Opinion
Case No. 94-21308, Adversary No. 02-0001.
April 2, 2009
MEMORANDUM OPINION
Summary
In this Circuit, the remedy of equitable subordination is available only to the extent of the injury caused by inequitable conduct. Wooley v. Faulkner (In re SI Restructuring, Inc.), 532 F.3d 355, 360-61 (5th Cir. 2008). In this case, the chapter 7 trustee settled the alleged general injuries caused to the debtor's bankruptcy estate by M. Louise Andrews ("Andrews") in a compromise that was approved pursuant to Fed.R.Bankr.P. 9019 after notice and a hearing. After the Bankruptcy Court issued an order approving the trustee's settlement and while the order was being appealed, Cadleway Properties Inc. ("Cadleway") brought an equitable subordination adversary proceeding based on alleged conduct that affected creditors generally rather than Cadleway particularly. Subsequently, the appeal of the Bankruptcy Court order approving the settlement agreement was dismissed and the agreement was consummated by payment of the final amount due under the agreement. Because this Circuit's jurisprudence precludes any further remedy for the alleged general injuries to debtor's bankruptcy estate, the Court holds that this adversary proceeding is now moot.
This is a narrow ruling premised on the unique facts of this case. The facts are summarized as follows:
• Prior to the commencement of her husband's bankruptcy case, M. Louise Andrews allegedly engaged in inequitable conduct that adversely affected the to-be-formed bankruptcy estate.
• In 1994, Joe Alvin Andrews, Sr. (M. Louis Andrew's husband) filed a chapter 7 bankruptcy petition.
• M. Louise Andrews timely filed a claim in her husband's bankruptcy case.
• In 1998, the Trustee compromised all claims against M. Louise Andrews, including any equitable subordination claim. Cadleway Properties, Inc., a creditor, was given notice of the compromise and filed an objection to the compromise, but the compromise was thereafter approved by the Bankruptcy Court. The Bankruptcy Court's 1998 order approving the compromise was appealed.
• In 2002, prior to the resolution of the appeal, Cadleway filed the present lawsuit seeking equitable subordination of M. Louise Andrew's claim.
• After a lengthy appellate process, the 1998 compromise was finally consummated in 2008 when M. Louise Andrews paid the last $325,000 due under the settlement agreement.
The Court concludes that this 2002 adversary proceeding became moot in 2008 when the 1998 compromise was finally consummated. Accordingly, by separate order, this lawsuit is dismissed with prejudice against re-filing.
Background
1. Factual Background
Mr. and Ms. Andrews incorporated Whataburger of Alice ("WOAI") in 1968 to facilitate the development of Whataburger franchises. The franchises were successful and provided Mr. Andrews with funds to invest in other ventures. One such venture was Anshad, Inc., which owned apartment buildings around San Antonio. In 1987, Mr. Andrews guaranteed a $2,495,000 loan from the Windsor Savings Association to Anshad. In 1988, Anshad defaulted on the loan repayment and Mr. Andrews defaulted on the guarantee. Windsor filed suit against Mr. Andrews and obtained a judgment against him for $1,075,167.47, plus interest. Cadleway acquired Windsor's judgment.
Mr. Andrews filed for chapter 7 bankruptcy on June 14, 1994. Cadleway filed several claims in the bankruptcy case in an effort to collect on the Windsor judgment. Cadleway also objected to Mr. Andrews' discharge pursuant to 11 U.S.C. §§ 727(a)(2)(A), 727(a)(4)(A), and 727(a)(5). In essence, Cadleway believes that the Andrews family — using WOAI — engaged in fraudulent transfers and other activities prior to the bankruptcy filing specifically to ensure that Mr. Andrews never had any property on which Cadleway could collect.
Among the transactions at issue are a settlement agreement obtained by the Andrews family and WOAI from Whataburger, Inc., and the transfer of 15,000 shares of WOAI out of Mr. Andrews' possession. With respect to the settlement agreement, Cadleway claims that the agreement was structured to shield proceeds from Mr. Andrews. The full settlement went to WOAI, and then bonuses were paid to all shareholders. While Mr. Andrews owned 23.7 percent of the stock at that time, he was the only shareholder not to receive a bonus. Any bonus paid to Mr. Andrews would have been an asset Cadleway could have seized.
