Court Opinion

ID: 9373973
Source: CourtListenerOpinion
Date Created: 2023-02-22 16:10:53.298398+00
Date Added: 2024-06-11T17:16:50.455498
License: Public Domain

FILED
                                                                                     MAR 21 2022
                            ORDERED PUBLISHED                                 SUSAN M. SPRAUL, CLERK
                                                                                 U.S. BKCY. APP. PANEL
                                                                                 OF THE NINTH CIRCUIT

           UNITED STATES BANKRUPTCY APPELLATE PANEL
                     OF THE NINTH CIRCUIT

In re:                                                BAP No. CC-21-1081-SFL
BRUCE ELIEFF,
                      Debtor.                         Bk. No. 8:19-bk-13858-ES

TODD KURTIN,                                          Adv. No. 8:19-ap-01205-ES
                      Appellant,
v.                                                    OPINION
HOWARD M. EHRENBERG, Chapter 7
Trustee,
            Appellee.

                Appeal from the United States Bankruptcy Court
                      for the Central District of California
                 Erithe A. Smith, Bankruptcy Judge, Presiding

                           APPEARANCES:
Daniel Luke Geyser of Haynes and Boone, LLP argued for appellant; Sean
A. O’Keefe of O’Keefe & Assoc. Law Corp., P.C. argued for appellee.

Before: SPRAKER, FARIS, and LAFFERTY, Bankruptcy Judges.

SPRAKER, Bankruptcy Judge:

                                  INTRODUCTION

     Creditor Todd Kurtin appeals from the entry of summary judgment

in favor of chapter 7 1 trustee Howard M. Ehrenberg subordinating Kurtin’s

     1
         Unless specified otherwise, all chapter and section references are to the
                                             1
claim under § 510(b). After its initial ruling, the bankruptcy court entered

an order clarifying that its ruling subordinated not only his claim but also

his lien rights arising from the prepetition judgment liens he obtained

against Elieff.

      We agree with the bankruptcy court that Kurtin’s claim for damages

arises from the purchase or sale of a security, and § 510(b) required

subordination of his claim and the associated lien rights. Accordingly, we

AFFIRM.

                                        FACTS 2

A.    Kurtin’s and Elieff’s joint ventures.

      Beginning in the early 1990s, Kurtin and Elieff, as equal partners,

engaged in a series of real estate investment and development projects.

Each project was owned and run through a separate business entity or

collection of entities. Typically, Elieff and Kurtin used corporations or

limited liability companies, but they also utilized limited partnerships

(collectively, the “Joint Entities”).

      It is not clear whether their business relationship was a single

partnership that engaged in multiple projects or a set of separate ventures.

Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
        2 We exercise our discretion to take judicial notice of documents electronically

filed in the underlying bankruptcy case and adversary proceeding. See Atwood v. Chase
Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
                                            2
In his declaration opposing the Trustee’s summary judgment motion,

Kurtin referred to it as “an equal general partnership, based on an oral

agreement.” Elsewhere, however, Kurtin admitted that he and Elieff

conducted their real estate investment and development business through

the Joint Entities and that each of them as individuals formed and jointly

owned the Joint Entities, rather than the partnership.

B.    Kurtin’s and Elieff’s first round of state court litigation and the
      resulting Settlement Agreement.

      The relationship between Kurtin and Elieff began to deteriorate in the

late 1990s. In 2003, Kurtin sued Elieff and his separately owned

development entities. Kurtin asserted claims for breach of contract, breach

of fiduciary duty, conversion, embezzlement, and constructive fraud,

among others. In turn, Elieff counter-sued Kurtin and his separately owned

development entities, stating causes of action similar to those Kurtin had

asserted.

      During this litigation (the “First Lawsuit”), the parties engaged in

mediation and entered into a Settlement Agreement in 2005. The

Settlement Agreement not only resolved the parties’ existing disputes but

also ended their business relationship. More specifically, the Settlement

Agreement required Kurtin to transfer his interests in the Joint Entities to

Elieff. In turn, Elieff agreed to indemnify Kurtin for any liabilities arising

from the Joint Entities. In exchange for both the dismissal of his causes of

action and the “sale” of his interest in the Joint Entities, Kurtin was to

                                       3
receive from Elieff or the Joint Entities an aggregate of $48.8 million in

“Settlement Payments.” The Settlement Agreement broke the Settlement

Payments into four installments: (1) $21 million by no later than August 19,

2005; (2) $1.8 million on January 2, 2006; (3) $13.1 million on or before June

30, 2006; and (4) $12.9 million on or before December 31, 2006. Elieff and

the Joint Entities were jointly and severally liable for the first Settlement

Payment. Only the Joint Entities were liable for the remainder of the

Settlement Payments.

      The Settlement Agreement did not allocate any specific portion of the

Settlement Payments to either the release of Kurtin’s claims or the sale of

his interest in the Joint Entities. Rather, the Settlement Agreement, as well

as Kurtin’s subsequent litigation statements, all indicated that the

resolution of disputes and the “buyout” of Kurtin’s interests were

indivisible.

      Paragraph 14 of the Settlement Agreement contained two distinct

provisions significant to the issues before us. The first granted Kurtin a

security interest “in the projects owned by the Joint Entities” to secure their

obligation to make the Settlement Payments. 3 The second and more

important of the two provisions contemplated a safeguard for the source of

funds from which Kurtin presumed the Settlement Payments would be

      3
         Neither Elieff nor the Joint Entities ever executed the documents necessary to
perfect these security interests.

                                            4
made—the funds of the Joint Entities. This provision prohibited Elieff from

taking any distribution from any of the Joint Entities to the extent that such

distributions would prevent satisfaction of the obligation to make

Settlement Payments.

C.    The default on the Settlement Agreement and the second round of
      state court litigation.

      When the Joint Entities failed to pay the full amount of the third

Settlement Payment and any of the fourth Settlement Payment, Kurtin was

entitled to judgment in the First Lawsuit for the amount of the shortfall

under the terms of the Settlement Agreement. Kurtin sought entry of

judgment against the Joint Entities for roughly $22.5 million. But the trial

court denied this relief because the Joint Entities were not parties to the

First Lawsuit at the time the Settlement Agreement was entered into.

