Dooley v. M B Industries L L C

UNITED STATES DISTRICT COURT

WESTERN DISTRICT OF LOUISIANA

SHREVEPORT DIVISION

DAVID M. DOOLEY CIVIL ACTION NO. 18-1039

VERSUS JUDGE ELIZABETH ERNY FOOTE

MB INDUSTRIES, LLC, ET AL. MAGISTRATE JUDGE HAYES

MEMORANDUM RULING

This adversaty proceeding atises 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

tuled 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

! As part of the bankruptcy, MB has been substituted in the adversary proceeding by

MB Industties, LLC Liquidating Trust. As this distinction is not substantively significant for

present purposes, this ruling will use MB to refer to both the company and the liquidating

trust.

proceedings consistent with this opinion.

I. Background

MB was patt 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 agteed 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

(Gif 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 (1) 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

ptoposed a reorganization 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 □□□

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

(i) 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 ate 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

agteement 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 Patties. [Jd 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 patties’ 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 Cir. 1992) (citing In re Hipp, Ine. 895

F.2d 1503, 1517(5th Cir. 1990)). Thus, a bankruptcy court’s discretionary decisions are

2 Class 8A contains contractually subordinated claims of another set of creditots.

[Record Document 3-15 at 19-20].

reviewed under an abuse of discretion standard, findings of fact are reviewed for clear error,

and legal conclusions ate reviewed de novo. See In re ASARCO, L.L.C., 702 F.3d 250, 257 (5th

Cir. 2012) (citing In re Coho Energy Inc., 395 F.3d 198, 204 (5th Cir. 2004); In re Barron, 225 F.3d

583, 585 (5th Cir. 2000); In re Consol. Bancshares, Inc, 785 F.2d 1249, 1252 (th Cir. 1986)).

Although an interpretation of a confirmed Chapter 11 plan is a question of law, Iz re Adusory

Comm. of Major Funding Corp., 109 F.3d 219, 222 (5th Cir. 1997) (citing Killebrew v. Brewer (In re

Killebrew), 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. [Jd]. 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. [[d. at 9-10]. In light of its decision about contractual

subordination, the Bankruptcy Court declined to teach the issues of mandatory or equitable

subordination. [/d. 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 (.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 Dooley’s

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 9 at 18-53]. In reply,

Dooley emphasizes MB’s reservation of its causes of action against the Dooley Parties to argue

that the MB Plan’s express language does not control the treatment of his claim. [Record

Document 11 at 6-8].

IV. Analysis

A. Jurisdiction

MB argues that this Court lacks appellate jurisdiction because Dooley did not attach

the Bankruptcy Court’s ruling to the notice of appeal he filed in the Bankruptcy Court. [Record

Document 9 at 1]. Under Rule 8003(a)(3)(B) of the Federal Rules of Bankruptcy Procedure, a

notice of appeal must “be accompanied by the judgment, order, or decree, or the part of it,

being appealed.” The appeal must be filed within fourteen days of the bankruptcy court’s

tuling. Fed. R. Bankr. P. 8002(a)(1). “[FJailure to file a notice of appeal within the meaning of

Rule 8003 during the proper time period defeats jurisdiction.” In re Dorsey, 870 F.3d 359, 363

(5th Cir. 2017) (citing In re Alexander, 472 B.R. 815, 924 (B.A.P. 9th Cir. 2012).

The Bankruptcy Court ruled on August 1, 2018. [Record Document 1-1 at 1]. On

August 9, 2018, Dooley filed a notice of appeal to which he did not attach the Bankruptcy

Court’s ruling. [Record Document 3-10 at 49-51]. The next day, Dooley filed a second notice

of appeal with the ruling attached. [Id. at 53-66]. As the corrected notice was filed within the

time provided by Rule 8002, this Court finds that it has jurisdiction over this appeal.

B. Subordination of Claims under the Bankruptcy Code

The Bankruptcy Code allows subordination of a creditor’s claim beneath other claims

in three ways. See 11 U.S.C. § 510. First, a claim may be subject to contractual subordination

under 11 U.S.C. § 510(a), that is, to subordination based on a separate agreement between

patties involved in the bankruptcy, see In re Gen. Homes Corp., 134 B.R. 853, 864 (Bankr. S.D.

Tex. 1991) (citing In re Leasing Consultants, Inc. 2 B.R. 165, 168 (Bankr. E.D.N.Y. 1980); In re

Hokday Mart, Inc, 715 F.2d 430, 433 Oth Cir. 1983)). Mandatory subordination under 11 U.S.C.

