                                                         FILED
                                                          DEC 09 2014
 1                       ORDERED PUBLISHED
                                                     SUSAN M. SPRAUL, CLERK
 2                                                      U.S. BKCY. APP. PANEL
                                                        OF THE NINTH CIRCUIT

 3               UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                         OF THE NINTH CIRCUIT
 5
 6   In re:                        )    BAP Nos.   CC-14-1021-TaDKi
                                   )               CC-14-1041-TaDKi
 7   ZAFAR DAVID KHAN,             )               CC-14-1062-TaDKi
                                   )
 8             Debtor.             )    Bk. No.    2:13-bk-19713-WB
     ______________________________)
 9                                 )    Adv. No.   2:13-ap-01962-WB
     ZAFAR DAVID KHAN,             )
10                                 )
               Appellant,          )
11                                 )
     v.                            )
12                                 )
     KENNETH BARTON; THOMAS BURKE; )
13   NANCY K. CURRY, Chapter 13    )
     Trustee,*                     )
14                                 )
               Appellees.          )
15                                 )
                                   )
16   In re:                        )    BAP Nos.   CC-14-1020-TaDKi
                                   )               CC-14-1060-TaDKi
17   TERRANCE ALEXANDER TOMKOW,    )               CC-14-1061-TaDKi
                                   )
18             Debtor.             )    Bk. No.    2:13-bk-19712-WB
     ______________________________)
19                                 )    Adv. No.   2:13-ap-01989-WB
     TERRANCE ALEXANDER TOMKOW,    )
20                                 )
               Appellant,          )
21                                 )
     v.                            )    O P I N I O N
22                                 )
     KENNETH BARTON; THOMAS BURKE; )
23   NANCY K. CURRY, Chapter 13    )
     Trustee,*                     )
24                                 )
               Appellees.          )
25                                 )
26               Argued and Submitted on October 23, 2014
                           at Malibu, California
27
28
          *
            Appellees Thomas Burke and Nancy K. Curry did not file
     briefs and did not participate in these appeals.
 1                        Filed – December 9, 2014
 2             Appeal from the United States Bankruptcy Court
                   for the Central District of California
 3
          Honorable Julia W. Brand, Bankruptcy Judge, Presiding
 4
 5
     Appearances:    Lewis R. Landau of Horgan, Rosen, Beckham &
 6                   Coren, LLP for appellants Zafar David Khan and
                     Terrance Alexander Tomkow; Patrick C. McGarrigle
 7                   of McGarrigle, Kenney & Zampiello, APC for
                     appellee Kenneth Barton.
 8
 9
10   Before:   TAYLOR, DUNN, and KIRSCHER, Bankruptcy Judges.
11
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                                     2
 1   TAYLOR, Bankruptcy Judge:
 2
 3        Creditor and appellee Kenneth Barton successfully recovered
 4   a state court judgment against debtors and appellants Zafar
 5   David Khan and Terrance Alexander Tomkow (jointly,
 6   “Appellants”)1 and their corporation, RPost International, Ltd.
 7   (“RIL”), based on conversion, fraud, breach of fiduciary duty,
 8   and California statutory violations related to his loss of
 9   common stock shares in RIL.   The state court found the
10   Appellants and RIL jointly and severally liable to Barton for
11   compensatory damages and also awarded him punitive damages
12   against the Appellants.
13        Prior to the final liquidation of damages, the Appellants
14   each filed a chapter 132 petition.   Barton filed proofs of claim
15   in each case and also moved to convert both chapter 13 cases to
16   chapter 7.   The Appellants each countered with an adversary
17   proceeding; they sought to disallow Barton’s claims under
18   § 502(b)(1) based on the allegation that the claims were subject
19   to mandatory subordination under § 510(b).   They also filed
20   objections to Barton’s claims in their respective bankruptcy
21
22        1
            The Appellants moved for permission to file a single
23   brief and excerpts of record as to all six of the related
     appeals. A BAP motions panel granted the unopposed request.
24   This treatment continues the same approach employed by the
     bankruptcy court and the parties before it; that is, a de facto
25
     joint administration of these proceedings.
26        The BAP Clerk of Court is directed to enter this
     disposition in each of these six related appeals.
27
          2
            Unless otherwise indicated, all chapter and section
28   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                     3
 1   cases on the same theory.
 2        After a hearing, the bankruptcy court converted the cases
 3   to chapter 7 and overruled the claims objections.    And, based on
 4   the Appellants’ representations that the claims objections
 5   resolved the adversary proceedings, it also dismissed the
 6   adversary proceedings with prejudice.   These six related appeals
 7   followed.
 8        We conclude that mandatory subordination was not required
 9   in relation to Barton’s claims and, thus, that the bankruptcy
10   court did not err in overruling the claims objections and
11   dismissing the adversary proceedings with prejudice.   Nor did it
12   abuse its discretion in converting the cases to chapter 7.
13   Therefore, we AFFIRM.
14                                 FACTS
15        During the “dot-com bubble” of the late 1990s, the
16   Appellants and Barton co-founded start-up companies RPost, Inc.
17   and RIL, which owned or controlled various patents relating to
18   authentication and verification of emails and electronic
19   payments.   Barton subsequently suffered a stroke and was
20   sidelined from active involvement in the businesses.   Afterward,
21   his relationship with the Appellants deteriorated to the point
22   that he commenced litigation seeking unpaid compensation and
23   reimbursement of expenses.
24        During the course of that litigation, Barton discovered
25   that the Appellants took control of his 6,016,500 common stock
26   shares in RIL, returned them to the company treasury, and
27   thereby divested him of an equity interest in RIL.
28   Consequently, he commenced another action against the Appellants

