they each re c e i v ed a n initial distribution of RI L stock in 2001. The consideration for the stock “was stated to be unreimbursed ex pens e s a n d compensation.”

A ft e r suffering a stroke, B arton took leave from RI L

. Thereafter, the Debtors cancelled B arton’s shares o f stock and returned them to the RI L treasury in J une or J uly of 2009. The Superior Court held th at the Debtors fraudulently converted B arton’s stock in 20 0 9 a n d determined that they had forg ed corporate resolutions in an attempt to support their fraud and either “misplaced o r d e s t r oy ed” the shareholder reg istry
, which was “the best e v idence of the issuance of [ the] stock.” The Superior Court then r u l e d that B a rton should

recover d amag es a

nd that hi s 6
, 016,500 shares should be reinstated. After further heari n g s, the Superior Court determined B arton should, instead, receive th e value of the converted s t ock. Therefore, it fix ed damag es for the conversion a t $3,850,560, based upon the value of the RI L stock as of J une 3 0, 2 009, the date of conversion, which was $0.64 per share. After adjustments, a ju d gm e n t including $3,840,060 for the converted shares was entered in B arton’s favor.

A few d ay s b e f

o r e the Superior Court intended to determine the value o f t h e RI L stock for the award o f compensatory and punitive damag es, e ach of the Debtors h ad separately filed a Chapter 13 petition for bankruptcy

. At the § 341 (cr e d i t o rs meeting ) hearing
, the Debtors did not g ive meaning ful information r eg arding their c ompanies’ business transact i o n s , stock valuation, and settlements. And, in their C h apter 13 Schedules, they e a ch reported their RI L stock as having a $0 v alue and listed B arton’s conversion judg ment a sI N R E K H A N 8

having a value of only $100,000 with a “[ rem ainder] unliquidated; pending [ the Superior Court] p r o c e eding s.” Neither Debtor filed amended schedules or an amended Plan that included the f

ull v a l ue of the judg ment after it was rendered.

B a rton f iled a proof of claim in each case and the Debtors objected. They arg ued that the claims should b e mandatorily subordinated under § 510(b), which, they said, would render the claim unenforceable and s ubject to disallowance under § 502(b)(1). The Debtors also f i l e d separate actions for mandatory subordination and d isallowan c e on the same g rounds as those alleg ed in their objections. The bankruptcy court dismissed the separate a c tions after the parties litig ated the claim objections to resolution because t h e s a me result would apply

to those actions.

B a rton had filed separate motions to convert each c ase to Chapter 7
, arg u ing that the Debtors acted in bad faith, which was cause to convert under § 1307(c).

After a h earing
, the bankruptcy court ruled on the Deb tors’ claim objections based on subordination a nd disallowance and on B arton’s motions to convert. I t held that B arton’s claims were not subject to subordin a t i on because they w ere not “ for damag e s arising f rom the purchase or sale of

. . . a security .” § 5 10(b). Rather, the bankrup t c y c o u rt determined that B arton’s claims were based u pon the Superior C o urt judg ment for fraud a nd conversion. The b a n k r u p t c y court did not specifically addres s t h e disallowance issue, but did dismiss the Debtors’ s e p ar a te objections r elated to th a t issue. F inally
, the court g ranted Ba r t o n ’s motions to convert. As to each of the Debtors, it found that “the timing o f the filing was intended to defeat theI N R E K H A N 9

state court a ction

. . . [ b e c ause] it was likely that there was g oing to be a

n award o f d amag es that would have put these Debtors outside a Chapter 13.” I t also found that the Debtors manipulated the bankruptcy process and concealed a s s e t s. The Debtors then appealed to the B AP.

The B AP affirmed the bankruptcy court’s subordinatio n determination, but on different g rounds. I t d etermined that § 510(b) did not “apply

in an individual debtor case.” Khan I
, 523 B .R. at 183. The B AP also affirmed the bankruptcy court’s refusal to disallow B a rton’s claims because they were not s u b j e ct to subordination a

nd, even if they were, “there [ was] no basis for claims disallowance under § 502(b)(1).” Id. at 182. L astly
, the B AP held that the bankruptcy court did not abuse its discretion when it found bad faith and converted the cases from Chapter 13 proceedi n g s to Chapter 7 proceeding s. Id. at 185–87. These appeals followed.

J U RI SDI CTI ON AND STANDARDS OF REVI EW

W e have jurisdiction pursuant to 28 U.S.C. § 158(d)(1).

