FILED MAY 11 2026 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. EC-25-1142-LSB MATHESON FLIGHT EXTENDERS, INC.; MATHESON POSTAL SERVICES, Bk. No. 22-21148 INC.; MATHESON TRUCKING, INC., Debtors. MAHAMET CAMARA; ANDRE DE OLIVERA; BEMBA DIALLO; SALIF DIALLO; MACIRE DIARRA; ARDITH DUKE, as Personal Representative of the Estate of Ernie Duke; DEAN PATRICELLI, Appellants,
v. OPINION
MATHESON FLIGHT EXTENDERS, INC.; MATHESON POSTAL SERVICES, INC.; MATHESON TRUCKING, INC., Appellees.
Appeal from the United States Bankruptcy Court for the Eastern District of California Christopher M. Klein, Bankruptcy Judge, Presiding
APPEARANCES Amy N. Tirre of the Law Offices of Amy N. Tirre, APC argued for appellants; Kevin W. Coleman of Nuti Hart LLP argued for appellees.
Before: LAFFERTY, SPRAKER, and BRAND, Bankruptcy Judges. 1 Opinion by Judge Lafferty Concurrence by Judge Spraker
LAFFERTY, Bankruptcy Judge:
INTRODUCTION
Creditors Mahamet Camara, Andre de Olivera, Bemba Diallo, Salif
Diallo, Macire Diarra, Ardith Duke, and Dean Patricelli (the “Camara
Creditors”) appeal the bankruptcy court’s order subordinating and
partially disallowing their claim against debtors Matheson Flight
Extenders, Inc. (“MFE”), Matheson Trucking, Inc. (“MTI”), and Matheson
Postal Services, Inc. (collectively, “Debtors”).
A federal jury awarded the Camara Creditors well over $14 million in
their discrimination lawsuit against MFE, and the Camara Creditors moved
for additional damages flowing from that judgment, such as attorneys’ fees
and interest. MFE promptly filed for chapter 11 1 protection.
In connection with MFE’s case, the parties reached a compromise to
settle the debt owed to the Camara Creditors. This settlement was
eventually incorporated into a chapter 11 plan and, for years, MFE and
MTI made payments pursuant to the compromise.
Almost a decade later, Debtors defaulted under the settlement
agreement and filed their current chapter 11 petitions. Debtors proposed a
Unless specified otherwise, all chapter and section references are to the 1
Bankruptcy Code, 11 U.S.C. §§ 101–1532. 2 joint plan of liquidation that treated the Camara Creditors’ claim as a
general unsecured claim, and the bankruptcy court confirmed that plan.
Post-confirmation, Debtors moved to subordinate the Camara
Creditors’ claim on the basis that the claim arose from an award of punitive
damages, and also moved for partial disallowance of their claim on the
basis that a portion of the claim was an unenforceable penalty.
The bankruptcy court agreed with Debtors. The court subordinated
the Camara Creditors’ claim under § 1129(a)(7) and disallowed $2.7 million
of the claim as a penalty because that portion of the claim was
disproportionate to actual damages sustained by the Camara Creditors.
We disagree that the Code allows for application of § 1129(a) outside
the context of confirmation of a plan, such as for post-confirmation
subordination of a claim. We further disagree that Nevada law would
deem $2.7 million of the claim an unenforceable penalty.
Accordingly, we REVERSE and REMAND this matter for further
proceedings consistent with this decision.
FACTS 2
A. The federal discrimination lawsuit and the 2015 bankruptcy case
Over a decade ago, the Camara Creditors sued MFE and MTI in
federal district court in Colorado (the “Colorado Court”) for racial
2 We have taken judicial notice of the bankruptcy court docket and various documents filed through the electronic docketing system. See O'Rourke v. Seaboard Sur. Co. (In re E.R. Fegert, Inc.), 887 F.2d 955, 957-58 (9th Cir. 1989); Atwood v. Chase Manhattan Mortg. Co. (In re Atwood), 293 B.R. 227, 233 n.9 (9th Cir. BAP 2003). 3 discrimination, retaliation, and a hostile work environment. In February
2015, after a jury trial and verdict, the Colorado Court entered a judgment
against MFE and MTI, jointly and severally, for a total of $968,100 in
compensatory damages and $14 million in punitive damages (the
“Discrimination Judgment”).
Subsequently, the parties filed certain post-trial motions before the
Colorado Court, including a motion filed by the Camara Creditors
requesting approximately $2.3 million in attorneys’ fees. Debtors disputed
the amount of this liability and filed their own post-trial motions.
Soon thereafter, while these motions were pending in the Colorado
Court, MFE filed a chapter 11 petition (the “2015 Case”). The Camara
Creditors promptly filed proofs of claim totaling $17,882,182.46. The proofs
of claim were based on the $14,968,100 Discrimination Judgment, the
Debtors filed a motion to strike certain documents from the Camara Creditors’ designation of the record on the basis that such documents were not presented to the bankruptcy court. The Camara Creditors, in turn, moved for leave to amend the designation of record to include the documents. Courts “may take judicial notice of proceedings in other courts, both within and without the federal judicial system, if those proceedings have a direct relation to matters at issue.” United States ex rel. Robinson Rancheria Citizens Council v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992) (citations modified). Here, all of the documents disputed by Debtors are court filings that are public record and directly relate to the matters at issue on appeal. Moreover, although Debtors assert that they dispute the meaning of the documents, Debtors do not articulate any specific dispute. Debtors do not, for instance, dispute the authenticity of the documents. We DENY Debtors’ motion to strike the documents and GRANT the Camara Creditors’ cross-motion for leave to file their amended designation of record. 4 Camara Creditors’ requests for attorneys’ fees and costs, and pre- and post-
judgment interest.
In November 2015, MFE and MTI made an offer of compromise to
the Camara Creditors, which the Camara Creditors accepted (the “2015
Settlement”). As relevant to this appeal, the 2015 Settlement provided that:
(i) MTI would make an initial payment of $185,714 to each of the Camara
Creditors; (ii) on the effective date of a confirmed chapter 11 plan, MFE
would pay $142,857 to each of the Camara Creditors; and (iii) thereafter,
MFE and/or MTI would make 32 quarterly payments totaling $714,286 to
each of the Camara Creditors. Altogether, this portion of the 2015
Settlement provided for payments totaling $7,299,999 to the Camara
Creditors (the “Payment Scheme”).