                                     4
 1   and RIL, among others, for conversion, fraud, breach of
 2   fiduciary duty, and violations of the California Business and
 3   Professions Code.
 4        In August 2012, the state court determined that Barton met
 5   his burden of proof on all of the causes of action against the
 6   Appellants and RIL.   As a result, it initially ordered the
 7   reissue of the converted RIL shares to Barton and awarded
 8   monetary damages for emotional distress.   It also determined
 9   that the Appellants acted with malice, oppression, and fraud
10   and, thus, that Barton was entitled to punitive damages.     The
11   state court subsequently conducted a second phase of trial to
12   determine the appropriate amount of punitive damages.
13        On April 14, 2013 – the eve of the final hearing on
14   punitive damages – the Appellants each filed a chapter 13
15   petition.   In addition to Barton’s claims, the Appellants each
16   scheduled their respective secured mortgage debt and credit card
17   debts.3
18        Thereafter, the bankruptcy court approved stipulated stay
19   relief that allowed the state court action to continue to
20   finalization of the judgment.4   In a revised statement of
21   decision and ruling on punitive damages issued in June 2013, the
22
          3
23          Both of the Appellants also scheduled a few “notice only”
     creditors, including the Internal Revenue Service and their
24   state court attorney, on their schedules E and F; there were no
     claim amounts provided for these creditors.
25
          4
26          We exercised our discretion to take judicial notice of
     documents electronically filed in the adversary proceedings and
27   bankruptcy cases as necessary. See Atwood v. Chase Manhattan
     Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP
28   2003).

                                      5
 1   state court reversed its decision to order restoration of
 2   Barton’s converted RIL stock; instead, it awarded the value of
 3   the converted stock.   It, thus, entered a judgment awarding
 4   Barton compensatory damages in the amount of $2,840,060 (the
 5   value of his dispossessed RIL common stock shares), damages for
 6   emotional distress, and $880,021.91 in prejudgment interest.
 7   The judgment provided for joint and several liability for these
 8   compensatory damages against each of the Appellants and RIL.
 9   The state court also awarded punitive damages to Barton; it
10   awarded $250,000 against Khan and $150,000 against Tomkow.     The
11   Appellants appealed from the judgment to the California court of
12   appeal; to our knowledge, the appeal remains pending.
13        Barton filed proofs of claim in the bankruptcy cases and
14   commenced adversary proceedings against the Appellants, seeking
15   to deem the state court judgment nondischargeable under
16   § 523(a)(2), (a)(4), and (a)(6).     Barton subsequently moved to
17   convert both of the Appellants’ chapter 13 cases to chapter 7
18   based on, among other things, bad faith filings.
19        Days later, the Appellants commenced adversary proceedings
20   against Barton.   The adversary complaints contained a single
21   claim for relief: disallowance of Barton’s claims pursuant to
22   § 502(b)(1) based on mandatory subordination under § 510(b).
23   Concurrently, they filed objections to Barton’s claims on the
24   adversary proceeding dockets based on the same grounds.    The
25   Appellants filed identical claims objections in their chapter 13
26   cases.
27        The bankruptcy court simultaneously heard the motions to
28   convert and claims objections.   At an initial hearing, it noted