“W e review decisions o f t h e BA P de n ovo.” Aalfs v

. W irum ( In re Straightline I

nvs., Inc.)
, 5 25 F .3d 870, 876 (9th Cir. 2008). “This court independently reviews the bankruptcy court’s ruling s on a

p peal from the B AP.” Miller v

. Cardinale ( In re DeVille)
, 361 F .3d 539, 5 47 (9th Cir. 2004). “‘B ecause

we are in as g ood a position as the B AP to review bankruptcy court rul ing s, we independently ex amine the bankruptcy

co u r t ’ s d e c i s i o n , r e v i e wing the bankruptcy court’s interpretation of the B ankruptcy Code de novo and its f actual finding s for clear error.’” Id. “[ W e] accept finding s of fact made by the bankruptcy court unless [ those] finding s leave the definite a

nd firm convic t i o n that a mistake has beenI N R E K H A N 10

committed by the bankruptcy judg e.” Aalfs
, 525 F .3d at 876 (internal quotation marks omitted).

“W e review for abuse of discretion the bankruptcy court’s ultimate decisions

. . . to c o nvert [ 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 illog ical, implausible, o r without s u p p o rt in inferences that may be drawn from the facts in the r ecord.” United States v. Hinkson
, 585 F .3d 1247, 1263 (9th Cir. 2009) (en banc). W e “ review the bankruptcy court’s finding of bad f

a i t h f o r c lear error.” Leavitt v. Soto ( In re Leavitt) , 171 F .3d 1219, 1222–23 (9th Cir. 1999).

D I SCUSSI ON

W e will first consider the Debtor s ’ a s sertion that the bankruptcy court and the B A P erred w h e n they determined that § 5 1 0(b) did n ot apply

. 6 Thereafter, we will c o n s i der their arg ument that those courts should not have determined that the conversion of their proceed i n g s from Chapter 13 to Chapter 7 was appropriate.

I

. Subordination of Barton’s Claims

Section 510(b) requires that claims f or damag es “arising from the p urchase or sale” of a “security of the debtor o r o f

an affiliate o f the debtor” shall b e subordinated to c ertain

6 In lig h t o f o u r d eterm in atio n th at § 5 10 (b ) d o es n o t ap p ly
, w e n eed

n o t co n s id er t

h e Deb to rs’ assertio n t h a t B arto n ’ s claim s sh ou ld b e d isallo w ed b ecau se th ey

w ere su b o rd in ated

.I N R E K H A N 11

other claims or inte r e s ts. 7 As already noted, the bankruptcy court determ ined that the section did not apply because B arton’ s c l ai m s did not arise from the p urchase or sale of a security

. T he B AP affirmed the bankruptcy court on the basis that the section did not a p ply because the Debtors were individuals. See Khan I

, 523 B .R. a t 183–84. However, a fter the B AP ruled, we held that § 510(b ) does apply when debtors are individuals and in doing so we s p ecifically disag reed with Khan I

. See Liquidating Tr. Comm. of the D el B i a g gio Liquidating Tr. v. Freeman ( In re Del Biaggi o

)
, 834 F .3d 1003, 1010 ( 9th Cir. 2016). That ef f e c t i v ely overturned the basis of the B A P’s decision, and we now make that ex p licit by

rejecting the B AP’s contrary decision.

Nevertheless, we affir m t h e b ankruptcy court’s decision

on the b asis stated by that c o u rt, t h a t i s, we ag ree that B arton’s claims did not arise out of a pu r ch ase o r sale o f securities. No doubt B arton did purchase securities in RI L in 2001 shortly after RI L was f ounded. A l s o , we assume that RI L is an a ffiliate o f the Debtors. 8 H owever, B arton’s c laims

7 Mo re p articu larly , th e sectio n read s as f

o llo w s:

Fo r th e p u rp o se o f

d i strib u tio n

u n d er th is title, a claim arisin g f ro m rescissio n o f a p u rch ase o r sale of a
secu rity o f th e d eb to r o r o f an af f i liate o f th e d eb to r, f

or d am ag es arisin g f

ro m th e p u rch a s e o r sale o f su ch a
secu rity
, o r f

o r reim bu rsem en t o r co n trib u tio n allo w ed

u n d er sectio n 5 0 2 o n

acco u n t o f

su ch a claim , sh all b e
su bo rd in ated to all claim s o r in terests th at are sen io r to

o r e q ua l th e claim o r in terest rep resen ted b y su ch

secu rity
, ex cep t th at if su ch secu rity is co m m o n s to ck
, su ch claim h as th e sam e p rio rity

as co m m o n sto ck

.

8 T h e D eb to rs alleg ed t

h at each o w n e d o v e r 2 0 % o f RIL

. S ee § 1 0 1 (2 )(B ) (d ef

in in g “ af f iliate”).I N R E K H A N 12

ag ainst the Debtors d o n o t a rise from his purchase of RI L securities. Rather, they are based upon the judg ment entered ag ainst the Debtors by the Superior Court on account of their actions many y ears later ( 2009) when they fraudulently converted B arton’s stock.