      Kurtin sought and obtained arbitration under paragraph 15 of the

Settlement Agreement. This paragraph permitted the arbitrator to supply

essential terms to the Settlement Agreement to the extent either party

subsequently asserted that the Settlement Agreement was missing material

terms. The arbitrator ultimately determined that the Settlement Agreement

should be deemed amended to include a term that, if the default in

Settlement Payments was not cured by June 30, 2007, “Kurtin shall have the

right to require Bruce Elieff to transfer to Kurtin or his designee by July 10,

2007, any and all of Elieff’s right, title and interest—held directly or

indirectly—in and to any or all of the Joint Entities . . . .” But Kurtin never

                                        5
sought to enforce this new term of the Settlement Agreement. According to

Kurtin, he suspected that by the time of the arbitrator’s ruling the

unencumbered assets and funds of the Joint Entities were grossly

insufficient to satisfy the shortfall in Settlement Payments.

      Instead, in December 2007, Kurtin sued Elieff and the Joint Entities,

stating numerous causes of action (“Second Lawsuit”). Only the seventh

cause of action for breach of contract is relevant to this appeal. In relevant

part, Kurtin alleged that Elieff breached paragraph 14 of the Settlement

Agreement by taking distributions from the Joint Entities, “which

distributions prevented the payment of the settlement payments as

required under the Settlement Agreement.”

      In May 2010, following a bifurcated trial, the jury returned a verdict

in favor of Kurtin and against Elieff for breach of paragraph 14 of the

Settlement Agreement in the amount of $24,411,433.86, and judgment was

entered for that amount. A series of appeals and a new trial on the amount

of Kurtin’s damages ensued. Ultimately, in February 2020,4 the state court

entered its fifth amended judgment against Elieff for $33,892,117.62 based

solely on his breach of the distribution restriction in the Settlement

Agreement. Prior to Elieff’s bankruptcy filing, Kurtin recorded abstracts of

judgment against Elieff and two of his separate entities that the state court

      4
        In December 2019, the bankruptcy court granted Kurtin relief from the
automatic stay so that he could take further action with respect to his claim, including
taking the steps necessary to obtain an amended judgment from the state court.
                                            6
included as additional judgment debtors based on its finding that those

two entities were Elieff’s alter egos—Morse Properties, LLC (“Morse”) and

4627 Camden, LLC (“Camden”).

D.    The bankruptcy filings and the subordination litigation.

      In October 2019, Elieff, Morse, and Camden each filed chapter 11

petitions. In February 2020, three additional Elieff-related entities filed

chapter 11 petitions. In June 2020, the bankruptcy court substantively

consolidated the cases and ordered the appointment of a chapter 11 trustee.

In September 2020, the consolidated case was converted to chapter 7, and

Howard Ehrenberg was appointed to serve as chapter 7 trustee.

      In his schedules, as amended, Elieff listed roughly $13 million in real

property and $260,000 in personal property. He disclosed numerous

affiliated entities but listed their values as zero or unknown. As for

liabilities, he listed $97 million in secured debt, including $35 million owed

to Kurtin on his judgment liens, and roughly $300,000 in unsecured debt.

      Within weeks of his bankruptcy filing, Elieff commenced an

adversary proceeding against Kurtin. In December 2019, Elieff filed his

second amended complaint (“SAC”), which stated subordination claims

under § 510(b), claims for transfer of Kurtin’s judgment liens to the estate

under § 510(c)(2), and various avoidance claims. In January 2020, Kurtin

moved to dismiss the SAC. Elieff countered in February 2020 with a

summary judgment motion filed jointly with intervenor the Official

Committee of Unsecured Creditors of Bruce Elieff.

                                       7
      The bankruptcy court heard and determined the motion to dismiss

and held its initial hearing on the summary judgment motion. The court

dismissed some of the avoidance claims with leave to amend. It also

dismissed without leave to amend the § 510(c)(2) claims seeking to transfer

the judgment liens to the estate. The court held that § 510(c)(2) did not

apply to claims subordinated under § 510(b) and only applied to claims

subordinated under § 510(c)(1). The court denied the remainder of the

motion to dismiss. As for the summary judgment motion, the court granted

Kurtin’s Civil Rule 56(d) (applicable via Rule 7056) request for time to

conduct discovery and continued the summary judgment hearing.

      By the time the court held its continued hearing on the summary

judgment motion, the case had been converted, and Howard Ehrenberg,

the chapter 7 trustee, had become the plaintiff. At the conclusion of the

hearing the court took the matter under submission. Kurtin then filed

another Civil Rule 56(d) motion asking for more time to conduct discovery.

Kurtin maintained that most of the rights and obligations exchanged under

the Settlement Agreement had little or nothing to do with his transfer of his

interests in the Joint Entities to Elieff. Kurtin advised that he intended to

seek additional discovery to allocate the Settlement Payments between the

transfer of his interest in the Joint Entities and other rights and obligations.

As Kurtin reasoned, if he could prove that the value of the Joint Entities

was less than Elieff’s first $21 million Settlement Payment, then none of the

other Settlement Payments had anything to do with the purchase or sale of

                                       8
securities. But Kurtin never alleged that the Settlement Payments were

allocable, and no evidence was submitted to suggest this. Nor did he argue

that the Settlement Agreement contemplated that the first Settlement

Payment specifically related to the transfer of Kurtin’s interest in the Joint

Entities.