The 2015 Settlement additionally provided that, upon default, the
Camara Creditors would be able to file a stipulated judgment totaling $10
million, less any payments received, with the Colorado Court (the
“Judgment Clause”). The parties further agreed that, in the event of a
default, the Camara Creditors “will be able to execute on their Stipulated
Judgment against MTI, as well as pursue their claims against [MFE] under
this agreement as contract creditors of [MFE].”
In December 2015, MFE and MTI, as a co-proponent, proposed a plan
of reorganization (the “2015 Plan”). The 2015 Plan incorporated the terms
of the 2015 Settlement. Eventually, the bankruptcy court confirmed the
2015 Plan.
5 MFE and MTI made several payments to the Camara Creditors in
accordance with the 2015 Settlement and 2015 Plan. The parties do not
dispute that, by 2022, MFE and MTI paid $6,206,249 of the $7,299,999
required under the 2015 Settlement and 2015 Plan.
B. The current bankruptcy cases and confirmation of a plan
In May 2022, MFE filed its chapter 11 petition. After failing to make
the quarterly payment owed to the Camara Creditors in July 2022, MTI also
filed for bankruptcy protection. 3
Subsequently, Debtors proposed a joint plan of liquidation (the
“Current Plan”). As relevant here, the Current Plan classified the Camara
Creditors’ claims as general unsecured claims to be treated under Class 7.
The Current Plan proposed paying Class 7 general unsecured creditors
25.98% of their claims pro rata with other general unsecured creditors.
The Current Plan was silent with respect to the nature of the Camara
Creditors’ claims; in other words, the Current Plan did not specify that the
Camara Creditors’ claims stemmed from a punitive damages award.
Instead, the Current Plan simply grouped the Camara Creditors’ claims
with other general unsecured claims.
The Current Plan also provided that, post-confirmation, the plan
administrator appointed through the Current Plan “shall retain, and may
seek to prosecute, any objections to the allowance of any Administrative
3 In May 2022, debtor Matheson Postal Services, Inc. also filed a chapter 11 petition. 6 Claim and any Claim in Class 6, Class 7, Class 8, or Class 9 on any ground,
including that such claim should be subject to subordination under
Bankruptcy Code section 510 or other applicable law.” Current Plan,
Article 9.1.
Along with the Current Plan, Debtors filed a disclosure statement
(the “Disclosure Statement”). In the Disclosure Statement, Debtors set forth
their liquidation analysis under § 1129(a)(7). The liquidation analysis
focused on the fact that conversion to chapter 7 would result in significant
additional administrative expenses based on the appointment of a chapter
7 trustee. Debtors also attached an exhibit to the Disclosure Statement
specifying the projected recoveries for creditors in a chapter 7 as compared
to the Current Plan. Additionally, Debtors submitted briefing in connection
with confirmation of the Current Plan. In their brief, Debtors argued that
the Current Plan complied with all applicable provisions of § 1129(a),
including § 1129(a)(7).
Both the Disclosure Statement and Debtors’ briefing were silent with
respect to subordination under § 726(a)(4) in a hypothetical chapter 7 case.
All of Debtors’ submissions in support of confirmation asserted that the
Current Plan, as structured, satisfied every requirement of § 1129(a).
In October 2024, the bankruptcy court entered an order confirming
the Current Plan (the “Confirmation Order”). The Confirmation Order
provided that the bankruptcy court “determined that all of the
7 requirements for confirmation of the [Current] Plan have been satisfied,
including those set forth in 11 U.S.C. § 1129(a) . . . .”
C. The objection to the Camara Creditors’ claims
Approximately four months post-confirmation, Debtors filed an
objection to the Camara Creditors’ claims (the “Objection to Claim”). In the
Objection to Claim, Debtors argued that the Camara Creditors’ claim
should be subordinated because all remaining payments owed to the
Camara Creditors stemmed from the Colorado Court’s punitive damages
award. Debtors’ argument mainly focused on the equitable principle that
creditors with actual pecuniary loss should be paid ahead of creditors
owed punitive damages. Debtors primarily relied on § 510(c) as the legal
basis for subordination of punitive damages claims.
In connection with this argument, Debtors also mentioned that the
liquidation analysis set forth in § 1129(a)(7) required subordination
because, in a hypothetical chapter 7 case, punitive damages claims would
be subordinated under § 726(a)(4), thus yielding a greater recovery for
certain creditors who otherwise had to share pro rata with the Camara
Creditors in the Current Plan.
In the Objection to Claim, Debtors also requested disallowance of a
portion of the Camara Creditors’ claim. Specifically, Debtors noted that the
Camara Creditors’ claim originated from two parts of the 2015 Settlement:
(i) first, the Camara Creditors requested $1,093,750, which represented the
amount still owing under the Payment Scheme; and (ii) second, the Camara
8 Creditors requested $2.7 million, which represented the amount owed by
MTI under the Judgment Clause. Debtors did not contest the amount owed
pursuant to the Payment Scheme, but argued that the Judgment Clause
constituted an unenforceable penalty because it was disproportionate to
the actual damages sustained by the Camara Creditors.
The Camara Creditors opposed the Objection to Claim. In their
opposition, the Camara Creditors argued that: (i) the 2015 Settlement and
2015 Plan converted their claim for punitive damages to a contract claim,
and the 2015 Plan had a res judicata effect on the allowability of the
Camara Creditors’ claims in the current cases; (ii) inequitable conduct was
required to equitably subordinate a claim under § 510(c), which Debtors
had not demonstrated; and (iii) Debtors were judicially estopped from
arguing that the Judgment Clause was an unenforceable penalty.