Of c ourse, we hav e g iven a b road interpretation to the “arising from” 9 lang uag e of the statute. F or ex ample, in D el Biaggio
, we f

o u n d a s ufficient nex us to a p urchase and sale where the c laimant (F reeman) had been fraudulently induced by the individual debtor to invest in an affiliate of the debtor. W e pointed out that “F reeman’s c laim is really no claim at all but for his investment in [the a f fi l i at e] .” Del Biaggio
, 834 F .3d at 1009. I n fact, F reeman’s claim was not for misrepresentations as such, but f or the investment he made in “detrimental reliance on those misrepresentations.” Id. A nd what he soug ht “correspond[ ed] e x a ct ly to the amount he invested.” Id.

The case at hand is qu i t e d ifferent from Del Biaggio because here what B arton seeks h as nothi n g to do with his investment, other than the fact that he had purchased the nowpurloined securities many y ears earlier. And the damag es he soug h t were not remotely re l a ted to the purchase; they were

s i m p l y a judg ment measured by the value of the converted property when the conversion took place.

W e recog ni z e that in other c ases, where n o actual purchase or sale h a d been consummated, we found that claims, never t h eless, arose from a purchase or sale transaction. See, e.g. , Pensco Tr. Co. v. Tris t a r E speranza Props., LLC (

In re Tristar Esperanza Props., LLC)
, 782 F .3d

9 S ee § 5 1 0 (b ).I N R E K H A N 13

492, 496–97 (9th Cir. 2015) (the c laim arose out of a failed ag reement by the debtor to purchase c laimant’s stock); A m

. Broad. Sys., Inc. v. Nugent ( In re Betacom of Phoenix, I nc.)
, 240 F .3d 8 23, 829–31 (9th Cir. 2001) (a merg er fell throug h

so no ultimate sale took p lace, b ut claim still arose fro m a sales transaction). Whil e those cases do b espeak a broad interpretation of “ a r i sing from,” there is a limit to the reach of § 510(b), which stops short of encompassing ev ery transaction that touches on or involves stock in a corporation. That is well ex plicated in Racusin v. Am. W agering, Inc. (

I n re Am. W a gering, Inc.) , 493 F .3d 1067 (9th Cir. 2007).

I n R a c u s i n , the claimant was promised that due to past services he would be paid, in part, with common stock of the company upon completio n of a common offering or initial public offering

. Id. at 10 7 0

. W hen the c ontract was breached, he sued the company a nd others f

o r d a m a g es. Id. The district court determined that Racusin should receive shares of stock, and he appealed. Id. He did so on the basis that he did not want stock; he wanted d a mag e s. W e ag reed with him. Id. Thus, w e “ remanded the case to the district court to calculate the monetary value of the

. . . s h a r e s.” Id. The amount was determined, the debtors quickly filed for bankruptcy
, Racusin filed a c l aim, a nd the d ebtors asserted that § 510(b) required subordination. Id. W e disag reed. Id.
at 1071. W e pointed out that Racusin d id not seek to be, a nd

was not, a shareho l d e r. Rather, the value of the stock was just the measuring stick for determining the “compensation owed for services he p erformed p ursuant to a contract that the debtors breached.” Id. at 1073. Thus, he was a true creditor rather than a n e quity investor in a “now-bankrupt corporation.” Id. ; see also In re Angeles Corp.
, 177 B .R. 920, 926 (B ankr. C.D. Cal. 1995) (debtor had committed b ad acts after claimant’s purchase of securities was complete, a n dI N R E K H A N 14

claims did not arise from the purchase), aff’d
, 199 B

. R. 220 (B .A.P. 9th Cir. 1996).

Here, B arton soug h t and obtained damag es. Even thoug h his damag e award for con v e r sion was based on the value o f the securities at the time o f conversion, his action d i d not arise out of the purchase of the securities and t h e r i sks that the pu r c hase mig ht entail. I t arose o ut of the Debtors’ conversion of the securities many y ea r s l a t e r. The value o f the securities at the date o f conversion was the m e asuring stick.

Moreover, the o f

t-quoted rationales for the § 510 ( b ) subordination requirement 1 0 d o not apply here. Primarily
, the separate wrong doing of the Debtors h ad no connection to the pu rc h a s e or sale of B arton’s shares of stock in RI L ; nor did the judg ments ag ainst the D ebtors that form the basis for B arton’s b ankruptcy claims arise f rom a purchase or sale. I n any event, the risk that those who pur c h a s e or sell stock (investors in a corporation) assume and ex pect to take is not that the shares themselves w ill late r b e stolen outrig ht b y ot h er individuals. 1 1 Nor, to the ex tent it applies at all, does the equity cushion rationale affect our decision here. 1 2 Even if the Debtors’ credit o rs did, somehow, rely upon the e quity contributed by

RI L ’s investors, that does not touch upon the separate torts committed by the Debtors in this case.