E.     The bankruptcy court’s decision.

       In January 2021, the bankruptcy court issued a memorandum

decision granting summary judgment on the § 510(b) claims for relief.5 The

bankruptcy court determined that the plain terms of the Settlement

Agreement established that it involved the purchase and sale of the

securities of Elieff’s affiliates. The bankruptcy court particularly relied on

the provisions concerning Kurtin’s transfer of his interests in the Joint

Entities as well as those that attempted to unwind Kurtin’s involvement in

and potential liability for the Joint Entities’ business. As the bankruptcy

court explained, “[t]he undisputed fact remains that the crux of the

Settlement Agreement required Kurtin to transfer his interest in the Joint

Entities in exchange for Settlement Payments.” Section 510(b), therefore,

applied even if some aspects of the Settlement Agreement did not directly

relate to the purchase or sale of securities.

       5
        In September 2020, the bankruptcy court entered a separate order in which it
made numerous evidentiary rulings. The evidentiary rulings are addressed in the
discussion to the extent they are relevant to our analysis and resolution of this appeal.
                                             9
      The court also denied Kurtin’s supplemental Civil Rule 56(d) request.

It concluded that even if the Settlement Payments could be partially

allocated to aspects other than the transfer of Kurtin’s interest in the Joint

Entities, this would not constitute a material issue of fact that would

preclude summary judgment. As the bankruptcy court reasoned, § 510

relief is triggered whenever there was “some nexus” or “causal

relationship” between the claim and the purchase or sale of securities of the

debtor or the debtor’s affiliates. Even if precise allocation of the Settlement

Payments were possible, it was immaterial as the trustee had established

the requisite nexus under § 510(b) between the restriction on distributions

from the Joint Entities, the unsatisfied Settlement Payment obligations, and

Kurtin’s transfer of his interest in the Joint Entities.

F.    The parties’ cross-motions seeking to clarify the court’s ruling.

      After the memorandum decision, both sides requested modification

of the court’s ruling to clarify whether subordination was limited to just

Kurtin’s “claim,” or included his judgment liens as well. After holding

another hearing, the court entered an order stating that Kurtin’s liens were

subsumed within the term “claim” as used in § 510(b). As a result, the

bankruptcy court concluded, Kurtin’s judgment liens were subordinated

for the same reasons and to the same extent that his claim had been

subordinated by the court.

                                        10
       On April 5, 2021, the bankruptcy court entered final judgment

pursuant to Civil Rule 54(b) on Ehrenberg’s § 510(b) subordination claims

for relief. Kurtin timely appealed.6

                                   JURISDICTION

       The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and

157(b)(2)(A) and (O). We have jurisdiction under 28 U.S.C. § 158.

                                         ISSUES

1.     Did the bankruptcy court err when it granted summary judgment in

favor of Ehrenberg?

2.     Did the bankruptcy court correctly construe § 510(b)?7

3.     Did the bankruptcy court abuse its discretion when it denied Kurtin’s

supplemental Civil Rule 56(d) motion?

4.     Did the bankruptcy court abuse its discretion when it excluded

certain portions of Kurtin’s evidence?

                            STANDARDS OF REVIEW

       We review the bankruptcy court’s grant of summary judgment de

novo. Wolkowitz v. Beverly (In re Beverly), 374 B.R. 221, 230 (9th Cir. BAP

       6
         The remainder of Ehrenberg’s surviving avoidance claims for relief have been
dismissed without prejudice.
       7 On appeal, Kurtin has not specifically and distinctly challenged the bankruptcy

court’s determination that his divestment of his interests in the Joint Entities constituted
a purchase or sale of securities of the debtor’s affiliates within the meaning of § 510(b).
Consequently, he has forfeited any issues he might have raised related to this
determination. See Christian Legal Soc'y v. Wu, 626 F.3d 483, 487–88 (9th Cir. 2010);
Brownfield v. City of Yakima, 612 F.3d 1140, 1149 n.4 (9th Cir. 2010).
                                             11
2007), aff'd in part, dismissed in part, 551 F.3d 1092 (9th Cir. 2008). In

conducting our de novo review, we must view the facts in the light most

favorable to the nonmoving part, and we must determine whether the

moving party was entitled to judgment as a matter of law because no

genuinely disputed issues of material fact needed to be tried. Id.

      We also review de novo the bankruptcy court’s construction of the

Code. Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).

De novo review means that we review the matter anew as if the

bankruptcy court had not previously decided it. Id.

      The denial of a Civil Rule 56(d) motion seeking more time to conduct

discovery is reviewed for an abuse of discretion. Atay v. Cnty. of Maui, 842

F.3d 688, 698 (9th Cir. 2016). We also review for an abuse of discretion the

bankruptcy court’s exclusion of evidence. Orr v. Bank of Am., NT & SA, 285

F.3d 764, 773 (9th Cir. 2002). The bankruptcy court abuses its discretion if it

applies an incorrect rule of law or its factual findings are illogical,

implausible, or without support in the record. TrafficSchool.com, Inc. v.

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

                                 DISCUSSION

A.    Kurtin’s claim for breach of the Settlement Agreement falls within
      the broad scope of § 510(b).

      Section 510(b) “mandates the subordination of damages claims

arising from the purchase or sale of a security.” Am. Broad. Sys., Inc. v.

Nugent (In re Betacom of Phx., Inc.), 240 F.3d 823, 827 (9th Cir. 2001) (internal

                                         12
quotation marks omitted). 8 Its principal purpose is to ensure that creditors

of the debtor are paid before disappointed equity interest holders who

bargain for the potential of a greater return in exchange for a greater risk of

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

1071-72 (9th Cir. 2007); Slain & Kripke, The Interface Between Securities

Regulation and Bankruptcy–Allocating Risk of Illegal Securities Issuance Between

Securityholders and the Issuer's Creditors, 48 N.Y.U. L. Rev. 261 (1973).

      The Ninth Circuit broadly interprets the scope of § 510(b). See

Liquidating Tr. Comm. of the Del Biaggio Liquidating Tr. v. Freeman (In re Del

Biaggio), 834 F.3d 1003, 1009 (9th Cir. 2016); Pensco Tr. Co. v. Tristar

Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), 782 F.3d 492, 495

(9th Cir. 2015) (“Tristar”). Thus, the Ninth Circuit has held that a claim

“arises from” the purchase or sale of securities whenever it shares a “nexus

or causal relationship” with the purchase or sale of securities. In re Del

Biaggio, 834 F.3d at 1009 (citing In re Am. Wagering, Inc., 493 F.3d at 1072).

