In re: Bruce Elieff

FILED
MAR 21 2022
ORDERED PUBLISHED SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. CC-21-1081-SFL
BRUCE ELIEFF,
Debtor. Bk. No. 8:19-bk-13858-ES
TODD KURTIN, Adv. No. 8:19-ap-01205-ES
Appellant,
v. OPINION
HOWARD M. EHRENBERG, Chapter 7
Trustee,
Appellee.
Appeal from the United States Bankruptcy Court
for the Central District of California
Erithe A. Smith, Bankruptcy Judge, Presiding
APPEARANCES:
Daniel Luke Geyser of Haynes and Boone, LLP argued for appellant; Sean
A. O’Keefe of O’Keefe & Assoc. Law Corp., P.C. argued for appellee.
Before: SPRAKER, FARIS, and LAFFERTY, Bankruptcy Judges.
SPRAKER, Bankruptcy Judge:
INTRODUCTION
Creditor Todd Kurtin appeals from the entry of summary judgment
in favor of chapter 7 1 trustee Howard M. Ehrenberg subordinating Kurtin’s
1
Unless specified otherwise, all chapter and section references are to the
1
claim under § 510(b). After its initial ruling, the bankruptcy court entered
an order clarifying that its ruling subordinated not only his claim but also
his lien rights arising from the prepetition judgment liens he obtained
against Elieff.
We agree with the bankruptcy court that Kurtin’s claim for damages
arises from the purchase or sale of a security, and § 510(b) required
subordination of his claim and the associated lien rights. Accordingly, we
AFFIRM.
FACTS 2
A. Kurtin’s and Elieff’s joint ventures.
Beginning in the early 1990s, Kurtin and Elieff, as equal partners,
engaged in a series of real estate investment and development projects.
Each project was owned and run through a separate business entity or
collection of entities. Typically, Elieff and Kurtin used corporations or
limited liability companies, but they also utilized limited partnerships
(collectively, the “Joint Entities”).
It is not clear whether their business relationship was a single
partnership that engaged in multiple projects or a set of separate ventures.
Bankruptcy Code, 11 U.S.C. §§ 101–1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2 We exercise our discretion to take judicial notice of documents electronically
filed in the underlying bankruptcy case and adversary proceeding. See Atwood v. Chase
Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003).
2
In his declaration opposing the Trustee’s summary judgment motion,
Kurtin referred to it as “an equal general partnership, based on an oral
agreement.” Elsewhere, however, Kurtin admitted that he and Elieff
conducted their real estate investment and development business through
the Joint Entities and that each of them as individuals formed and jointly
owned the Joint Entities, rather than the partnership.
B. Kurtin’s and Elieff’s first round of state court litigation and the
resulting Settlement Agreement.
The relationship between Kurtin and Elieff began to deteriorate in the
late 1990s. In 2003, Kurtin sued Elieff and his separately owned
development entities. Kurtin asserted claims for breach of contract, breach
of fiduciary duty, conversion, embezzlement, and constructive fraud,
among others. In turn, Elieff counter-sued Kurtin and his separately owned
development entities, stating causes of action similar to those Kurtin had
asserted.
During this litigation (the “First Lawsuit”), the parties engaged in
mediation and entered into a Settlement Agreement in 2005. The
Settlement Agreement not only resolved the parties’ existing disputes but
also ended their business relationship. More specifically, the Settlement
Agreement required Kurtin to transfer his interests in the Joint Entities to
Elieff. In turn, Elieff agreed to indemnify Kurtin for any liabilities arising
from the Joint Entities. In exchange for both the dismissal of his causes of
action and the “sale” of his interest in the Joint Entities, Kurtin was to
3
receive from Elieff or the Joint Entities an aggregate of $48.8 million in
“Settlement Payments.” The Settlement Agreement broke the Settlement
Payments into four installments: (1) $21 million by no later than August 19,
2005; (2) $1.8 million on January 2, 2006; (3) $13.1 million on or before June
30, 2006; and (4) $12.9 million on or before December 31, 2006. Elieff and
the Joint Entities were jointly and severally liable for the first Settlement
Payment. Only the Joint Entities were liable for the remainder of the
Settlement Payments.
The Settlement Agreement did not allocate any specific portion of the
Settlement Payments to either the release of Kurtin’s claims or the sale of
his interest in the Joint Entities. Rather, the Settlement Agreement, as well
as Kurtin’s subsequent litigation statements, all indicated that the
resolution of disputes and the “buyout” of Kurtin’s interests were
indivisible.
Paragraph 14 of the Settlement Agreement contained two distinct
provisions significant to the issues before us. The first granted Kurtin a
security interest “in the projects owned by the Joint Entities” to secure their
obligation to make the Settlement Payments. 3 The second and more
important of the two provisions contemplated a safeguard for the source of
funds from which Kurtin presumed the Settlement Payments would be
3
Neither Elieff nor the Joint Entities ever executed the documents necessary to
perfect these security interests.
4
made—the funds of the Joint Entities. This provision prohibited Elieff from
taking any distribution from any of the Joint Entities to the extent that such
distributions would prevent satisfaction of the obligation to make
Settlement Payments.
C. The default on the Settlement Agreement and the second round of
state court litigation.
When the Joint Entities failed to pay the full amount of the third
Settlement Payment and any of the fourth Settlement Payment, Kurtin was
entitled to judgment in the First Lawsuit for the amount of the shortfall
under the terms of the Settlement Agreement. Kurtin sought entry of
judgment against the Joint Entities for roughly $22.5 million. But the trial
court denied this relief because the Joint Entities were not parties to the
First Lawsuit at the time the Settlement Agreement was entered into.