In July 2025, the bankruptcy court issued a decision subordinating
the Camara Creditors’ claim and disallowing $2.7 million of the claim as an
unenforceable penalty. The court first reasoned that, pursuant to the
Supreme Court’s decisions in Archer v. Warner, 538 U.S. 314 (2003), and
Brown v. Felsen, 442 U.S. 127 (1979), the court had the ability to look behind
the 2015 Settlement to assess the nature of the debt owed to the Camara
Creditors. In doing that, the court held that the debt originated from a
punitive damages award.
The court then concluded that, as punitive damages, the Camara
Creditors’ claim must be subordinated under § 1129(a)(7). As the
9 bankruptcy court explained, § 1129(a)(7) requires a showing that creditors
will not receive less through a plan than a chapter 7 liquidation; because
§ 726(a)(4) would apply in a chapter 7 case to subordinate claims arising
from punitive damages, certain creditors would receive more in a chapter 7
liquidation because their claims would be paid ahead of the Camara
Creditors, whereas, through the Current Plan, they would be paid pro rata
in the same class as the Camara Creditors.
Finally, the court held that $2.7 million of the Camara Creditors’
claim must be disallowed as an unenforceable penalty under Nevada law.
The court reasoned that it would be disproportionate to compel Debtors to
pay $2.7 million under the Judgment Clause as a “fixed charge”
notwithstanding the actual damages sustained by the Camara Creditors.
In accordance with its decision, the court entered an order sustaining
the Objection to Claim (the “Subordination Order”). The Camara Creditors
timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and
157(b)(2)(B) and (O). We have jurisdiction under 28 U.S.C. § 158.
ISSUES
1. Did the bankruptcy court err in applying Brown and Archer to
characterize the Camara Creditors’ claim as punitive damages?
2. Did the bankruptcy court err in subordinating the Camara
Creditors’ claim under § 1129(a)(7)?
10 3. Did the bankruptcy court err in disallowing $2.7 million of the
Camara Creditors’ claim under Nevada law?
STANDARDS OF REVIEW
A bankruptcy court’s order allowing or disallowing a proof of claim
is reviewed for abuse of discretion. See Burlington N. R.R. Co. v. Dant &
Russell, Inc. (In re Dant & Russell, Inc.), 853 F.2d 700, 707 (9th Cir. 1988);
Bitters v. Networks Elec. Corp. (In re Networks Elec. Corp.), 195 B.R. 92, 96 (9th
Cir. BAP 1996). A bankruptcy court abuses its discretion if it applies the
wrong legal standard or its findings are illogical, implausible or without
support in the record. TrafficSchool.com, Inc. v. Edriver Inc., 653 F.3d 820, 832
(9th Cir. 2011).
“We review the bankruptcy court’s findings of fact for clear error; we
review its conclusions of law de novo.” Adinolfi v. Meyer (In re Adinolfi), 543
B.R. 612, 614 (9th Cir. BAP 2016) (citation omitted).
“Whether a person’s due process rights have been violated is a mixed
question of law and fact, which is reviewed de novo.” Hasso v. Mozsgai (In
re La Sierra Fin. Servs., Inc.), 290 B.R. 718, 726 (9th Cir. BAP 2002). Under a
de novo review, “we look at the matter anew . . . giving no deference to the
bankruptcy court’s determinations.” Barnes v. Belice (In re Belice), 461 B.R.
564, 572 (9th Cir. BAP 2011) (quoting Charlie Y., Inc. v. Carey (In re Carey),
446 B.R. 384, 389 (9th Cir. BAP 2011)).
11 DISCUSSION
On appeal, the Camara Creditors argue that the court erred by:
(i) characterizing their claims as punitive damages, (ii) subordinating their
claim under § 726(a)(4), which the Camara Creditors contend does not
apply in chapter 11 cases; and (iii) disallowing a portion of their claim as an
unenforceable penalty.
As we discuss in section A, we disagree with the Camara Creditors’
analysis of Brown and Archer, and agree with the bankruptcy court’s
conclusion that those cases allowed the court to look behind the 2015
Settlement to ascertain the nature of the Camara Creditors’ claims.
However, as we discuss in section B, we believe the bankruptcy court
erred in applying § 1129(a)(7) in a manner that is inconsistent with the
plain language of the Code. And, as we discuss in section C, we further
believe the bankruptcy court erred in disallowing a portion of the Camara
Creditors’ claim as an unenforceable penalty.
A. The bankruptcy court did not err in characterizing the Camara Creditors’ claim as punitive damages. Prior to assessing whether the bankruptcy court properly
subordinated the Camara Creditors’ claim, we must decide whether the
court appropriately characterized the claim as punitive damages.
The Camara Creditors argue that the 2015 Settlement and 2015 Plan
converted their punitive damages claim into a contract claim. Although the
Camara Creditors refrain from using the word “novation,” in essence, they
12 assert that the 2015 Settlement and 2015 Plan “worked a kind of novation.”
Archer, 538 U.S. at 323.
On this issue, the bankruptcy court correctly held that Brown and
Archer control. In Brown, the Supreme Court considered whether the
doctrine of claim preclusion prevented bankruptcy courts from looking
beyond a settlement incorporated into a state court judgment to assess
whether the claim arose from fraud and was thus subject to
nondischargeability. Brown, 442 U.S. at 138-39. Noting that Congress gave
bankruptcy courts broad powers to resolve the dischargeability of a debt,
the Court concluded that claim preclusion did not bar bankruptcy courts’
inquiries into the true nature of a debt, even where the debt was liquidated
in a settlement agreement. Id.
Years later, in Archer, the Court again revisited the impact of a
settlement agreement on a bankruptcy court’s ability to assess the nature of
a debt for purposes of nondischargeability litigation. Archer, 538 U.S. at
318-19. As in Brown, the Court held that the prepetition settlement
agreement did not interfere with the bankruptcy court’s ability to parse
whether the debt is dischargeable under the Code. Id. at 323. In so holding,
the Court expressly stated that even a novation that transformed a tort
liability to a contract liability would not prevent a bankruptcy court from
analyzing the nature of a claim for purposes of the Code. Id.