      We see no material difference between Tristar and the instant case. In

Tristar, creditor O’Donnell sought to withdraw as a member of the debtor

limited liability company. 782 F.3d at 494. In response, Tristar invoked its

right to purchase O’Donnell’s membership interest, but the parties could

      8
         Section 510(b) also applies to claims “arising from rescission of a purchase or
sale of a security of the debtor or of an affiliate of the debtor” and claims “for
reimbursement or contribution allowed under section 502 on account of such a claim.”
But the bankruptcy court’s ruling did not apply either of these aspects of § 510(b). There
is no need for us to consider these other aspects of § 510(b).
                                            13
not agree on a valuation of her interest. O’Donnell then initiated an

arbitration and obtained an award which was reduced to judgment in state

court. Id. Tristar then filed its chapter 11 bankruptcy petition and

commenced an adversary proceeding to subordinate O’Donnell’s claim

under § 510(b) and (c). The bankruptcy court granted summary judgment

in favor of Tristar on its § 510(b) claim. Id. Relying on its broad construction

of “arising from,” the Ninth Circuit affirmed. In the process, it rejected

O’Donnell’s contention that § 510(b) did not apply because the claim had

been reduced to judgment and was a debt as of the petition date. Id. at 495-

97. As the Tristar panel explained:

      [I]t is clear that O’Donnell’s claim arises from the sale of a security of
      the debtor. Her claim originates from the failed sale of her
      membership interest and Tristar’s breach of the operating
      agreement’s provisions regarding repurchase of membership
      interests. The direct causal link between O’Donnell’s claim and the
      purchase and sale of an equity interest leaves no doubt as to whether
      her claim for damages “flows from” the purchase or sale of a security
      of the debtor.

Id. at 497.

      Similarly, Kurtin’s claim originated from the failed Settlement

Agreement pursuant to which he divested himself of his interests or rights

in the Joint Entities. Kurtin has admitted these interests were worth

millions of dollars at the time of the Settlement Agreement. Under the

Settlement Agreement, the only significant consideration flowing to Kurtin

was his right to receive the Settlement Payments. And the restriction in

                                       14
paragraph 14 prohibiting Elieff from receiving distributions from the Joint

Entities to the extent they interfered with the Settlement Payments

indisputably was intended to protect and preserve the Joint Entities’ funds

necessary to make the Settlement Payments. Under these undisputed facts,

Kurtin’s claim based on Elieff’s breach of paragraph 14 shares a direct

causal link with the conveyance of his equity interests in the Joint Entities.

Accordingly, the bankruptcy court correctly applied § 510(b) to Kurtin’s

claim.

B.    None of Kurtin’s arguments persuade us that the bankruptcy court
      erred in construing or applying § 510(b).

      1.    Khan does not justify reversal.

      Citing Khan v. Barton (In re Khan), 846 F.3d 1058 (9th Cir. 2017), Kurtin

contends that § 510(b) does not apply because his claim arises from “Elieff’s

post-settlement diversion of [Joint Entity] assets,” which has nothing to do

with the sale of securities. Aplt. Opn. Br. at 37 (emphasis in original). In

Khan, the creditor, Barton, obtained a state court judgment against the

debtors for the fraudulent conversion of his stock in the debtors’ affiliated

entity. 846 F.3d at 1061, 1063-64. In their subsequent bankruptcy cases, the

debtors sought mandatory subordination of Barton’s proof of claim under

§ 510(b). Id. at 1062. The Ninth Circuit acknowledged the broad

construction afforded § 510(b), but it reasoned that there was necessarily an

outer limit to the scope of § 510(b) that “stops short of encompassing every

transaction that touches on or involves stock in a corporation.” Id. at 1064

                                       15
(citing In re Am. Wagering, Inc., 493 F.3d at 1071-73). According to Khan, the

debtors’ conversion of Barton’s interest and the resulting damages had

“nothing to do with his investment” in the entity except for the fact that his

loss was measured by the value of his stock at the time the debtors

converted it. Id. at 1064-65.

      Kurtin argues that this case is analogous to Khan because his

damages arose from Elieff’s post-settlement misconduct, which occurred

after the purchase of securities was complete. He contends that Elieff’s

conduct was too remote to trigger subordination under § 510(b). However,

in Khan there was no connection between the debtors’ conversion of

Barton’s stock and the earlier purchase of that stock. In contrast, by

Kurtin’s own admission, the purpose of paragraph 14’s restriction on

distributions from the Joint Entities was to protect and preserve the

“income stream allocated to Kurtin” to ensure that all of the Settlement

Payments were made. The Settlement Payments, in turn, were the only

significant consideration flowing to Kurtin on account of his divestment of

his interests in the Joint Entities. Unlike the conversion of the interests in

Khan, Kurtin’s judgment was based on Elieff’s breach of the Settlement

Agreement. As such, it shared a direct causal link to Kurtin’s sale of his

interests in the Joint Entities made in that very same agreement. Kurtin

obviously expected to be compensated for these interests from the Joint

Entities’ cash. And the purpose of the distribution restriction in paragraph

14 was to protect and preserve that source of funds. Kurtin’s claim arising

                                       16
from the breach of the Settlement Agreement thus triggers § 510(b) because

the claim originates or flows from his efforts to divest himself of his equity

investment. Tristar, 782 F.3d at 497; see also Baroda Hill Invs., Ltd. v.

Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 133, 142 (3d Cir. 2002) (in

affirming subordination of shareholders’ claims for the debtor-

corporation’s post-sale breach of the stock purchase agreement, the court

stated: “[m]ore important than the timing of the actionable conduct, from a

policy standpoint, is the fact that the claims in this case seek to recover a

portion of the claimants’ equity investment.”).

      2.    Kurtin’s consideration under the Settlement Agreement
            cannot be apportioned between the securities-related and
            non-securities-related components.

