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Dooley v. MB Industries LLC

United States District Court, W.D. Louisiana, Shreveport Division

August 12, 2019


          HAYES JUDGE.



         This adversary proceeding arises out of the Chapter 11 bankruptcy of MB Industries, LLC ("MB").[1] David Dooley ("Dooley"), a creditor of MB, filed an adversary proceeding to which MB filed a counterclaim that alleged that Dooley's claims arising out of a promissory note issued by MB are subject to mandatory and equitable subordination. [Record Documents 3-1 at 1-17 and 3-7 at 146-49]. Following stipulations and briefing, the Bankruptcy Court ruled in MB's favor on the counterclaim, declaring that Dooley's claim was contractually subordinated. [Record Document 1-1 at 2]. Dooley appeals, arguing that no party had raised the issue of contractual subordination. [Record Documents 1 and 8 at 5-10]. This Court agrees with the Bankruptcy Court's interpretation of the language of MB's confirmed Chapter 11 plan. [Record Document 1-1 at 8-10]. However, because contractual subordination was not at issue in the counterclaim that the Bankruptcy Court purported to decide, the judgment of the Bankruptcy Court is VACATED, and this matter is REMANDED for further proceedings consistent with this opinion.

         I. Background

         MB was part of a network of companies in which Dooley and two trusts associated with the Dooley family owned interests. [Record Documents 1-1 at 1-3 and 3-9 at 25]. On October 27, 2011 (the "Closing Date"), MB entered into an agreement (the "Realignment Agreement") that transferred Dooley's interest in these companies to MB. [Record Documents 1-1 at 3 and 3-9 at 9-24]. MB was then to transfer those interests to the issuing companies for cancellation. [Record Document 3-9 at 10].

         In exchange, MB agreed to employ Brenda Dooley, David M. Dooley, and Chris Vallot (the "Dooley Relatives") at salaries of $10, 000 per month plus benefits. [Record Documents 1-1 at 3 and 3-9 at 11]. The parties have stipulated that the Dooley Relatives "were never expected by [MB] to show up for work." [Record Document 3-9 at 3]. In addition, MB agreed to issue a unsecured promissory note for $2, 750, 000 (the "Note"). [Record Documents 1-1 at 3-4 and 3-9 at 11]. The Note provided for payment of the principal, interest, and attorney fees (if the matter entered collections). [Record Document 3-9 at 27-29]. Although interest payments were to begin January 15, 2012, principal payments were due "the later of (i) June 30, 2015 or (ii) the date that the creditors of [MB] are repaid in full all amounts owing to them at the Closing Date." [Id. at 27]. The Note included an acceleration clause triggered by late payments or by commencement of bankruptcy proceedings. [Id. at 28].

         MB was insolvent when it entered the Realignment Agreement. [Id. at 3]. Nevertheless, MB made some monthly payments to the Dooley Relatives and paid some of the interest before defaulting. [Record Documents 1-1 at 4 and 3-9 at 3]. On October 2, 2014, MB's creditors petitioned for an involuntary Chapter 7 bankruptcy; the Bankruptcy Court converted the case to one filed under Chapter 11. [Record Documents 1-1 at 2 and 3-16 at 3]. MB proposed a reorgani2ation plan, and Dooley objected to the disclosure statement. [Record Document 3-13 at 1-21]. MB then filed an amended plan (the "MB Plan"); Dooley did not object to the amended plan, which the Bankruptcy Court confirmed on May 25, 2016. [Record Documents 1-1 at 2-3 and 3-15 at 8-91].

         The MB Plan establishes eleven classes of creditors. [Record Document 3-15 at 28- 29]. Classes 1-5 comprise unimpaired priority and secured claims. [Id. at 28]. Claims in the remaining classes are impaired. [Id. at 28-29]. Class 6 contains a subset of unsecured claims that do not include claims by Dooley, the two Dooley family trusts, and the Dooley Relatives (collectively, the "Dooley Parties"). [Id. at 32]. Class 7 comprises general unsecured claims, including claims by the Dooley Relatives. [Id. at 33-34]. Class 8 contains all unsecured contractually subordinated claims, including Dooley's claim arising from the Note:

With respect to Class 8B (David M. Dooley, Sr.'s Contractually Subordinated Claims), that certain promissory note dated October 27, 2011 from the Debtor made payable to the order of David M. Dooley, Sr. provides that the "principal amount of this promissory note shall be payable the later of (i) June 30, 2015 or (ii) the date the creditors of Maker are repaid in full all amounts owing to them at the Closing Date (as defined in the Realignment Agreement)." Thus, all claims arising from said promissory note are contractually subordinated to all creditors of Maker until they are repaid in full all amounts owing to them as the Closing Date (as defined in the Realignment Agreement). The holder of David M. Dooley, Sr.'s Contractually Subordinated Class 8B Claim, to the extent it is allowed, will receive, in full and final satisfaction of such Claim, its Pro Rata Share of the Liquidating Trust Interests, to be paid after payment to Allowed Claims in Classes 6, 7 and 8A in a manner consistent with any subordination agreement of David M. Dooley, Sr. and/or § 510(a) of the Bankruptcy Code.