Kurtin sought and obtained arbitration under paragraph 15 of the
Settlement Agreement. This paragraph permitted the arbitrator to supply
essential terms to the Settlement Agreement to the extent either party
subsequently asserted that the Settlement Agreement was missing material
terms. The arbitrator ultimately determined that the Settlement Agreement
should be deemed amended to include a term that, if the default in
Settlement Payments was not cured by June 30, 2007, “Kurtin shall have the
right to require Bruce Elieff to transfer to Kurtin or his designee by July 10,
2007, any and all of Elieff’s right, title and interest—held directly or
indirectly—in and to any or all of the Joint Entities . . . .” But Kurtin never
5
sought to enforce this new term of the Settlement Agreement. According to
Kurtin, he suspected that by the time of the arbitrator’s ruling the
unencumbered assets and funds of the Joint Entities were grossly
insufficient to satisfy the shortfall in Settlement Payments.
Instead, in December 2007, Kurtin sued Elieff and the Joint Entities,
stating numerous causes of action (“Second Lawsuit”). Only the seventh
cause of action for breach of contract is relevant to this appeal. In relevant
part, Kurtin alleged that Elieff breached paragraph 14 of the Settlement
Agreement by taking distributions from the Joint Entities, “which
distributions prevented the payment of the settlement payments as
required under the Settlement Agreement.”
In May 2010, following a bifurcated trial, the jury returned a verdict
in favor of Kurtin and against Elieff for breach of paragraph 14 of the
Settlement Agreement in the amount of $24,411,433.86, and judgment was
entered for that amount. A series of appeals and a new trial on the amount
of Kurtin’s damages ensued. Ultimately, in February 2020,4 the state court
entered its fifth amended judgment against Elieff for $33,892,117.62 based
solely on his breach of the distribution restriction in the Settlement
Agreement. Prior to Elieff’s bankruptcy filing, Kurtin recorded abstracts of
judgment against Elieff and two of his separate entities that the state court
4
In December 2019, the bankruptcy court granted Kurtin relief from the
automatic stay so that he could take further action with respect to his claim, including
taking the steps necessary to obtain an amended judgment from the state court.
6
included as additional judgment debtors based on its finding that those
two entities were Elieff’s alter egos—Morse Properties, LLC (“Morse”) and
4627 Camden, LLC (“Camden”).
D. The bankruptcy filings and the subordination litigation.
In October 2019, Elieff, Morse, and Camden each filed chapter 11
petitions. In February 2020, three additional Elieff-related entities filed
chapter 11 petitions. In June 2020, the bankruptcy court substantively
consolidated the cases and ordered the appointment of a chapter 11 trustee.
In September 2020, the consolidated case was converted to chapter 7, and
Howard Ehrenberg was appointed to serve as chapter 7 trustee.
In his schedules, as amended, Elieff listed roughly $13 million in real
property and $260,000 in personal property. He disclosed numerous
affiliated entities but listed their values as zero or unknown. As for
liabilities, he listed $97 million in secured debt, including $35 million owed
to Kurtin on his judgment liens, and roughly $300,000 in unsecured debt.
Within weeks of his bankruptcy filing, Elieff commenced an
adversary proceeding against Kurtin. In December 2019, Elieff filed his
second amended complaint (“SAC”), which stated subordination claims
under § 510(b), claims for transfer of Kurtin’s judgment liens to the estate
under § 510(c)(2), and various avoidance claims. In January 2020, Kurtin
moved to dismiss the SAC. Elieff countered in February 2020 with a
summary judgment motion filed jointly with intervenor the Official
Committee of Unsecured Creditors of Bruce Elieff.
7
The bankruptcy court heard and determined the motion to dismiss
and held its initial hearing on the summary judgment motion. The court
dismissed some of the avoidance claims with leave to amend. It also
dismissed without leave to amend the § 510(c)(2) claims seeking to transfer
the judgment liens to the estate. The court held that § 510(c)(2) did not
apply to claims subordinated under § 510(b) and only applied to claims
subordinated under § 510(c)(1). The court denied the remainder of the
motion to dismiss. As for the summary judgment motion, the court granted
Kurtin’s Civil Rule 56(d) (applicable via Rule 7056) request for time to
conduct discovery and continued the summary judgment hearing.
By the time the court held its continued hearing on the summary
judgment motion, the case had been converted, and Howard Ehrenberg,
the chapter 7 trustee, had become the plaintiff. At the conclusion of the
hearing the court took the matter under submission. Kurtin then filed
another Civil Rule 56(d) motion asking for more time to conduct discovery.
Kurtin maintained that most of the rights and obligations exchanged under
the Settlement Agreement had little or nothing to do with his transfer of his
interests in the Joint Entities to Elieff. Kurtin advised that he intended to
seek additional discovery to allocate the Settlement Payments between the
transfer of his interest in the Joint Entities and other rights and obligations.
As Kurtin reasoned, if he could prove that the value of the Joint Entities
was less than Elieff’s first $21 million Settlement Payment, then none of the
other Settlement Payments had anything to do with the purchase or sale of
8
securities. But Kurtin never alleged that the Settlement Payments were
allocable, and no evidence was submitted to suggest this. Nor did he argue
that the Settlement Agreement contemplated that the first Settlement
Payment specifically related to the transfer of Kurtin’s interest in the Joint
Entities.
E. The bankruptcy court’s decision.
In January 2021, the bankruptcy court issued a memorandum
decision granting summary judgment on the § 510(b) claims for relief.5 The
bankruptcy court determined that the plain terms of the Settlement
Agreement established that it involved the purchase and sale of the
securities of Elieff’s affiliates. The bankruptcy court particularly relied on
the provisions concerning Kurtin’s transfer of his interests in the Joint
Entities as well as those that attempted to unwind Kurtin’s involvement in
and potential liability for the Joint Entities’ business. As the bankruptcy
court explained, “[t]he undisputed fact remains that the crux of the
Settlement Agreement required Kurtin to transfer his interest in the Joint
Entities in exchange for Settlement Payments.” Section 510(b), therefore,
applied even if some aspects of the Settlement Agreement did not directly
relate to the purchase or sale of securities.
