In re: Bruce Elieff, 637 B.R. 612

Background

Kurtin and Elieff were long-time real‑estate partners who resolved disputes in a 2005 Settlement Agreement under which Kurtin transferred his interests in various "Joint Entities" to Elieff in exchange for four "Settlement Payments."
Paragraph 14 granted Kurtin a security interest in project assets and prohibited Elieff from taking distributions that would prevent satisfaction of the Settlement Payments.
The Joint Entities defaulted on later Settlement Payments; Kurtin sued and obtained a large state‑court judgment against Elieff for breach of the distribution restriction; Kurtin recorded judgment liens.
Elieff and related entities later filed bankruptcy; the chapter 7 trustee sued to subordinate Kurtin’s claim under 11 U.S.C. § 510(b) and to subordinate the related lien rights.
The bankruptcy court granted summary judgment: Kurtin’s claim for damages "arose from" the sale of securities (the divestiture of his Joint Entities interests) and § 510(b) subordinated both his claim and the associated lien rights.
The Bankruptcy Appellate Panel affirmed, holding the Settlement Agreement was indivisible, § 510(b) applied, and subordination encompassed the lien incident to the subordinated claim.

Issues

Issue	Kurtin's Argument	Trustee's Argument	Held
Whether summary judgment was proper on § 510(b) subordination	Kurtin: damages arose from post‑settlement diversion of assets, not the securities sale; nexus too remote	Trustee: claim flows from the sale of Kurtin’s equity interests; the distribution restriction was intended to protect consideration for that sale	Affirmed — claim "arose from" the purchase/sale; § 510(b) applies because of the causal nexus
Whether § 510(b) subsumes judgment liens	Kurtin: § 510(b) subordinates claims only; liens remain with prepetition priority unless avoided or transferred under § 510(c)(2) or § 725	Trustee: a "claim" includes the creditor’s entire right to payment (personal and in rem); lien is incident to the debt and follows subordination	Affirmed — subordination of the claim renders the lien junior (lien follows the subordinated debt)
Whether denial of supplemental Civil Rule 56(d) discovery was an abuse of discretion	Kurtin: needed discovery to apportion Settlement Payments between securities‑sale component and other compensation; to show the nexus was stale	Trustee: allocation evidence irrelevant because the Settlement Agreement is indivisible and nexus exists	Affirmed — denial not an abuse; allocation discovery was not material to § 510(b) analysis
Whether exclusion of certain evidence was an abuse of discretion	Kurtin: court improperly excluded valuation/apportionment evidence and his declarations about intent	Trustee: that evidence was irrelevant; objective contract terms control; subjective intent immaterial	Affirmed — exclusion proper because evidence would not create a genuine issue of material fact

Key Cases Cited

In re Betacom of Phx., Inc., 240 F.3d 823 (9th Cir. 2001) (§ 510(b) mandates subordination of damages claims arising from purchase or sale of securities)
Pensco Tr. Co. v. Tristar Esperanza Props., LLC, 782 F.3d 492 (9th Cir. 2015) (claim originating from failed sale of membership interest arises under § 510(b))
Liquidating Tr. Comm. of the Del Biaggio Liquidating Tr. v. Freeman (In re Del Biaggio), 834 F.3d 1003 (9th Cir. 2016) (broad Ninth Circuit construction of "arising from" as a nexus/causal relationship)
Khan v. Barton (In re Khan), 846 F.3d 1058 (9th Cir. 2017) (limiting § 510(b) where conversion had no causal connection to the investment sale)
Johnson v. Home State Bank, 501 U.S. 78 (U.S. 1991) ("claim" under the Code includes secured rights and the lien is incident to the underlying claim)
Pepper v. Litton, 308 U.S. 295 (U.S. 1939) (equitable subordination principles codified in § 510(c))