FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

IN RE ZAFAR DAVID KHAN,

Debtor,

Zafar David Khan,

Appellant,

v.

KENNETH BARTON; THOMAS BURKE;

NANCY K. CURRY, Chapter 13

Trustee,

Appellees.

No. 15-60002

BAP No.

14-1021

IN RE TERRANCE ALEXANDER

TOMKOW,

Debtor,

TERRANCE ALEXANDER TOMKOW,

Appellant,

v.

KENNETH BARTON,

Appellee.

No. 15-60003

BAP No.

14-1060
2 IN RE KHAN

IN RE TERRANCE ALEXANDER

TOMKOW,

Debtor,

TERRANCE ALEXANDER TOMKOW,

Appellant,

v.

KENNETH BARTON,

Appellee.

No. 15-60004

BAP No.

14-1020

IN RE ZAFAR DAVID KHAN,

Debtor,

ZAFAR DAVID KHAN,

Appellant,

v.

KENNETH BARTON,

Appellee.

No. 15-60005

BAP No.

14-1041
IN RE KHAN 3

IN RE TERRANCE ALEXANDER

TOMKOW,

Debtor,

TERRANCE ALEXANDER TOMKOW,

Appellant,

v.

KENNETH BARTON,

Appellee.

No. 15-60006

BAP No.

14-1061

IN RE ZAFAR DAVID KHAN,

Debtor,

ZAFAR DAVID KHAN,

Appellant,

v.

KENNETH BARTON,

Appellee.

No. 15-60007

BAP No.

14-1062

OPINION

Appeal from the Ninth Circuit

Bankruptcy Appellate Panel

Taylor, Dunn, and Kirscher, Bankruptcy Judges, Presiding

Argued and Submitted November 9, 2016

Pasadena, California
4 IN RE KHAN

Filed January 23, 2017

Before: Diarmuid F. O’Scannlain, Ferdinand F. Fernandez,

and Johnnie B. Rawlinson, Circuit Judges.

Opinion by Judge Fernandez;

Partial Concurrence and Partial Dissent by

Judge Rawlinson

SUMMARY*

Bankruptcy

On 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.

11 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

* This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.
IN RE KHAN 5

judgment entered against the debtors on account of their

actions in fraudulently converting the creditor’s stock.

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 7 proceedings.

Concurring 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.

COUNSEL

Lewis R. Landau (argued), Calabasas, California, for

Appellants. 

Patrick C. McGarrigle (argued) and Michael J. Kenney,

McGarrigle Kenney & Zampiello APC, Chatsworth,

California, for Appellees.
6 IN RE KHAN

OPINION

FERNANDEZ, Circuit Judge:

Zafar David Khan and Terrance Alexander Tomkow

(collectively “Debtors”) appeal the judgment1of 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),

2

and converted3the

Debtors’ Chapter 13 bankruptcy proceedings

4

to Chapter 7

proceedings.5 We affirm the decision of the bankruptcy

court.

BACKGROUND

In 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.

1 Khan v. Barton, (In re Khan) (“Khan I”), 523 B.R. 175, 178 (B.A.P.

9th Cir. 2014).

2 Hereafter all references to section numbers are to sections of Title

11 of the United States Code, unless otherwise indicated.

3

See § 1307(c).

4

 §§ 1301–1330.

5

 §§ 701–784.
IN RE KHAN 7

The 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.”

After 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 Barton’s

favor.

A few 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
8 IN RE KHAN

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.

Barton 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.

Barton 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).

After a 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
IN RE KHAN 9

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.

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 followed.

JURISDICTION AND STANDARDS OF REVIEW

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

“We 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 independentlyreviews 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 BankruptcyCode 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
10 IN RE KHAN

committed by the bankruptcy judge.” Aalfs, 525 F.3d at 876

(internal quotation marks omitted).

“We 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).

DISCUSSION

We will first consider the Debtors’ assertion that the

bankruptcy court and the BAP erred when they determined

that § 510(b) did not apply.

6 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.

I. Subordination of Barton’s Claims

Section 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

6

In light of our determination that § 510(b) does not apply, we need

not consider the Debtors’ assertion that Barton’s claims should be

disallowed because they were subordinated.
IN RE KHAN 11

other claims or interests.7 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 Biaggio),

834 F.3d 1003, 1010 (9th Cir. 2016). That effectively

overturned the basis of the BAP’s decision, and we now make

that explicit by rejecting the BAP’s contrary decision.

