1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

FILED

DEC 09 2014

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

ORDERED PUBLISHED

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP Nos. CC-14-1021-TaDKi

) CC-14-1041-TaDKi

ZAFAR DAVID KHAN, ) CC-14-1062-TaDKi 

)

Debtor. ) Bk. No. 2:13-bk-19713-WB

______________________________)

) Adv. No. 2:13-ap-01962-WB

ZAFAR DAVID KHAN, )

)

Appellant, )

)

v. )

)

KENNETH BARTON; THOMAS BURKE; )

NANCY K. CURRY, Chapter 13 )

Trustee,* )

)

Appellees. )

 )

)

In re: ) BAP Nos. CC-14-1020-TaDKi

) CC-14-1060-TaDKi

TERRANCE ALEXANDER TOMKOW, ) CC-14-1061-TaDKi

)

Debtor. ) Bk. No. 2:13-bk-19712-WB

______________________________)

) Adv. No. 2:13-ap-01989-WB

TERRANCE ALEXANDER TOMKOW, )

)

Appellant, )

)

v. ) O P I N I O N

)

KENNETH BARTON; THOMAS BURKE; )

NANCY K. CURRY, Chapter 13 )

Trustee,* )

)

Appellees. )

 )

Argued and Submitted on October 23, 2014

at Malibu, California

* Appellees Thomas Burke and Nancy K. Curry did not file

briefs and did not participate in these appeals.
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Filed – December 9, 2014

Appeal from the United States Bankruptcy Court

for the Central District of California

Honorable Julia W. Brand, Bankruptcy Judge, Presiding

 

Appearances: Lewis R. Landau of Horgan, Rosen, Beckham &

Coren, LLP for appellants Zafar David Khan and

Terrance Alexander Tomkow; Patrick C. McGarrigle

of McGarrigle, Kenney & Zampiello, APC for

appellee Kenneth Barton.

 

Before: TAYLOR, DUNN, and KIRSCHER, Bankruptcy Judges.

2
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

TAYLOR, Bankruptcy Judge:

Creditor and appellee Kenneth Barton successfully recovered

a state court judgment against debtors and appellants Zafar

David Khan and Terrance Alexander Tomkow (jointly,

“Appellants”)1 and their corporation, RPost International, Ltd.

(“RIL”), based on conversion, fraud, breach of fiduciary duty,

and California statutory violations related to his loss of

common stock shares in RIL. The state court found the

Appellants and RIL jointly and severally liable to Barton for

compensatory damages and also awarded him punitive damages

against the Appellants.

Prior to the final liquidation of damages, the Appellants

each filed a chapter 132 petition. Barton filed proofs of claim

in each case and also moved to convert both chapter 13 cases to

chapter 7. The Appellants each countered with an adversary

proceeding; they sought to disallow Barton’s claims under

§ 502(b)(1) based on the allegation that the claims were subject

to mandatory subordination under § 510(b). They also filed

objections to Barton’s claims in their respective bankruptcy

1 The Appellants moved for permission to file a single

brief and excerpts of record as to all six of the related

appeals. A BAP motions panel granted the unopposed request. 

This treatment continues the same approach employed by the

bankruptcy court and the parties before it; that is, a de facto

joint administration of these proceedings.

The BAP Clerk of Court is directed to enter this

disposition in each of these six related appeals.

2 Unless otherwise indicated, all chapter and section

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

3
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

cases on the same theory.

After a hearing, the bankruptcy court converted the cases

to chapter 7 and overruled the claims objections. And, based on

the Appellants’ representations that the claims objections

resolved the adversary proceedings, it also dismissed the

adversary proceedings with prejudice. These six related appeals

followed.

We conclude that mandatory subordination was not required

in relation to Barton’s claims and, thus, that the bankruptcy

court did not err in overruling the claims objections and

dismissing the adversary proceedings with prejudice. Nor did it

abuse its discretion in converting the cases to chapter 7. 

Therefore, we AFFIRM.