5
In September 2020, the bankruptcy court entered a separate order in which it
made numerous evidentiary rulings. The evidentiary rulings are addressed in the
discussion to the extent they are relevant to our analysis and resolution of this appeal.
9
The court also denied Kurtin’s supplemental Civil Rule 56(d) request.
It concluded that even if the Settlement Payments could be partially
allocated to aspects other than the transfer of Kurtin’s interest in the Joint
Entities, this would not constitute a material issue of fact that would
preclude summary judgment. As the bankruptcy court reasoned, § 510
relief is triggered whenever there was “some nexus” or “causal
relationship” between the claim and the purchase or sale of securities of the
debtor or the debtor’s affiliates. Even if precise allocation of the Settlement
Payments were possible, it was immaterial as the trustee had established
the requisite nexus under § 510(b) between the restriction on distributions
from the Joint Entities, the unsatisfied Settlement Payment obligations, and
Kurtin’s transfer of his interest in the Joint Entities.
F. The parties’ cross-motions seeking to clarify the court’s ruling.
After the memorandum decision, both sides requested modification
of the court’s ruling to clarify whether subordination was limited to just
Kurtin’s “claim,” or included his judgment liens as well. After holding
another hearing, the court entered an order stating that Kurtin’s liens were
subsumed within the term “claim” as used in § 510(b). As a result, the
bankruptcy court concluded, Kurtin’s judgment liens were subordinated
for the same reasons and to the same extent that his claim had been
subordinated by the court.
10
On April 5, 2021, the bankruptcy court entered final judgment
pursuant to Civil Rule 54(b) on Ehrenberg’s § 510(b) subordination claims
for relief. Kurtin timely appealed.6
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(A) and (O). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court err when it granted summary judgment in
favor of Ehrenberg?
2. Did the bankruptcy court correctly construe § 510(b)?7
3. Did the bankruptcy court abuse its discretion when it denied Kurtin’s
supplemental Civil Rule 56(d) motion?
4. Did the bankruptcy court abuse its discretion when it excluded
certain portions of Kurtin’s evidence?
STANDARDS OF REVIEW
We review the bankruptcy court’s grant of summary judgment de
novo. Wolkowitz v. Beverly (In re Beverly), 374 B.R. 221, 230 (9th Cir. BAP
6
The remainder of Ehrenberg’s surviving avoidance claims for relief have been
dismissed without prejudice.
7 On appeal, Kurtin has not specifically and distinctly challenged the bankruptcy
court’s determination that his divestment of his interests in the Joint Entities constituted
a purchase or sale of securities of the debtor’s affiliates within the meaning of § 510(b).
Consequently, he has forfeited any issues he might have raised related to this
determination. See Christian Legal Soc'y v. Wu, 626 F.3d 483, 487–88 (9th Cir. 2010);
Brownfield v. City of Yakima, 612 F.3d 1140, 1149 n.4 (9th Cir. 2010).
11
2007), aff'd in part, dismissed in part, 551 F.3d 1092 (9th Cir. 2008). In
conducting our de novo review, we must view the facts in the light most
favorable to the nonmoving part, and we must determine whether the
moving party was entitled to judgment as a matter of law because no
genuinely disputed issues of material fact needed to be tried. Id.We also review de novo the bankruptcy court’s construction of the
Code. Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
De novo review means that we review the matter anew as if the
bankruptcy court had not previously decided it. Id.The denial of a Civil Rule 56(d) motion seeking more time to conduct
discovery is reviewed for an abuse of discretion. Atay v. Cnty. of Maui, 842
F.3d 688, 698 (9th Cir. 2016). We also review for an abuse of discretion the
bankruptcy court’s exclusion of evidence. Orr v. Bank of Am., NT & SA, 285
F.3d 764, 773 (9th Cir. 2002). The bankruptcy court abuses its discretion if it
applies an incorrect rule of law or its factual findings are illogical,
implausible, or without support in the record. TrafficSchool.com, Inc. v.
Edriver, Inc., 653 F.3d 820, 832 (9th Cir. 2011).
DISCUSSION
A. Kurtin’s claim for breach of the Settlement Agreement falls within
the broad scope of § 510(b).
Section 510(b) “mandates the subordination of damages claims
arising from the purchase or sale of a security.” Am. Broad. Sys., Inc. v.
Nugent (In re Betacom of Phx., Inc.), 240 F.3d 823, 827 (9th Cir. 2001) (internal
12
quotation marks omitted). 8 Its principal purpose is to ensure that creditors
of the debtor are paid before disappointed equity interest holders who
bargain for the potential of a greater return in exchange for a greater risk of
loss. Racusin v. Am. Wagering, Inc. (In re Am. Wagering, Inc.), 493 F.3d 1067,
1071-72 (9th Cir. 2007); Slain & Kripke, The Interface Between Securities
Regulation and Bankruptcy–Allocating Risk of Illegal Securities Issuance Between
Securityholders and the Issuer's Creditors, 48 N.Y.U. L. Rev. 261 (1973).
The Ninth Circuit broadly interprets the scope of § 510(b). See
Liquidating Tr. Comm. of the Del Biaggio Liquidating Tr. v. Freeman (In re Del
Biaggio), 834 F.3d 1003, 1009 (9th Cir. 2016); Pensco Tr. Co. v. Tristar
Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), 782 F.3d 492, 495
(9th Cir. 2015) (“Tristar”). Thus, the Ninth Circuit has held that a claim
“arises from” the purchase or sale of securities whenever it shares a “nexus
or causal relationship” with the purchase or sale of securities. In re Del
Biaggio, 834 F.3d at 1009 (citing In re Am. Wagering, Inc., 493 F.3d at 1072).