                                      6
 1   its disinclination to rule on the claims objections given the
 2   pending adversary proceedings.    The Appellants, however,
 3   requested consideration of the claims objections at a continued
 4   hearing, asserted that they filed the adversary proceedings only
 5   to comply with procedural rules, and acknowledged that a ruling
 6   on the claims objections would resolve the adversary
 7   proceedings.
 8        At the continued hearing, the bankruptcy court orally ruled
 9   in favor of Barton on both the motions to convert and the claims
10   objections.    Based on the factors set forth in Leavitt v. Soto
11   (In re Leavitt), 171 F.3d 1219 (9th Cir. 1999), it found that
12   the Appellants filed their chapter 13 cases in bad faith and,
13   thus, it determined that cause for conversion to chapter 7
14   existed.   The bankruptcy court found that the timing of the
15   Appellants’ chapter 13 filings evidenced an intent to defeat the
16   state court action and that Appellants refused to provide
17   sufficiently complete and accurate financial information
18   relating to settlements and transactions involving their
19   companies.    As to the claims objections, it determined that
20   Barton’s claims were not subject to mandatory subordination
21   under § 510(b).
22        The bankruptcy court entered orders converting the cases
23   and overruling the claims objections, as well as judgments
24   dismissing the adversary proceedings with prejudice.    The
25   Appellants timely appealed.
26                               JURISDICTION
27        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
28   §§ 1334 and 157(b)(2)(B) and (O).    We have jurisdiction under 28

                                      7
 1   U.S.C. § 158.
 2                                   ISSUES
 3   1.   Did the bankruptcy court err in determining that Barton’s
 4        claims were not subject to mandatory subordination and,
 5        thus, overruling the Appellants’ claims objections?
 6   2.   Did the bankruptcy court err in dismissing the Appellants’
 7        adversary proceedings?
 8   3.   Did the bankruptcy court abuse its discretion in converting
 9        the Appellants’ chapter 13 cases to chapter 7?
10                           STANDARDS OF REVIEW
11        We review de novo the bankruptcy court’s dismissals of the
12   adversary proceedings with prejudice.    In the context of the
13   claims objections, we review the bankruptcy court’s legal
14   conclusions de novo and its factual findings for clear error.
15   See Pierce v. Carson (In re Rader), 488 B.R. 406, 409 (9th Cir.
16   BAP 2013) (“An order overruling a claim objection can raise
17   legal issues (such as the proper construction of statutes and
18   rules) which we review de novo, as well as factual issues (such
19   as whether the facts establish compliance with particular
20   statutes or rules), which we review for clear error.” (citation
21   omitted)).
22        Factual findings are clearly erroneous if illogical,
23   implausible, or without support in inferences that may be drawn
24   from the facts in the record.    See TrafficSchool.com, Inc. v.
25   Edriver Inc., 653 F.3d 820, 832 (9th Cir. 2011) (citing United
26   States v. Hinkson, 585 F.3d 1247, 1262 (9th Cir. 2009) (en
27   banc)).    Bad faith is a factual finding reviewed for clear
28   error.    Ellsworth v. Lifescape Med. Assocs., P.C. (In re

                                       8
 1   Ellsworth), 455 B.R. 904, 914 (9th Cir. BAP 2011).
 2        An order converting a chapter 13 case to chapter 7 is
 3   reviewed for an abuse of discretion.    Rosson v. Fitzgerald (In
 4   re Rosson), 545 F.3d 764, 771 (9th Cir. 2008).    A bankruptcy
 5   court abuses its discretion if it applies the wrong legal
 6   standard, misapplies the correct legal standard, or if its
 7   factual findings are clearly erroneous.   TrafficSchool.com,
 8   Inc., 653 F.3d at 832.
 9        We may affirm on any basis in the record.    Caviata Attached
10   Homes, LLC v. U.S. Bank, N.A. (In re Caviata Attached Homes,
11   LLC), 481 B.R. 34, 44 (9th Cir. BAP 2012).
12                             DISCUSSION5
13   A.   The bankruptcy court did not err in determining that
14        Barton’s claims were neither subject to mandatory
15        subordination nor appropriately dismissed.
16        The Appellants argue that the bankruptcy court erred when
17   it failed to disallow Barton’s claims based on the alleged
18   necessity for mandatory subordination of the claims under
19
20        5
            Barton filed a request for judicial notice as to an order
     entered by the United States District Court for the Eastern
21
     District of Texas in an unrelated action. He seeks to
22   supplement the record on our review of the bankruptcy court’s
     decision to convert the cases with the district court’s findings
23   and conclusions as to the Appellants’ conduct in that case. The
     district court’s order, however, was entered on January 30, 2014
24   – after the bankruptcy court’s entry of all of the orders and
     judgments on appeal here except for the judgment dismissing
25   Tomkow’s adversary proceeding.
26        Given that we review the bankruptcy court’s decision to
     convert the cases for an abuse of discretion, we decline to take
27   judicial notice of bad faith findings that were not before the
     bankruptcy court when it rendered its decision. Therefore, we
28   deny Barton’s request for judicial notice.