Cadleway further argues that when Mr. Andrews held 15,000 shares of WOAI, he pledged these to a debt he owed to Laredo National Bank ("LNB"). When Mr. Andrews defaulted and the bank obtained a judgment against him, WOAI purchased the judgment — including the lien on the 15,000 shares pledged by Mr. Andrews. Thus, the shares never returned to Mr. Andrews' possession. This transaction prevented Cadleway from seizing the shares to satisfy the Windsor judgment. 2. Procedural Background
The underlying bankruptcy case (Case No. 94-21308) and this adversary proceeding have a long and complicated history before numerous courts and judges over the past decade.
Andrews filed an amended proof of claim in the amount of $559,728.65 in Mr. Andrews' bankruptcy case. Cadleway filed a proof of claim in the amount of $1,386,871.45. Mr. Andrews' bankruptcy schedules listed approximately $10,000,000.00 in unsecured claims and $5,000,000.00 in secured claims. On January 17, 2002, Cadleway filed this adversary proceeding objecting to and seeking equitable subordination of Andrews' proof of claim. Andrews filed a counterclaim, seeking equitable subordination of Cadleway's proof of claim. This Court held a trial on the adversary proceeding from August 31, 2004 through September 2, 2004. On December 12, 2004, the Court issued a Memorandum Opinion that subordinated the allowed portion of Andrews' claim but did not subordinate Cadleway's claim.
Andrews appealed the Court's December 12 Memorandum Opinion to the District Court. On May 17, 2008, the District Court affirmed the Court's decision to not subordinate Cadleway's claim but remanded the decision to subordinate Andrews' claim. The District Court also instructed this Court to consider the effect of the chapter 7 trustee's settlement agreement with Andrews.
3. The Settlement Agreement
On March 27, 1998, Michael Boudloche, the trustee of Mr. Andrew's chapter 7 bankruptcy case ("Trustee Boudloche") and members of the Andrews family, including defendant Andrews, executed a settlement agreement ("Settlement Agreement"). The Settlement Agreement provided that it would not become effective until: (1) the bankruptcy court issued an order approving the Settlement Agreement; (2) the bankruptcy court order was no longer subject to a pending appeal; (3) and the trustee received a final payment of $325,000.00. See, MOTION AND AUTHORITIES IN RESPONSE TO COURT'S DIRECTIVE AND IN SUPPORT OF MOOTNESS OF DISTRICT COURT APPEAL BY THE JOINT-ANDREWS-TRUSTEE'S RULE 9019 SETTLEMENTS OF CLAIMS, attachment 1, section II, Cadleway Properties, Inc. v. Andrews (In re Andrews), Case No. 94-21308, Adv. No. 02-0001 (Bankr. S.D. Tex. 2008).
The three above conditions were met by July 25, 2008. On September 22, 1998, the Bankruptcy Court for the Southern District of Texas, Laredo Division, issued an order approving the Settlement Agreement. Cadleway appealed to the District Court. The District Court initially dismissed the appeal. The Fifth Circuit reversed and remanded a single issue. On February 21, 2007, the Bankruptcy Court issued an order on the remanded issue. Cadleway appealed the February 21 Bankruptcy Court order. On January 12, 2008, the District Court dismissed the appeal as untimely. On July 25, 2008, the independent examiner for Andrews filed a certificate of closing stating that the final payment of $325,000.00 was made. Accordingly, by July 25, 2008, the Settlement Agreement was fully consummated.
Under the Settlement Agreement, Andrews agreed to pay Trustee Boudloche $425,000 for the benefit of Mr. Andrews' chapter 7 bankruptcy estate, execute a compromise of various claims asserted by Trustee Boudloche against the Andrews family in multiple adversary proceedings, and release the estate from all other claims other than Andrews' $559,728.65 proof of claim. In return, Trustee Boudloche agreed to compromise the adversary proceedings and release Andrews from any claims or rights the estate had against her.
The mutual release, incorporated by the Settlement Agreement, is extremely broad. The released provides that Trustee Boudloche:
Fully releases, acquits and forever discharges Andrews and their respective attorneys, agents, representatives, successors, subsidiaries, affiliates, directors, officers, past and present employees, shareholders, children or grandchildren, and other representatives from any and all losses, claims, debts, liabilities, demands, obligations, promises, acts, omissions, agreements, costs, expenses, damages, rent, injuries, suits, actions and causes of action, of whatever kind or nature, whether known or unknown, whether suspected or unsuspected, whether contingent or fixed, whether accrued or unaccrued, and whether arising in tort or in contract, including but not limited to all claims that were alleged or that could have been alleged in the lawsuit and controversy as set forth in the Settlement Agreement. This Release specifically includes, but is not limited to, any rights, claims, and/or causes of action that arise from or relate in any way to each and every, or any act or omission by Andrews and their respective attorneys, agents, representatives, successors, subsidiaries, affiliates, directors, officers, past and present employees, shareholders, children or grandchildren, and other representatives occurring prior to or simultaneously with the execution of this Release.