We see no material difference between Tristar and the instant case. In
Tristar, creditor O’Donnell sought to withdraw as a member of the debtor
limited liability company. 782 F.3d at 494. In response, Tristar invoked its
right to purchase O’Donnell’s membership interest, but the parties could
8
Section 510(b) also applies to claims “arising from rescission of a purchase or
sale of a security of the debtor or of an affiliate of the debtor” and claims “for
reimbursement or contribution allowed under section 502 on account of such a claim.”
But the bankruptcy court’s ruling did not apply either of these aspects of § 510(b). There
is no need for us to consider these other aspects of § 510(b).
13
not agree on a valuation of her interest. O’Donnell then initiated an
arbitration and obtained an award which was reduced to judgment in state
court. Id. Tristar then filed its chapter 11 bankruptcy petition and
commenced an adversary proceeding to subordinate O’Donnell’s claim
under § 510(b) and (c). The bankruptcy court granted summary judgment
in favor of Tristar on its § 510(b) claim. Id. Relying on its broad construction
of “arising from,” the Ninth Circuit affirmed. In the process, it rejected
O’Donnell’s contention that § 510(b) did not apply because the claim had
been reduced to judgment and was a debt as of the petition date. Id. at 495-
97. As the Tristar panel explained:
[I]t is clear that O’Donnell’s claim arises from the sale of a security of
the debtor. Her claim originates from the failed sale of her
membership interest and Tristar’s breach of the operating
agreement’s provisions regarding repurchase of membership
interests. The direct causal link between O’Donnell’s claim and the
purchase and sale of an equity interest leaves no doubt as to whether
her claim for damages “flows from” the purchase or sale of a security
of the debtor.
Id. at 497.
Similarly, Kurtin’s claim originated from the failed Settlement
Agreement pursuant to which he divested himself of his interests or rights
in the Joint Entities. Kurtin has admitted these interests were worth
millions of dollars at the time of the Settlement Agreement. Under the
Settlement Agreement, the only significant consideration flowing to Kurtin
was his right to receive the Settlement Payments. And the restriction in
14
paragraph 14 prohibiting Elieff from receiving distributions from the Joint
Entities to the extent they interfered with the Settlement Payments
indisputably was intended to protect and preserve the Joint Entities’ funds
necessary to make the Settlement Payments. Under these undisputed facts,
Kurtin’s claim based on Elieff’s breach of paragraph 14 shares a direct
causal link with the conveyance of his equity interests in the Joint Entities.
Accordingly, the bankruptcy court correctly applied § 510(b) to Kurtin’s
claim.
B. None of Kurtin’s arguments persuade us that the bankruptcy court
erred in construing or applying § 510(b).
1. Khan does not justify reversal.
Citing Khan v. Barton (In re Khan), 846 F.3d 1058 (9th Cir. 2017), Kurtin
contends that § 510(b) does not apply because his claim arises from “Elieff’s
post-settlement diversion of [Joint Entity] assets,” which has nothing to do
with the sale of securities. Aplt. Opn. Br. at 37 (emphasis in original). In
Khan, the creditor, Barton, obtained a state court judgment against the
debtors for the fraudulent conversion of his stock in the debtors’ affiliated
entity. 846 F.3d at 1061, 1063-64. In their subsequent bankruptcy cases, the
debtors sought mandatory subordination of Barton’s proof of claim under
§ 510(b). Id. at 1062. The Ninth Circuit acknowledged the broad
construction afforded § 510(b), but it reasoned that there was necessarily an
outer limit to the scope of § 510(b) that “stops short of encompassing every
transaction that touches on or involves stock in a corporation.” Id. at 1064
15
(citing In re Am. Wagering, Inc., 493 F.3d at 1071-73). According to Khan, the
debtors’ conversion of Barton’s interest and the resulting damages had
“nothing to do with his investment” in the entity except for the fact that his
loss was measured by the value of his stock at the time the debtors
converted it. Id. at 1064-65.
Kurtin argues that this case is analogous to Khan because his
damages arose from Elieff’s post-settlement misconduct, which occurred
after the purchase of securities was complete. He contends that Elieff’s
conduct was too remote to trigger subordination under § 510(b). However,
in Khan there was no connection between the debtors’ conversion of
Barton’s stock and the earlier purchase of that stock. In contrast, by
Kurtin’s own admission, the purpose of paragraph 14’s restriction on
distributions from the Joint Entities was to protect and preserve the
“income stream allocated to Kurtin” to ensure that all of the Settlement
Payments were made. The Settlement Payments, in turn, were the only
significant consideration flowing to Kurtin on account of his divestment of
his interests in the Joint Entities. Unlike the conversion of the interests in
Khan, Kurtin’s judgment was based on Elieff’s breach of the Settlement
Agreement. As such, it shared a direct causal link to Kurtin’s sale of his
interests in the Joint Entities made in that very same agreement. Kurtin
obviously expected to be compensated for these interests from the Joint
Entities’ cash. And the purpose of the distribution restriction in paragraph
14 was to protect and preserve that source of funds. Kurtin’s claim arising
16
from the breach of the Settlement Agreement thus triggers § 510(b) because
the claim originates or flows from his efforts to divest himself of his equity
investment. Tristar, 782 F.3d at 497; see also Baroda Hill Invs., Ltd. v.
Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3d 133, 142 (3d Cir. 2002) (in
affirming subordination of shareholders’ claims for the debtor-
corporation’s post-sale breach of the stock purchase agreement, the court
stated: “[m]ore important than the timing of the actionable conduct, from a
policy standpoint, is the fact that the claims in this case seek to recover a
portion of the claimants’ equity investment.”).
2. Kurtin’s consideration under the Settlement Agreement
cannot be apportioned between the securities-related and
non-securities-related components.
Kurtin next argues that even if his judgment against Elieff is directly
linked to the Settlement Payments, there is no link between the unpaid
Settlement Payments and his sale of his interests in the Joint Entities.