                                    9
 1   § 510(b).    We disagree.   On this record, disallowance would not
 2   follow mandatory subordination, even if subordination was
 3   appropriate.     In any event, on this record, subordination was
 4   not required.
 5        As the dismissal judgments were predicated on the orders
 6   overruling the claims objections, we first review the decisions
 7   on the claims objections.
 8        1.     The bankruptcy court correctly overruled the claims
 9               objections.
10        The Appellants contend that the plain language of § 510(b)
11   requires mandatory subordination of Barton’s claims and, as a
12   result, that claims disallowance under § 502(b)(1) necessarily
13   follows.    Although the bulk of the Appellants’ arguments focus
14   on mandatory subordination, it is clear that subordination is
15   simply a means to an end: the total disallowance of Barton’s
16   claims.    We conclude that disallowance would never result in
17   these cases.
18               a.    Even if Barton’s claims were subject to mandatory
19                     subordination, statutory claims disallowance
20                     would not follow.
21        Generally speaking, subordination relates to the order of
22   distribution among a debtor’s creditors, not whether a claim is
23   allowed under the Code.     See O’Donnell v. Tristar Esperanza
24   Props., LLC (In re Tristar Esperanza Props., LLC), 488 B.R. 394,
25   404 (9th Cir. BAP 2013) (“The purpose of subordination . . . is
26   to adjust the place in line of certain claims in the bankruptcy
27   distribution scheme.”).     Although subordination may result in
28   the functional disallowance of a claim, it is not a statutory

                                       10
 1   basis for claims disallowance.   See Travelers Cas. & Sur. Co. of
 2   Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 449 (2007) (claims
 3   disallowance is limited to grounds set forth in § 502(b)(1)-
 4   (9)).
 5        Here, the Appellants contend that mandatory subordination
 6   effectuates disallowance under § 502(b)(1) “because a holder of
 7   common stock has no claim or interest against individual
 8   [d]ebtors.”   We certainly agree that one cannot hold an equity
 9   interest in another human being.      But, other than quoting
10   § 502(b)(1) in their brief on appeal, the Appellants’ argument
11   lacks both logical development and any authoritative support.
12        The Appellants’ cursory reference to Carrieri v. Jobs.com
13   Inc., 393 F.3d 508 (5th Cir. 2004), does not aid them.      As
14   directly relevant here, the Fifth Circuit affirmed the district
15   court’s determination that a shareholders group’s asserted
16   claims based on a contract allowing redemption of shares and
17   warrants were “equity securities,” as defined by § 101(16)(C).
18   Id. at 518-28.   In doing so, it concluded that, “even assuming
19   arguendo” that the shareholders held claims, the bankruptcy
20   court properly disallowed the claims for two reasons: (1) the
21   claims were subject to subordination under § 510(a) or (b); and
22   (2) the shareholders’ rights under the operative agreement with
23   the debtor were neither ripe nor exercised as of the petition
24   date.   Id. at 526-27.
25        Carrieri is distinguishable.      There, the debtor was a
26   corporation, not an individual, and the shareholders held only
27   equity securities within the meaning of § 101(16).      Here, the
28   Appellants are individuals, and they fail to explain how any

                                      11
 1   claim based on a state court judgment is categorized correctly
 2   as an equity security, within the plain meaning of § 101(16), as
 3   opposed to being categorized as a claim under § 101(5)(A).    More
 4   importantly, they fail to recognize that while the Carrieri
 5   bankruptcy court disallowed claims following subordination under
 6   § 510(b), it did so because there was no then-existing right to
 7   payment or recovery as required for a claim under § 101(5)(A).
 8   Id. at 524-25.   Here, the state court judgment created a present
 9   right to payment.   And, finally, they fail to acknowledge that
10   the Fifth Circuit noted support for the theory that equity
11   securities are not always mutually exclusive of a claim,
12   although it ultimately determined not to finally decide that
13   issue.   Id. at 525.   Carrieri, if anything, makes clear that
14   what Barton holds here is a claim or right to payment - not an
15   equity security.
16        On this record, there is no basis for claims disallowance
17   under § 502(b)(1) - even if mandatory subordination is
18   appropriate; and it is not.
19              b.    Barton’s claims were not subject to mandatory
20                    subordination under the Code.
21        Section 510(b) “mandates the subordination of damages
22   claims arising from the purchase or sale of a security.”6    Am.
23   Broad. Sys., Inc. v. Nugent (In re Betacom of Phx., Inc.), 240
24   F.3d 823, 827 (9th Cir. 2001) (internal quotation marks
25
          6
26          Mandatory subordination also includes claims arising from
     rescission of a purchase or sale of security and allowed
27   reimbursement or contribution under § 502 on account of such a
     claim. Those types of claims, however, are not at issue in this
28   appeal.