10 S ee Beta co m , 2 4 0 F.3 d at 8 3 0 (d issim ilar risk s an d eq u ity cu sh io n ratio n ales).

11 S ee id

. ; s ee a lso Del Bia gg io , 8 3 4 F.3 d at 1 0 1 0

– 1 1

.

12 Beta co m , 2 4 0 F.3 d at 8 3 0 ; s e e a l so Del Bia g

g io , 8 3 4 F.3 d at 1 0 1 1

– 1 2

.I N R E K H A N 15

I n short, the bankruptcy court did n ot err when it refused to subordinate B arton’s claims pursuant to § 510(b).

I I

. Conversion of Chapter 13 Proceedings to Chapter 7 Proceedings

The Debtors also assert that the bankruptcy court clearly erred when it found bad faith, 1 3 and a bused its discretion 1 4 when it c onverted their Chapter 13 proceeding s to Chapter 7 proceeding s. 1 5 W e disag r ee. The bankruptcy c ourt was required to and did c o n sider “the totality of the circ u m s tances.” Eisen v. Curry ( In re E isen)
, 14 F .3d 469, 470 (9th Cir. 1994) ( per c uriam) (internal qu otation marks omitted). Howeve r, the Debtors point to the factors we outlined in Leavitt
, 171 F .3d at 1224. Those are:

(1) whether the debtor misrepresented f a c ts in his petition or plan, unfairly manipulated the Ba n kruptcy Code, o r otherwise filed his Chapter 13 p etition or plan in an inequitable manner;

(2) t h e debtor’s history of filing s a nd dismissals;

13 See Lea vitt , 1 7 1 F.3 d at 1 22 2

– 2 3 ; d e la S a lle v. U.S

. Ba n k, N

.A. ( In re d e la S a lle) , 4 6 1 B .R. 5 9 3 , 6 0 5 (B .A .P . 9 th Cir. 2 0 1 1 ).

14 S ee Ro sso n , 5 4 5 F.3 d at 7 7 1 ; se e a l s o H i n kso n , 58 5 F.3 d at 1 2 6 3

– 6 4

.

15 S ee § 1 3 0 7 (c).I N R E K H A N 16

(3) whet h e r the debtor only intended to defeat state court litig ation; and

(4) whether eg reg ious behavior is present.

Id. (citations, internal quotat i o n marks, and b rackets omitted). The bankruptcy court was we l l aware of those factors, and declared that the second factor did n ot cut ag ainst the Debtors. I t did, however, find manipulatio n o f the bankruptcy proceeding s (first factor) and interference with the state p roceeding s (third factor). Moreover, althoug h it did not specifically mention the eg reg iousness of the Debtors’ behavior, it plainly t h o u ght that the behavior was quite troubling at t h e v ery least (fourth factor). The B AP ag reed with the b ankruptcy court’s analy sis. See Khan I
, 5 23 B .R. at 185–87.

The Debtors attack those determinations and concentrate

a g o od deal of their firepower on Leav itt ’s third f actor. Leavitt
, 171 F .3d at 1224; see also Chinichian v. Campolongo ( In re Chinichian)
, 784 F .2d 1440, 1 445 ( 9th C i r

. 1986). They focus o n the word “only ” and take that to m e a n that defeating state court litig ation had to be the sole motive, but

we have not so trea t e d it. F or ex ample, in Leavitt itself we decided that avoi dance was merely the “primary ” motive. Leavi t t , 1 71 F .3d at 1 225; see also Eisen
, 14 F .3d a t 4 70 (if only intent is to defeat state court litig ation, that is bad faith); Chinichian
, 784 F .2d at 1445 (multitude of fact o r s showed bad f a ith, including the real purpose of the filing ). The Debtors do not appear to r ecog n iz e that the factors a re simply factors to c onsider and tha t n o t every one of them must be met. T hat rather blinds them to the overarching r equirement
t h a t w h a t matters is “the ‘totality of the circumstances.’” Eisen
, 14 F .3d at 470; see a l s o Ho v. Dowell (

In re Ho)
,I N R E K H A N 17

274 B .R. 8 67, 877 (B .A.P. 9 th Cir. 2002) (a court must decide “‘in the lig ht of all militating f actors’”). The B AP recog niz ed that. See Khan I

, 523 B .R. at 185. As the B A P put it: “Even if a debtor presents more than one purpose for filing
, the third L ea v itt factor does not fail to support cause if the o t h e r purpose also r eflects bad faith. And, o nce ag ain, t h e third factor is considered in a totality of the circumstances contex t.” I

d

. at 186.

W e have ca r e fully r eviewed the record tog ether with decisions of the b a

n kruptcy court and the B AP
, a n d a re satisfied that the evidence fully supports t h e determinations that there w as bad faith and that c o nversion was appropriate. The hig h l y suspect timing of the Debtors’ Chapter 13 petitions, their failure and refus a l t o provide financial information c ritical to the determination of the value of their assets, and their further failure to provide information reg arding t h e movement o f funds among their v arious business entities all combined to justi f y the conversion decision.

