Khan v. Barton

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Debtors 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. View "Khan v. Barton" on Justia Law