                                      12
 1   omitted).    The Ninth Circuit broadly interprets the scope of
 2   § 510(b).    See In re Tristar Esperanza Props., LLC, 488 B.R. at
 3   403.
 4          Our analysis here begins with the statutory construction of
 5   § 510(b), “the first step of which is to determine whether the
 6   language has a plain and unambiguous meaning with regard to the
 7   particular dispute.”    Hawkins v. Franchise Tax Bd. of Cal., 769
 8   F.3d 662, 666 (9th Cir. 2014).    This first step requires an
 9   evaluation of “not only the specific provision at issue, but
10   also the structure of the statute as a whole, including its
11   object and policy.”    Id. (citation and internal quotation marks
12   omitted).    If the plain language of the statute is unambiguous,
13   that meaning controls, and the inquiry terminates.    Id.   If,
14   however, the language is ambiguous, then we proceed to the
15   second step and consult the legislative history.    Id.
16          Section 510(b) provides for subordination in relation to
17   “claims or interests that are senior to or equal the claim or
18   interest represented by such security.”    11 U.S.C. § 510(b)
19   (emphasis added).    It is axiomatic that a claim or interest
20   based on stock may exist only at a corporate level because, as
21   the Appellants concede in connection with their claims
22   disallowance argument, it is impossible to assert an equity
23   interest in a person.
24          More importantly, the subordination that § 510(b) mandates
25   relates to claims that are senior or equal to Barton’s claims.
26   Here, there is no evidence that the Appellants’ individual,
27   general unsecured creditors could seek recovery as creditors at
28   the corporate level.    As a result, their individual, general

                                      13
 1   unsecured creditors do not hold claims senior to or equal to any
 2   of Barton’s claims, past or current, based on an equity position
 3   at the corporate level.     We find this portion of the statutory
 4   language clearly inconsistent with mandatory subordination of
 5   Barton’s claims, but, at a minimum, ambiguity exists as to
 6   whether § 510(b) applies in an individual debtor case.
 7        The object and policy of mandatory subordination “serve[]
 8   to effectuate one of the general principles of corporate and
 9   bankruptcy law: that creditors are entitled to be paid ahead of
10   shareholders in the distribution of corporate assets.”        Racusin
11   v. Am. Wagering, Inc. (In re Am. Wagering, Inc.), 493 F.3d 1067,
12   1071 (9th Cir. 2007) (emphasis added).     As these general
13   principles disfavor shifting all of the risk of loss to
14   creditors, § 510(b) works “to prevent disappointed shareholders,
15   sometimes the victims of corporate fraud, from recouping their
16   investment in parity with [the corporation’s] unsecured
17   creditors.”     Id. at 1071-72.   The object and policy of mandatory
18   subordination, thus, affirm that § 510(b) relates to corporate
19   debt and the distribution of corporate assets.
20        The legislative history of § 510(b) also supports its
21   inapplicability in an individual debtor’s case.     In enacting
22   mandatory subordination, Congress intended to address “the
23   historical problem of investors recovering fraud claims pari
24   passu with general creditors in [corporate] bankruptcy cases.”
25   In re Tristar Esperanza Props., LLC, 488 B.R. at 402.     And, in
26   crafting the statute, Congress relied extensively on a 1973 law
27   review article authored by professors John J. Slain and Homer
28   Kripke.   Id.    As acknowledged in the legislative history of

                                        14
 1   § 510, the article concluded that the distribution of assets in
 2   corporate bankruptcy should be predicated on the allocation of
 3   risk between general creditors and security holders.   See H.R.
 4   Rep. 95-595, at 195 (1977).
 5        The Ninth Circuit has since recognized that § 510(b) is,
 6   thus, premised on two assumptions: “1) the dissimilar risk and
 7   return expectations of shareholders and [corporate] creditors;
 8   and 2) the reliance of [corporate] creditors on the equity
 9   cushion provided by shareholder investment.”   In re Betacom of
10   Phx., Inc., 240 F.3d at 830.   These assumptions support
11   subordination at the corporate level - not in an individual
12   debtor case where, once again, equity interests do not exist.
13        Neither the language of the statute nor the object and
14   policy of mandatory subordination nor the legislative history of
15   § 510(b) support the view that Congress intended mandatory
16   subordination to apply in an individual debtor case.   Instead,
17   all of these sources point to the subordination of a corporate
18   shareholder’s equity-based claim in a corporate case context.
19        The Ninth Circuit case law on mandatory subordination is
20   consistent with our interpretation.   Our review of the case law
21   reveals no case in which § 510(b) was applied in an individual
22   debtor’s case based on an equity position in an affiliate
23   entity.   The cases at the appellate level, instead, all involved
24   entity debtors.   See, e.g., In re Am. Wagering, Inc., 493 F.3d
25   1067; In re Betacom of Phx., Inc., 240 F.3d 823; Kira v. Holiday
26   Mart, Inc. (In re Holiday Mart, Inc.), 715 F.2d 430 (9th Cir.
27   1983); Falcon Capital Corp. S’holders v. Osborne (In re THC Fin.
28   Corp.), 679 F.2d 784 (9th Cir. 1982) (Bankruptcy Act case);