Nevertheless, we affirm the bankruptcy court’s decision

on the basis stated by that court, that is, we agree that

Barton’s claims did not arise out of a purchase or sale of

securities. No doubt Barton did purchase securities in RIL in

2001 shortly after RIL was founded. Also, we assume that

RIL is an affiliate of the Debtors.8 However, Barton’s claims

7

 More particularly, the section reads as follows:

For the purpose of distribution under this title, a claim

arising from rescission of a purchase or sale of a

security of the debtor or of an affiliate of the debtor, for

damages arising from the purchase or sale of such a

security, or for reimbursement or contribution allowed

under section 502 on account of such a claim, 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.

8 The Debtors alleged that each owned over 20% of RIL. See

§ 101(2)(B) (defining “affiliate”).
12 IN RE KHAN

against the Debtors do not arise from his purchase of RIL

securities. Rather, they are based upon the judgment entered

against the Debtors by the Superior Court on account of their

actions many years later (2009) when they fraudulently

converted Barton’s stock.

Of course, we have given a broad interpretation to the

“arising from”9language of the statute. For example, in Del

Biaggio, we found a sufficient nexus to a purchase and sale

where the claimant (Freeman) had been fraudulently induced

by the individual debtor to invest in an affiliate of the debtor. 

We pointed out that “Freeman’s claim is really no claim at all

but for his investment in [the affiliate].” Del Biaggio,

834 F.3d at 1009. In fact, Freeman’s claim was not for

misrepresentations as such, but for the investment he made in

“detrimental reliance on those misrepresentations.” Id. And

what he sought “correspond[ed] exactly to the amount he

invested.” Id.

The case at hand is quite different from Del Biaggio

because here what Barton seeks has nothing to do with his

investment, other than the fact that he had purchased the nowpurloined securities many years earlier. And the damages he

sought were not remotely related to the purchase; they were

simply a judgment measured by the value of the converted

property when the conversion took place.

We recognize that in other cases, where no actual

purchase or sale had been consummated, we found that

claims, nevertheless, arose from a purchase or sale

transaction. See, e.g., Pensco Tr. Co. v. Tristar Esperanza

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

9

See § 510(b).
IN RE KHAN 13

492, 496–97 (9th Cir. 2015) (the claim arose out of a failed

agreement by the debtor to purchase claimant’s stock); Am.

Broad. Sys., Inc. v. Nugent (In re Betacom of Phoenix, Inc.),

240 F.3d 823, 829–31 (9th Cir. 2001) (a merger fell through

so no ultimate sale took place, but claim still arose from a

sales transaction). While those cases do bespeak a broad

interpretation of “arising from,” there is a limit to the reach

of § 510(b), which stops short of encompassing every

transaction that touches on or involves stock in a corporation. 

That is well explicated in Racusin v. Am. Wagering, Inc. (In

re Am. Wagering, Inc.), 493 F.3d 1067 (9th Cir. 2007).

In Racusin, the claimant was promised that due to past

services he would be paid, in part, with common stock of the

company upon completion of a common offering or initial

public offering. Id. at 1070. When the contract was

breached, he sued the company and others for damages. 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 damages. We agreed

with him. Id. Thus, we “remanded the case to the district

court to calculate the monetary value of the . . . shares.” Id.

The amount was determined, the debtors quickly filed for

bankruptcy, Racusin filed a claim, and the debtors asserted

that § 510(b) required subordination. Id. We disagreed. Id.

at 1071. We pointed out that Racusin did not seek to be, and

was not, a shareholder. Rather, the value of the stock was

just the measuring stick for determining the “compensation

owed for services he performed pursuant to a contract that the

debtors breached.” Id. at 1073. Thus, he was a true creditor

rather than an equity investor in a “now-bankrupt

corporation.” Id.; see also In re Angeles Corp., 177 B.R. 920,

926 (Bankr. C.D. Cal. 1995) (debtor had committed bad acts

after claimant’s purchase of securities was complete, and
14 IN RE KHAN

claims did not arise from the purchase), aff’d, 199 B.R. 220

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

Here, Barton sought and obtained damages. Even though

his damage award for conversion was based on the value of

the securities at the time of conversion, his action did not

arise out of the purchase of the securities and the risks that

the purchase might entail. It arose out of the Debtors’

conversion of the securities many years later. The value of

the securities at the date of conversion was the measuring

stick.