The Camara Creditors’ primary argument against application of
Brown and Archer is that those cases apply only to determinations of
13 nondischargeability under § 523. But the Court did not so limit its holding,
and subsequent cases have applied Brown and Archer to support a
bankruptcy court’s ability to look beyond a settlement agreement in other
contexts. See, e.g., Orange Cnty. Nursery, Inc. v. Minority Voting Tr. (In re
Orange Cnty. Nursery Inc.), 523 B.R. 692, 699 (C.D. Cal. 2014) (“[T]he
Supreme Court has ‘looked behind’ a state court judgment in interpreting
other provisions of the bankruptcy code, and to do so makes sense in the
context of Section 510(b).”); Peltz v. Vancil, Inc. (In re Bridge Info. Sys., Inc.),
327 B.R. 382, 386–87 (8th Cir. BAP 2005), aff'd, 474 F.3d 1063 (8th Cir. 2007)
(using the reasoning of Archer to determine the nature of a claim in the
context of preference litigation under § 547).
As this Panel recently observed in the context of allowance of claims,
“simply, Archer provides that there is no overall bankruptcy law
prohibition on looking past a settlement agreement in performing a central
purpose of the bankruptcy laws, including the allowance of claims.” Enpark
Landscape, LLC v. AKF, Inc. (In re Enpark Landscape, LLC), BAP No. NV-23-
1182-PLC, 2024 WL 4328581, at *6 (9th Cir. BAP Sept. 27, 2024); see also In re
Orange Cnty. Nursery Inc., 523 B.R. at 699 (“Looking behind the judgment
prevents claimants from characterizing their claims to avoid the reach of”
the subordination provisions in the Code.).
Nor are we persuaded by the Camara Creditors’ assertion that Brown
and Archer do not apply because the 2015 Settlement agreement was
14 incorporated into a chapter 11 plan. First, nothing in the 2015 Plan purports
to change the characterization of the punitive damages award.
Second, and more crucially, even if the 2015 Plan contained such
language, it is doubtful that Brown and Archer would be rendered
inapplicable. Ultimately, Brown and Archer simply reaffirm Congress’s
grant of power to bankruptcy courts to effectuate the Code by giving them
the ability to consider the true nature of a debt despite the subsequent
conversion of that claim into a settlement agreement or judgment.4
Based on the foregoing, we are not persuaded by the Camara
Creditors’ arguments that the 2015 Settlement and/or 2015 Plan prevented
the bankruptcy court from characterizing the Camara Creditors’ claims as
arising from a punitive damages award.
B. The bankruptcy court erred in subordinating the Camara Creditors’ claim under § 1129(a)(7). The Code provides two potential statutory paths to subordination of
a punitive damages claim.
A straightforward statutory path is via equitable subordination
under § 510(c), which is available in all chapters. See § 103(a). However, as
the bankruptcy court correctly observed in its decision, the Supreme Court
has held that bankruptcy courts lack the power to categorically subordinate
claims under § 510(c). See United States v. Noland, 517 U.S. 535, 542-43
4 For this reason, we also find irrelevant the 2015 Settlement’s use of the term “contract creditors” to refer to the Camara Creditors. 15 (1996); see also United States v. Reorganized CF & I Fabricators of Utah, Inc., 518
U.S. 213, 228–29 (1996). While neither of these cases prevent bankruptcy
courts from equitably subordinating a claim based on punitive damages on
a case-by-case basis after making the relevant factual findings for
subordination under § 510(c), the bankruptcy court here refused to make
any findings or conclusions under § 510(c), resting its decision instead on
§ 1129(a)(7).5
An alternative statutory path for subordination of a punitive
damages claim is § 726(a), which provides the priority scheme in chapter 7
liquidations and places claims of punitive damages in lower priority than
general unsecured creditors.
The Camara Creditors contend that, pursuant to § 103(b), § 726(a) is
inapplicable in a chapter 11 case. § 103(b) (“Subchapters I and II of chapter
7 of this title apply only in a case under such chapter.”). But the analysis is
not so simple. For one, the Supreme Court has made clear that, although
the Code “provides somewhat more flexibility for distributions pursuant to
Chapter 11 plans,” courts may not otherwise violate the priority scheme in
5 In their appellate brief, Debtors argue that the record supports equitable subordination of the Camara Creditors’ claims as an alternative basis to affirm the court’s Subordination Order. But we decline the invitation to act as factfinder and rule on this issue before the bankruptcy court has had an opportunity to do so. Debtors are free to move for equitable subordination of the Camara Creditors’ claim on remand.
16 § 726 outside the plan confirmation context. Czyzewski v. Jevic Holding Corp.,
580 U.S. 451, 457 (2017).
But even in the context of plan confirmation, which does allow for
reordering of priorities if certain conditions are met, courts may need to
consult the priority scheme set forth in § 726(a) as part of the liquidation
analysis inquiry set forth in § 1129(a)(7). Section 1129(a)(7) provides that a
plan may be confirmed only if, with respect to each impaired class of
claims or interests:
(A)each holder of a claim or interest of such class—
(i) has accepted the plan; or
(ii) will receive or retain under the plan on account of such
claim or interest property of a value, as of the effective date
of the plan, that is not less than the amount that such holder
would so receive or retain if the debtor were liquidated
under chapter 7 of this title on such date . . . .
§ 1129(a)(7)(A)(i)-(ii). Put simply for purposes of this appeal, § 1129(a)(7)
requires either that each holder of a claim in a class accepts the plan,
§ 1129(a)(7)(A)(i), or that the holder will not receive less than it would in a
chapter 7 liquidation. § 1129(a)(7)(A)(ii). 6
We take no issue with the bankruptcy court’s conclusion that courts
may consult § 726(a) to assess whether § 1129(a)(7)(A)(ii) has been satisfied.
6 Courts frequently refer to the analysis under § 1129(a)(7)(A)(ii) as the “liquidation analysis” or “best interest of creditors test.” 17 Certainly, had the bankruptcy court conducted its liquidation analysis at
the time of confirmation, subordination of the Camara Creditors’ claim
might have been appropriate. 7
Our concern lies instead with the preclusive effect of the Current Plan
and the court’s post-confirmation application of § 1129(a), a statute which,
by its own language, applies only for the purpose of confirmation and must
be satisfied at the time of confirmation. As noted above, prior to confirming a
plan, a bankruptcy court must conclude that every subsection of § 1129(a),
including § 1129(a)(7), has been satisfied. § 1129(a) (“The court shall
confirm a plan only if all of the following requirements are met . . . .”)