      Kurtin next argues that even if his judgment against Elieff is directly

linked to the Settlement Payments, there is no link between the unpaid

Settlement Payments and his sale of his interests in the Joint Entities.

Though Kurtin admits that some amount of the Settlement Payments was

meant to compensate him for his sale of his interests in the Joint Entities, he

maintains that they also included compensation for other non-sale

damages beyond the scope of § 510(b). Kurtin believes that the first

Settlement Payment of $21 million fully paid the securities sale aspect of

the Settlement Agreement. In support, he states that he only transferred his

equity interest after Elieff made the first Settlement Payment. As a result,

                                        17
he argues, the outstanding Settlement Payments cannot constitute damages

that arise from the sale of his securities under § 510(b).

      Kurtin has cited nothing in the record that evidenced, or even

suggested, that the division or allocation of the Settlement Payments was a

part of the parties’ contract. To the contrary, the plain language of the

Settlement Agreement reveals no distinction of purpose between any of the

Settlement Payments. Moreover, nothing in the record remotely suggests

that the Settlement Payments were severable rather than indivisible.

      Undeterred, Kurtin asserts that the bankruptcy court still should

have allocated the Settlement Payments between the securities sale and

other damages. As Kurtin put it, “if those non-sale items were separated

out into individual claims, there would be no basis for subordinating them

under Section 510(b).” Kurtin cites Betacom of Phoenix, Inc., 240 F.3d at 831-

32, and KIT digital, Inc. v. Invigor Grp. Ltd. (In re KIT digital, Inc.), 497 B.R.

170 (Bankr. S.D.N.Y. 2013), as modified (Dec. 2, 2013), in support of his

position. But these decisions do not help Kurtin. Neither stands for the

proposition that damages from a single indivisible contract can be

apportioned between damages that trigger § 510(b) and those that do not.

      California law applies, and it simply does not permit apportionment

of cash consideration within a contract when the contract itself does not

provide some basis or means for attributing consideration between the

various items or services for which it was given. Absent such basis, the

contract is indivisible, and the consideration cannot be apportioned. See

                                         18
Alderson v. Houston, 154 Cal. 1, 9 (1908); see also Keene v. Harling, 61 Cal. 2d

318, 320 (1964) (stating that severing and apportioning a partially illegal

contract only is permissible when the court can “reasonably relate the

illegal consideration on one side to some specified or determinable portion

of the consideration on the other side” in a manner that is “consistent with

the intent of the parties”); Perry v. Ayers, 159 Cal. 414, 418 (1911) (“The

purchase price was not apportioned to the various items of property, and

there is no basis upon which this court can divide the purchase price, and

say that any specific part of it was applicable to the stock of the Mother

Lode Company and any other part to the interest in the Crystalline

mine.”). 9

      In sum, Kurtin failed to establish a genuine dispute that the

Settlement Agreement permitted allocation of the Settlement Payments

among the purchase and sale of securities and other non-securities related

damages. The breach of paragraph 14 was directly linked to the obligation

to make the Settlement Payments that arose, in part, from the purchase and

sale of his securities. Kurtin expected to be paid from the source of funds

      9
          Under California law, whether a contract is indivisible or severable largely
depends on the contract’s language and subject matter and like any question of contract
interpretation must be answered based on the parties’ intent. Keene, 61 Cal. 2d at 320;
Sterling v. Gregory, 149 Cal. 117, 119–21, (1906). In turn, when considering the parties’
intent for purposes of contract interpretation, it is their mutual intent as manifested in
the contract and in their conduct that matters, not whatever subjective intent they
harbored in their own minds. Italiane v. Jeffrey Catanzarite Family Ltd. P’ship (In re
Italiane), 632 B.R. 662, 674 (9th Cir. BAP 2021) (citing California cases).
                                            19
that paragraph 14 was meant to protect. As such, all of the Settlement

Payments were integral and indivisible consideration for the triggering

securities sale. Under these circumstances, Kurtin’s attempt to break the

causal link between a portion of his claim and the sale of his interests in the

Joint Entities must fail. That the Settlement Payments also resolved other

disputes is immaterial because Kurtin failed to present any basis to treat

the Settlement Agreement as severable. As a result, the bankruptcy court

correctly determined that Kurtin’s entire claim for breach of paragraph 14

“arose from” the sale of his interests in the Joint Entities for purposes of

§ 510(b). To hold otherwise would impermissibly read into the mandatory

language of § 510(b) a requirement that the claim “solely” arise from the

purchase or sale of securities. As the bankruptcy court correctly observed,

§ 510(b) contains no such requirement.

C.    Kurtin’s liens were subordinated under § 510(b) for distribution
      purposes.

      Kurtin also contends that the bankruptcy court misinterpreted

§ 510(b) by applying it to his judgment liens. Kurtin admits that § 510(b)

subordinates claims, including secured claims. But he maintains that

§ 510(b) has no effect on liens. According to Kurtin, subordination

reprioritized Elieff’s personal liability only. He contends that his secured

claim remains entitled to the same priority it held prior to subordination.

Because of this, he contends that the bankruptcy court erred when it

subordinated the judgment liens that secure his claim.

                                       20
       1.     The structure and text of the Code do not bar the bankruptcy
              court’s interpretation of § 510(b) as covering liens.

       The undisputed purpose of § 510(b) is to prevent an existing or

former equity investor from sharing pari passu with the estate’s creditors

based on the attempted or consummated transmutation of its investment

from equity to debt whether consensually or by a court ruling. See, e.g., In

re Am. Wagering, Inc., 493 F.3d at 1071-72; In re Betacom of Phx., Inc., 240 F.3d

at 830. It also is undisputed that the scope of § 510(b) covers both secured

and unsecured claims. § 101(5). 10 But Kurtin insists that § 510(b) does not

cover liens because Congress only referenced “claims” in § 510(b) and did

not mention “liens” in that subsection. We disagree.

              a. Section 510(b) subordinates the entirety of a claim
                 including the creditor’s in rem right to payment.