Thus, the bankruptcy court did not clearly err or abuse its discretion.

CONCL USI ON

This case presents a sag a of p icaresque behavior. The Debtors converted B arton’s stock and were requi red by the Superior Court to pay substantial damag es as a result. I n the bankruptcy proceeding s, their timing w as at least suspicious, and th e y continued their inappropriate behavior by refusing to be forthcoming a

bout the nature and activities of the bu siness entities they controlled. On this record, the bankruptcy court p roperly determined that B arton’s cl aimsI N R E K H A N 18

should not be sub o r dinated and that the Chapter 13 proceeding s should be c o n verted to Chapter 7 proceeding s. W e , therefore, affirm the bankruptcy court. 1 6

AF F IRMED. B arton shall recover his costs on appeal.

RAW L I NSON, Circuit J udg e, concurring in p art a nd dissenting in part:

I ag ree w ith the majority that the bankruptcy c o urt acted within its d i scretion w hen it converted the debtors’ bankruptcy proceeding s from Chapter 13 to Chapter 7. I also join the majority ’s conclusion that 11 U .S.C. § 510(b) applies to D ebtors who are individuals. However, I dissent from the conclusion of the majority that § 510(b) is inap p l i c able b e c ause the claims of Kenneth B arton did not arise f r o m a p u r chase or sale of securities. I n my view, the oppo s i t e conclusion is inescapable–that B arton’s claim did arise from the purchase or sale of a security under § 510(b).

I t is undisputed that B arton purchased securities in RPost I nternational, L td. I t is also undisputed t h at Debtors impermissibly converted B arton’s stock. However, that conversion did not e rase the fact that B arton’s s u b s equent claims ag ainst Debtors arose from his previous p u rc h ase o f securities.

The majority acknowledg es th a t we h ave consistently interpreted the phrase “ arising fr o m ” b roadly

. Majority

16 Of co u rse, in so d o in g w e h av e rej ected t h e reaso n in g o f

th e B A P

o n th e su b o rd in atio n

issu e.I N R E K H A N 19

Opinion
, p. 12–12. W e m o s t r ecently reiterated that i n terpretation in Del Biaggio Liquidating Trust v. Freem a n ( In re Del Biaggio ), 834 F .3d 1003, 1009 (9th C ir. 2 016) (“[ W ] e observe that § 510(b)’s arising from lang uag e r eaches broadly to subordinate d a mag e claims involving q ualify ing securities.”) (citation and internal quotation marks omitted). W e went on to ex plicate that the “arising from” phraseolog y is “ b r o ader than causation” and is “ordinarily understood to

mean ‘orig inating from,’ ‘having its o r i gi n in’ ‘g rowing out of,’ or ‘flowing from’ or in short, ‘incident to o r h aving connection with.’” Id . (citation omitted).

W e rejected the creditor’s conte n t i o n that his claims did not arise from the purchase o r s a l e of securities because the claimant was indisputably an investor in the debtor’s affiliate. See id

. at 1008–09. Rather, we continued to adhere t o “one of the g eneral principles o f corporate and bankruptcy law” embodied within the tex t of § 510(b): “ t h a t c reditors a re entitled to be p aid ahead of shareholders in the distribution o f corporate assets.” I

d . at 1008 (quoting R acusin v. American W agering Inc

. (

In re American W

agering ), 493 F

. 3d 1067, 1071 (9th Cir. 2007)).

I n Del Biaggio
, we cited our precedent concluding that a

c laimant w as a shareholder even thoug h the debtor’ s defalcation “converted the claimant’s interest from an e quity interest to a debt interest before the bankruptcy filing

. ” Id

. at 1009 ( q uoting Pensco Trust Co. v. Tris t ar Esperanza Properties, LLC (

In re Trista r E

speranza Properties, LLC ), 782 F .3d 492, 497–98 (9th Cir. 2015)).

W e also referenced American Br o a d c asting Sys. v

. Nugent ( In re Betacom of Ph o e n i

x , Inc .), 240 F .3d 823, 830 (9th Cir. 2001), as an ex ample of our broad interpretation ofI N R E K H A N 20

§ 510(b). See id

. W e ex plained that we applied § 5 10(b) to

a damag es claim predicated on a “ p u r p o rted breach o f contract in a merg er ag reement” because the claim was “one ‘surrounding ’ the sale o r p u rchase of a security of the debtor.” Id . (quoting In re Betacom , 240 F .3d at 829).

I n addition, we noted that our broad interpretation of the “arising from” lang uag e of § 510(b) is consistent w i t h t h e interpretations advanced by o u r s ister circuits. See id

. (referencing Tem

p leton v. O’Cheskey (

In re Am. Hous. Found .), 7 85 F .3d 143 (5th Cir. 2015); SeaQuest Diving, LP

v. S& J Diving, Inc. (

In re SeaQ u es t Diving, LP ), 579 F .3d 411, 421–22 ( 5th Cir. 2009); Rombro v. Dufrayne ( I n re Med Diversified, Inc .), 461 F

. 3d 251, 254–55 (2d Cir. 2006)).

