In re: Zafar David Khan Terrance Alexander Tomkow
CC-14-1021-TaDKi CC-14-1041-TaDKi CC-14-1062-TaDKi CC-14-1020-TaDKi CC-14-1060-TaDKi CC-14-1061-TaDKi
| 9th Cir. BAP | Dec 9, 2014Background
- Appellants Zafar Khan and Terrance Tomkow co-founded RPost entities; Barton, a co-founder, obtained a state-court judgment against them and RPost International, Ltd. (RIL) for conversion, fraud, breach of fiduciary duty and statutory violations related to his lost RIL shares, including compensatory and punitive damages.
- On the eve of the punitive-damages hearing, both Appellants filed chapter 13 petitions; Barton filed proofs of claim and moved to convert the chapter 13 cases to chapter 7.
- Appellants filed adversary proceedings and claim objections seeking disallowance of Barton’s claims under § 502(b)(1) on the theory that those claims were mandatorily subordinated under § 510(b).
- The bankruptcy court converted both cases to chapter 7 (finding bad-faith filings under the Leavitt factors), overruled the § 510(b)-based claim objections, and dismissed the adversary proceedings with prejudice.
- The BAP affirmed: § 510(b) does not apply to subordinated claims against individual debtors based on equity interests in a corporation, disallowance under § 502(b)(1) does not follow from § 510(b), and conversion to chapter 7 was not an abuse of discretion.
Issues
| Issue | Barton’s Argument | Khan/Tomkow’s Argument | Held |
|---|---|---|---|
| Whether § 510(b) mandates subordination (and thus disallowance) of Barton’s state-court judgment claims | § 510(b) applies and requires subordination (leading to disallowance) because claims arise from loss of equity in RIL | § 510(b) does not apply to individual debtors asserting claims that derive from corporate equity; at minimum, subordination would not produce statutory disallowance | § 510(b) does not apply in this individual-debtor context; even if it did, it would not automatically produce disallowance under § 502(b)(1) |
| Whether disallowance under § 502(b)(1) follows from § 510(b) subordination | Subordination should effectively disallow the claim as a matter of distributional logic | Statutory disallowance is limited to the grounds enumerated in § 502(b); subordination adjusts priority, not allowance | Disallowance does not follow automatically from § 510(b); § 502(b) controls statutory disallowance |
| Whether dismissal of the adversary proceedings was proper after overruling claim objections | Dismissal appropriate because claim objections resolved the merits and defeated the adversary complaints | Adversary proceedings required separate adjudication | Dismissal with prejudice was proper because the objections resolved the claims and plaintiffs could not prevail as a matter of law |
| Whether conversion to chapter 7 was an abuse of discretion | Conversion not warranted | Conversion was an abuse because court failed to weigh all Leavitt factors and ignored proposed plans | No abuse: court considered totality of circumstances, applied Leavitt factors, found bad faith (timing and evasive disclosures), and conversion was proper |
Key Cases Cited
- Am. Broad. Sys., Inc. v. Nugent (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 a security)
- Travelers Cas. & Sur. Co. v. Pac. Gas & Elec. Co., 549 U.S. 443 (U.S. 2007) (claims disallowance is limited to grounds listed in § 502(b))
- In re Tristar Esperanza Props., LLC, 488 B.R. 394 (9th Cir. BAP 2013) (analysis of § 510(b) scope and purpose)
- In re Am. Wagering, Inc., 493 F.3d 1067 (9th Cir. 2007) (§ 510(b) serves to protect corporate creditors ahead of shareholders)
- In re Leavitt, 171 F.3d 1219 (9th Cir. 1999) (four-factor test for bad-faith chapter 13 filing and conversion/dismissal analysis)
- Eisen v. Curry (In re Eisen), 14 F.3d 469 (9th Cir. 1994) (totality-of-circumstances standard for bad faith in chapter 13)
- TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820 (9th Cir. 2011) (standard for reviewing factual findings for clear error)
- Carrieri v. Jobs.com Inc., 393 F.3d 508 (5th Cir. 2004) (corporate shareholder claims treated as equity securities; distinguishable where debtor is an entity)