Though Kurtin admits that some amount of the Settlement Payments was
meant to compensate him for his sale of his interests in the Joint Entities, he
maintains that they also included compensation for other non-sale
damages beyond the scope of § 510(b). Kurtin believes that the first
Settlement Payment of $21 million fully paid the securities sale aspect of
the Settlement Agreement. In support, he states that he only transferred his
equity interest after Elieff made the first Settlement Payment. As a result,
17
he argues, the outstanding Settlement Payments cannot constitute damages
that arise from the sale of his securities under § 510(b).
Kurtin has cited nothing in the record that evidenced, or even
suggested, that the division or allocation of the Settlement Payments was a
part of the parties’ contract. To the contrary, the plain language of the
Settlement Agreement reveals no distinction of purpose between any of the
Settlement Payments. Moreover, nothing in the record remotely suggests
that the Settlement Payments were severable rather than indivisible.
Undeterred, Kurtin asserts that the bankruptcy court still should
have allocated the Settlement Payments between the securities sale and
other damages. As Kurtin put it, “if those non-sale items were separated
out into individual claims, there would be no basis for subordinating them
under Section 510(b).” Kurtin cites Betacom of Phoenix, Inc., 240 F.3d at 831-
32, and KIT digital, Inc. v. Invigor Grp. Ltd. (In re KIT digital, Inc.), 497 B.R.
170 (Bankr. S.D.N.Y. 2013), as modified (Dec. 2, 2013), in support of his
position. But these decisions do not help Kurtin. Neither stands for the
proposition that damages from a single indivisible contract can be
apportioned between damages that trigger § 510(b) and those that do not.
California law applies, and it simply does not permit apportionment
of cash consideration within a contract when the contract itself does not
provide some basis or means for attributing consideration between the
various items or services for which it was given. Absent such basis, the
contract is indivisible, and the consideration cannot be apportioned. See
18
Alderson v. Houston, 154 Cal. 1, 9 (1908); see also Keene v. Harling, 61 Cal. 2d
318, 320 (1964) (stating that severing and apportioning a partially illegal
contract only is permissible when the court can “reasonably relate the
illegal consideration on one side to some specified or determinable portion
of the consideration on the other side” in a manner that is “consistent with
the intent of the parties”); Perry v. Ayers, 159 Cal. 414, 418 (1911) (“The
purchase price was not apportioned to the various items of property, and
there is no basis upon which this court can divide the purchase price, and
say that any specific part of it was applicable to the stock of the Mother
Lode Company and any other part to the interest in the Crystalline
mine.”). 9
In sum, Kurtin failed to establish a genuine dispute that the
Settlement Agreement permitted allocation of the Settlement Payments
among the purchase and sale of securities and other non-securities related
damages. The breach of paragraph 14 was directly linked to the obligation
to make the Settlement Payments that arose, in part, from the purchase and
sale of his securities. Kurtin expected to be paid from the source of funds
9
Under California law, whether a contract is indivisible or severable largely
depends on the contract’s language and subject matter and like any question of contract
interpretation must be answered based on the parties’ intent. Keene, 61 Cal. 2d at 320;
Sterling v. Gregory, 149 Cal. 117, 119–21, (1906). In turn, when considering the parties’
intent for purposes of contract interpretation, it is their mutual intent as manifested in
the contract and in their conduct that matters, not whatever subjective intent they
harbored in their own minds. Italiane v. Jeffrey Catanzarite Family Ltd. P’ship (In re
Italiane), 632 B.R. 662, 674 (9th Cir. BAP 2021) (citing California cases).
19
that paragraph 14 was meant to protect. As such, all of the Settlement
Payments were integral and indivisible consideration for the triggering
securities sale. Under these circumstances, Kurtin’s attempt to break the
causal link between a portion of his claim and the sale of his interests in the
Joint Entities must fail. That the Settlement Payments also resolved other
disputes is immaterial because Kurtin failed to present any basis to treat
the Settlement Agreement as severable. As a result, the bankruptcy court
correctly determined that Kurtin’s entire claim for breach of paragraph 14
“arose from” the sale of his interests in the Joint Entities for purposes of
§ 510(b). To hold otherwise would impermissibly read into the mandatory
language of § 510(b) a requirement that the claim “solely” arise from the
purchase or sale of securities. As the bankruptcy court correctly observed,
§ 510(b) contains no such requirement.
C. Kurtin’s liens were subordinated under § 510(b) for distribution
purposes.
Kurtin also contends that the bankruptcy court misinterpreted
§ 510(b) by applying it to his judgment liens. Kurtin admits that § 510(b)
subordinates claims, including secured claims. But he maintains that
§ 510(b) has no effect on liens. According to Kurtin, subordination
reprioritized Elieff’s personal liability only. He contends that his secured
claim remains entitled to the same priority it held prior to subordination.
Because of this, he contends that the bankruptcy court erred when it
subordinated the judgment liens that secure his claim.
20
1. The structure and text of the Code do not bar the bankruptcy
court’s interpretation of § 510(b) as covering liens.
The undisputed purpose of § 510(b) is to prevent an existing or
former equity investor from sharing pari passu with the estate’s creditors
based on the attempted or consummated transmutation of its investment
from equity to debt whether consensually or by a court ruling. See, e.g., In
re Am. Wagering, Inc., 493 F.3d at 1071-72; In re Betacom of Phx., Inc., 240 F.3d
at 830. It also is undisputed that the scope of § 510(b) covers both secured
and unsecured claims. § 101(5). 10 But Kurtin insists that § 510(b) does not
cover liens because Congress only referenced “claims” in § 510(b) and did
not mention “liens” in that subsection. We disagree.
a. Section 510(b) subordinates the entirety of a claim
including the creditor’s in rem right to payment.