The majority a lso cites our precedent and does not attempt to disting uish it, other than to try to f i t t h e facts o f this case within the confines of our d ecision in American W agering

. See Majority Opinion
, p

. 12–13. However, the fit is cramped and imperfect. Preliminarily
, in Del Biaggio
, we described our decision in American W agering a s requiring subordination “ where there e x ists some nexus or c ausal relationship between t h e c l aim and the purchase of the securities.” Del Biaggio
, 834 F .3d at 1009 ( citation a nd internal quotation marks o mitted) (emphasis added). W e

ex p lained that the facts in Amer i c a n W agering did n ot fall within our b r oad interpretation because, and only because, the claimant’s contract with the debtor was ex plicitly not for the purchase or sale of securities. Se e i d

. Rather, the contract

was ex plicitly f

o r s ervices as a financial advisor. The resulting ag reement stated:I N R E K H A N 21

Should [ the creditor] bring in a b uy er

. . . said company will be paid a commission based on 5% of the purchase price.

In re Am. W

agering , 493 F .3d at 1069.

Seven months late r , another ag reement w as entered into between the same parties, with the following provision:

[ Claimant] has been o ur financial advisor for the purpose of an initial public offering

. . . As compensation he wou ld be paid 4 1⁄2% o f the final e v aluation in the f o r m o f

. . . common stock and $150,000 cash.

Id . at 1070.

After two y ears, the debtor filed an a c t i on ag ainst the creditor seeking to invalidate the contract in its entirety

. See id . F ollowing a jury

trial, a verdict was rendered in favor of the creditor for “ stock

. . . in an a m o u n t e q ual to 4.5% o f $45,000,000 [ the final valuation of the c o m m o n stock] a nd $150,000 in cash.” Id

. Consistent with this verdict, the court awarded the creditor 337,500 shares of stoc k w o r t h $2.025 million. See id

.
The c reditor appealed the award, arg uing that it w as error for the court to award specif i c performance by way o f bestowing stock, when the creditor re q u e s ted money damag es. See id

. W e a g reed and remanded for the court to calculate the monetary e q uivalent o f the 337,500 shares. See Leroy’s Horse and Spor ts Place v. Racusin
, 21 F ed. Appx

. 716, 717–18 (9th Cir. 2001). On remand, the creditor was awarded monetary dam ag es of $2,310,000–$150,000 cashI N R E K H A N 22

plus $2,160,000 (the value of the sto c k a s of the d ate when the creditor could have sold his shares). See American W agering , 4 93 F .3d at 1070

. Shortly after the damag es award, t h e d ebtor filed for Chapter 1 1 bankruptcy protection, and soug ht to subordinate the creditor’s claim pursuant to § 510(b). See id

.

As we observed in Del Biaggio
, the creditor in American W agering never soug ht “to r ecover an investment loss.” D el Biaggio
, 8 34 F .3d at 1009. Rather, the creditor’s “contract

w i t h t h e debtor merely u sed stock value as a b asis f o r calculating compensation.” Id

. W e c larified in American W agering that the c reditor “ recei v e d a money judg ment for services rendered.” 4 93 F .3d a t 1073. W e referenced “[ o] u r earlier decision” reversing the award of stock to the creditor

as making it clear that the c reditor’s “underly ing claim [was]

a debt claim, not an equity claim.” Id

. T he creditor “did not sue debtors as an equity

investor seeking monetary damag e s for fraud

. . . related to their mishandling o f s hareholders’ economic investment.” I d . I nstead, the creditor broug h t his action as an individual who was not compensated as provided in an employ

ment ag reement. See id

.

I n c ontrast, B arton initially broug h t his ac t i o n in state court specifically describing himself as a shareholder w ho had been wrong fully deprived of his shares by the debtors. I n his Third A mended Complaint, B arton asserted that he was issued 6,016,500 shares of RPost I nternationa l L imited Stock, that Defendants owed. B arto n a l l eg ed that he was “a shareholder,” owed a f i d u c iary duty of disclosure, a nd Defendants wrong fully converted B arton’s shares of s t o ck,

c a u s ing B arton to suffer damag es “[ a ] s a direct, prox imate, and foreseeable result o f the taking and con v e r s i on o fI N R E K H A N 23

B arton’s shares

. . .” Third Amended Complaint
, Barton v

. R P o s t I nternational Ltd
, Case No. YC061581, Superior Cour t of the State of Califo r n i a f or the County of L os A ng elesSouthwest District, F ebruary 16, 2011, pp. 5–9.