(emphasis added). Because of this, there are a few problems with the
bankruptcy court’s post-confirmation application of § 1129(a).
7 The record reflects that not every holder of a claim in Class 7 – the class in which the Camara Creditors’ claim was placed – voted to accept the Current Plan. As a result, Debtors were required to engage in a liquidation analysis under § 1129(a)(7)(A)(ii). However, it is unclear from the record whether including the Camara Creditors within the general unsecured creditors resulted in a projected distribution to the unsecured creditors that would have been less than what they would get in the hypothetical chapter 7 case detailed in the court-approved Disclosure Statement. Neither the parties nor the court addressed this issue, but it is worth noting that subordination would not be necessary to satisfy § 1129(a)(7)(A)(ii) unless such subordination would impact the distribution to other creditors in a hypothetical chapter 7 case. In any event, to the extent Debtors now believe that the Current Plan violated § 1129(a)(7)(A)(ii), the Current Plan is nevertheless final and enforceable. United Student Aid Funds v. Espinosa, 559 U.S. 260, 275 (2010) (confirmed plan remained enforceable and binding even though confirmation of the plan violated § 523(a)(8)).
18 First, the plain language of the statute does not contemplate
application of § 1129(a) in any context outside of confirmation. By stating
that courts can confirm a plan “only if all” requirements under § 1129(a)
are met, the statute makes clear that Congress intended to make
satisfaction of § 1129(a) a precondition to confirmation of a plan. Logically,
then, § 1129(a) must be satisfied prior to confirmation, and, by its own
terms, is inapplicable in the post-confirmation context.
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.” § 1127(b). Section 1127(c) also
requires modified plans to provide adequate disclosures and follow the
solicitation requirements of § 1125.
Here, Debtors did not move for modification of the Current Plan
under § 1127(b), and nothing in the record suggests that the bankruptcy
court made any findings of fact or conclusions of law related to the
requirements of § 1127(b) or (c). Outside of the court’s ability to confirm a
modified plan if all the requirements of § 1127(b) are met, which
19 requirements incorporate § 1129(a), the bankruptcy court lacked authority
to apply § 1129(a) to subordinate a claim post-confirmation. 8
Next, the Confirmation Order precluded relitigation of the very same
issues resolved by the Confirmation Order, i.e., whether the Current Plan
satisfied the requirements of § 1129(a). An order confirming a bankruptcy
plan is “binding on all parties and all questions that could have been raised
pertaining to the plan are entitled to res judicata effect.” Trulis v. Barton, 107
F.3d 685, 691 (9th Cir. 1995). This is so “even if the confirmed bankruptcy
plan contains illegal provisions.” Great Lakes Higher Educ. Corp. v. Pardee (In
re Pardee), 193 F.3d 1083, 1086 (9th Cir. 1999) (citing Trulis, 107 F.3d at 691).
The Confirmation Order explicitly stated that the bankruptcy court
“determined that all of the requirements for confirmation of the [Current]
Plan have been satisfied, including those set forth in 11 U.S.C. § 1129(a).” 9
Obviously, this would include the liquidation analysis required under
§ 1129(a)(7). Thus, entry of the Confirmation Order precluded future
litigation of all questions regarding § 1129(a) that were or could have been
raised. Trulis, 107 F.3d at 691.
8 During oral arguments, Debtors argued that § 502(b)(1), which provides for disallowance of claims under “applicable law,” granted the bankruptcy court statutory authority to subordinate the Camara Creditors’ claim under § 1129(a)(7). But for all the reasons discussed herein, § 1129(a)(7) does not qualify as “applicable law” outside of the context of confirmation. 9 Even if the Confirmation Order did not include this language, the bankruptcy
court would have necessarily had to decide that the Current Plan satisfied all requirements of § 1129(a) to confirm the Current Plan. 20 Debtors’ primary argument in support of subordination under
§ 1129(a)(7) is that the Current Plan reserved their right to seek post-
confirmation subordination of the Camara Creditors’ claim. Specifically,
the Current Plan provides that “the Plan Administrator shall retain, and
may seek to prosecute, any objections to the allowance of . . . any Claim in
Class 6, Class 7, Class 8, or Class 9 on any ground, including that such
claim should be subject to subordination under Bankruptcy Code section
510 or other applicable law.” Current Plan, Article 9.1.
The proposition that debtors may use a chapter 11 plan to modify
Congress’s intended use and purpose of a statute is questionable. But even
if plan proponents may modify statutes through confirmation of a plan, the
language in the Current Plan was much too vague to contemplate
subordination of the Camara Creditors’ claim under a theory that
erroneously utilizes a confirmation statute for non-confirmation purposes.