Id., at attachment 1, Exhibit C, paragraph 2. The release's plain language releases any and all claims or rights Trustee Boudloche had against defendant Andrews.
Cadleway contends that the plain language of the Settlement Agreement "carves-out" from the release the estate's right to seek equitable subordination of Andrews' claim. Cadleway cites a provision that states: "there shall exist no claims of any manner assertable in any proceeding in any Court by the Andrews . . . excluding only the proofs of claims filed by Lousie Andrews . . ." Cadleway contends that this exception was also intended to except any objections to Andrews' claim.
Cadleway's argument is without merit. The mutual release could not have been broader, releasing "any rights, claims, and/or causes of action that arise from or relate in any way to each and every, or any act or omission by Andrews." The alleged "carve-out" only excepts Andrews' proofs of claim from those claims that Andrews was releasing. The "carve-out" does not apply to the bankruptcy estate's claims or rights against Andrews. Trustee Boudloche's release contains no exceptions. The Settlement Agreement released all the estate's claims and rights with respect to Andrews.
Cadleway also contends that Andrews did not properly fulfill her obligations under the Settlement Agreement after the order approving the Settlement Agreement was no longer subject to a pending appeal. Cadleway noted that Andrews died and the payment due from Ms. Andrews had not yet been paid. These arguments are now moot. A motion to substitute parties was filed. On July 28, 2008, a certificate of closing signed by the closing agent was filed with the Court stating that the payment required by the Settlement Agreement was made. On August 5, 2008, the Court issued an order substituting Billy G. York, Independent Examiner, for defendant Andrews.
Given the Settlement Agreement's release of all the estate's rights and claims, the Court must consider whether the Court can afford the relief Cadleway seeks.
Jurisdiction
The Court has jurisdiction of this matter under 28 U.S.C. § 1334. This is a core matter under 28 U.S.C. § 157(b)(2). Venue is proper in this District pursuant to 28 U.S.C. § 1409.
Analysis
The Court first considers the nature of the available equitable subordination remedies provided by § 510(c). The Court then considers the extent to which Trustee Boudloche's Settlement Agreement precludes this Court from granting the remedy sought by Cadleway.
Under § 510(c), a proof of claim can be subordinated to a single claim, or all or a class of claims. The former remedy is a personal remedy based on personal injuries while the latter is a general remedy based on general injuries shared by all or a class of creditors. The remedy must always match the injury. Cadleway's adversary proceeding seeks to subordinate Andrews' claim to all claims based on alleged conduct that injured creditors generally. The adversary proceeding seeks a general remedy. However, Trustee Boudloche's Settlement Agreement released any claims based on general injuries by releasing all the estate's claims against Andrews. After notice and a hearing and a lengthy appellate process, the compromise has been consummated. The Court can no longer grant the general equitable subordination remedy Cadleway's adversary proceeding seeks. Cadleway's adversary proceeding has become moot.
1. Individualized Subordination
The plain language of § 510(c), precedent, and the purposes of the Bankruptcy Code support the contention that an individual creditor may seek to equitably subordinate a claim to its claim.
Section 510(c) provides:
Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may —
(1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or part of an allowed interest to all or part of an allowed interest; or
(2) order that any lien securing such a subordinated claim be transferred to the estate.
The language of § 510 suggest that Congress intended to afford creditors standing to assert equitable subordination claims. Section 510(c) refers to individual creditor versus individual creditor disputes. Section 510(c) provides that the court may subordinate "all or part of an allowed claim to all or part of another allowed claim." 11 U.S.C. § 510(c)(1). The language speaks of subordinating one creditor's claim to another creditor's claim, rather than subordinating a claim generally to all other claims. Moreover, when Congress intended to grant the trustee exclusive standing to prosecute a claim, Congress has often included specific language to that effect. Congress explicitly provided that the trustee alone can bring Code-based causes of action like fraudulent transfer and preference claims. 11 U.S.C. § 544 ("the trustee shall have . . ."); § 545 ("The trustee may . . ."); § 547(b) (". . . the trustee may avoid . . ."); § 548 ("The trustee may avoid . . ."); § 549 ("The trustee may avoid . . ."); § 550 (". . . the trustee may recover . . ."). Section 510(c) does not contain similar limiting language.