Consistent with B arton’s a lleg ations focusing ex clusively

on the conversion of his shares, the Superior Court judg e continued in the same vein. I ndeed, the decision of the state court judg e leaves no doubt a bout the g enesis of B arton’s claims. The state court “ issue[ d] a declaratio n that Plaintiff B arton was a t all r elevant times an owner of 6
, 0 1 6 ,500

common shares

. . . a nd that he provid e d ap p ropriate consideration for s a i d s h ares of stock.

. . .” Statement of Decision
, Ba r t on v. RPost International Ltd
., Case No. YC061581, Superior Court o f the State of California for the County of L os Ang eles, Aug u st 3, 2 012, p. 5. The state court prohibited RPost I nternational “from t a king any action to encumber, forfeit, and/or cancel B ar ton’s shares without having obtained prior written a pproval f r om either the court, B arton or his duly authoriz ed counsel.” Id

.
The court ordered Defendants to r estore the shares o f stock to B arton. See id
., p. 8

. L eaving no doubt that the remedy w as intended to restore B arton to the position o f shareholder, the state court ordered that B arton “have no role in the manag ement of the c ompany but

. . . b e g iven reasonable n otice o f meeting s of its shareholders and major transactions.” Id

. The state court “encour a g ed [ the parties] to meet and confer to determine, on their own , a p u r c h a s e price for B a

rton ’ s s hares o f stock so that a potentially uncomfortable relationship g o ing forward can be a v o ided.” Id . (emphasis added).I N R E K H A N 24

The state court’s order unequivocally res t o red B arton to his status as a shareholder in RPost I nternational. Unlike the

c r e ditor in American W

agering , the record nowhere refle c t s that B arton objected to the remedy of specific performance. I t w as only after the punitive damag es phase of the trial that
t he state court awarded the monetary value of the st o c k t o B ar t o n

. S

e e Ruling on P unitive Damages and Revisions to Statement of Decision, B arton v. RPost Internation a l L td
., Case No. YC061581, Superior Co u r t o f the State o f California for the County of L os Ang eles, J une 18, 2 013, pp. 1–2. Nevertheless, the state court continued to link its damag es award to the conversion of B arton’s shares. See id
., p. 2. T he c o u rt e x plained that because “the assets a nd character of RPost I nternational had c hang ed dramatically

. . . returning the 6,016,500 shares to Mr. B arton would undoubtedly spark an endless round o f post-judg ment motions and additional lawsuits.” Id

. H o w e v er, the court

never stray ed from its conclusion that Mr. B arton was entitled to this remedy as a shareholder of RPost I ntern a t i o nal. See id

.
The facts of this case are n o t e v e n c lose to those we considered in American W agering . I n that case, the creditor

was n ever a shareholder of the debtor a nd n ever soug h t o r accepted specific performance by w ay of the award of shares. See Am. W

a gering , 493 F .3d at 1069–70. The plaintiff in that

case steadfastly b a sed his claim on an employ m en t contact that was simply measured by the price of the stock. See id

. at 1071 (noting that the orig inal contra c t “ o n ly g ave [ the creditor] the monetary value o f the shares of stock, not the stock itself”). Notably
, the plaintiff in Amer ican W agering actually appealed the district court’s decision awarding stock

as a remedy

. See id

. at 1070. I n contrast, B arton predicated his entire complaint on his status as a shareholder. No otherI N R E K H A N 25

basis for recovery w as ever articulated, a nd B arton posed no objection when the state court a w arded him shares a

nd shareholder rig hts as a remedy

. At bottom, B arton’s claim is closer to the facts of Del Biaggio
, where we characteriz ed the damag es c laim in a similar fraudulent scheme resulting in the loss of equity shares as “clearly one arising from the s a l e o r purchase o f securities.” 834 F .3d at 1009. As in Del Biaggio
, the damag es soug ht by B arton and awarded b y the state court “correspond ex actly to the amou n t [ Barton] invested in [ RPost I nternational] throug h hi s initial purchase o f [ RPost I nternational] s ec u r i t i es

. . .” Id

. As in Del Biaggio
, “[ B arton’s c laim is really no c laim at all but f or h is investment in [ RPost I nternational]

. Id

.
Similar to the majorit y ’ s a p proach, the creditor in D el Biaggio soug ht to “analog iz [ e ] his case to the facts of American W

agering .” Id

. W e rejected the proposed a nalog y because the creditor in D el Biaggio
, like B ar t on, soug ht to “recover an investment loss,” id

. , rather than “ valu[ ing ] a free-standing injury by reference to a sec u rity .” Id

. at 1009–10. A s in Del Biaggio
, without a s eparate source o f injury unrelated to his security h o l d ing s, B arton’s “asserted injury is inseparable f rom his [ RPost I nternational] investment.” Id . at 1010.

