United States District Court, W.D. Louisiana, Shreveport Division
DAVID M. DOOLEY
MB INDUSTRIES, LLC, ET AL.
ELIZABETH ERNY FOOTE UNITED STATES DISTRICT JUDGE.
adversary proceeding arises out of the Chapter 11 bankruptcy
of MB Industries, LLC ("MB"). 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.
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].
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].
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].
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.
at 34]. 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
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].
Standard of Review .
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.
Opinion Below and Parties' Arguments
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].
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 ...