As both the Ninth Circuit Court of Appeals and this Panel have
recently observed, a party is entitled to some measure of clear and
unambiguous notice when the party’s rights are impacted by a chapter 11
case. See Munding v. Masingale (In re Masingale), 108 F.4th 1195, 1205-07 (9th
Cir. 2024); Solimano Framing Grp. v. Pier Constr. & Dev., LLC (In re Solimano
Framing Grp.), 664 B.R. 803, 813 (9th Cir. BAP 2024). 10 In addition, a
10We recognize that the facts in this case are slightly different from Masingale and Solimano Framing. In those cases, the debtors affirmatively sought to capitalize on their prior lack of clarity. Here, in their post-confirmation Objection to Claim, Debtors mainly sought subordination under § 510(c), which the Current Plan explicitly contemplated. 21 cornerstone of the confirmation process is the statutory mandate to provide
adequate disclosures so that creditors who vote to accept a plan do so with
informed consent. § 1125(a). Given that creditors rely on the classification
of their claim within a specific class in deciding whether to accept or reject
a plan, adequate disclosures surrounding classification are crucial. 11
Nothing in the language of the Current Plan fairly placed the Camara
Creditors on notice that their claim – or any creditors’ claim – was subject
to post-confirmation subordination under § 1129(a), a statute that all
parties would reasonably expect to be applied only at the time of
confirmation. 12 Nor did the liquidation analysis in the Current Plan
mention the potential subordination of punitive claims. Instead, Debtors
merely argued that § 1129(a)(7) was satisfied because a chapter 7
liquidation would increase administrative expenses and the bankruptcy
Debtors only briefly mentioned § 1129(a)(7) as an alternative basis supporting equitable subordination, and likely did not anticipate that the bankruptcy court would rest its subordination decision entirely on § 1129(a)(7). Thus, it does not appear that Debtors actively sought to mislead the Camara Creditors. Nevertheless, pursuant to Masingale and Solimano Framing, the Camara Creditors were still entitled to fair notice of any impact the Current Plan may have had on their post-confirmation rights. 11 As discussed below, we are not suggesting that a debtor can never move to
subordinate or reclassify a claim post-confirmation, but rather that such subordination and/or reclassification must comply with the Code, including by providing adequate disclosures regarding the potential for post-confirmation subordination. 12 Contrary to Debtors’ position in their briefs, post-confirmation subordination
under § 1129(a) is not analogous to post-confirmation disallowance of claims. Disallowance of claims does not require application of § 1129(a) or any other statutes that are inapplicable in the post-confirmation context, nor is disallowance of claims a precondition to confirmation of a plan. 22 court, in holding that all subsections of § 1129(a) were satisfied, appears to
have agreed that Debtors’ liquidation analysis passed muster on this basis
alone. As a result, the Current Plan failed to adequately reserve any right
for Debtors to seek post-confirmation subordination under § 1129(a)(7).
Notably, had Debtors explicitly set forth the possibility of post-
confirmation subordination under § 1129(a)(7) in their Current Plan, there
might have been less of a disconnect between the Current Plan, as
confirmed, and post-confirmation utilization of § 1129(a)(7). Moreover,
such explicit language may have triggered objections to confirmation not
only from the Camara Creditors but from other interested parties impacted
by the proposed subordination; in fact, the very purpose of confirmation
proceedings is to resolve all such issues and objections prior to
confirmation. Debtors’ failure to be explicit in the Current Plan deprived
both Debtors and interested parties of this process.
It is important to note that our analysis herein does not foreclose
debtors from seeking post-confirmation modifications of confirmed plans
or from requesting subordination of claims under other applicable
authorities, such as § 510. Our conclusion is simply that such post-
confirmation actions must comply with the Code. On remand, Debtors are
free to pursue subordination under alternative theories, or to move for
modification of the Current Plan under § 1127.
We also are not holding that a chapter 11 plan can never reserve an
issue under § 1129(a) for post-confirmation adjudication, although it is
23 difficult to conceive of a scenario where a court might confirm a plan
without deciding that every subsection of § 1129(a) has been satisfied. For
purposes of this appeal, it is enough that: (i) the language in the Current
Plan was wholly inadequate to revive § 1129(a) for post-confirmation
usage; (ii) the Current Plan did not place the Camara Creditors on notice
that their claim was at risk of post-confirmation subordination under
§ 1129(a), a statute that would have to be satisfied at the time of
confirmation; and (iii) Debtors did not move to modify the Current Plan as
statutorily allowed under § 1127.
Because the bankruptcy court lacked statutory authority to apply
§ 1129(a)(7) outside of confirmation, and because the Confirmation Order
precluded relitigation of issues arising under § 1129(a), the bankruptcy
court erred in subordinating the Camara Creditors’ claim under
§ 1129(a)(7).
C. The bankruptcy court erred in disallowing $2.7 million of the Camara Creditors’ claim. The bankruptcy court disallowed $2.7 million of the Camara
Creditors’ claim on the basis that the Judgment Clause, from which this
portion of the Camara Creditors’ claim originated, was a liquidated
damages provision that amounted to an unenforceable penalty.
Under Nevada law,13 liquidated damages provisions “serve as a
good-faith effort to fix the amount of damages when contractual damages
13 The parties do not dispute that Nevada law governs interpretation of both the 24 are uncertain or immeasurable.” Khan v. Bakhsh, 306 P.3d 411, 414 (2013)
(emphasis added); see also Mason v. Fakhimi, 865 P.2d 333, 335 (1993)
(liquidated damages are “arrived at by a good faith effort to estimate the
actual damages that will probably ensue from a breach”).
As a preliminary matter, we question whether the Judgment Clause
is a liquidated damages provision at all. The bankruptcy court did not
provide its reasoning for holding that the Judgment Clause qualified as a
liquidated damages provision, instead jumping directly to its analysis that
the Judgment Clause was an unenforceable penalty.
But the record does not reflect that the Judgment Clause was
implemented to estimate uncertain or immeasurable damages. To the
contrary, the purpose of the 2015 Settlement was to settle damages that
were already liquidated or easily ascertainable. By the time the parties
executed the 2015 Settlement, the Camara Creditors had filed proofs of
claim totaling $17,882,182.46 based on the $14,968,100 Discrimination
Judgment as well as additional, easily ascertainable damages like
attorneys’ fees and interest.
Given that the total possible recovery in the event of a breach of the
2015 Settlement was $10,000,000 (as further discussed below), i.e., much
less than $17,882,182.46, it appears that the 2015 Settlement, including the
2015 Settlement and the 2015 Plan. 25 Judgment Clause, was meant to settle and adjust the existing debt owed by
Debtors instead of estimating unascertainable future damages.
Nevertheless, even if we assume that the Judgment Clause is a
liquidated damages provision, the bankruptcy court erred in concluding
that the provision is an unenforceable penalty. A provision amounts to an
unenforceable penalty where it “is a sum inserted in a contract, not as the
measure of compensation for its breach, but rather as punishment for
default, or by way of security for actual damages which may be sustained
by reason of non-performance, and it involves the idea of punishment . . . .”