                                     15
 1   Kelce v. U.S. Fin. Inc. (In re U.S. Fin. Inc.), 648 F.2d 515
 2   (9th Cir. 1980) (Bankruptcy Act case); see also Margaret B.
 3   McGimsey Trust v. USA Capital Diversified Trust Deed Fund, LLC
 4   (In re USA Commercial Mortg. Co.), 377 B.R. 608 (9th Cir. BAP
 5   2007); cf. In re Tristar Esperanza Props., LLC, 488 B.R. 394
 6   (applying § 510(b) to a limited liability company).
 7        We acknowledge that an unpublished decision reached a
 8   contrary conclusion.    See Liquidating Trust Comm. of the Del
 9   Biaggio Liquidating Trust v. Freeman (In re Del Biaggio), 2012
10   WL 5467754 (Bankr. N.D. Cal. Nov. 8, 2012), aff’d, 2013 WL
11   6073367 (N.D. Cal. Nov. 18, 2013).    Del Biaggio, however, is not
12   binding on this Panel.    Further, as an unpublished decision, the
13   analysis and outline of the facts is not well-developed; in
14   particular, it does not focus squarely on the question of who is
15   being subordinated.    And while the factual summary is not
16   complete, the case appears distinguishable; the subordinated
17   creditor did not hold a final judgment that included a punitive
18   damages recovery, and the facts suggest that creditors in the
19   individual case also held claims against the corporate affiliate
20   for recovery of embezzled funds used to acquire shares in the
21   affiliate.
22        At oral argument, the Appellants also referenced two other
23   cases that they contend are supportive of their position on
24   mandatory subordination: Orange Cnty. Nursery, Inc. v. The
25   Minority Voting Trust (In re Orange Cnty. Nursery Inc.),
26   --- B.R. ----, 2014 WL 5472534 (C.D. Cal. Oct. 1, 2014); and In
27   re Lehman Brothers, Inc., 503 B.R. 778 (Bankr. S.D.N.Y. 2014).
28   For the reasons already discussed, however, neither case assists

                                      16
 1   them, as both cases involved a corporate debtor.   The
 2   Appellants, in fact, conceded that the case law is devoid of any
 3   published decision in which § 510(b) subordination occurred in a
 4   non-entity debtor case.
 5        Here, in determining that Barton’s claims were not subject
 6   to mandatory subordination, the bankruptcy court recognized the
 7   critical distinction between corporate debtor cases and
 8   individual debtor cases when mandating subordination.    Based on
 9   the plain language of the statute, its objective and policy, the
10   § 510(b) legislative history, and case law, we conclude that the
11   bankruptcy court did not err in determining that § 510(b) was
12   not applicable here and in overruling the claims objections.
13        2.   As there was no basis for claims disallowance or
14             mandatory subordination, the bankruptcy court
15             appropriately dismissed the adversary proceedings.
16        Given our conclusion on the claims objections, the
17   challenge to the adversary proceeding dismissals necessarily
18   fails, and the bankruptcy court did not err in dismissing them
19   with prejudice.
20        At the first hearing, the bankruptcy court indicated that
21   it would not rule on the claims objections because of the
22   pending adversary proceedings.   In response, the Appellants
23   clarified that they filed the claims objections in both the
24   bankruptcy cases and adversary proceedings for procedural and
25   technical reasons; namely, in order to comply with Rules 3007
26   and 7001 of the Federal Rules of Bankruptcy Procedure.    The
27   Appellants asserted, emphatically, that resolution of the claims
28   objections and the adversary proceedings did not require a trial

                                      17
 1   and that a ruling on the claims objections resolved the
 2   adversary proceedings.    Barton agreed.   The bankruptcy court
 3   then proceeded accordingly.
 4        The bankruptcy court’s case dismissals were based
 5   appropriately and squarely on its determinations on the claims
 6   objections.   The Appellants could not, as a matter of law,
 7   prevail on the adversary complaints.    We, thus, conclude that
 8   dismissal of the adversary proceedings was appropriate.
 9   B.   The bankruptcy court did not abuse its discretion in
10        converting the Appellants’ chapter 13 cases to chapter 7
11        cases.
12        The Appellants also argue that the bankruptcy court erred
13   when it failed to consider the totality of the circumstances in
14   converting their chapter 13 cases to chapter 7.     In particular,
15   they contend that the bankruptcy court improperly considered
16   only two of the four factors set forth in In re Leavitt.     We
17   again disagree.
18        On request of a party in interest and after notice and a
19   hearing, the bankruptcy court may convert a chapter 13 case to
20   chapter 7 for cause.    11 U.S.C. § 1307(c).   In addition to a
21   non-exclusive statutory list of factors, the filing of a chapter
22   13 case in bad faith may constitute cause for conversion.     See
23   In re Leavitt, 171 F.3d at 1224 (citing Eisen v. Curry (In re
24   Eisen), 14 F.3d 469, 470 (9th Cir. 1994) (discussing bad faith
25   in the context of chapter 13 case dismissal)).
26        In determining whether cause exists based on a bad faith
27   filing, the bankruptcy court must assess the totality of the
28   circumstances.    In re Eisen, 14 F.3d at 470.   This assessment