FACTS

During the “dot-com bubble” of the late 1990s, the

Appellants and Barton co-founded start-up companies RPost, Inc.

and RIL, which owned or controlled various patents relating to

authentication and verification of emails and electronic

payments. Barton subsequently suffered a stroke and was

sidelined from active involvement in the businesses. Afterward,

his relationship with the Appellants deteriorated to the point

that he commenced litigation seeking unpaid compensation and

reimbursement of expenses.

During the course of that litigation, Barton discovered

that the Appellants took control of his 6,016,500 common stock

shares in RIL, returned them to the company treasury, and

thereby divested him of an equity interest in RIL. 

Consequently, he commenced another action against the Appellants

4
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

and RIL, among others, for conversion, fraud, breach of

fiduciary duty, and violations of the California Business and

Professions Code.

In August 2012, the state court determined that Barton met

his burden of proof on all of the causes of action against the

Appellants and RIL. As a result, it initially ordered the

reissue of the converted RIL shares to Barton and awarded

monetary damages for emotional distress. It also determined

that the Appellants acted with malice, oppression, and fraud

and, thus, that Barton was entitled to punitive damages. The

state court subsequently conducted a second phase of trial to

determine the appropriate amount of punitive damages.

On April 14, 2013 – the eve of the final hearing on

punitive damages – the Appellants each filed a chapter 13

petition. In addition to Barton’s claims, the Appellants each

scheduled their respective secured mortgage debt and credit card

debts.3

Thereafter, the bankruptcy court approved stipulated stay

relief that allowed the state court action to continue to

finalization of the judgment.4 In a revised statement of

decision and ruling on punitive damages issued in June 2013, the

3 Both of the Appellants also scheduled a few “notice only”

creditors, including the Internal Revenue Service and their

state court attorney, on their schedules E and F; there were no

claim amounts provided for these creditors.

4 We exercised our discretion to take judicial notice of

documents electronically filed in the adversary proceedings and

bankruptcy cases as necessary. See Atwood v. Chase Manhattan

Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP

2003).

5
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

state court reversed its decision to order restoration of

Barton’s converted RIL stock; instead, it awarded the value of

the converted stock. It, thus, entered a judgment awarding

Barton compensatory damages in the amount of $2,840,060 (the

value of his dispossessed RIL common stock shares), damages for

emotional distress, and $880,021.91 in prejudgment interest. 

The judgment provided for joint and several liability for these

compensatory damages against each of the Appellants and RIL. 

The state court also awarded punitive damages to Barton; it

awarded $250,000 against Khan and $150,000 against Tomkow. The

Appellants appealed from the judgment to the California court of

appeal; to our knowledge, the appeal remains pending.

Barton filed proofs of claim in the bankruptcy cases and

commenced adversary proceedings against the Appellants, seeking

to deem the state court judgment nondischargeable under

§ 523(a)(2), (a)(4), and (a)(6). Barton subsequently moved to

convert both of the Appellants’ chapter 13 cases to chapter 7

based on, among other things, bad faith filings.

Days later, the Appellants commenced adversary proceedings

against Barton. The adversary complaints contained a single

claim for relief: disallowance of Barton’s claims pursuant to

§ 502(b)(1) based on mandatory subordination under § 510(b). 

Concurrently, they filed objections to Barton’s claims on the

adversary proceeding dockets based on the same grounds. The

Appellants filed identical claims objections in their chapter 13

cases.

The bankruptcy court simultaneously heard the motions to

convert and claims objections. At an initial hearing, it noted

6
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

its disinclination to rule on the claims objections given the

pending adversary proceedings. The Appellants, however,

requested consideration of the claims objections at a continued

hearing, asserted that they filed the adversary proceedings only

to comply with procedural rules, and acknowledged that a ruling

on the claims objections would resolve the adversary

proceedings.

At the continued hearing, the bankruptcy court orally ruled

in favor of Barton on both the motions to convert and the claims

objections. Based on the factors set forth in Leavitt v. Soto

(In re Leavitt), 171 F.3d 1219 (9th Cir. 1999), it found that

the Appellants filed their chapter 13 cases in bad faith and,

thus, it determined that cause for conversion to chapter 7

existed. The bankruptcy court found that the timing of the

Appellants’ chapter 13 filings evidenced an intent to defeat the

state court action and that Appellants refused to provide

sufficiently complete and accurate financial information

relating to settlements and transactions involving their

companies. As to the claims objections, it determined that

Barton’s claims were not subject to mandatory subordination

under § 510(b).