As the bankruptcy court noted, Kurtin’s narrow interpretation of
§ 510(b) is inconsistent with Johnson v. Home State Bank, 501 U.S. 78, 83-84
(1991), which held that the term “claim” as used in the Code includes
mortgage liens. In Johnson, the Supreme Court examined the relationship
between the underlying “claim” and the lien that secures repayment,
10
This is consistent with Congress’ understanding of pre-Code bankruptcy law.
As reflected in the legislative history for § 510, Congress recognized that, “under
existing law, a claim is generally subordinated . . . if . . . the claim itself is of a status
susceptible to subordination, such as a penalty or a claim for damages arising from the
purchase or sale of a security of the debtor. The fact that such a claim may be secured
is of no consequence to the issue of subordination. 124 Cong. Rec. H11,095 (daily ed.
Sept. 28, 1978) (remarks of Rep. Don Edwards), as reprinted in D Collier on Bankruptcy
App’x Part 4(f)(i)(2) (16th ed. 2021) (emphasis added).
21
beginning with the statutory definition of “claim” as either an unsecured or
secured right of payment or a right to an equitable remedy. § 101(5). The
Supreme Court explained:
A mortgage is an interest in real property that secures a creditor’s
right to repayment. But unless the debtor and creditor have provided
otherwise, the creditor ordinarily is not limited to foreclosure on the
mortgaged property should the debtor default on his obligation;
rather, the creditor may in addition sue to establish the debtor’s in
personam liability for any deficiency on the debt and may enforce any
judgment against the debtor’s assets generally. A defaulting debtor
can protect himself from personal liability by obtaining a discharge in
a Chapter 7 liquidation. However, such a discharge extinguishes only
the personal liability of the debtor. Codifying the rule of Long v.
Bullard, the Code provides that a creditor’s right to foreclose on the
mortgage survives or passes through the bankruptcy.
Johnson, 501 U.S. at 82-83 (cleaned up).
Johnson proceeded to distinguish the two components of a secured
claim: (1) personal liability dischargeable in bankruptcy; and (2) in rem
liability that remains unaffected by a bankruptcy discharge. It concluded:
“a bankruptcy discharge extinguishes only one mode of enforcing a
claim—namely, an action against the debtor in personam—while leaving
intact another—namely, an action against the debtor in rem.” Id. at 84.
Section 510(b) mandates the subordination of the “claim” for
damages arising from the sale of securities. This necessarily encompasses
the entirety of Kurtin’s “right to payment” whether personal or in rem.
§ 101(5). Thus, unlike a bankruptcy discharge, which only enjoins collection
22
of the in personam liability, subordination divested Kurtin of any right to
payment from any means until the unsecured creditors are paid in full. As
the bankruptcy court correctly pointed out, Kurtin retains his secured
claim. Subordination simply rendered it junior to the interests of the
unsecured creditors. And a lien is incident to the debt it secures. Cal. Civ.
Code § 2909. Therefore, unless the unsecured creditors have been paid in
full, Kurtin has no right to any repayment. If the unsecured creditors
remain unpaid, Kurtin’s judgment liens are simply wholly undersecured,
valueless junior liens.
Viewed from another vantage, Kurtin’s narrow reading of “claim” as
used in § 510(b) would lead to incongruous if not absurd results that are
wholly at odds with a contextual reading of the statute. The specific benefit
of reordering priorities that § 510(b) confers on unsecured creditors would
be nullified by Kurtin’s reading of the statute. It would permit a former
equity investor to elevate its lien rights ahead of the unsecured creditors
§ 510(b) was enacted to protect. Neither § 510(b) nor the Ninth Circuit’s
case law can be reconciled with this result. If obtaining a judgment for
damages arising from the purchase or sale of securities does not remove
that claim from § 510(b)’s purview, Tristar, 782 F.3d at 495-96, it makes no
sense why recording that same judgment would have any greater effect.
Indeed, Tristar evidently involved a claim secured by a judgment lien, see
id., and that fact did not alter the Ninth Circuit’s subordination analysis.
23
In short, § 510(b) statutorily precludes Kurtin from collecting his
damages until the unsecured creditors are paid. However one may choose
to explain that result, it remains the same: satisfaction of Kurtin’s right to
payment on his underlying claim, whether deriving personally or in rem, is
not statutorily permitted until all other claims are paid.
b. Subordination of liens does not conflict with other
provisions of the Bankruptcy Code.
Kurtin additionally argues that any interpretation of § 510(b) to
include subordination of liens conflicts with both § 725 and § 510(c).
Section 510(b) states that mandatory subordination is for “the purpose of
distribution.” Kurtin believes that subordination only affects distribution of
the estate’s property under § 726 and, therefore, cannot affect his liens. In
Kurtin’s view, his liens retain their prepetition priority, and the
encumbered property must be “disposed of” pursuant to § 725 which
provides:
After the commencement of a case under this chapter, but
before final distribution of property of the estate under section
726 of this title, the trustee, after notice and a hearing, shall
dispose of any property in which an entity other than the estate
has an interest, such as a lien, and that has not been disposed of
under another section of this title.
According to Kurtin, there is a substantive difference between the
estate’s distribution under § 726, which specifically references § 510, and
the disposition of encumbered property required by § 725, which does not.
24
As a result, Kurtin contends that subordination of his liens runs afoul of
§ 725.
Kurtin’s reliance on § 725 is misplaced. Section 725 is one of the Code
sections governing “distribution” of estate property. See Czyzewski v. Jevic
Holding Corp., 137 S. Ct. 973, 979 (2017) (citing both §§ 725 and 726 and
stating that “distributions of assets in a Chapter 7 liquidation must follow
this prescribed order” (emphasis added)); see also H.R. Rep. No. 95-595,
382-383, as reprinted in 1978 U.S.C.C.A.N. 5963, 6338-39 (explaining that
§ 725—which grants bankruptcy courts broad and flexible authority to
order “dispositions” of estate property in which third parties hold interests
or liens—was enacted by Congress “in lieu of a section that would direct a
certain distribution to secured creditors” (emphasis added)). As such, it is
explicitly subject to the mandatory effect of subordination under the plain
language of § 510(b).