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 1   includes consideration of the following four factors:
 2   1.   whether the debtor misrepresented facts in his petition or
 3        plan, unfairly manipulated the Bankruptcy Code, or
 4        otherwise filed his petition or plan in an inequitable
 5        manner;
 6   2.   the debtor’s history of filings and dismissals;
 7   3.   whether the debtor only intended to defeat state court
 8        litigation; and
 9   4.   the presence of egregious behavior.
10   In re Leavitt, 171 F.3d at 1224.
11        The Leavitt factors are not conjunctive.   The bankruptcy
12   court is not required to find that each factor is satisfied or
13   even to weigh each factor equally.   See, e.g., Meyer v. Lepe (In
14   re Lepe), 470 B.R. 851, 863 (9th Cir. BAP 2012) (in the context
15   of a good faith determination at plan confirmation, the Panel
16   noted that two of the Leavitt factors were inapplicable to the
17   case on appeal).   The Appellants conceded as much at oral
18   argument.   The bankruptcy court’s critical consideration in
19   determining bad faith is the totality of the circumstances.    The
20   Leavitt factors are simply tools that the bankruptcy court
21   employs in considering the totality of the circumstances.
22        Here, the bankruptcy court found that the Appellants filed
23   their chapter 13 cases in bad faith.   Stating that it had
24   considered all of the Leavitt factors in reaching its
25   determination, it found that the majority of the factors were
26   satisfied, with the exception of the second factor, which it
27   deemed inapplicable.
28        The bankruptcy court found that the timing of the filings

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 1   demonstrated the Appellants’ intent to impose barriers to the
 2   conclusion of the state court action; in particular, that they
 3   strategically filed prior to entry of the state court judgment,
 4   a judgment that would have precluded the Appellants from seeking
 5   chapter 13 relief based on the statutory debt limit.   See 11
 6   U.S.C. § 109(e).
 7        The bankruptcy court also specifically found that the
 8   Appellants did not candidly and completely provide financial
 9   information.   It observed that they refused to provide
10   information on transactions made by owned or controlled
11   companies, including litigation settlements that resulted in
12   payments to the Appellants and RIL, and that they valued their
13   ownership interests in RIL at zero despite the potential
14   positive impact on value from the settlements.
15        Based on its statements at the hearing, it is clear that
16   the bankruptcy court did not apply the wrong legal standard.    It
17   expressly identified the Leavitt factors, stated that it
18   considered all four factors, and then made adequate findings.
19        The Appellants specifically challenge the bankruptcy
20   court’s application of the third Leavitt factor.   Relying first
21   on Ho v. Dowell (In re Ho), 274 B.R. 867 (9th Cir. BAP 2002),
22   they argue that the bankruptcy court was required to find that
23   the sole purpose for their chapter 13 filings was to defeat the
24   state court action, which they assert it did not do.   We are not
25   persuaded by this argument.
26        In Ho, this panel recognized that “bad faith exists where
27   the debtor’s only purpose is to defeat state court litigation.”
28   274 B.R. at 877 (emphasis in original).   The Panel, however,

                                     20
 1   concluded that the bankruptcy court abused its discretion where
 2   it “relied exclusively on the third [Leavitt] factor and did not
 3   base its bad faith finding on the totality of the
 4   circumstances.”    Id. at 876-77.    The converse is true here; the
 5   bankruptcy court identified and applied the relevant Leavitt
 6   factors and, as its statements at the hearing reflect, it
 7   considered the totality of the circumstances of the Appellants’
 8   filings.
 9        Although the third Leavitt factor presumes that a debtor
10   has no other legitimate purpose for filing, the bankruptcy court
11   does not consider this factor in a vacuum.     Even if a debtor
12   presents more than one purpose for filing, the third Leavitt
13   factor does not fail to support cause if the other purpose also
14   reflects bad faith.    And, once again, the third factor is
15   considered in a totality of the circumstances context.       The
16   record here does not evidence a legitimate purpose that negated
17   a totality of the circumstances finding of bad faith.
18        The Appellants also argue that the bankruptcy court should
19   have considered their proposed chapter 13 plans in evaluating
20   the purpose of their chapter 13 filings.     This argument
21   similarly fails.    There is no per se rule mandating that the
22   bankruptcy court evaluate confirmability of a debtor’s proposed
23   chapter 13 plan when determining whether § 1307(c) cause exists.
24   In fact, one Leavitt factor requires consideration of whether
25   the debtor misrepresented facts in his petition or plan, or
26   otherwise filed his petition or plan in an inequitable manner.
27   We reject the suggestion that cause cannot exist where a plan is
28   facially confirmable.    And, here, the plans did not propose to