The majority of courts have found that a creditor may assert an equitable subordination claim. The Seventh Circuit's Vitreous Steel case was the first circuit court opinion to directly consider the issue and is the opinion most often cited in later opinions. In re Vitreous Steel Prods. Co., 911 F.2d 1223 (7th Cir. 1990). In Vitreous Steel, an unsecured creditor brought an equitable subordination adversary proceeding against a secured creditor. Id. at 1230. The Seventh Circuit held that the unsecured creditor had standing to bring the § 510(c) claim. The Court reasoned:
Equitable subordination is not a benefit to all unsecured creditors equally, at least where the creditor whose claim is objected to is at least partially unsecured; it is a detriment to the creditor whose debt is subordinated. Thus, when a party seeks equitable subordination, it is not acting in the interests of all the unsecured creditors. While the Trustee may find that it is in the best interests of the estate to seek equitable subordination, individual creditors have an interest in subordination separate and apart from the interests of the estate as a whole. The individual creditor should have an opportunity to pursue its separate interest.
Id. at 1231.
Most courts have followed Vitreous Steel and found that a creditor has standing to seek equitable subordination under § 510(c). P.W. Enters., Inc. v. N.D. (In re Racing Servs., Inc.), 363 B.R. 911 (B.A.P. 8th Cir. 2007) (holding that a creditor has standing under § 510(c) based on § 502(a)'s express authority for a creditor to object to claims and the absence of language limiting a creditor's standing in § 510(c)) (reversed on other grounds); In re Elrod Holdings Corp., 392 B.R. 110, 115 (Bankr. D. Del. 2008) ("An injured secured creditor should be permitted to pursue its separate interest apart from the trustee."); In re J.S. II, L.L.C., 389 B.R. 570, 580 (Bankr. N.D. Ill. 2008) ("However, the Seventh Circuit has held that creditors have direct standing to pursue an equitable subordination claim under § 510."); Bunch v. J.M. Capital Fin., Ltd. (In re Hoffinger Indus., Inc.), 327 B.R. 389, 413 (Bankr. E.D. Ark. 2005) ("Utilizing the contextual features recognized by the Supreme Court, it is apparent that Congress intended for § 510(c) to be broadly available. Had the trustee been the only party with authority to use this section, Congress could have so stated, as it has in many instances."); Clippard v. LWD, Inc. (In re LWD, Inc.), 342 B.R. 514, 520 (Bankr. W.D. K.Y. 2006) ("Equitable subordination claims are not property of the bankruptcy estates but rather may be brought by individual creditors on their own behalf to achieve fair distribution of estate assets."); ABF Capital Mgmt. v. Kidder Peabody Co (In re Granite Partners, L.P.), 210 B.R. 508, 514 n. 5 (Bankr. S.D. N.Y. 1997) ("Although not technically a standing issue, the remedy of equitable subordination is not limited to a trustee and one creditor may seek to equitably subordinate another creditor's claim to his own."); Midlantic Nat'l Bank N. v. Borg-Warner Acceptance Corp. (In re Mayo), 112 B.R. 607, 651 ("To bar the wronged creditor from asserting a § 510(c) action would violate the fundamental concept of equality of distribution under the Code."); Algonquim Power Income Fund v. Ridgewood Heights, Inc. (In re Franklin Indus. Complex, Inc.), 2007 WL 2509709 (Bankr. N.D. N.Y. Aug. 30, 2007).
Andrews cites the 2nd Circuit's AppliedTheory opinion for the contention that a creditor lacks standing to seek equitable subordination under § 510(c). Official Comm. of Unsecured Creditors v. Halifx Fund, L.P. (In re AppliedTheory), 493 F.3d 82 (2nd Cir. 2007). However, AppliedTheory is inapposite to this case. In AppliedTheory, the unsecured creditor's committee, rather than an individual creditor, sought to bring the 510(c) adversary. Id. at 84. The Court noted that §§ 1102 and 1103 limited committees' rights and precluded standing to seek equitable subordination. Id. at 85. The Bankruptcy Code does not contain similar provisions with respect to individual creditors. Moreover, the AppliedTheory Court cited Vitreous without directly disagreeing with Vitreous's holding. Instead, the Second Circuit held that even if it applied Vitreous's holding, the committee would not have standing to bring the claim because the committee could only bring a claim on behalf of all creditors, rather than a claim based on a particular harm. Id. at 87. The Second Circuit stated that such general claims on behalf of all creditors could only be asserted by the trustee. Id. 2. General Subordination
Section 510(c) only refers to particular, individualized remedies. Section 510(c) provides that a claim can be subordinated to all or part of another claim. Nothing in § 510(c) provides for a general remedy that would subordinate a claim to a class of claims or all claims.