The bankruptcy court entered orders converting the cases

and overruling the claims objections, as well as judgments

dismissing the adversary proceedings with prejudice. The

Appellants timely appealed.

JURISDICTION

The bankruptcy court had jurisdiction pursuant to 28 U.S.C.

§§ 1334 and 157(b)(2)(B) and (O). We have jurisdiction under 28

7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

U.S.C. § 158.

ISSUES

1. Did the bankruptcy court err in determining that Barton’s

claims were not subject to mandatory subordination and,

thus, overruling the Appellants’ claims objections?

2. Did the bankruptcy court err in dismissing the Appellants’

adversary proceedings?

3. Did the bankruptcy court abuse its discretion in converting

the Appellants’ chapter 13 cases to chapter 7?

STANDARDS OF REVIEW

We review de novo the bankruptcy court’s dismissals of the

adversary proceedings with prejudice. In the context of the

claims objections, we review the bankruptcy court’s legal

conclusions de novo and its factual findings for clear error. 

See Pierce v. Carson (In re Rader), 488 B.R. 406, 409 (9th Cir.

BAP 2013) (“An order overruling a claim objection can raise

legal issues (such as the proper construction of statutes and

rules) which we review de novo, as well as factual issues (such

as whether the facts establish compliance with particular

statutes or rules), which we review for clear error.” (citation

omitted)).

Factual findings are clearly erroneous if illogical,

implausible, or without support in inferences that may be drawn

from the facts in the record. See TrafficSchool.com, Inc. v.

Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United

States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en

banc)). Bad faith is a factual finding reviewed for clear

error. Ellsworth v. Lifescape Med. Assocs., P.C. (In re

8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP 2011).

An order converting a chapter 13 case to chapter 7 is

reviewed for an abuse of discretion. Rosson v. Fitzgerald (In

re Rosson), 545 F.3d 764, 771 (9th Cir. 2008). A bankruptcy

court abuses its discretion if it applies the wrong legal

standard, misapplies the correct legal standard, or if its

factual findings are clearly erroneous. TrafficSchool.com,

Inc., 653 F.3d at 832.

We may affirm on any basis in the record. Caviata Attached

Homes, LLC v. U.S. Bank, N.A. (In re Caviata Attached Homes,

LLC), 481 B.R. 34, 44 (9th Cir. BAP 2012).

DISCUSSION5

A. The bankruptcy court did not err in determining that

Barton’s claims were neither subject to mandatory

subordination nor appropriately dismissed.

The Appellants argue that the bankruptcy court erred when

it failed to disallow Barton’s claims based on the alleged

necessity for mandatory subordination of the claims under

5 Barton filed a request for judicial notice as to an order

entered by the United States District Court for the Eastern

District of Texas in an unrelated action. He seeks to

supplement the record on our review of the bankruptcy court’s

decision to convert the cases with the district court’s findings

and conclusions as to the Appellants’ conduct in that case. The

district court’s order, however, was entered on January 30, 2014

– after the bankruptcy court’s entry of all of the orders and

judgments on appeal here except for the judgment dismissing

Tomkow’s adversary proceeding.

Given that we review the bankruptcy court’s decision to

convert the cases for an abuse of discretion, we decline to take

judicial notice of bad faith findings that were not before the

bankruptcy court when it rendered its decision. Therefore, we

deny Barton’s request for judicial notice.

9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

§ 510(b). We disagree. On this record, disallowance would not

follow mandatory subordination, even if subordination was

appropriate. In any event, on this record, subordination was

not required.

As the dismissal judgments were predicated on the orders

overruling the claims objections, we first review the decisions

on the claims objections.

1. The bankruptcy court correctly overruled the claims

objections.