Moreover, the oft-quoted rationales for the § 510(b)

subordination requirement10do not apply here. Primarily, the

separate wrongdoing of the Debtors had no connection to the

purchase or sale of Barton’s shares of stock in RIL; nor did

the judgments against the Debtors that form the basis for

Barton’s bankruptcy claims arise from a purchase or sale. In

any event, the risk that those who purchase or sell stock

(investors in a corporation) assume and expect to take is not

that the shares themselves will later be stolen outright by

other individuals.11 Nor, to the extent it applies at all, does

the equity cushion rationale affect our decision here.12 Even

if the Debtors’ creditors did, somehow, rely upon the equity

contributed by RIL’s investors, that does not touch upon the

separate torts committed by the Debtors in this case.

10 See Betacom, 240 F.3d at 830 (dissimilar risks and equity cushion

rationales).

11 See id.; see also Del Biaggio, 834 F.3d at 1010–11.

12 Betacom, 240 F.3d at 830; see also Del Biaggio, 834 F.3d at

1011–12.
IN RE KHAN 15

In short, the bankruptcy court did not err when it refused

to subordinate Barton’s claims pursuant to § 510(b).

II. Conversion of Chapter 13 Proceedings to Chapter 7

Proceedings

The Debtors also assert that the bankruptcy court clearly

erred when it found bad faith,13and abused its discretion14

when it converted their Chapter 13 proceedings to Chapter 7

proceedings.15 We disagree. The bankruptcy court was

required to and did consider “the totality of the

circumstances.” Eisen v. Curry (In re Eisen), 14 F.3d 469,

470 (9th Cir. 1994) (per curiam) (internal quotation marks

omitted). However, the Debtors point to the factors we

outlined in Leavitt, 171 F.3d at 1224. Those are:

(1) whether the debtor misrepresented

facts in his petition or plan, unfairly

manipulated the Bankruptcy Code, or

otherwise filed his Chapter 13 petition or plan

in an inequitable manner;

(2) the debtor’s history of filings and

dismissals;

13 See Leavitt, 171 F.3d at 1222–23; de la Salle v. U.S. Bank, N.A. (In

re de la Salle), 461 B.R. 593, 605 (B.A.P. 9th Cir. 2011).

14 See Rosson, 545 F.3d at 771; see also Hinkson, 585 F.3d at

1263–64.

15 See § 1307(c).
16 IN RE KHAN

(3) whether the debtor only intended to

defeat state court litigation; and

(4) whether egregious behavior is present.

Id. (citations, internal quotation marks, and brackets

omitted). The bankruptcy court was well aware of those

factors, and declared that the second factor did not cut against

the Debtors. It did, however, find manipulation of the

bankruptcy proceedings (first factor) and interference with

the state proceedings (third factor). Moreover, although it did

not specifically mention the egregiousness of the Debtors’

behavior, it plainly thought that the behavior was quite

troubling at the very least (fourth factor). The BAP agreed

with the bankruptcy court’s analysis. See Khan I, 523 B.R. at

185–87.

The Debtors attack those determinations and concentrate

a good deal of their firepower on Leavitt’s third factor. 

Leavitt, 171 F.3d at 1224; see alsoChinichian v. Campolongo

(In re Chinichian), 784 F.2d 1440, 1445 (9th Cir. 1986). 

They focus on the word “only” and take that to mean that

defeating state court litigation had to be the sole motive, but

we have not so treated it. For example, in Leavitt itself we

decided that avoidance was merely the “primary” motive. 

Leavitt, 171 F.3d at 1225; see also Eisen, 14 F.3d at 470 (if

only intent is to defeat state court litigation, that is bad faith);

Chinichian, 784 F.2d at 1445 (multitude of factors showed

bad faith, including the real purpose of the filing). The

Debtors do not appear to recognize that the factors are simply

factors to consider and that not every one of them must be

met. That rather blinds them to the overarching requirement

that what matters is “the ‘totality of the circumstances.’”

Eisen, 14 F.3d at 470; see also Ho v. Dowell (In re Ho),
IN RE KHAN 17

274 B.R. 867, 877 (B.A.P. 9th Cir. 2002) (a court must decide

“‘in the light of all militating factors’”). The BAP recognized

that. See Khan I, 523 B.R. at 185. As the BAP put it: “Even

if a debtor presents more than one purpose for filing, the third

Leavitt factor does not fail to support cause if the other

purpose also reflects bad faith. And, once again, the third

factor is considered in a totality of the circumstances

context.” Id. at 186.