Mason, 865 P.2d at 335 (citing 22 Am. Jur. 2d Damages § 684 (1980)). To
prove that a liquidated damages provision “constitutes a penalty, the
challenging party must persuade the court that the liquidated damages are
disproportionate to the actual damages sustained by the injured party.” Id.
In their respective analyses of this issue, both the parties and the
bankruptcy court assessed proportionality based on a specific time of
breach. The bankruptcy court relied heavily on a hypothetical where a
breach would occur when there was only one installment payment left,
whereas the Camara Creditors argue that damages must be assessed at the
time of breach.
The case law does not support this type of snapshot analysis. All the
Supreme Court of Nevada requires is that a liquidated damages provision
not be grossly disproportionate to damages actually sustained by a party.
Of course, in a case where the first instance of damages is sustained by the
26 breach itself, courts must necessarily assess damages at the time of breach,
as the Camara Creditors contend.
But none of the cases cited by the parties or the bankruptcy court
involve a settlement of a preexisting judgment and other damages flowing
therefrom. 14 In a contract that aims to resolve a preexisting debt, such as
the 2015 Settlement, it would seem the best way to conform to the Nevada
courts’ proportionality test and determine whether a provision is meant as
punishment would be to compare all actual damages sustained by a party
with the maximum possible recovery under the so-called liquidated
damages provision.
Here, the maximum possible recovery under the 2015 Settlement is
$10,000,000. Pursuant to the 2015 Settlement, in the event of a default, the
Camara Creditors could both: (i) enter a judgment against MTI in the
amount of $10,000,000, less any amounts paid, and (ii) pursue a judgment
for breach of contract against MFE for $7,299,999, less any amounts paid.
Although the potential judgments against MFE and MTI could total
$17,299,999 based on this structure, the 2015 Settlement also provided that
any amount paid towards the $7,299,999 liability would reduce the
$10,000,000 liability in an equal amount. As a result, the Camara Creditors
could recover, at most, $10,000,000 in accordance with the 2015 Settlement.
Given that this amount would be less than the actual damages sought by
14 Perhaps understandably, because, as discussed above, actual damages are easily ascertainable in such cases. 27 the Camara Creditors in the amount of $17,882,182.46, and also less than
the already liquidated judgment of $14,968,100, it is unclear how the
Judgment Clause could qualify as a penalty that is disproportionate to the
Camara Creditors’ actual damages.
We acknowledge that it is tempting to label the Judgment Clause a
penalty where, had there been no default under the Payment Scheme, MTI
would owe $0 under the Judgment Clause, and Debtors’ obligations under
the 2015 Settlement would have been satisfied after payment of only
$7,299,999. Because of the nature of this payment structure, the urge to
characterize the $7,299,999 owed pursuant to the Payment Scheme as the
“actual damages” owed for breach of the contract is understandable.
Nevertheless, it is difficult to ignore the fact that both MFE and MTI
were jointly and severally liable for damages up to $17,882,182.46. As a
result, the 2015 Settlement – whether via the Payment Scheme or the
Judgment Clause – only reduced their potential liability. Ultimately, the
2015 Settlement benefitted MFE and MTI by capping the damages they
would owe the Camara Creditors. For instance, even in the scenario of an
instant breach, MFE and MTI would only be liable in the amount of
$7,299,999 and $10,000,000, respectively, instead of the $17,882,182.46 the
Camara Creditors claimed in the 2015 Case. 15
15We also note that the 2015 Settlement was styled as an offer of compromise by MFE and MTI. Debtors do not dispute that they in fact offered the subject compromise to the Camara Creditors. It is unlikely that a party that offers to settle a debt for a lesser amount can also be deemed to have been punished by its own offer of compromise. 28 Under the facts of this case, the bankruptcy court’s conclusion that
the Judgment Clause was an unenforceable penalty is not supported by the
facts of this case or Nevada law on unenforceable penalties. As such, the
bankruptcy court abused its discretion in disallowing $2.7 million of the
Camara Creditors’ claim.
CONCLUSION
For the reasons set forth above, we REVERSE the Subordination
Order and REMAND this matter for further proceedings consistent with
this decision.
Concurrence begins on next page.
29 SPRAKER, Bankruptcy Judge, concurring:
I join in Sections A and C of the decision and agree with the result
reached in Section B. I write separately because I view the subordination
issue as limited to a question under § 726(a)(4) rather than § 1129(a)(7) as
predominantly discussed in the decision. However, Debtors never sought
to relitigate confirmation or modify their plan, and § 1129(a)(7) does not
speak of subordination. Instead, Debtors objected to the Camara Creditors’
claims—and sought to subordinate their claims for punitive damages—
several months after plan confirmation. The bankruptcy court applied
§ 726(a)(4) to subordinate the Camara Creditors’ claims. Relying on
§ 726(a)(4), the court held that “[i]f a chapter 11 plan provides for
liquidation, then the subordinations inherent in the chapter 7 bankruptcy
waterfall become mandatory.” Thus, according to the bankruptcy court,
§ 726(a)(4) mandated the categorical subordination of the Camara
Creditors’ punitive damage claims.
But § 726 does not apply in chapter 11. To the contrary, § 103(b)
expressly provides: “Subchapters I and II of chapter 7 of this title apply
only in a case under such chapter.” Courts have previously recognized that
the unambiguous language of § 103(b) precludes direct application of
§ 726(a) in chapter 11. See, e.g., In re Hyatt, 509 B.R. 707, 719 n.14 (Bankr.
D.N.M. 2014) (quoting § 103(b) and stating “[a]lthough punitive damages
claims are statutorily subordinated under 11 U.S.C. 726(a)(4), that
provision does not apply in Chapter 11 cases.”); see also Zante, Inc. v.
30 Delegado (In re Zante, Inc.), 467 B.R. 216, 219 (D. Nev. 2012) (“After all, in
Chapter 7 cases the Bankruptcy Code mandates precisely this
discrimination. This is not a Chapter 7 case, however.”) (emphasis in
original); In re Xpedior Inc., 354 B.R. 210, 225 (Bankr. N.D. Ill. 2006) (“Section
726 should only be applied to cases under Chapter 7.”).