More importantly, there is no conflict between § 510(b) and § 725.
Section 725 only requires the trustee to dispose of any other entity’s interest
prior to the final distribution under § 726. There is no evidence in the
record that the estate is ready for final distribution. Indeed, there is nothing
in the record concerning the administration of this estate to implicate § 725
at all. Rather, it appears that the trustee sought subordination of Kurtin’s
liens so it could administer the property of the estate that the liens
encumber. Presumably, Kurtin’s liens precluded the estate from
administering the estate’s asset(s) under § 363(f). His subordinated liens are
25
now junior to the unsecured creditors’ interests, and the estate will likely
liquidate those encumbered assets under § 363(f) and § 506(d). Any
encumbered proceeds from the liquidation of those assets would be
distributed in satisfaction of § 725. Furthermore, an approved sale that did
not pay the unsecured creditors in full would establish that the
subordinated liens were worthless and effectively unsecured. If the estate
does not administer the encumbered assets, they will be disposed of prior
to the estate’s final distribution under § 726. That is all that § 725 requires.
There is nothing to suggest that subordinating his liens violates that
statute.
Kurtin next points to § 510(c)(2) to support his argument that “claim”
as used in § 510(b) should not be read to include liens. Section 510(c)(2)
permits the court to exercise its discretion to transfer a lien to the estate
under equitable subordination principles. 11 Kurtin theorizes that the
reference to “claims” in § 510(b) should be narrowly construed to exclude
“liens” because § 510(c) provides for separate treatment of “liens” and
“claims” in the context of equitable subordination whereas § 510(b) does
not. As Kurtin posits, if Congress wanted to cover liens for purposes of
§ 510(b), it obviously knew how to do so. And the absence of a provision
11 Section 510(c) generally codifies the result in Pepper v. Litton, 308 U.S. 295(1939), and similar pre-Code cases. H.R. Rep. No. 95-595, 359, as reprinted in 1978
U.S.C.C.A.N. 5963, 6315. Litton itself involved the subordination of a secured claim. See
308 U.S. at 312.
26
like § 510(c)(2) in § 510(b) is a strong indicator that Congress did not intend
§ 510(b) subordination to cover liens.
Kurtin’s argument misses the point. Lien transfer is a remedy distinct
from lien subordination. As explained above, lien subordination under
§ 510(b)—and § 510(c)(1)—is nothing more than a recognition of the well-
established proposition that a lien is an incident of the debt, Freeman v.
Nationstar Mortg. LLC (In re Freeman), 608 B.R. 228, 235 (9th Cir. BAP 2019),
and that once the claim has been subordinated, the lien automatically
follows the debt. In contrast, the lien transfer relief provided for under
§ 510(c)(2) gives the estate the benefit of the lien right—including priority
over intervening liens. Simply put, these two forms of lien relief are not
mutually exclusive. And Congress’s choice not to provide for lien transfer
relief in conjunction with § 510(b) tells us little or nothing about its
provision of lien subordination relief under both § 510(b) and (c).
In sum, none of Kurtin’s arguments based on the text and structure of
the Code persuade us that the bankruptcy court incorrectly interpreted
§ 510(b).
2. The traditional and general treatment of liens in bankruptcy
does not bar the bankruptcy court’s interpretation of § 510(b)
as covering liens.
Kurtin insists that subordination of liens under § 510(b) also is
inconsistent with the traditional and general protections that liens are
afforded out of respect for the secured creditor’s state law rights. Relying
27
on such venerable cases as Dewsnup v. Timm, 502 U.S. 410, 417 (1992),
Johnson, 501 U.S. at 84, and United States v. Whiting Pools, Inc., 462 U.S. 198,
211–12 (1983), Kurtin points out that liens generally pass through
bankruptcy unaffected, and when Congress has modified or impeded the
exercise of lien rights, it typically strives to provide safeguards to protect
their collateral from dissipation or devaluation, or it offers offsetting
compensation to the extent the collateral is consumed.
However, Kurtin’s argument regarding Congress’s generally
protective attitude towards lien rights ignores the fact that when Congress
perceives a need and justification to affect such rights, it has done so.
Merely within chapter five of the Code, there are numerous sections that
can drastically affect lien rights. See §§ 506(c), 506(d), 522(f), 547, and 548.
Based on our above analysis and construction, § 510(b) also affects lien
rights. Based on our construction of § 510(b) as covering “liens,” we reject
Kurtin’s argument founded on the Code’s general practice of protecting
and preserving lien rights.
3. Application of § 510(b) to Kurtin’s lien rights did not violate
his due process rights.
Similarly, Kurtin’s constitutional argument is circular. Kurtin argues
that the bankruptcy court should have eschewed a construction of § 510(b)
that risks a determination that § 510(b) is unconstitutional. As Kurtin
reasons, to the extent § 510(b) affects his lien rights, it constitutes an
28
unconstitutional taking of his property interests in violation of the Fifth
Amendment.
Assuming without deciding that judicial liens constitute property
interests subject to Fifth Amendment protection, Kurtin’s constitutional
argument still lacks merit. When Congress duly exercises its bankruptcy
power to impair property rights granted under state law, and the enacted
bankruptcy legislation pre-dates the parties’ agreement, the limitations on
the parties’ property rights arising from the legislation become an implicit
part of the parties’ agreement. See Wright v. Union Cent. Life Ins. Co., 304
U.S. 502, 516-18 (1938). Hence Congress’s legislation does not violate either
party’s due process rights. Id.Nor can there be any legitimate question that bankruptcy courts have
the power to subordinate claims, and the appurtenant lien rights,
regardless of state law. See Litton, 308 U.S. at 304-06, 312; see also Fahs v.