However, bankruptcy courts have long been recognized as courts of equity, empowered and obligated to exercise their equitable jurisdiction to effectuate equitable distribution of estate assets. Though § 510(c) does not explicitly refer to a general remedy of subordination of a claim to all or an entire class of claims, § 510(c) "permits the bankruptcy court, in the exercise of its equitable jurisdiction, to apply pre-Code principles of equitable subordination." Wilson v. Huffman (In re Missionary Baptist Found. of Am.), 818 F.2d 1135 (5th Cir. 1987). The legislative history of § 510 "indicates that equitable subordination is to be invoked according to case law existing at the time of codification, with development of the concept being left to the courts." Fabricators, Inc. v. Technical Fabricators, Inc. (In re Fabricators, Inc.), 926 F.2d 1458, 1464 (5th Cir. 1991) (citing 124 Cong. Rec. 32398 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards); 124 Cong. Rec. 33998 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini)).
Additionally, bankruptcy courts have broad power under § 105 to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105(a).
Consistent with legislative history, courts have routinely read a general remedy into § 510(c), subordinating a claim to all claims or an entire class of claims. See Official Comm. of Unsecured Creditors v. Cajun Elec. Power Coop., Inc. (In re Cajun Elec. Power Coop., Inc.), 119 F.3d 349, 353 n. 2 (5th Cir. 1997); Summit Coffee Co. v. Herby's Foods, Inc. (In re Herby's Foods, Inc.), 2 F.3d 128 (5th Cir. 1993); In re Fabricators, Inc., 926 F.2d at 1470; In re Missionary Baptist Found. of Am., 818 F.2d 1135.
Accordingly, § 510(c) affords both a personal and a general remedy. Creditors may assert a § 510(c) claim based on personal injuries. Whether a creditor may also assert a § 510(c) claim based on general injuries is a more difficult question. However, the Court need not decide whether an equitable subordination claim seeking a general remedy can be asserted by a creditor. Under Fifth Circuit jurisprudence, an equitable subordination remedy must match the injury. Cadleway's adversary proceeding asserts a general equitable subordination claim based on general injuries. Even if, theoretically, Cadleway could assert a general subordination claim, in this case, the general claim has been released by Trustee Boudloche's Settlement Agreement. Accordingly, Cadleway's adversary proceeding is moot.
3. Mootness
Under Fifth Circuit jurisprudence, an equitable subordination remedy must match the alleged harm. The Fifth Circuit has repeatedly limited equitable subordination claims by narrowly tailoring the remedy to the extent of the alleged injury. In re SI Restructuring, Inc., 532 F.3d at 360-61. "[A] claim should be subordinated only to the extent necessary to offset the harm which the debtor or its creditors have suffered as a result of the inequitable conduct." Id. (citing Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692, 701 (5th Cir. 1977); 80 Nassau Assoc. v. Crossland Fed. Savings Bank (In re 80 Nassau Assoc.), 169 B.R. 832, 840 (Bankr. S.D.N.Y. 1994)). Based on this jurisprudence, the Court cannot afford a general subordination remedy for a subordination claim based on individualized injuries or an individualized subordination remedy for a subordination clam based on general injuries.
Cadleway's adversary proceeding is based on a generalized harm. Cadleway contends that Andrews was an insider of the debtor and participated in pre-bankruptcy loans and other transactions that diminished the estate's assets and limited Cadleway's recovery. Cadleway also contends that Andrews made false statements within her proofs of claim and before the Court.
The alleged conduct and harm was not personal to Cadleway. Any improper pre-bankruptcy transfers that diminished assets available for distribution from a bankruptcy estate affected all creditors. The conduct is general and its harm was not limited to Cadleway. Cadleway notes that it was the largest creditor, holding a $1,075,167.47 judgment. However, there were other significant creditors as well. The fact that Cadleway may have suffered the greatest harm from the alleged conduct by virtue of the size of its claim does not alter the characterization of the underlying claim. The underlying claim remains a general grievance based on conduct that harmed all creditors.