The Appellants contend that the plain language of § 510(b)

requires mandatory subordination of Barton’s claims and, as a

result, that claims disallowance under § 502(b)(1) necessarily

follows. Although the bulk of the Appellants’ arguments focus

on mandatory subordination, it is clear that subordination is

simply a means to an end: the total disallowance of Barton’s

claims. We conclude that disallowance would never result in

these cases.

a. Even if Barton’s claims were subject to mandatory

subordination, statutory claims disallowance

would not follow.

Generally speaking, subordination relates to the order of

distribution among a debtor’s creditors, not whether a claim is

allowed under the Code. See O’Donnell v. Tristar Esperanza

Props., LLC (In re Tristar Esperanza Props., LLC), 488 B.R. 394,

404 (9th Cir. BAP 2013) (“The purpose of subordination . . . is

to adjust the place in line of certain claims in the bankruptcy

distribution scheme.”). Although subordination may result in

the functional disallowance of a claim, it is not a statutory

10
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

basis for claims disallowance. See Travelers Cas. & Sur. Co. of

Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 449 (2007) (claims

disallowance is limited to grounds set forth in § 502(b)(1)-

(9)).

Here, the Appellants contend that mandatory subordination

effectuates disallowance under § 502(b)(1) “because a holder of

common stock has no claim or interest against individual

[d]ebtors.” We certainly agree that one cannot hold an equity

interest in another human being. But, other than quoting

§ 502(b)(1) in their brief on appeal, the Appellants’ argument

lacks both logical development and any authoritative support.

The Appellants’ cursory reference to Carrieri v. Jobs.com

Inc., 393 F.3d 508 (5th Cir. 2004), does not aid them. As

directly relevant here, the Fifth Circuit affirmed the district

court’s determination that a shareholders group’s asserted

claims based on a contract allowing redemption of shares and

warrants were “equity securities,” as defined by § 101(16)(C). 

Id. at 518-28. In doing so, it concluded that, “even assuming

arguendo” that the shareholders held claims, the bankruptcy

court properly disallowed the claims for two reasons: (1) the

claims were subject to subordination under § 510(a) or (b); and

(2) the shareholders’ rights under the operative agreement with

the debtor were neither ripe nor exercised as of the petition

date. Id. at 526-27.

Carrieri is distinguishable. There, the debtor was a

corporation, not an individual, and the shareholders held only

equity securities within the meaning of § 101(16). Here, the

Appellants are individuals, and they fail to explain how any

11
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

claim based on a state court judgment is categorized correctly

as an equity security, within the plain meaning of § 101(16), as

opposed to being categorized as a claim under § 101(5)(A). More

importantly, they fail to recognize that while the Carrieri

bankruptcy court disallowed claims following subordination under

§ 510(b), it did so because there was no then-existing right to

payment or recovery as required for a claim under § 101(5)(A). 

Id. at 524-25. Here, the state court judgment created a present

right to payment. And, finally, they fail to acknowledge that

the Fifth Circuit noted support for the theory that equity

securities are not always mutually exclusive of a claim,

although it ultimately determined not to finally decide that

issue. Id. at 525. Carrieri, if anything, makes clear that

what Barton holds here is a claim or right to payment - not an

equity security.

On this record, there is no basis for claims disallowance

under § 502(b)(1) - even if mandatory subordination is

appropriate; and it is not.

b. Barton’s claims were not subject to mandatory

subordination under the Code.

Section 510(b) “mandates the subordination of damages

claims arising from the purchase or sale of a security.”6 Am.

Broad. Sys., Inc. v. Nugent (In re Betacom of Phx., Inc.), 240

F.3d 823, 827 (9th Cir. 2001) (internal quotation marks

6 Mandatory subordination also includes claims arising from

rescission of a purchase or sale of security and allowed

reimbursement or contribution under § 502 on account of such a

claim. Those types of claims, however, are not at issue in this

appeal.

12
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

omitted). The Ninth Circuit broadly interprets the scope of

§ 510(b). See In re Tristar Esperanza Props., LLC, 488 B.R. at

403.

