Khan v. Barton, No. 15-60002 (9th Cir. 2017)
Annotate this CaseDebtors challenged the Bankruptcy Appellate Panel's (BAP) judgment affirming the bankruptcy court's decision that the claim of Kenneth Barton was not subordinated pursuant to the provisions of 11 U.S.C. 510(b), and converted debtors’ Chapter 13 bankruptcy proceedings to Chapter 7 proceedings. The court disagreed with BAP and Khan I. See Liquidating Tr. Comm. of the Del Biaggio Liquidating Tr. v. Freeman (In re Del Biaggio), holding that section 510(b) does apply when debtors are individuals. Nevertheless, the court concluded that the bankruptcy court did not err when it refused to subordinate Barton’s claims pursuant to section 510(b). In this case, Barton sought and obtained damages. Even though his damage award for conversion was based on the value of the securities at the time of conversion, his action did not arise out of the purchase of the securities and the risks that the purchase might entail. Rather, his actions arose out of debtors' conversion of the securities many years later. The court rejected debtors arguments that the bankruptcy court clearly erred when it found bad faith, and abused its discretion when it converted their Chapter 13 proceedings to Chapter 7 proceedings. Accordingly, the court affirmed the judgment.
Court Description: Bankruptcy. On appeal from the Bankruptcy Appellate Panel, the panel affirmed (1) the bankruptcy court’s decision that a creditor’s claims were not subordinated and (2) the bankruptcy court’s conversion of the debtors’ Chapter 13 bankruptcy proceedings to Chapter 7 proceedings. 11 U.S.C. § 510(b) requires that claims for damages arising from the purchase or sale of a security of the debtor or an affiliate of the debtor be subordinated to certain other claims or interests. Disagreeing with the BAP, and following Liquidating Tr. Comm. of the Del Biaggio Liquidating Tr. v. Freeman (In re Del Biaggio), 834 F.3d 1003 (9th Cir. 2016), the panel held that § 510(b) applies when debtors are individuals. Nevertheless, the panel agreed with the bankruptcy court that the creditor’s claims did not arise out of a purchase or sale of securities, but rather were based upon a IN RE KHAN 5 judgment entered against the debtors on account of their actions in fraudulently converting the creditor’s stock. The panel held that the bankruptcy court did not clearly err when it found bad faith and did not abuse its discretion when it converted the debtors’ Chapter 13 proceedings to Chapter 7 proceedings. Concurring in part, Judge Rawlinson agreed with the majority that the bankruptcy court acted within its discretion when it converted the proceedings from Chapter 13 to Chapter 7. She also joined the majority’s conclusion that 11 U.S.C. § 510(b) applies to debtors who are individuals. Judge Rawlinson dissented from the conclusion of the majority that § 510(b) was inapplicable because the creditor’s claims did not arise from a purchase or sale of securities.
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