We have carefully reviewed the record together with

decisions of the bankruptcy court and the BAP, and are

satisfied that the evidence fully supports the determinations

that there was bad faith and that conversion was appropriate. 

The highly suspect timing of the Debtors’ Chapter 13

petitions, their failure and refusal to provide financial

information critical to the determination of the value of their

assets, and their further failure to provide information

regarding the movement of funds among their various

business entities all combined to justify the conversion

decision.

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

discretion.

CONCLUSION

This case presents a saga of picaresque behavior. The

Debtors converted Barton’s stock and were required by the

Superior Court to pay substantial damages as a result. In the

bankruptcy proceedings, their timing was at least suspicious,

and they continued their inappropriate behavior by refusing

to be forthcoming about the nature and activities of the

business entities they controlled. On this record, the

bankruptcy court properly determined that Barton’s claims
18 IN RE KHAN

should not be subordinated and that the Chapter 13

proceedings should be converted to Chapter 7 proceedings. 

We, therefore, affirm the bankruptcy court.16

AFFIRMED. Barton shall recover his costs on appeal.

RAWLINSON, Circuit Judge, concurring in part and

dissenting in part:

I agree with the majority that the bankruptcy court acted

within its discretion when it converted the debtors’

bankruptcy proceedings from Chapter 13 to Chapter 7. I also

join the majority’s conclusion that 11 U.S.C. § 510(b) applies

to Debtors who are individuals. However, I dissent from the

conclusion of the majority that § 510(b) is inapplicable

because the claims of Kenneth Barton did not arise from a

purchase or sale of securities. In my view, the opposite

conclusion is inescapable–that Barton’s claim did arise from

the purchase or sale of a security under § 510(b).

It is undisputed that Barton purchased securities in RPost

International, Ltd. It is also undisputed that Debtors

impermissibly converted Barton’s stock. However, that

conversion did not erase the fact that Barton’s subsequent

claims against Debtors arose from his previous purchase of

securities.

The majority acknowledges that we have consistently

interpreted the phrase “arising from” broadly. Majority

16 Of course, in so doing we have rejected the reasoning of the BAP

on the subordination issue.
IN RE KHAN 19

Opinion, p. 12–12. We most recently reiterated that

interpretation in Del Biaggio Liquidating Trust v. Freeman

(In re Del Biaggio), 834 F.3d 1003, 1009 (9th Cir. 2016)

(“[W]e observe that § 510(b)’s arising from language reaches

broadly to subordinate damage claims involving qualifying

securities.”) (citation and internal quotation marks omitted). 

We went on to explicate that the “arising from” phraseology

is “broader than causation” and is “ordinarily understood to

mean ‘originating from,’ ‘having its origin in’ ‘growing out

of,’ or ‘flowing from’ or in short, ‘incident to or having

connection with.’” Id. (citation omitted).

We rejected the creditor’s contention that his claims did

not arise from the purchase or sale of securities because the

claimant was indisputably an investor in the debtor’s affiliate. 

See id. at 1008–09. Rather, we continued to adhere to “one

of the general principles of corporate and bankruptcy law”

embodied within the text of § 510(b): “that creditors are

entitled to be paid ahead of shareholders in the distribution of

corporate assets.” Id. at 1008 (quoting Racusin v. American

Wagering Inc. (In re American Wagering), 493 F.3d 1067,

1071 (9th Cir. 2007)).

In Del Biaggio, we cited our precedent concluding that a

claimant was a shareholder even though the debtor’s

defalcation “converted the claimant’s interest from an equity

interest to a debt interest before the bankruptcy filing.” Id. at

1009 (quoting Pensco Trust Co. v. Tristar Esperanza

Properties, LLC (In re Tristar Esperanza Properties, LLC),

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

We also referenced American Broadcasting Sys. v.

Nugent (In re Betacom of Phoenix, Inc.), 240 F.3d 823, 830

(9th Cir. 2001), as an example of our broad interpretation of
20 IN RE KHAN

§ 510(b). See id. We explained that we applied § 510(b) to

a damages claim predicated on a “purported breach of

contract in a merger agreement” because the claim was “one

‘surrounding’ the sale or purchase of a security of the

debtor.” Id. (quoting In re Betacom, 240 F.3d at 829).