Our analysis here begins with the statutory construction of

§ 510(b), “the first step of which is to determine whether the

language has a plain and unambiguous meaning with regard to the

particular dispute.” Hawkins v. Franchise Tax Bd. of Cal., 769

F.3d 662, 666 (9th Cir. 2014). This first step requires an

evaluation of “not only the specific provision at issue, but

also the structure of the statute as a whole, including its

object and policy.” Id. (citation and internal quotation marks

omitted). If the plain language of the statute is unambiguous,

that meaning controls, and the inquiry terminates. Id. If,

however, the language is ambiguous, then we proceed to the

second step and consult the legislative history. Id.

Section 510(b) provides for subordination in relation to

“claims or interests that are senior to or equal the claim or

interest represented by such security.” 11 U.S.C. § 510(b)

(emphasis added). It is axiomatic that a claim or interest

based on stock may exist only at a corporate level because, as

the Appellants concede in connection with their claims

disallowance argument, it is impossible to assert an equity

interest in a person.

More importantly, the subordination that § 510(b) mandates

relates to claims that are senior or equal to Barton’s claims. 

Here, there is no evidence that the Appellants’ individual,

general unsecured creditors could seek recovery as creditors at

the corporate level. As a result, their individual, general

13
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

unsecured creditors do not hold claims senior to or equal to any

of Barton’s claims, past or current, based on an equity position

at the corporate level. We find this portion of the statutory

language clearly inconsistent with mandatory subordination of

Barton’s claims, but, at a minimum, ambiguity exists as to

whether § 510(b) applies in an individual debtor case.

The object and policy of mandatory subordination “serve[]

to effectuate one of the general principles of corporate and

bankruptcy law: that creditors are entitled to be paid ahead of

shareholders in the distribution of corporate assets.” Racusin

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

1071 (9th Cir. 2007) (emphasis added). As these general

principles disfavor shifting all of the risk of loss to

creditors, § 510(b) works “to prevent disappointed shareholders,

sometimes the victims of corporate fraud, from recouping their

investment in parity with [the corporation’s] unsecured

creditors.” Id. at 1071-72. The object and policy of mandatory

subordination, thus, affirm that § 510(b) relates to corporate

debt and the distribution of corporate assets.

The legislative history of § 510(b) also supports its

inapplicability in an individual debtor’s case. In enacting

mandatory subordination, Congress intended to address “the

historical problem of investors recovering fraud claims pari

passu with general creditors in [corporate] bankruptcy cases.” 

In re Tristar Esperanza Props., LLC, 488 B.R. at 402. And, in

crafting the statute, Congress relied extensively on a 1973 law

review article authored by professors John J. Slain and Homer

Kripke. Id. As acknowledged in the legislative history of

14
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

§ 510, the article concluded that the distribution of assets in

corporate bankruptcy should be predicated on the allocation of

risk between general creditors and security holders. See H.R.

Rep. 95-595, at 195 (1977).

The Ninth Circuit has since recognized that § 510(b) is,

thus, premised on two assumptions: “1) the dissimilar risk and

return expectations of shareholders and [corporate] creditors;

and 2) the reliance of [corporate] creditors on the equity

cushion provided by shareholder investment.” In re Betacom of

Phx., Inc., 240 F.3d at 830. These assumptions support

subordination at the corporate level - not in an individual

debtor case where, once again, equity interests do not exist.

Neither the language of the statute nor the object and

policy of mandatory subordination nor the legislative history of

§ 510(b) support the view that Congress intended mandatory

subordination to apply in an individual debtor case. Instead,

all of these sources point to the subordination of a corporate

shareholder’s equity-based claim in a corporate case context.

The Ninth Circuit case law on mandatory subordination is

consistent with our interpretation. Our review of the case law

reveals no case in which § 510(b) was applied in an individual

debtor’s case based on an equity position in an affiliate

entity. The cases at the appellate level, instead, all involved

entity debtors. See, e.g., In re Am. Wagering, Inc., 493 F.3d

1067; In re Betacom of Phx., Inc., 240 F.3d 823; Kira v. Holiday

Mart, Inc. (In re Holiday Mart, Inc.), 715 F.2d 430 (9th Cir.

1983); Falcon Capital Corp. S’holders v. Osborne (In re THC Fin.