         [Id. at 34].[2] Unsecured equitably subordinated claims are placed in Class 9. [Id.]. Classes 10 and 11 hold deficiency claims and equity interests. [Id. at 35]. The MB Plan also reserves MB's right to pursue any claims that MB may have against the Dooley Parties. [Id. at 89].

         Before the Bankruptcy Court confirmed the MB Plan, the Dooley Parties initiated an adversary proceeding to rescind the Realignment Agreement. [Record Document 3-1 at 1-17]. MB filed an answer, which it later amended, and six counterclaims. [Record Documents 3-1 at 18-29 and 3-6 at 1-30]. Counterclaim 6, which is at issue here, seeks mandatory and equitable subordination of the Dooley Parties' claims pursuant to 11 U.S.C. § 510(b)-(c). [Record Document 3-7 at 146-49]. The parties agreed that the Bankruptcy Court could rule based on their stipulations and briefing. [Record Document 1-1 at 2]. The Dooley Relatives also agreed to subordinate their claims, and, upon the parties' joint motion, the Bankruptcy Court dismissed all of the counterclaims other than Counterclaim 6 against Dooley. [Record Documents 1-1 at 2, 3-9 at 4-5, and 3-10 at 1-2]. After reviewing the parties' submissions and stipulations, the Bankruptcy Court issued the ruling from which Dooley has appealed. [Record Document 1-1].

         II. Standard of Review .

         In reviewing a decision by a bankruptcy court, a district court functions as an appellate court, applying the same standards of review applied by federal appellate courts. Webb v. Reserve Life Ins. Co. (In re Webb), 954 F.2d 1102, 1103-04 (5th Or. 1992) (citing In re Hipp, Inc., 895 F.2d 1503, 1517(5th Cir. 1990)). Thus, a bankruptcy court's discretionary decisions are reviewed under an abuse of discretion standard, findings of fact are reviewed for clear error, and legal conclusions are reviewed de novo. See In re ASARCO, L.L.C., 702 F.3d 250, 257 (5th Or. 2012) (citing In re Coho Energy Inc., 395 F.3d 198, 204 (5th Or. 2004); In re Barron, 225 F.3d 583, 585 (5th Or. 2000); In re ConsoL Bancshares, Inc., 785 F.2d 1249, 1252 (5th Or. 1986)). Although an interpretation of a confirmed Chapter 11 plan is a question of law, In re Advisory Comm. of Major Funding Corp., 109 F.3d 219, 222 (5th Cir. 1997) (citing Killebrew v. Brewer (In re Killebreiv), 888 F.2d 1516, 1519 (5th Cir. 1989)), a bankruptcy court's interpretation is "entitled to deference," McGee v. Stumpf (In re O'Connor), 258 F.3d 392, 401 (5th Cir. 2001) (citing In re Weber, 25 F.3d 413, 416 (7th Cir. 1994); In re Terex Corp., 984 F.2d 170, 172 (6th Cir. 1993)).

         III. Opinion Below and Parties' Arguments

         In its ruling, the Bankruptcy Court concluded that Dooley's claim arose from the Note and that the MB Plan had "propose[d] specific treatment of that claim." [Record Document 1-1 at 8]. The Bankruptcy Court acknowledged that the Note appeared to subordinate payments of principal but not of interest and attorney fees. [Id. at 9]. Nevertheless, the Bankruptcy Court decided that the express language of the MB Plan required the contractual subordination of Dooley's entire claim. [Id.]. Because a confirmed plan binds a creditor who has notice of a plan and fails to object or to appeal confirmation and because Dooley did neither, the Bankruptcy Court then held that Dooley's claim was contractually subordinated to those of MB's other creditors. [Id. at 9-10]. In light of its decision about contractual subordination, the Bankruptcy Court declined to reach the issues of mandatory or equitable subordination. [Id. at 10].

         On appeal, Dooley argues that the Bankruptcy Court violated his due process rights by considering contractual subordination when the parties' briefing and stipulations referred only to the allegations in Counterclaim 6 (i.e., mandatory and equitable subordination). [Record Document 8 at 5-10]. Dooley then argues that neither type of subordination applies to his claim. [Id. at 14-25]. Dooley also maintains that the Note is not a subordination agreement and that, even if it is, the Bankruptcy Court failed to specify to which claims and in which amounts his claim is subordinated. [Id. at 10-14]. MB responds that the Bankruptcy Court correctly looked to the terms of the MB Plan to identify the appropriate treatment of Dooley5s claim and that, even if the Bankruptcy Court erred in doing so, Dooley's claim is subject to contractual, mandatory, and equitable subordination. [Record Document ...

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