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 1   pay any amount to Barton; that is, the plans did not suggest a
 2   good faith attempt to pay the Appellants’ largest creditor.
 3        The Appellants also emphasize that they were eligible for
 4   chapter 13 at the time of their petitions.     But, eligibility is
 5   not synonymous with entitlement.      Chapter 13 was advantageous to
 6   the Appellants; they possessed more control over estate assets
 7   and, importantly, could potentially circumvent
 8   nondischargeability of Barton’s claims under § 523(a)(6).     See
 9   11 U.S.C. §§ 523(a), 1328(a), (c)(2); Fed. R. Bankr. P. 4007(d);
10   Toste v. Smedberg (In re Toste), 2014 WL 3908139, at *2 (9th
11   Cir. BAP Aug. 12, 2014) (unless a chapter 13 debtor moves for a
12   hardship discharge, § 523(a)(6) is unavailable in chapter 13
13   case).    As the state court judgment sounded, in part, in
14   conversion, chapter 13 offered a unique and attractive
15   opportunity to the Appellants.    A strategic desire for
16   chapter 13 relief, however, does not support reversal on this
17   record.
18        In sum, the bankruptcy court appropriately considered the
19   third Leavitt factor; there was no abuse of discretion in this
20   regard.
21        Further, the Appellants challenge the bankruptcy court’s
22   alleged finding that they concealed information relating to
23   potentially valuable settlements.     They contend that the
24   bankruptcy court did not actually find that they concealed
25   anything and, instead, improperly based its decision to convert
26   on “if there were valuable settlements that might enhance stock
27   value, then [Appellants’] may have misrepresented the value of
28   such shares in their schedules by scheduling a zero value.”

                                      22
 1   Aplts’ Joint Op. Br. at 21 (emphasis in original).    The
 2   Appellants insist that they did not conceal anything and, to the
 3   best of their ability, made appropriate disclosures.    This
 4   argument also fails.
 5        The record reflects that the bankruptcy court’s findings
 6   related to the nature and quality of the Appellants’ conduct in
 7   filing their chapter 13 schedules and responding to questions at
 8   their § 341(a) meetings of creditors.    Transcripts of the
 9   Appellants’ § 341(a) meetings show that the chapter 13 trustee
10   asked for additional information as to valuation of the
11   Appellants’ shares in their various businesses and requested
12   that the Appellants amend their statements of financial affairs
13   accordingly.   At a continued meeting of creditors two months
14   later, the Appellants had not done so.    Khan, in fact, never
15   amended his schedules.7
16        On examination by Barton’s counsel at the § 341(a) meeting,
17   Khan refused to respond to questions about third party
18   settlements based on non-disclosure agreements.    When asked
19   whether he or Tomkow provided the terms of the settlement to the
20   chapter 13 trustee, Khan evasively responded that he provided
21   many documents and had not committed to memory the documents
22   produced to the trustee.   And, Khan also refused to provide
23   testimony as to the approximate amount of sales, transfers of
24   assets, and loans by and between various business entities owned
25
          7
26          Khan filed amendments to schedules B and J and the
     statement of financial affairs on the same day as the second
27   continued § 341(a) meeting. The Clerk’s Office, however,
     immediately issued a notice of error and instructed him to re-
28   file the documents. Khan never did so.

                                     23
 1   or controlled by Appellants in the 18 months before the chapter
 2   13 filings.
 3        The bankruptcy court’s concern regarding these statements
 4   was reasonable, as was its determination that a chapter 7
 5   trustee was necessary to investigate the settlements and to
 6   determine whether additional assets existed.    It did not find
 7   that the Appellants had concealed assets; and it did not need to
 8   do so.   Instead, as part of its totality of the circumstances
 9   analysis, the bankruptcy court appropriately considered the
10   nature and quality of the Appellants’ statements and conduct and
11   found them evasive and inappropriate.    On this record, its
12   findings were not clearly erroneous.
13        The bankruptcy court did not abuse its discretion in
14   converting the Appellants’ cases to chapter 7.
15                               CONCLUSION
16        Based on the foregoing, we AFFIRM the bankruptcy court.
17
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