Corp.), 679 F.2d 784 (9th Cir. 1982) (Bankruptcy Act case);

15
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Kelce v. U.S. Fin. Inc. (In re U.S. Fin. Inc.), 648 F.2d 515

(9th Cir. 1980) (Bankruptcy Act case); see also Margaret B.

McGimsey Trust v. USA Capital Diversified Trust Deed Fund, LLC

(In re USA Commercial Mortg. Co.), 377 B.R. 608 (9th Cir. BAP

2007); cf. In re Tristar Esperanza Props., LLC, 488 B.R. 394

(applying § 510(b) to a limited liability company).

We acknowledge that an unpublished decision reached a

contrary conclusion. See Liquidating Trust Comm. of the Del

Biaggio Liquidating Trust v. Freeman (In re Del Biaggio), 2012

WL 5467754 (Bankr. N.D. Cal. Nov. 8, 2012), aff’d, 2013 WL

6073367 (N.D. Cal. Nov. 18, 2013). Del Biaggio, however, is not

binding on this Panel. Further, as an unpublished decision, the

analysis and outline of the facts is not well-developed; in

particular, it does not focus squarely on the question of who is

being subordinated. And while the factual summary is not

complete, the case appears distinguishable; the subordinated

creditor did not hold a final judgment that included a punitive

damages recovery, and the facts suggest that creditors in the

individual case also held claims against the corporate affiliate

for recovery of embezzled funds used to acquire shares in the

affiliate.

At oral argument, the Appellants also referenced two other

cases that they contend are supportive of their position on

mandatory subordination: Orange Cnty. Nursery, Inc. v. The

Minority Voting Trust (In re Orange Cnty. Nursery Inc.),

--- B.R. ----, 2014 WL 5472534 (C.D. Cal. Oct. 1, 2014); and In

re Lehman Brothers, Inc., 503 B.R. 778 (Bankr. S.D.N.Y. 2014). 

For the reasons already discussed, however, neither case assists

16
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

them, as both cases involved a corporate debtor. The

Appellants, in fact, conceded that the case law is devoid of any

published decision in which § 510(b) subordination occurred in a

non-entity debtor case.

Here, in determining that Barton’s claims were not subject

to mandatory subordination, the bankruptcy court recognized the

critical distinction between corporate debtor cases and

individual debtor cases when mandating subordination. Based on

the plain language of the statute, its objective and policy, the

§ 510(b) legislative history, and case law, we conclude that the

bankruptcy court did not err in determining that § 510(b) was

not applicable here and in overruling the claims objections.

2. As there was no basis for claims disallowance or

mandatory subordination, the bankruptcy court

appropriately dismissed the adversary proceedings.

Given our conclusion on the claims objections, the

challenge to the adversary proceeding dismissals necessarily

fails, and the bankruptcy court did not err in dismissing them

with prejudice.

At the first hearing, the bankruptcy court indicated that

it would not rule on the claims objections because of the

pending adversary proceedings. In response, the Appellants

clarified that they filed the claims objections in both the

bankruptcy cases and adversary proceedings for procedural and

technical reasons; namely, in order to comply with Rules 3007

and 7001 of the Federal Rules of Bankruptcy Procedure. The

Appellants asserted, emphatically, that resolution of the claims

objections and the adversary proceedings did not require a trial

17
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

and that a ruling on the claims objections resolved the

adversary proceedings. Barton agreed. The bankruptcy court

then proceeded accordingly.

The bankruptcy court’s case dismissals were based

appropriately and squarely on its determinations on the claims

objections. The Appellants could not, as a matter of law,

prevail on the adversary complaints. We, thus, conclude that

dismissal of the adversary proceedings was appropriate.

B. The bankruptcy court did not abuse its discretion in

converting the Appellants’ chapter 13 cases to chapter 7

cases.

The Appellants also argue that the bankruptcy court erred

when it failed to consider the totality of the circumstances in

converting their chapter 13 cases to chapter 7. In particular,

they contend that the bankruptcy court improperly considered

only two of the four factors set forth in In re Leavitt. We

again disagree.