The majority also relies upon the decision o f a bankruptcy court, In re Angeles Corp
., 177 B. R. 9 20, 927 (B ankr. C.D. Cal. 1 9 95) that was summarily a f firmed by the B ankruptcy Appellate Panel. See 199 B

. R. 220 (B .A.P. 9th Cir. 1996).

The discussi o n section of Angeles is lig ht on the underly ing facts. The c o u r t n oted only that “it appears that ap p r ox imately $250 million o f money invested by limited p a rtners was lost f

rom inception of the partnerships to t h eI N R E K H A N 26

present.” Angeles
, 1 7 7 B. R. at 924. Addressing the subordination question, the court r uled that “claims alleg ing misconduct, breach of f

i d u c iary duty
, or wrong ful acts b y Debtor

. . . in manag ing the p a rtnerships subsequent to the purchase of the limited p artnership interests are not

. . . s u b ject to subordination

. . .” I d

. at 926 (emphase s i n t h e orig inal).

This inte r pretation ig nores the broad lang uag e of § 510. See W eissman v. Pre-Press Graphics Co., Inc

. ( In re PrePress Graphics Co., Inc
., 307 B .R. 65, 76 (N.D. I ll. 2 014) (describing Angeles as “supporting the narrow a pproach” to interpreting § 5 10). I t is also directly contrary to more recent precedent. See SeaQuest Diving
, 579 F .3d at 418 (involving resciss ion of creditor’s equity investment subsequent to the purchase); Tristar Esperanza Prop
., 7 8 2 F .3d at 497 (ex plicitly rejecting the arg ument that the subsequent nature of the claim dictates the outcome); Del Biaggio , 834 F .3d at 1007 ( addressing a subsequent fraud claim stemming from an equity investment).

I n the twenty -plus y ears that A n geles has been in

ex istence, the c ase has been widely and r o undly criticiz ed. I n t h e c a se of In re Enron Corp
., 341 B .R. 141, 154 (B ank r. S.D.N.Y. 2006), t h e bankruptcy court questioned whether Angeles “can still be considered g o o d law” in view of “the recent trend in the case law.” The c ourt described A n geles a s “embrac[ ing a ] restricted reading of section 510(b)” that h ad been “uniformly rejected” in more recent cases, and observed that these more recent cases “ex plicit l y d i s ag ree[ ] with the leg al principles” espou s ed in In re A ngeles

. I d

. The bankruptcy c o u rt e x pressly referenced our decision in Betacom
, noting that the holding in Betacom “eviscerates the log ic of Angeles even if the Betacom court did not addressI N R E K H A N 27

[ Angeles ] directl y

. Id

. at 155 (citation omitted); see also Frankum v. Int’l W

ireless Comm. Hldgs, Inc

. ( In re I nt’l W ireless ), 2 79 B

. R

. 4 6 3
, 469 n.2 (D. Del. 2002) (“[ T] he

v a l idity of

. . . A ngeles in this circuit is suspect

. . . According ly
, the Court declines to adopt the rationale[ ] o f [ Angeles .”] ); In re Pre-P r es s Graphics
, 307 B .R. at 77–78 (declaring Angeles “ n o t

. . . persuasive” and undermined b y
more r ecent p recedent from the Ninth Circuit); Id

. at 76 (“The statutory interpretation set forth in [ Angeles ]

. . . has been called int o doubt by recent decisions from the Third, Ninth and Tenth Circuits.”) ( emphasis add e d ); In re Granite Partners
, 208 B .R. 3 32, 342–43 (B ankr. S.D.N

. Y

. 1 997) (characteriz ing In re Angeles as “not persuasive”).

F inally
, but not incidental ly
, I disag ree with the majority ’s conclusion that B ar t o n should not be included within the categ ory of investors w h o as s umed the risk o f investment loss. As a s h areholder, B arton was the quintessential investor w hose fortune was tied to the ups a nd downs of his investment, including those linked to f raud. See Del Biaggio
, 8 34 F .3d a t 1011 (“As an investor, [ the creditor] barg a ined for increased risk in e x chang e for an e x pectation in
t he profits

. . .” “Cong ress enacted § 510(b) to pr ev e n t disappointed shareholders from rec o v e ring their investment loss by using fraud

. . . to bootstrap their way to parity with g eneral unsecured creditors

. . .”) (citation and footnote reference omitted). Unfortunately
, B arton is not ex empt.

I n sum, c onsidering the broad lang uag e of § 510(b) a nd the corresponding ly broad interpretati on we have consistently applied in our precedent, B arton, a shareholder in the debtor corporation, asserted c onversion claims arising from the purchase of his shares. W ithout a doubt, his c laim stemmed directly from the wrong ful appropriation of the very shares heI N R E K H A N 28

purchased. See Del Biaggio
, 834 F .3d at 1009. I respectfully dissent from the majority ’s contrary conclusion which, in my view, contravenes circuit precedent a nd the policy underly

ing § 510(b).