Summary
The United States Bankruptcy Appellate Panel of the Ninth Circuit reviews an order subordinating and partially disallowing claims held by creditors arising from a discrimination judgment and subsequent settlement. The Panel holds that the bankruptcy court could look behind the settlement to characterize the claims as punitive damages, but could not apply 11 U.S.C. § 1129(a)(7) post-confirmation to subordinate the claims. It also reverses the disallowance of $2.7 million as an unenforceable penalty and remands for further proceedings.
Topics
Practice areas
Questions Presented
- Whether Brown v. Felsen and Archer v. Warner permitted the bankruptcy court to look behind the settlement and plan to characterize the appellants' claim as arising from punitive damages.
- Whether the bankruptcy court could subordinate the appellants' claim under 11 U.S.C. § 1129(a)(7) after confirmation of the chapter 11 plan.
- Whether $2.7 million due under the settlement's judgment clause was an unenforceable penalty under Nevada law.
Holdings
- Brown v. Felsen and Archer v. Warner permitted the bankruptcy court to look behind the settlement and plan to determine the true nature of the debt; the settlement and plan did not prevent characterization of the claim as arising from punitive damages.
- Section 1129(a), including § 1129(a)(7), applies as a precondition to plan confirmation and does not authorize post-confirmation subordination of a claim absent a statutorily compliant plan modification or another applicable legal basis.
- Section 726(a)(4) does not directly apply in a chapter 11 case; it may be consulted only as part of the hypothetical chapter 7 liquidation analysis required by § 1129(a)(7)(A)(ii).
- The bankruptcy court abused its discretion by disallowing $2.7 million as an unenforceable penalty under Nevada law.
Key quotations
“The only statutory exception Congress created to § 1129(a)’s pre-confirmation application is in § 1127, which provides that a plan proponent may modify a plan post-confirmation “before substantial consummation of such plan,” and then only if the modified plan meets the requirements of §§ 1122 and 1123, “circumstances warrant such modification” and the bankruptcy court, “after notice and a hearing, confirms such plan as modified, under section 1129 of this title.”” (18)
“Ultimately, the 2015 Settlement benefitted MFE and MTI by capping the damages they would owe the Camara Creditors.” (28)
Factual background
A federal jury awarded the Camara Creditors $968,100 in compensatory damages and $14 million in punitive damages in a racial-discrimination, retaliation, and hostile-work-environment action against MFE and MTI. During MFE's 2015 chapter 11 case, the parties settled for payments totaling $7,299,999, with a default provision permitting entry of a stipulated $10 million judgment less payments received. The settlement was incorporated into a confirmed plan, and the debtors paid $6,206,249 before defaulting and filing the current chapter 11 cases. The bankruptcy court later subordinated the remaining claim and disallowed $2.7 million as an unenforceable penalty.
Procedural history
The appellants obtained a federal discrimination judgment against Matheson Flight Extenders and Matheson Trucking and later entered into a settlement incorporated into a confirmed chapter 11 plan. After the debtors defaulted and filed new chapter 11 cases, the bankruptcy court confirmed a joint plan of liquidation. Post-confirmation, the bankruptcy court sustained the debtors' claim objection, subordinated the appellants' claim under 11 U.S.C. § 1129(a)(7), and disallowed $2.7 million under Nevada penalty law. The BAP reversed and remanded.
Remand instructions
Reverse the Subordination Order and remand for further proceedings consistent with the opinion. The debtors may pursue equitable subordination under § 510(c), other applicable theories, or a plan modification under § 1127, subject to the Bankruptcy Code.