On request of a party in interest and after notice and a

hearing, the bankruptcy court may convert a chapter 13 case to

chapter 7 for cause. 11 U.S.C. § 1307(c). In addition to a

non-exclusive statutory list of factors, the filing of a chapter

13 case in bad faith may constitute cause for conversion. See

In re Leavitt, 171 F.3d at 1224 (citing Eisen v. Curry (In re

Eisen), 14 F.3d 469, 470 (9th Cir. 1994) (discussing bad faith

in the context of chapter 13 case dismissal)).

In determining whether cause exists based on a bad faith

filing, the bankruptcy court must assess the totality of the

circumstances. In re Eisen, 14 F.3d at 470. This assessment

18
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

includes consideration of the following four factors:

1. whether the debtor misrepresented facts in his petition or

plan, unfairly manipulated the Bankruptcy Code, or

otherwise filed his petition or plan in an inequitable

manner;

2. the debtor’s history of filings and dismissals;

3. whether the debtor only intended to defeat state court

litigation; and

4. the presence of egregious behavior.

In re Leavitt, 171 F.3d at 1224.

The Leavitt factors are not conjunctive. The bankruptcy

court is not required to find that each factor is satisfied or

even to weigh each factor equally. See, e.g., Meyer v. Lepe (In

re Lepe), 470 B.R. 851, 863 (9th Cir. BAP 2012) (in the context

of a good faith determination at plan confirmation, the Panel

noted that two of the Leavitt factors were inapplicable to the

case on appeal). The Appellants conceded as much at oral

argument. The bankruptcy court’s critical consideration in

determining bad faith is the totality of the circumstances. The

Leavitt factors are simply tools that the bankruptcy court

employs in considering the totality of the circumstances.

Here, the bankruptcy court found that the Appellants filed

their chapter 13 cases in bad faith. Stating that it had

considered all of the Leavitt factors in reaching its

determination, it found that the majority of the factors were

satisfied, with the exception of the second factor, which it

deemed inapplicable.

The bankruptcy court found that the timing of the filings

19
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

demonstrated the Appellants’ intent to impose barriers to the

conclusion of the state court action; in particular, that they

strategically filed prior to entry of the state court judgment,

a judgment that would have precluded the Appellants from seeking

chapter 13 relief based on the statutory debt limit. See 11

U.S.C. § 109(e).

The bankruptcy court also specifically found that the

Appellants did not candidly and completely provide financial

information. It observed that they refused to provide

information on transactions made by owned or controlled

companies, including litigation settlements that resulted in

payments to the Appellants and RIL, and that they valued their

ownership interests in RIL at zero despite the potential

positive impact on value from the settlements.

Based on its statements at the hearing, it is clear that

the bankruptcy court did not apply the wrong legal standard. It

expressly identified the Leavitt factors, stated that it

considered all four factors, and then made adequate findings.

The Appellants specifically challenge the bankruptcy

court’s application of the third Leavitt factor. Relying first

on Ho v. Dowell (In re Ho), 274 B.R. 867 (9th Cir. BAP 2002),

they argue that the bankruptcy court was required to find that

the sole purpose for their chapter 13 filings was to defeat the

state court action, which they assert it did not do. We are not

persuaded by this argument.

In Ho, this panel recognized that “bad faith exists where

the debtor’s only purpose is to defeat state court litigation.” 

274 B.R. at 877 (emphasis in original). The Panel, however,

20
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

concluded that the bankruptcy court abused its discretion where

it “relied exclusively on the third [Leavitt] factor and did not

base its bad faith finding on the totality of the

circumstances.” Id. at 876-77. The converse is true here; the

bankruptcy court identified and applied the relevant Leavitt

factors and, as its statements at the hearing reflect, it

considered the totality of the circumstances of the Appellants’

filings.

Although the third Leavitt factor presumes that a debtor

has no other legitimate purpose for filing, the bankruptcy court

does not consider this factor in a vacuum. 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. The

record here does not evidence a legitimate purpose that negated

a totality of the circumstances finding of bad faith.