§ 510(b) ensures that “creditors . . . ate paid ahead of shareholders in the distribution of

corporate assets.” Templeton v. O’Cheskey (In re Am. Housing Found.), 785 F.3d 143, 153 (5th Cir.

2015) (quoting SeaQuest Diving, LP v. S ¢» J Diving, Inc. (In re SeaQuest Diving, LP), 579 F.3d 411,

417 (th Cir. 2009)). 11 U.S.C. § 510(¢) authorizes equitable subordination to redress creditors’

injuries caused by a clatmant’s unjust conduct. In re ST Restructuring, Inc., 532 F.3d 355, 360 (5th

Cir. 2008).

Counterclaim 6 alleges that the Dooley Patties’ claims ate subject to equitable and

mandatory subordination under 11 U.S.C. § 510(b)-(c). [Record Document 3-7 at 146-49].

When ruling on Counterclaim 6, the Bankruptcy Court declined to decide whether Dooley’s

claim is subject to either of these types of subordination. [Record Document 1-1 at 10].

Instead, the Bankruptcy Court found that the MB Plan had determined that Dooley’s claim

atising from the Note was to be contractually subordinated. [Id at 2].

The Bankruptcy Court’s reasoning is somewhat confusing. Contractual subordination

refers to the process by which a bankruptcy court gives effect to an agreement in which a

creditor accepted subordination of its claim. See Gernsbacher v. Campbell (In re Equip. Equity

Holdings, Inc.), 491 B.R. 792, 865 (Bankr. N.D. Tex. 2013). The agreement providing for

subordination is sepatate from the debtor’s bankruptcy plan. See, eg, id at 798, 831, 865

(describing contractual subordination of claims arising from an agreement that became

effective seven years before the bankruptcy commenced). Although the Bankruptcy Court

purports to “contractually subordinate [Dooley’s] claim based on the terms of the confirmed

Chapter 11 Plan,” [Record Document 1-1 at 10], this statement collapses two analytically

distinct steps. First, the Bankruptcy Court held that the MB Plan construed the Note as

contractually subordinating Dooley’s claim. The court then held that confirmation of the MB

Plan prevented Dooley from challenging the MB Plan’s treatment of the obligations created

by the Note. What the Bankruptcy Court did not do is interpret the Note to determine whether

the Note required subordination of Dooley’s claim. Instead, the Bankruptcy Court interpreted

the language of the MB Plan and found that that language, regardless of whether it was an

accurate interpretation of the Note, bound Dooley. [Record Document 1-1 at 9]. Thus, the

issue in this appeal is not contractual subordination (e., the correct interpretation of the

Note). Rather, the issue is the effect of the MB Plan’s language on Dooley’s claim.

C. Chapter 11 Plan Confirmation

Reorganization or liquidation under Chapter 11 begins when a debtor or another party

in interest files a plan. 11 U.S.C. § 1121(a),(c). Such plans divide creditors into hierarchical

classes, the higher of which receive payment before the lower. Id. § 1122; see In re Greystone III

Joint Venture, 995 F.2d 1274, 1277 (5th Cir. 1991) (“Chapter 11 requires classification of claims

against a debtor... .”). A bankruptcy plan impairs a creditor’s claim “unless ... the plan...

leaves unaltered the legal, equitable, and contractual rights to which such claim or interest

entitles the holder of such claim or interest.” 11 U.S.C. § 1124(@). The plan is sent to the

creditors accompanied by a disclosure statement, which must give them sufficient information

to enable “a hypothetical investor of the relevant class to make an informed judgment about

the plan.” Id. § 1125(a)(1), (b). After time to review the plan and the disclosure statement,

creditors whose interests are impaired may vote to accept or reject the plan. Id § 1126. In

addition, any party in interest may object to confirmation of the plan. Id § 1128(b). A plan

becomes effective once the bankruptcy court issues a confirmation order. Id. § 1129.

“A confirmed liquidation plan is... a direct order from the court... .” CHS, Inc. v.