In addition, we noted that our broad interpretation of the

“arising from” language of § 510(b) is consistent with the

interpretations advanced by our sister circuits. See id.

(referencing Templeton v. O’Cheskey (In re Am. Hous.

Found.), 785 F.3d 143 (5th Cir. 2015); SeaQuest Diving, LP

v. S&J Diving, Inc. (In re SeaQuest Diving, LP), 579 F.3d

411, 421–22 (5th Cir. 2009); Rombro v. Dufrayne (In re Med

Diversified, Inc.), 461 F.3d 251, 254–55 (2d Cir. 2006)).

The majority also cites our precedent and does not

attempt to distinguish it, other than to try to fit the facts of

this case within the confines of our decision in American

Wagering. See Majority Opinion, p. 12–13. However, the fit

is cramped and imperfect. Preliminarily, in Del Biaggio, we

described our decision in American Wagering as requiring

subordination “where there exists some nexus or causal

relationship between the claim and the purchase of the

securities.” Del Biaggio, 834 F.3d at 1009 (citation and

internal quotation marks omitted) (emphasis added). We

explained that the facts in American Wagering did not fall

within our broad interpretation because, and onlybecause, the

claimant’s contract with the debtor was explicitly not for the

purchase or sale of securities. See id. Rather, the contract

was explicitly for services as a financial advisor. The

resulting agreement stated:
IN RE KHAN 21

Should [the creditor] bring in a buyer . . . said

company will be paid a commission based on

5% of the purchase price.

In re Am. Wagering, 493 F.3d at 1069.

Seven months later, another agreement was entered into

between the same parties, with the following provision:

[Claimant] has been our financial advisor for

the purpose of an initial public offering . . . 

As compensation he would be paid 4 1⁄2% of

the final evaluation in the form of . . .

common stock and $150,000 cash.

Id. at 1070.

After two years, the debtor filed an action against the

creditor seeking to invalidate the contract in its entirety. See

id. Following a jury trial, a verdict was rendered in favor of

the creditor for “stock . . . in an amount equal to 4.5% of

$45,000,000 [the final valuation of the common stock] and

$150,000 in cash.” Id. Consistent with this verdict, the court

awarded the creditor 337,500 shares of stock worth $2.025

million. See id.

The creditor appealed the award, arguing that it was error

for the court to award specific performance by way of

bestowing stock, when the creditor requested money

damages. See id. We agreed and remanded for the court to

calculate the monetary equivalent of the 337,500 shares. See

Leroy’s Horse and Sports Place v. Racusin, 21 Fed. Appx.

716, 717–18 (9th Cir. 2001). On remand, the creditor was

awarded monetary damages of $2,310,000–$150,000 cash
22 IN RE KHAN

plus $2,160,000 (the value of the stock as of the date when

the creditor could have sold his shares). See American

Wagering, 493 F.3d at 1070.

Shortly after the damages award, the debtor filed for

Chapter 11 bankruptcy protection, and sought to subordinate

the creditor’s claim pursuant to § 510(b). See id.

As we observed in Del Biaggio, the creditor in American

Wagering never sought “to recover an investment loss.” Del

Biaggio, 834 F.3d at 1009. Rather, the creditor’s “contract

with the debtor merely used stock value as a basis for

calculating compensation.” Id. We clarified in American

Wagering that the creditor “received a money judgment for

services rendered.” 493 F.3d at 1073. We referenced “[o]ur

earlier decision” reversing the award of stock to the creditor

as making it clear that the creditor’s “underlying claim [was]

a debt claim, not an equity claim.” Id. The creditor “did not

sue debtors as an equity investor seeking monetary damages

for fraud . . . related to their mishandling of shareholders’

economic investment.” Id. Instead, the creditor brought his

action as an individual who was not compensated as provided

in an employment agreement. See id.

In contrast, Barton initially brought his action in state

court specifically describing himself as a shareholder who

had been wrongfully deprived of his shares by the debtors. In

his Third Amended Complaint, Barton asserted that he was

issued 6,016,500 shares of RPost InternationalLimited Stock,

that Defendants owed. Barton alleged that he was “a

shareholder,” owed a fiduciary duty of disclosure, and

Defendants wrongfully converted Barton’s shares of stock,

causing Barton to suffer damages “[a]s a direct, proximate,

and foreseeable result of the taking and conversion of
IN RE KHAN 23

Barton’s shares . . .” Third Amended Complaint, Barton v.