       As the bankruptcy court noted, Kurtin’s narrow interpretation of

§ 510(b) is inconsistent with Johnson v. Home State Bank, 501 U.S. 78, 83-84

(1991), which held that the term “claim” as used in the Code includes

mortgage liens. In Johnson, the Supreme Court examined the relationship

between the underlying “claim” and the lien that secures repayment,

       10
          This is consistent with Congress’ understanding of pre-Code bankruptcy law.
As reflected in the legislative history for § 510, Congress recognized that, “under
existing law, a claim is generally subordinated . . . if . . . the claim itself is of a status
susceptible to subordination, such as a penalty or a claim for damages arising from the
purchase or sale of a security of the debtor. The fact that such a claim may be secured
is of no consequence to the issue of subordination. 124 Cong. Rec. H11,095 (daily ed.
Sept. 28, 1978) (remarks of Rep. Don Edwards), as reprinted in D Collier on Bankruptcy
App’x Part 4(f)(i)(2) (16th ed. 2021) (emphasis added).
                                              21
beginning with the statutory definition of “claim” as either an unsecured or

secured right of payment or a right to an equitable remedy. § 101(5). The

Supreme Court explained:

      A mortgage is an interest in real property that secures a creditor’s
      right to repayment. But unless the debtor and creditor have provided
      otherwise, the creditor ordinarily is not limited to foreclosure on the
      mortgaged property should the debtor default on his obligation;
      rather, the creditor may in addition sue to establish the debtor’s in
      personam liability for any deficiency on the debt and may enforce any
      judgment against the debtor’s assets generally. A defaulting debtor
      can protect himself from personal liability by obtaining a discharge in
      a Chapter 7 liquidation. However, such a discharge extinguishes only
      the personal liability of the debtor. Codifying the rule of Long v.
      Bullard, the Code provides that a creditor’s right to foreclose on the
      mortgage survives or passes through the bankruptcy.

Johnson, 501 U.S. at 82-83 (cleaned up).

      Johnson proceeded to distinguish the two components of a secured

claim: (1) personal liability dischargeable in bankruptcy; and (2) in rem

liability that remains unaffected by a bankruptcy discharge. It concluded:

“a bankruptcy discharge extinguishes only one mode of enforcing a

claim—namely, an action against the debtor in personam—while leaving

intact another—namely, an action against the debtor in rem.” Id. at 84.

      Section 510(b) mandates the subordination of the “claim” for

damages arising from the sale of securities. This necessarily encompasses

the entirety of Kurtin’s “right to payment” whether personal or in rem.

§ 101(5). Thus, unlike a bankruptcy discharge, which only enjoins collection

                                      22
of the in personam liability, subordination divested Kurtin of any right to

payment from any means until the unsecured creditors are paid in full. As

the bankruptcy court correctly pointed out, Kurtin retains his secured

claim. Subordination simply rendered it junior to the interests of the

unsecured creditors. And a lien is incident to the debt it secures. Cal. Civ.

Code § 2909. Therefore, unless the unsecured creditors have been paid in

full, Kurtin has no right to any repayment. If the unsecured creditors

remain unpaid, Kurtin’s judgment liens are simply wholly undersecured,

valueless junior liens.

      Viewed from another vantage, Kurtin’s narrow reading of “claim” as

used in § 510(b) would lead to incongruous if not absurd results that are

wholly at odds with a contextual reading of the statute. The specific benefit

of reordering priorities that § 510(b) confers on unsecured creditors would

be nullified by Kurtin’s reading of the statute. It would permit a former

equity investor to elevate its lien rights ahead of the unsecured creditors

§ 510(b) was enacted to protect. Neither § 510(b) nor the Ninth Circuit’s

case law can be reconciled with this result. If obtaining a judgment for

damages arising from the purchase or sale of securities does not remove

that claim from § 510(b)’s purview, Tristar, 782 F.3d at 495-96, it makes no

sense why recording that same judgment would have any greater effect.

Indeed, Tristar evidently involved a claim secured by a judgment lien, see

id., and that fact did not alter the Ninth Circuit’s subordination analysis.

                                      23
      In short, § 510(b) statutorily precludes Kurtin from collecting his

damages until the unsecured creditors are paid. However one may choose

to explain that result, it remains the same: satisfaction of Kurtin’s right to

payment on his underlying claim, whether deriving personally or in rem, is

not statutorily permitted until all other claims are paid.

            b. Subordination of liens does not conflict with other
               provisions of the Bankruptcy Code.

      Kurtin additionally argues that any interpretation of § 510(b) to

include subordination of liens conflicts with both § 725 and § 510(c).

Section 510(b) states that mandatory subordination is for “the purpose of

distribution.” Kurtin believes that subordination only affects distribution of

the estate’s property under § 726 and, therefore, cannot affect his liens. In

Kurtin’s view, his liens retain their prepetition priority, and the

encumbered property must be “disposed of” pursuant to § 725 which

provides:

      After the commencement of a case under this chapter, but
      before final distribution of property of the estate under section
      726 of this title, the trustee, after notice and a hearing, shall
      dispose of any property in which an entity other than the estate
      has an interest, such as a lien, and that has not been disposed of
      under another section of this title.

      According to Kurtin, there is a substantive difference between the

estate’s distribution under § 726, which specifically references § 510, and

the disposition of encumbered property required by § 725, which does not.

                                       24
As a result, Kurtin contends that subordination of his liens runs afoul of

§ 725.

         Kurtin’s reliance on § 725 is misplaced. Section 725 is one of the Code

sections governing “distribution” of estate property. See Czyzewski v. Jevic

Holding Corp., 137 S. Ct. 973, 979 (2017) (citing both §§ 725 and 726 and

stating that “distributions of assets in a Chapter 7 liquidation must follow

this prescribed order” (emphasis added)); see also H.R. Rep. No. 95-595,

382-383, as reprinted in 1978 U.S.C.C.A.N. 5963, 6338-39 (explaining that

§ 725—which grants bankruptcy courts broad and flexible authority to

order “dispositions” of estate property in which third parties hold interests

or liens—was enacted by Congress “in lieu of a section that would direct a

certain distribution to secured creditors” (emphasis added)). As such, it is

explicitly subject to the mandatory effect of subordination under the plain

language of § 510(b).