Plaquemines Holdings, LLC, 735 F.3d 231, 239 (5th Cir. 2013). As a direct order, it is binding

once the time for appeal has elapsed. See Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050 (5th

Cir. 1987). “[A] provision in [a] debtor’s confirmed plan of reorganization [i]s enforceable and

binding, even though a proper and timely objection might have resulted in rendering the

provision unenforceable and stricken from the plan.” In re Friedman’s, Inc., 356 B.R. 766, 773

(Bankr. $.D. Ga. 2006) (citing Finova Capital Corp. v. Larson Pharmacy Inc. (In re Optical Techs.,

Inc.), 425 F.3d 1294 (11th Cir. 2005)). This is true “[rlegardless of whether that provision is

inconsistent with the bankruptcy laws or within the authority of the bankruptcy court.” Soaf,

815 F.2d at 1050; of Travelers Indem. Co. v. Batley, 557 U.S. 137, 152-53 (2009) (holding that a

bankruptcy court’s injunction that is not challenged on direct appeal cannot be collaterally

attacked even for lack of subject matter jurisdiction). In United Student Aid Funds v. Espinosa,

the Supreme Court affirmed this principle, holding that a bankruptcy court’s confirmation of

a plan that discharged a debt without making a finding required by the Bankruptcy Code

nevertheless bound a creditor who neither objected nor appealed. 559 U.S. 260, 275 (2010). A

Chapter 11 creditor dissatisfied with the treatment of its claim thus has two routes to telief: an

objection before confirmation or an appeal after confirmation. See Shoaf, 815 F.2d at 1050.

D. Effect of Dooley’s Failure to Object to the MB Plan or to Appeal the

Confirmation Order

‘The MB Plan’s treatment of Dooley’s claim contains two operative clauses. The first is

a suspensive condition: “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 of the Closing Date.” [Record Document 3-15 at 34]. This language reflects but also

expands that of the Note, which provides that the principal will be paid “the later of @ June

30, 2015 or Gi) the date that the creditors of Maker are repaid in full all amounts owing to

them at the Closing Date.” [Record Document 3-9 at 27]. While the Note requires that MB’s

creditors be paid all of what they were owed as of October 27, 2011 before Dooley recetves

any payment of the principal, the Note’s suspensive condition does not apply to interest and

attorney fees. The MB Plan thus appeats to exceed the terms of the Note by extending

subordination to “all claims arising from” the Note. [Record Document 3-15 at 34 (emphasis

added)].

10

The next sentence of the MB Plan provides an additional layer of subordination:

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.

This second condition construes the Note as a subordination agreement that places

Dooley’s claim beneath all of the creditors in the higher classes not merely those creditors

referenced in the Note.

Dooley disputes three features of the MB Plan. First, he argues that once MB’s default

triggered the Note’s acceleration clause, the Note ceased to be a subordination agreement.

[Record Document 8 at 11]. Even if the Bankruptcy Court misinterpreted the Note when

approving the MB Plan (a question that this Court does not decide), the confirmation of the

MB Plan without an objection to or appeal of that confirmation renders the plan binding on

all creditors, including Dooley. Now that the MB Plan has been confirmed, it is no longer a

question of whether the Note is a subordination agreement. The question has become whether

the MB Plan requires placement of Dooley’s claim in Class 8B. This Court agrees with the

Bankruptcy Court that Dooley’s claim must be classified and satisfied in accordance with the

terms of the confirmed plan. [Record Document 1-1 at 9].

Dooley next disputes the treatment of interest and attorney fees. [Record Document

11 at 10 n.2]. The Note requires MB to make quarterly interest payments and to pay Dooley’s

attorney fees if collection enforcement is required. [Record Document 3-9 at 27, 29]. Unlike

the Note’s treatment of the principal, the Note does not require that MB’s other creditors be

paid before Dooley can collect interest and attorney fees. [Jd]. As a result, Dooley suggests

11

that his claim for interest and attorney fees should not have been placed in Class 8B and that

in doing so the Bankruptcy Court misinterpreted the Note. [Record Document 11 at 10 n.2].

Here again, this Court will not decide the correct interpretation of the Note because the MB

Plan clearly states that “all claims” arising from the Note “are contractually subordinated” and

ate “to be paid after payment to Allowed Claims in Classes 6, 7 and 8A.” [Record Document

3-15 at 34 (emphasis added)]. Because language in a confirmed plan binds creditors even if the

provision at issue is legally incorrect, Shoaf, 815 F.2d at 1050, interest and attorney fees will

not be treated differently than principal.

Dooley also argues that his claim arising from the Note is only subordinated until MB’s

creditors as of the Closing Date are paid in full. [Record Documents 8 at 13 and 11 at 9-11].