RPostInternational Ltd, Case No. YC061581, Superior Court

of the State of California for the County of Los AngelesSouthwest District, February 16, 2011, pp. 5–9.

Consistent with Barton’s allegations focusing exclusively

on the conversion of his shares, the Superior Court judge

continued in the same vein. Indeed, the decision of the state

court judge leaves no doubt about the genesis of Barton’s

claims. The state court “issue[d] a declaration that Plaintiff

Barton was at all relevant times an owner of 6,016,500

common shares . . . and that he provided appropriate

consideration for said shares of stock. . . .” Statement of

Decision, Barton v. RPost International Ltd., Case No.

YC061581, Superior Court of the State of California for the

County of Los Angeles, August 3, 2012, p. 5. The state court

prohibited RPost International “from taking any action to

encumber, forfeit, and/or cancel Barton’s shares without

having obtained prior written approval from either the court,

Barton or his duly authorized counsel.” Id.

The court ordered Defendants to restore the shares of

stock to Barton. See id., p. 8. Leaving no doubt that the

remedy was intended to restore Barton to the position of

shareholder, the state court ordered that Barton “have no role

in the management of the company but . . . be given

reasonable notice of meetings of its shareholders and major

transactions.” Id. The state court “encouraged [the parties]

to meet and confer to determine, on their own, a purchase

price for Barton’s shares of stock so that a potentially

uncomfortable relationship going forward can be avoided.” 

Id. (emphasis added).
24 IN RE KHAN

The state court’s order unequivocally restored Barton to

his status as a shareholder in RPost International. Unlike the

creditor in American Wagering, the record nowhere reflects

that Barton objected to the remedy of specific performance. 

It was only after the punitive damages phase of the trial that

the state court awarded the monetary value of the stock to

Barton. See Ruling on Punitive Damages and Revisions to

Statement of Decision, Barton v. RPost International Ltd.,

Case No. YC061581, Superior Court of the State of

California for the County of Los Angeles, June 18, 2013, pp.

1–2. Nevertheless, the state court continued to link its

damages award to the conversion of Barton’s shares. See id.,

p. 2. The court explained that because “the assets and

character of RPost International had changed dramatically . . .

returning the 6,016,500 shares to Mr. Barton would

undoubtedly spark an endless round of post-judgment

motions and additional lawsuits.” Id. However, the court

never strayed from its conclusion that Mr. Barton was entitled

to this remedy as a shareholder of RPost International. See

id.

The facts of this case are not even close to those we

considered in American Wagering. In that case, the creditor

was never a shareholder of the debtor and never sought or

accepted specific performance by way of the award of shares. 

See Am. Wagering, 493 F.3d at 1069–70. The plaintiff in that

case steadfastly based his claim on an employment contact

that was simply measured by the price of the stock. See id. at

1071 (noting that the original contract “only gave [the

creditor] the monetary value of the shares of stock, not the

stock itself”). Notably, the plaintiff in American Wagering

actually appealed the district court’s decision awarding stock

as a remedy. See id. at 1070. In contrast, Barton predicated

his entire complaint on his status as a shareholder. No other
IN RE KHAN 25

basis for recovery was ever articulated, and Barton posed no

objection when the state court awarded him shares and

shareholder rights as a remedy. At bottom, Barton’s claim is

closer to the facts of Del Biaggio, where we characterized the

damages claim in a similar fraudulent scheme resulting in the

loss of equity shares as “clearly one arising from the sale or

purchase of securities.” 834 F.3d at 1009. As in Del Biaggio,

the damages sought by Barton and awarded by the state court

“correspond exactly to the amount [Barton] invested in

[RPost International] through his initial purchase of [RPost

International] securities . . .” Id. As in Del Biaggio,

“[Barton’s claim is really no claim at all but for his

investment in [RPost International]. Id.

Similar to the majority’s approach, the creditor in Del

Biaggio sought to “analogiz[e] his case to the facts of

American Wagering.” Id. We rejected the proposed analogy

because the creditor in Del Biaggio, like Barton, sought to

“recover an investment loss,” id., rather than “valu[ing] a

free-standing injury by reference to a security.” Id. at

1009–10. As in Del Biaggio, without a separate source of

injury unrelated to his security holdings, Barton’s “asserted

injury is inseparable from his [RPost International]

investment.” Id. at 1010.