The Appellants also argue that the bankruptcy court should

have considered their proposed chapter 13 plans in evaluating

the purpose of their chapter 13 filings. This argument

similarly fails. There is no per se rule mandating that the

bankruptcy court evaluate confirmability of a debtor’s proposed

chapter 13 plan when determining whether § 1307(c) cause exists. 

In fact, one Leavitt factor requires consideration of whether

the debtor misrepresented facts in his petition or plan, or

otherwise filed his petition or plan in an inequitable manner. 

We reject the suggestion that cause cannot exist where a plan is

facially confirmable. And, here, the plans did not propose to

21
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

pay any amount to Barton; that is, the plans did not suggest a

good faith attempt to pay the Appellants’ largest creditor.

The Appellants also emphasize that they were eligible for

chapter 13 at the time of their petitions. But, eligibility is

not synonymous with entitlement. Chapter 13 was advantageous to

the Appellants; they possessed more control over estate assets

and, importantly, could potentially circumvent

nondischargeability of Barton’s claims under § 523(a)(6). See

11 U.S.C. §§ 523(a), 1328(a), (c)(2); Fed. R. Bankr. P. 4007(d);

Toste v. Smedberg (In re Toste), 2014 WL 3908139, at *2 (9th

Cir. BAP Aug. 12, 2014) (unless a chapter 13 debtor moves for a

hardship discharge, § 523(a)(6) is unavailable in chapter 13

case). As the state court judgment sounded, in part, in

conversion, chapter 13 offered a unique and attractive

opportunity to the Appellants. A strategic desire for

chapter 13 relief, however, does not support reversal on this

record.

In sum, the bankruptcy court appropriately considered the

third Leavitt factor; there was no abuse of discretion in this

regard.

Further, the Appellants challenge the bankruptcy court’s

alleged finding that they concealed information relating to

potentially valuable settlements. They contend that the

bankruptcy court did not actually find that they concealed

anything and, instead, improperly based its decision to convert

on “if there were valuable settlements that might enhance stock

value, then [Appellants’] may have misrepresented the value of

such shares in their schedules by scheduling a zero value.” 

22
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Aplts’ Joint Op. Br. at 21 (emphasis in original). The

Appellants insist that they did not conceal anything and, to the

best of their ability, made appropriate disclosures. This

argument also fails.

The record reflects that the bankruptcy court’s findings

related to the nature and quality of the Appellants’ conduct in

filing their chapter 13 schedules and responding to questions at

their § 341(a) meetings of creditors. Transcripts of the

Appellants’ § 341(a) meetings show that the chapter 13 trustee

asked for additional information as to valuation of the

Appellants’ shares in their various businesses and requested

that the Appellants amend their statements of financial affairs

accordingly. At a continued meeting of creditors two months

later, the Appellants had not done so. Khan, in fact, never

amended his schedules.7

On examination by Barton’s counsel at the § 341(a) meeting, 

Khan refused to respond to questions about third party

settlements based on non-disclosure agreements. When asked

whether he or Tomkow provided the terms of the settlement to the

chapter 13 trustee, Khan evasively responded that he provided

many documents and had not committed to memory the documents

produced to the trustee. And, Khan also refused to provide

testimony as to the approximate amount of sales, transfers of

assets, and loans by and between various business entities owned

7 Khan filed amendments to schedules B and J and the

statement of financial affairs on the same day as the second

continued § 341(a) meeting. The Clerk’s Office, however,

immediately issued a notice of error and instructed him to refile the documents. Khan never did so.

23
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

or controlled by Appellants in the 18 months before the chapter

13 filings.

The bankruptcy court’s concern regarding these statements

was reasonable, as was its determination that a chapter 7

trustee was necessary to investigate the settlements and to

determine whether additional assets existed. It did not find

that the Appellants had concealed assets; and it did not need to

do so. Instead, as part of its totality of the circumstances

analysis, the bankruptcy court appropriately considered the

nature and quality of the Appellants’ statements and conduct and

found them evasive and inappropriate. On this record, its

findings were not clearly erroneous.

The bankruptcy court did not abuse its discretion in

converting the Appellants’ cases to chapter 7.

CONCLUSION

Based on the foregoing, we AFFIRM the bankruptcy court.

24