The MB Plan requites that Dooley’s claims 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 and/or § 510(a) of the Bankruptcy Code.” [Record Document 3-15 at 34 (emphasis

added)]. Dooley argues if the Note is treated as a subordination agreement, then he must be

paid in accordance with the Note, which requires payment on “the date that the creditors of

Maker ate repaid in full all amounts owing to them at the Closing Date.” [Record Documents

3-9 at 27 and 8 at 13]. On that basis, he suggests that any subordination lasts only until the

creditors referenced in the Note are fully satisfied and asserts that this has occurred. [Record

Documents 8 at 13 and 11 at 10-11]. The Bankruptcy Court did not decide this issue. [Record

Document 1-1 at 10]. Although the correct interpretation of the MB Plan is a question of law

that this Court may decide now, see In re Advisory Comm. of Major Funding Corp., 109 F.3d at 222

(citing Killebrew, 888 F.2d at 1519), the application of that interpretation will depend on the

12

resolution of factual and mixed questions related to the continued existence and extent of

MB?’s debts. Hence, this Court will leave this issue to be addressed by the Bankruptcy Court

in the first instance.

Although Dooley argues that he was “blindsided by the Bankruptcy Court,” [Record

Document 8 at 7], the MB Plan provided all the notice to which Dooley was entitled. Because

the interpretation of the MB Plan was not at issue in Counterclaim 6, MB did not need to

specifically plead any issues related to the construction of Class 8B or the relationship between

that class and the Note. [Record Document 11 at 8-9]. In short, this Court agrees with the

Bankruptcy Court that Dooley is bound by the MB Plan, which places his claim in Class 8B.

[Record Document 1-1 at 10}.

E. Effect of MB’s Reservation of Certain Claims

Dooley also argues that the MB Plan did not finalize the classification of his claim

because the MB Plan tesetved certain causes of action. [Record Document 11 at 6-8]. Dooley

is correct that the MB Plan reserved MB’s right to litigate claims against the Dooley Patties,

including the six counterclaims alleged in the adversary proceeding. [Record Document 3-15

at 89]. It is also true that “[rles judicata does not apply where a claim is expressly reserved by

[a] litigant in the earlier bankruptcy proceeding.” In re Tex. Wyo. Drilling, Inc., 647 F.3d 547, 553

(5th Cir. 2011) (quoting Browning v. Levy, 283 F.3d 761, 774 (6th Cir. 2002) (citing Rees v. Paige

(In re Paige), 610 F.3d 865, 867 (5th Cir. 2010)). Nevertheless, this rule of law does nothing to

advance Dooley’s position.

Dooley misconstrues the nature of the reservation of claims in the MB Plan. According

to Dooley, “{t]he obvious purpose of the [MB] Plan provision relating to the Retained Causes

13

of Action was to allow the Trustee to assert and prove a contractual subordination claim if he

so desired.” [Record Document 11 at 8]. The MB Plan resetves

[alny and all claims against the Dooley Parties . . . . Such claims and causes of

action include, but are not limited to: Claims under chapter 5 of the Bankruptcy

Code or applicable law, including . . . all claims asserted in the Debtot’s

counterclaim against the Dooley Parties . . . including . . . Count 6 -

subordination of claims under § 510 of the Code.

[Record Document 3-15 at 89]. Counterclaim 6 alleges that the Dooley Parties’ claims are

subject to mandatory and equitable subordination under 11 U.S.C. §510(b)-(c). [Record

Document 3-7 at 146-49]. The MB Plan provided that the Dooley Relatives’ claims would fall

into either Class 9 (if they were equitably subordinated) or Class 7 (if they were not). [Record

Document 3-15 at 32-34]. Thus, the reservation of Counterclatm 6 meant that MB could

continue to litigate the equitable subordination of the Dooley Relatives’ claims for their salaries

and benefits and the Dooley Relatives could continue to defend themselves and seek a position

in a superior class of claimants.

Dooley’s situation, however, is not parallel to that of his relatives. The MB Plan places

his claim arising from the Note in Class 8B and defines it as contractually subordinated. [Id at

34]. Dooley did not object to the confirmation of the MB Plan nor did he appeal the

confirmation order. In effect, Dooley asks this Court to conclude that a debtot’s reservation

of a counterclaim in an adversary proceeding relieves a creditor of the obligation to object or

appeal within the main bankruptcy. This Court rejects Dooley’s attempt to defeat the language

of the MB Plan within the context of a trial on MB’s counterclaim.