Martin, 224 F.2d 387, 395 & n.5 (5th Cir. 1955) (citing Vanston Bondholders
Protective Comm. v. Green, 329 U.S. 156, 162-63 & n.5 (1946), and recognizing
bankruptcy court’s power and duty to subordinate certain claims).
Given our reading of § 510(b), the potential that a bankruptcy court
might later subordinate any claims or liens arising from the Settlement
Agreement was an implicit part of the contract between Kurtin and Elieff.
As a result, we reject Kurtin’s argument that his due process rights might
have been violated as a result of the bankruptcy court’s subordination of
his liens under § 510(b).
29
4. Kurtin’s liens were not extinguished as a result of the
subordination, but his collateral can be consumed through
distribution.
Kurtin generally argues that subordination of his secured claim
makes no sense because the court did not avoid his lien. He points out that
the court took pains to articulate that his liens were not avoided but merely
subordinated. He reasons that this necessarily means that his lien, and its
priority, remain unaffected. Kurtin goes so far as to say that “if the trustee
distributes that property [his collateral] to someone else, the property
arguably remains subject to his lien.” Accordingly, in his view, his lien
rights would continue to exist in the same priority as prior to
subordination even after that collateral is distributed to other creditors of
Elieff’s bankruptcy estate.
For the reasons previously discussed at length, subordination of
Kurtin’s claim was required under § 510(b). Subordination of the claim
necessarily subordinated the associated liens securing the underlying
claim. The court did not avoid the lien; it did not need to do so. Based on
the bankruptcy court’s decision, Kurtin holds a subordinated encumbrance
junior to the unsecured creditors. His claim is not entitled to payment from
any source until the unsecured creditors are paid in full. Kurtin’s
observations concerning lien avoidance are unfounded and do not
establish any error in the bankruptcy court’s decision.
30
D. Kurtin’s challenge of the bankruptcy court’s denial of his
supplemental Civil Rule 56(d) request and its evidentiary rulings
do not justify reversal.
Kurtin contends that the bankruptcy court committed reversible
error by denying his supplemental Civil Rule 56(d) request. Kurtin
maintains that he needed additional time to conduct discovery on two
points. First, he stated that he needed additional time to discover facts
regarding the value of the different types of consideration he gave under
the Settlement Agreement. Kurtin particularly wanted discovery as to the
value of the securities-sale component and the value of the dispute
resolution component to allocate the Settlement Payments between those
two components.
As we have explained above, the Settlement Agreement was an
indivisible contract, its various components were not severable, and
consideration could not be apportioned among them. Consequently, the
valuation evidence was irrelevant to the bankruptcy court’s summary
judgment ruling. The valuation issue did not pertain to a genuine issue of
“material” fact. For summary judgment purposes, a factual issue only is
material if it could affect the outcome of the litigation under applicable law.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Therefore, Kurtin’s
asserted need to discover valuation evidence was insufficient to support its
supplemental Civil Rule 56(d) motion. See Cal. ex rel. Cal. Dep't of Toxic
Substances Control v. Campbell, 138 F.3d 772, 779 (9th Cir. 1998) (holding that
31
a litigant seeking to extend discovery in the face of a pending summary
judgment motion must show among other things that evidence the litigant
seeks to discover is “essential” to opposing summary judgment).
The only other facts Kurtin sought to discover related to his belief
that the sale of his equity interests in the Joint Entities occurred so long
before the bankruptcy case that the causal nexus between his equity
interest and the resulting debt had been negated. He claims he needed
additional time to conduct discovery regarding the evolution of the Joint
Entities’ debt structure. The unstated conclusion Kurtin draws from these
circumstances is that his equity to debt transmutation was so “old and
cold” that creditors in existence at the time of Elieff’s bankruptcy filing
could not possibly have extended credit in reliance on the equity cushion
his equity investments in the Joint Entities provided. However, creditor
reliance on the equity cushion is only one of the two rationales for
imposition of § 510(b) subordination. See In re Am. Wagering, Inc., 493 F.3d
at 1071-72 (explaining the two rationales underlying § 510(b)). The other
rationale is the greater risk of loss investors assume when they invest in a
business entity—as compared to the risk assumed by creditors. See id.
Nothing that Kurtin has shown or argued suggests that the passage of time
has impacted this risk-allocation rationale as it applies in this case.
The Ninth Circuit has made clear that the risk allocation rationale is
the critical rationale for imposing § 510(b) subordination and that the
creditor reliance rationale does not apply at all in the context of a sale of
32
securities by an affiliate of the debtor. In re Del Biaggio, 834 F.3d at 1011-12.
Because Kurtin’s “old and cold” argument only implicates the creditor
reliance rationale, any evidence he sought to discover in support of that
argument was not material to the plaintiffs’ summary judgment motion.
As for excluded evidence, he mostly objects to the exclusion of
evidence related to his already-discredited attempts to value and apportion
the Settlement Payments. The only other evidence he argues that the
bankruptcy court should not have excluded consisted of “direct evidence
[in his declarations] of the purpose and intent of the Settlement Payments.”
But this evidence was also irrelevant. Kurtin’s statements regarding his
personal, subjective intent in entering into the Settlement Agreement is
immaterial to the proper construction of the parties’ mutually manifested
objective intent in entering into the Settlement Agreement. See In re Italiane,
632 B.R. at 674.
In sum, Kurtin has not persuaded us that the bankruptcy court
abused its discretion by denying Kurtin’s supplemental Civil Rule 56(d)
motion or by excluding certain parts of Kurtin’s evidence.
CONCLUSION
For the reasons set forth above, we affirm both the bankruptcy
court’s summary judgment in favor of Ehrenberg on his § 510(b) claims for
relief and its subsequent order clarifying that its summary judgment ruling
subordinated Kurtin’s lien rights as well as his claim.
33