         More importantly, there is no conflict between § 510(b) and § 725.

Section 725 only requires the trustee to dispose of any other entity’s interest

prior to the final distribution under § 726. There is no evidence in the

record that the estate is ready for final distribution. Indeed, there is nothing

in the record concerning the administration of this estate to implicate § 725

at all. Rather, it appears that the trustee sought subordination of Kurtin’s

liens so it could administer the property of the estate that the liens

encumber. Presumably, Kurtin’s liens precluded the estate from

administering the estate’s asset(s) under § 363(f). His subordinated liens are

                                        25
now junior to the unsecured creditors’ interests, and the estate will likely

liquidate those encumbered assets under § 363(f) and § 506(d). Any

encumbered proceeds from the liquidation of those assets would be

distributed in satisfaction of § 725. Furthermore, an approved sale that did

not pay the unsecured creditors in full would establish that the

subordinated liens were worthless and effectively unsecured. If the estate

does not administer the encumbered assets, they will be disposed of prior

to the estate’s final distribution under § 726. That is all that § 725 requires.

There is nothing to suggest that subordinating his liens violates that

statute.

      Kurtin next points to § 510(c)(2) to support his argument that “claim”

as used in § 510(b) should not be read to include liens. Section 510(c)(2)

permits the court to exercise its discretion to transfer a lien to the estate

under equitable subordination principles. 11 Kurtin theorizes that the

reference to “claims” in § 510(b) should be narrowly construed to exclude

“liens” because § 510(c) provides for separate treatment of “liens” and

“claims” in the context of equitable subordination whereas § 510(b) does

not. As Kurtin posits, if Congress wanted to cover liens for purposes of

§ 510(b), it obviously knew how to do so. And the absence of a provision

      11 Section 510(c) generally codifies the result in Pepper v. Litton, 308 U.S. 295
(1939), and similar pre-Code cases. H.R. Rep. No. 95-595, 359, as reprinted in 1978
U.S.C.C.A.N. 5963, 6315. Litton itself involved the subordination of a secured claim. See
308 U.S. at 312.
                                            26
like § 510(c)(2) in § 510(b) is a strong indicator that Congress did not intend

§ 510(b) subordination to cover liens.

      Kurtin’s argument misses the point. Lien transfer is a remedy distinct

from lien subordination. As explained above, lien subordination under

§ 510(b)—and § 510(c)(1)—is nothing more than a recognition of the well-

established proposition that a lien is an incident of the debt, Freeman v.

Nationstar Mortg. LLC (In re Freeman), 608 B.R. 228, 235 (9th Cir. BAP 2019),

and that once the claim has been subordinated, the lien automatically

follows the debt. In contrast, the lien transfer relief provided for under

§ 510(c)(2) gives the estate the benefit of the lien right—including priority

over intervening liens. Simply put, these two forms of lien relief are not

mutually exclusive. And Congress’s choice not to provide for lien transfer

relief in conjunction with § 510(b) tells us little or nothing about its

provision of lien subordination relief under both § 510(b) and (c).

      In sum, none of Kurtin’s arguments based on the text and structure of

the Code persuade us that the bankruptcy court incorrectly interpreted

§ 510(b).

      2.    The traditional and general treatment of liens in bankruptcy
            does not bar the bankruptcy court’s interpretation of § 510(b)
            as covering liens.

      Kurtin insists that subordination of liens under § 510(b) also is

inconsistent with the traditional and general protections that liens are

afforded out of respect for the secured creditor’s state law rights. Relying

                                       27
on such venerable cases as Dewsnup v. Timm, 502 U.S. 410, 417 (1992),

Johnson, 501 U.S. at 84, and United States v. Whiting Pools, Inc., 462 U.S. 198,

211–12 (1983), Kurtin points out that liens generally pass through

bankruptcy unaffected, and when Congress has modified or impeded the

exercise of lien rights, it typically strives to provide safeguards to protect

their collateral from dissipation or devaluation, or it offers offsetting

compensation to the extent the collateral is consumed.

      However, Kurtin’s argument regarding Congress’s generally

protective attitude towards lien rights ignores the fact that when Congress

perceives a need and justification to affect such rights, it has done so.

Merely within chapter five of the Code, there are numerous sections that

can drastically affect lien rights. See §§ 506(c), 506(d), 522(f), 547, and 548.

Based on our above analysis and construction, § 510(b) also affects lien

rights. Based on our construction of § 510(b) as covering “liens,” we reject

Kurtin’s argument founded on the Code’s general practice of protecting

and preserving lien rights.

      3.    Application of § 510(b) to Kurtin’s lien rights did not violate
            his due process rights.

      Similarly, Kurtin’s constitutional argument is circular. Kurtin argues

that the bankruptcy court should have eschewed a construction of § 510(b)

that risks a determination that § 510(b) is unconstitutional. As Kurtin

reasons, to the extent § 510(b) affects his lien rights, it constitutes an

                                        28
unconstitutional taking of his property interests in violation of the Fifth

Amendment.

      Assuming without deciding that judicial liens constitute property

interests subject to Fifth Amendment protection, Kurtin’s constitutional

argument still lacks merit. When Congress duly exercises its bankruptcy

power to impair property rights granted under state law, and the enacted

bankruptcy legislation pre-dates the parties’ agreement, the limitations on

the parties’ property rights arising from the legislation become an implicit

part of the parties’ agreement. See Wright v. Union Cent. Life Ins. Co., 304

U.S. 502, 516-18 (1938). Hence Congress’s legislation does not violate either

party’s due process rights. Id.

      Nor can there be any legitimate question that bankruptcy courts have

the power to subordinate claims, and the appurtenant lien rights,

regardless of state law. See Litton, 308 U.S. at 304-06, 312; see also Fahs v.