Following the dismissal of Countetclaims 1-6 as to the Dooley Relatives and

Counterclaims 1-5 as to Dooley, the remaining counterclaim alleged that Dooley’s claim

14

atising from the Note is subject to mandatory and equitable subordination. [Record Document

3-10 at 1-2]. That was the issue that the Bankruptcy Court was to decide. It is perhaps arguable

that MB’s reservation of “[a]ny and all claims against the Dooley Parties” included the

possibility that further litigation would determine that Dooley’s claim arising from the Note

was to be placed not in Class 8B but instead in a superior class of unsecured claims, [Record

Document 3-15 at 89], but this would be a highly strained reading of MB’s generic reservation

of its causes of action. Moreover, a confirmed plan binds all creditors, not merely those directly

affected by a particular provision. 11 U.S.C. § 1141(@) (‘T]he provisions of a confirmed plan

bind... any creditor... whether or not the claim or interest of such creditor . . . is impaired

under the plan and whether or not such creditor ... has accepted the plan.”); In re Pavlovich,

952 F.2d 114, 117 (th Cir. 1992) (citing 11 U.S.C. § 1141(a)) (“But for debts excepted under

§ 523, confirmation of the Plan bound the debtor and all then-existing creditors who had

notice of the case.”’). The MB Plan provides for a specific treatment of Dooley’s claim arising

from the Note. [Record Document 3-15 at 33-34]. MB’s other creditors were entitled to rely

on the MB Plan’s actual language when determining how to vote and whether to object. MB

and the Dooley Parties may have intended to allow further litigation regarding the classification

of Dooley’s claims arising from the Note. Nevertheless, this Court cannot give effect to that

intention when doing so might prejudice other creditors who reasonably relied on the language

of the MB Plan.

The MB Plan asserted that Dooley’s claim arising from the Note fell into Class 8B

because the Note contractually subordinated his claim. [Jd. at 34]. MB had no need to reserve

in the MB Plan a right to litigate an issue already addressed within the plan itself. Dooley had

15

afl Opportunity to object to the treatment of his claim. He did not avail himself of that

opportunity. He cannot now tely on a provision designed to protect MB’s rights in order to

press for a different treatment of his claim.

F. Effect of the Parties’ Stipulations

Dooley also argues that the parties’ pretrial stipulations were a settlement to which the

Bankruptcy Court failed to give effect when it based its ruling on contractual subordination

rather than on equitable or mandatory subordination. [Record Document 8 at 5-10]. Dooley’s

ptemise is cortect; contractual subordination is not an issue in Counterclaim 6. [Record

Document 3-7 at 146-49]. Therefore, a ruling that Dooley’s claim is contractually

subordinated is not a legally acceptable resolution of Counterclaim 6 and so must be vacated.3

If MB wishes to continue to pursue the counterclaim on remand, the Bankruptcy Court must

tule on the issues actually presented.

Nevertheless, from the correct premise, Dooley draws the incorrect conclusion that

the contractual subordination of Dooley’s claim arising from the Note “was excluded pursuant

to the compromise agreement wherein certain of the Dooley Parties gave up claims in return

for an agreement by the Debtor that its potential relief would be limited to subordination

under Sections 510(b) and (c).” [Record Document 8 at 9]. The counterclaim is, of course,

limited to mandatory and equitable subordination. But the counterclaim in the Dooley Parties’

advetsaty proceeding is not the only proceeding that affects Dooley’s claim. His claim was

3 Because this Court vacates the Bankruptcy Court’s ruling, this Court need not address

Dooley’s arguments that a ruling by this Court on the basis of mandatory or equitable

subordination would be a ruling on issues not passed on below or that addressing certain new

arguments taised by MB would unfairly modify the judgment in MB’s favor. [Record

Document 11 at 11-15].

16

also, of necessity, affected by the confirmation of the MB Plan within the bankruptcy itself. A

tuling in Dooley’s favor on Counterclaim 6 will leave his claim in Class 8B (at least initially); a

ruling in MB’s favor might result in placement of Dooley’s claim in a different class.

V. Conclusion

Because the Bankruptcy Court did not decide either of the issues before it, the

judgment in MB’s favor on Counterclaim 6 is VACATED, and this matter is REMANDED

for further proceedings consistent with this opinion.

Given the binding effect of plan confirmation, the starting place for Dooley’s claim is

Class 8B. On temand, the Bankruptcy Court must rule on the issues actually raised in

Counterclaim 6 (1e., mandatory and equitable subordination) unless MB is willing to dismiss

the counterclaim because MB is satisfied with the MB Plan’s treatment of Dooley’s claim

atising from the Note. In order to determine how much Dooley is entitled to recover in the

bankruptcy, the Bankruptcy Court may also need to determine the precise extent of the

contractual subordination recognized in the MB Plan, that is, whether Dooley’s claim arising

from the Note should receive a different treatment once the creditors referenced in the Note

have been fully satisfied.

THUS DONE AND SIGNED in Shreveport, Louisiana, this /, od Jf day of

NJ ( d 4 , 2019.

□□ DISTRICTJUDGE

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