The majority also relies upon the decision of a bankruptcy

court, In re Angeles Corp., 177 B.R. 920, 927 (Bankr. C.D.

Cal. 1995) that was summarily affirmed by the Bankruptcy

Appellate Panel. See 199 B.R. 220 (B.A.P. 9th Cir. 1996).

The discussion section of Angeles is light on the

underlying facts. The court noted only that “it appears that

approximately $250 million of money invested by limited

partners was lost from inception of the partnerships to the
26 IN RE KHAN

present.” Angeles, 177 B.R. at 924. Addressing the

subordination question, the court ruled that “claims alleging

misconduct, breach of fiduciary duty, or wrongful acts by

Debtor . . . in managing the partnerships subsequent to the

purchase of the limited partnership interests are not . . .

subject to subordination . . .” Id. at 926 (emphases in the

original).

This interpretation ignores the broad language of § 510. 

See Weissman v. Pre-Press Graphics Co., Inc. (In re PrePress Graphics Co., Inc., 307 B.R. 65, 76 (N.D. Ill. 2014)

(describing Angeles as “supporting the narrow approach” to

interpreting § 510). It is also directly contrary to more recent

precedent. See SeaQuest Diving, 579 F.3d at 418 (involving

rescission of creditor’s equity investment subsequent to the

purchase); Tristar Esperanza Prop., 782 F.3d at 497

(explicitly rejecting the argument 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).

In the twenty-plus years that Angeles has been in

existence, the case has been widely and roundly criticized. In

the case of In re Enron Corp., 341 B.R. 141, 154 (Bankr.

S.D.N.Y. 2006), the bankruptcy court questioned whether

Angeles “can still be considered good law” in view of “the

recent trend in the case law.” The court described Angeles as

“embrac[ing a] restricted reading of section 510(b)” that had

been “uniformly rejected” in more recent cases, and observed

that these more recent cases “explicitly disagree[ ] with the

legal principles” espoused in In re Angeles. Id. The

bankruptcy court expressly referenced our decision in

Betacom, noting that the holding in Betacom “eviscerates the

logic of Angeles even if the Betacom court did not address
IN RE KHAN 27

[Angeles] directly. Id. at 155 (citation omitted); see also

Frankum v. Int’l Wireless Comm. Hldgs, Inc. (In re Int’l

Wireless), 279 B.R. 463, 469 n.2 (D. Del. 2002) (“[T]he

validity of . . . Angeles in this circuit is suspect . . . 

Accordingly, the Court declines to adopt the rationale[ ] of

[Angeles.”]); In re Pre-Press Graphics, 307 B.R. at 77–78

(declaring Angeles “not . . . persuasive” and undermined by

more recent precedent from the Ninth Circuit); Id. at 76 (“The

statutory interpretation set forth in [Angeles] . . . has been

called into doubt by recent decisions from the Third, Ninth

and Tenth Circuits.”) (emphasis added); In re Granite

Partners, 208 B.R. 332, 342–43 (Bankr. S.D.N.Y. 1997)

(characterizing In re Angeles as “not persuasive”).

Finally, but not incidentally, I disagree with the

majority’s conclusion that Barton should not be included

within the category of investors who assumed the risk of

investment loss. As a shareholder, Barton was the

quintessential investor whose fortune was tied to the ups and

downs of his investment, including those linked to fraud. See

Del Biaggio, 834 F.3d at 1011 (“As an investor, [the creditor]

bargained for increased risk in exchange for an expectation in

the profits . . .” “Congress enacted § 510(b) to prevent

disappointed shareholders from recovering their investment

loss by using fraud . . . to bootstrap their way to parity with

general unsecured creditors . . .”) (citation and footnote

reference omitted). Unfortunately, Barton is not exempt.

In sum, considering the broad language of § 510(b) and

the correspondinglybroad interpretation we have consistently

applied in our precedent, Barton, a shareholder in the debtor

corporation, asserted conversion claims arising from the

purchase of his shares. Without a doubt, his claim stemmed

directly from the wrongful appropriation of the very shares he
28 IN RE KHAN

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 and the policy underlying

§ 510(b).