Martin, 224 F.2d 387, 395 & n.5 (5th Cir. 1955) (citing Vanston Bondholders

Protective Comm. v. Green, 329 U.S. 156, 162-63 & n.5 (1946), and recognizing

bankruptcy court’s power and duty to subordinate certain claims).

      Given our reading of § 510(b), the potential that a bankruptcy court

might later subordinate any claims or liens arising from the Settlement

Agreement was an implicit part of the contract between Kurtin and Elieff.

As a result, we reject Kurtin’s argument that his due process rights might

have been violated as a result of the bankruptcy court’s subordination of

his liens under § 510(b).

                                        29
      4.    Kurtin’s liens were not extinguished as a result of the
            subordination, but his collateral can be consumed through
            distribution.

      Kurtin generally argues that subordination of his secured claim

makes no sense because the court did not avoid his lien. He points out that

the court took pains to articulate that his liens were not avoided but merely

subordinated. He reasons that this necessarily means that his lien, and its

priority, remain unaffected. Kurtin goes so far as to say that “if the trustee

distributes that property [his collateral] to someone else, the property

arguably remains subject to his lien.” Accordingly, in his view, his lien

rights would continue to exist in the same priority as prior to

subordination even after that collateral is distributed to other creditors of

Elieff’s bankruptcy estate.

      For the reasons previously discussed at length, subordination of

Kurtin’s claim was required under § 510(b). Subordination of the claim

necessarily subordinated the associated liens securing the underlying

claim. The court did not avoid the lien; it did not need to do so. Based on

the bankruptcy court’s decision, Kurtin holds a subordinated encumbrance

junior to the unsecured creditors. His claim is not entitled to payment from

any source until the unsecured creditors are paid in full. Kurtin’s

observations concerning lien avoidance are unfounded and do not

establish any error in the bankruptcy court’s decision.

                                      30
D.    Kurtin’s challenge of the bankruptcy court’s denial of his
      supplemental Civil Rule 56(d) request and its evidentiary rulings
      do not justify reversal.

      Kurtin contends that the bankruptcy court committed reversible

error by denying his supplemental Civil Rule 56(d) request. Kurtin

maintains that he needed additional time to conduct discovery on two

points. First, he stated that he needed additional time to discover facts

regarding the value of the different types of consideration he gave under

the Settlement Agreement. Kurtin particularly wanted discovery as to the

value of the securities-sale component and the value of the dispute

resolution component to allocate the Settlement Payments between those

two components.

      As we have explained above, the Settlement Agreement was an

indivisible contract, its various components were not severable, and

consideration could not be apportioned among them. Consequently, the

valuation evidence was irrelevant to the bankruptcy court’s summary

judgment ruling. The valuation issue did not pertain to a genuine issue of

“material” fact. For summary judgment purposes, a factual issue only is

material if it could affect the outcome of the litigation under applicable law.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Therefore, Kurtin’s

asserted need to discover valuation evidence was insufficient to support its

supplemental Civil Rule 56(d) motion. See Cal. ex rel. Cal. Dep't of Toxic

Substances Control v. Campbell, 138 F.3d 772, 779 (9th Cir. 1998) (holding that

                                       31
a litigant seeking to extend discovery in the face of a pending summary

judgment motion must show among other things that evidence the litigant

seeks to discover is “essential” to opposing summary judgment).

      The only other facts Kurtin sought to discover related to his belief

that the sale of his equity interests in the Joint Entities occurred so long

before the bankruptcy case that the causal nexus between his equity

interest and the resulting debt had been negated. He claims he needed

additional time to conduct discovery regarding the evolution of the Joint

Entities’ debt structure. The unstated conclusion Kurtin draws from these

circumstances is that his equity to debt transmutation was so “old and

cold” that creditors in existence at the time of Elieff’s bankruptcy filing

could not possibly have extended credit in reliance on the equity cushion

his equity investments in the Joint Entities provided. However, creditor

reliance on the equity cushion is only one of the two rationales for

imposition of § 510(b) subordination. See In re Am. Wagering, Inc., 493 F.3d

at 1071-72 (explaining the two rationales underlying § 510(b)). The other

rationale is the greater risk of loss investors assume when they invest in a

business entity—as compared to the risk assumed by creditors. See id.

Nothing that Kurtin has shown or argued suggests that the passage of time

has impacted this risk-allocation rationale as it applies in this case.

      The Ninth Circuit has made clear that the risk allocation rationale is

the critical rationale for imposing § 510(b) subordination and that the

creditor reliance rationale does not apply at all in the context of a sale of

                                       32
securities by an affiliate of the debtor. In re Del Biaggio, 834 F.3d at 1011-12.

Because Kurtin’s “old and cold” argument only implicates the creditor

reliance rationale, any evidence he sought to discover in support of that

argument was not material to the plaintiffs’ summary judgment motion.

      As for excluded evidence, he mostly objects to the exclusion of

evidence related to his already-discredited attempts to value and apportion

the Settlement Payments. The only other evidence he argues that the

bankruptcy court should not have excluded consisted of “direct evidence

[in his declarations] of the purpose and intent of the Settlement Payments.”

But this evidence was also irrelevant. Kurtin’s statements regarding his

personal, subjective intent in entering into the Settlement Agreement is

immaterial to the proper construction of the parties’ mutually manifested

objective intent in entering into the Settlement Agreement. See In re Italiane,

632 B.R. at 674.

      In sum, Kurtin has not persuaded us that the bankruptcy court

abused its discretion by denying Kurtin’s supplemental Civil Rule 56(d)

motion or by excluding certain parts of Kurtin’s evidence.

                                CONCLUSION

      For the reasons set forth above, we affirm both the bankruptcy

court’s summary judgment in favor of Ehrenberg on his § 510(b) claims for

relief and its subsequent order clarifying that its summary judgment ruling

subordinated Kurtin’s lien rights as well as his claim.

                                        33