Any claims for general relief which could have been asserted have been released. Trustee Boudloche's Settlement Agreement released all claims for injuries to the estate. After Trustee Boudloche's Settlement Agreement was consummated in 2008, a general subordination remedy was no longer available. Because the Court cannot grant the remedy Cadleway seeks, Cadleway's adversary proceeding has become moot.
Cadleway makes two additional arguments that the Court does not consider. Cadleway contends that Andrews "opened the door" for Cadleway to seek equitable subordination by filing an adversary seeking subordination of Cadleway's proof of claim. Andrews cannot transfer an estate right to Cadleway. Cadleway's "opened the door" argument is unpersuasive and unsupported. Cadleway also contends that the Settlement Agreement did not have res judicata effect on Cadleway. Res judicata is not at issue in this case. Claims based on a generalized injury were released by the Settlement Agreement.
Cadleway argues that waiver or latches bars Andrews from contesting Cadleway's standing to prosecute an equitable subordination proceeding against Andrews. Regardless of Andrews' conduct, the Court has an independent duty to consider its subject matter jurisdiction.
Mootness is a jurisdictional issue. North Carolina v. Rice, 404 U.S. 244, 246, 92 S. Ct. 402, 39 L. Ed. 2d 413 (1971) ("Mootness is a jurisdictional question because the Court `is not empowered to decide moot questions or abstract propositions.'") (quoting U.S. v. Alaska S.S. Co., 253 U.S. 113, 116, 40 S. Ct. 448, 449, 64 L. Ed. 808 (1920)). If an issue has become moot, a case or controversy no longer exists, and the court therefore lacks subject matter jurisdiction. Id. ("[O]ur impotence `to review moot cases derives from the requirement of Article III of the Constitution under which the exercise of judicial power depends upon the existence of a case or controversy.'") (quoting Liner v. Jafco, Inc., 375 U.S. 301, 306 n. 3, 84 S. Ct. 391, 394, 11 L. Ed. 2d 347 (1964)).
The Court has an independent obligation to consider its subject matter jurisdiction at all times. Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567, 593, 124 S. Ct. 1920, 1937, 158 L. Ed. 2d 866 (2004) ("Moreover, by whatever route a case arrives in federal court, it is the obligation of both district court and counsel to be alert to jurisdictional requirements."). The absence of subject matter jurisdiction cannot be waived. One 18th Century Colombian Monstrance, 797 F.2d at 1374-75.
4. Analysis of In re Medomak Canning
The Court notes that the First Circuit considered a factual scenario similar to the one presented by Cadleway's adversary proceeding. In re Medomak Canning, 922 F.2d 895. In Medomak, the trustee also executed a settlement agreement with a creditor compromising "any and all claims" held by the estate. Id. at 904. After the bankruptcy court approved the settlement, other creditors filed an adversary against the settling creditor seeking equitable subordination of the settling creditor's claim. Id. at 898. The bankruptcy court found that the settlement agreement had res judicata effect on the adversary proceeding. Id. at 899. The Circuit Court upheld the bankruptcy court's ruling that the settlement agreement was res judicata with respect to the equitable subordination claims. Id. at 900-05. The Court noted that the settlement agreement released all the estate's claims against the settling creditors. Id. at 904. The Court then reasoned that the appealing creditors were bound by the trustee's settlement because the trustee's role as the representative of the creditors created a relationship of privity between the trustee and the creditors. Id. at 901.
The Medomak opinion is not in conflict with this Memorandum Opinion. This Court dismisses the adversary proceeding on mootness grounds before reaching the res judicata issue.
The 1st Circuit reaffirmed In re Medomak Canning in 1997. Petitioning Creditors of Melon Produce, Inc. v. Braunstein, 112 F.3d 1232 (1st Cir. 1997).
Conclusion
Pursuant to the District Court's remand order, the Court has considered the effect of the 2008 District Court order dismissing the appeal of the Bankruptcy Court order approving Trustee Boudloche's 1998 Settlement Agreement. For the reasons set forth above, the Court holds that Cadleway's adversary proceeding has become moot. Accordingly, the Court dismisses adversary proceeding 02-0001, with prejudice. A separate order will be issued.