The only potential relevance of § 726(a) in chapter 11 relates to the
liquidation analysis required by the best interest of creditors test imposed
by § 1129(a)(7)(A)(ii) as a condition for confirmation. 16 The best interest test
requires the debtor to prove that those creditors not accepting the plan will
receive at least as much as they would in a hypothetical chapter 7
distribution. Where creditors hold claims for punitive damages or
noncompensatory penalties, the projected chapter 7 distribution must
apply the scheme mandated by § 726(a)(4) and account for the statutory
subordination of those claims to the full payment of all timely and
untimely unsecured claims. But nothing in § 1129(a)(7) imports § 726(a)(4)
directly into chapter 11 cases—even liquidating cases. Rather, the best
interest test simply requires chapter 11 debtors to account for the
mandatory, statutory subordination of certain claims in projecting the
chapter 7 distribution for their liquidation analysis. The chapter 11 debtor
must pay creditors who do not accept its plan at least as much as they
16 The Supreme Court has applied § 726(a) to structured dismissals in chapter 11. Czyzewski, 580 U.S. at 464-65. But that situation differs materially from a chapter 11 involving a confirmed plan. 31 would receive in the hypothetical chapter 7 distribution. Precisely how a
debtor accomplishes this is left to the terms of the plan. See In re Hyatt, 509
B.R. at 720 (explaining that chapter 11 debtors may subordinate claims to
comply with the best interest test through § 510(c)—or separate
classification and treatment—in appropriate instances); In re Zante, Inc., 467
B.R. at 219-20. Nothing in § 1129(a)(7), or otherwise in the Code, permits
chapter 11 debtors to utilize § 726(a)(4) to mandatorily and categorically
subordinate all punitive damages to the full payment of unsecured
claims. 17
All that § 1129(a)(7)(A)(ii) requires is a comparison of the debtor’s
proposed chapter 11 distribution against the projected, hypothetical
distribution that would occur if the case was in chapter 7. Debtors’
liquidation analysis in their final Disclosure Statement did exactly that.
Debtors concluded that their general unsecured creditors, including the
Camara Creditors, would receive more under their chapter 11 plan than
17 The bankruptcy court chose not to address equitable subordination under § 510(c) in light of its application of § 726(a)(4). I agree with my colleagues that the case must be remanded for consideration of Debtors’ arguments for subordination under § 510(c). Debtors have cited a handful of cases noting that courts have used their general equitable powers to subordinate punitive damages and penalties in chapter 11. See, e.g., In re Motors Liquidation Co., 604 B.R. 138, 142 (Bankr. S.D.N.Y. 2019); In re Friedman's, Inc., 356 B.R. 766, 777-78 (Bankr. S.D. Ga. 2006); Owens Corning v. Credit Suisse First Bos., 322 B.R. 719, 723–24 (D. Del. 2005). The clear language of § 103(b) and § 1129(a)(7) render these cases inapposite and preclude statutory subordination of such claims under § 726(a)(4). To what extent, if any, these cases may support equitable subordination under § 510(c) remains for further analysis by the bankruptcy court on remand. 32 they would in a hypothetical chapter 7. No one challenged the liquidation
analysis or objected to confirmation of Debtors’ final plan under
§ 1129(a)(7). And the bankruptcy court confirmed Debtors’ final plan,
holding that it satisfied all the requirements of § 1129(a), including the best
interest test found in § 1129(a)(7)(A)(ii).
The Confirmation Order was never appealed and is final. All
confirmation issues are necessarily beyond the scope of this appeal. To the
extent that Debtors erroneously sought and obtained confirmation of their
plan in violation of the best interest test imposed under § 1129(a)(7), the
confirmation order precludes relitigation of that issue. Espinosa, 559 U.S. at
275. Moreover, no party in interest has sought relief from the Confirmation
Order or asked to modify the plan. Debtors’ claim objection never sought
such relief. This appeal does not involve reexamination of confirmation or
modification of the plan or any analysis under § 1129(a).
To the extent that § 726(a)(4) applied at all to Debtors’ chapter 11, it
applied to confirmation of their plan. Those questions have been asked and
answered. Interestingly, neither Debtors, nor the bankruptcy court, nor this
Panel’s decision, addressed whether inclusion of the Camara Creditors’
claims for $3,793,750 within the general unsecured class actually violated
the best interest test. Yet a simple mathematical calculation shows that
even if the Camara Creditors’ claims were removed from the projected,
hypothetical chapter 7 distribution, the general unsecured creditors still
received more through the chapter 11 plan than a projected hypothetical
33 chapter 7 distribution that categorically subordinated the Camara
Creditors’ claims under § 726(a)(4). This is all that the best interest test
required. Cf. In re Zante, Inc., 467 B.R. at 219 (separate classification to
subordinate punitive damage claims would unfairly discriminate under
§ 1129(b) where no dilution of other creditors would occur).
In sum, this analysis illustrates the limited application of § 726(a)(4)
in chapter 11. It is merely a component of the liquidation analysis to
determine the amount creditors would be paid in a hypothetical chapter 7
distribution. So long as the creditors will receive at least as much under the
chapter 11 plan as they would in a hypothetical chapter 7, the best interest
test is satisfied. The best interest test does not import or authorize statutory
subordination in chapter 11.
Debtors objected to the Camara Creditors’ claims and argued that
§ 1129(a)(7)(A)(ii) provided the applicable law under which they reserved
their right to subordinate the Camara Creditors’ claims for punitive
damages. As discussed above, it did not. Section 1129(a)(7)(A)(ii) only
required that those creditors who did not accept the plan would receive at
least as much as they would in a hypothetical chapter 7 distribution.
Section 1129(a)(7) simply does not create a statutory right of subordination
or incorporate § 726(a)(4). 18 Debtors cannot reserve a right that never
existed.
Even under Debtors’ reading of § 1129(a)(7), any subordination of punitive 18
damages should have been addressed in their plan as it relates only to the best interest 34 test and is not an independent basis for subordination. Under Espinosa, Debtors may not now seek to challenge the plan they confirmed in contravention of their own assurances that the plan satisfied the best interest test. 35