DEBTOR

FIRELIGHT INVESTMENTS CORPORATION PLAINTIFF

VS. ADVERSARY NO. 01-5147

CENTRAL BANK & TRUST COMPANY DEFENDANT

MEMORANDUM OPINION

This matter is pending on cross-motions for summary judgment of the plaintiff, Firelight Investments Corporation, and the defendant, Central Bank and Trust Company.

FINDINGS OF FACT:

The court adopts the findings of fact set out in its Memorandum Opinion of March 13, 2002, as follows:

Firelight’s complaint, which was filed March 23, 2001 in the Fayette Circuit Court, Civil Action No. 2001-CI-1116, seeks enforcement of a subordination agreement. The agreement was executed September 27, 1988 by Second National Bank and Trust Company, Lexington, Kentucky as Trustee of the Warren Wright, Jr. Trust. At the time of execution of the agreement Calumet Farm, Inc. (hereinafter “Calumet Farm” or “debtor”) was indebted to the trust in the amount of $13,187,500, evidenced by two notes, plus accrued interest. To induce First City National Bank Houston, Texas to loan monies from time to time with or without security to Calumet Farm, the trust subordinated the indebtedness owed to it by Calumet Farm to indebtedness the debtor was in the process of incurring to First City National Bank, which indebtedness was evidenced by a line of credit note for $50,000,000 and a term note for $15,000,000. See Subordination Agreement.

Warren Wright, Jr., the son of the founder of Calumet Farm, predeceased his mother, Lucille Wright Markey, who held a life estate in the farm under the will of Warren Wright, Sr. Following the death of Lucille Wright Markey in 1982 the farm was incorporated and the owners were issued stock evidencing their interest in the farm. As a result of incorporation the Warren Wright, Jr. trust owned an approximately 62.5% interest in the farm. Bertha Wright, the widow of Warren Wright, Jr. is the life beneficiary of the trust. The four children of Warren Wright, Jr. and Bertha Wright, Lucille, Courtney, Warren III, and Tom Wright were issued stock evidencing their pro rata ownership of the remaining 37.5% interest in the farm.

Calumet Farm, Inc. filed a petition for relief under chapter 11 of the Bankruptcy Code in this court on July 11, 1991.

Since commencement of the bankruptcy proceeding there has been a transformation of the parties referred to in the Subordination Agreement.

The debtor in possession, formerly known as Calumet Farm, changed its name to Phoenix Corporation. Apparently this was to accommodate the fact the name Calumet Farm was sold as an asset along with the farm in order that the purchaser might continue to race thoroughbred horses under the name Calumet Farm.

Second National Bank and Trust Company, the trustee of the Warren Wright, Jr. Trust, merged with Bank of Commerce and became Commerce National Bank. The merged bank was acquired by National City Bank.

During the course of administration of the Warren Wright, Jr. Trust certain officers of these banks served on the board of directors of Calumet Farm, Inc., representing the interest of the trust in the farm.

The creditors’ committee in the Calumet Farm, Inc. bankruptcy case was granted leave of court to file an action against the officers and directors of Calumet Farm, including the bank officers who had served on the debtor’s board of directors, for, inter alia, alleged breach of their fiduciary duty. This action was filed by the committee in the U.S. District Court. Case No. 93-291. The action was settled with respect to National City Bank by payment of a substantial sum to the bankruptcy estate.

On November 1, 1994 the Probate Division of the Fayette Circuit court appointed Central Bank and Trust Company as Successor Trustee of the Warren Wright, Jr. Trust. The bank qualified as trustee on December 1, 1994. Thus, Central Bank and Trust Company is named defendant in the present action to enforce the subordination agreement executed by the trust in 1988 in favor of First City National Bank, Houston, Texas.

On October 30, 1992 First City National Bank, Houston, Texas was closed by the Comptroller of the Currency and the Federal Deposit Insurance Corporation, FDIC, was appointed receiver. On the same date the FDIC, as receiver, conveyed certain assets of the closed bank, including the notes and other documentation evidencing the indebtedness of Calumet Farm to the bank, to New First City National Association, a bridge bank. On February 13, 1993 the Comptroller of the Currency closed New First City National Association and appointed the FDIC as receiver. On the same date the FDIC as receiver conveyed the assets of New First City to Texas Commerce Bank, N.A. Thereby, Texas Commerce Bank became the owner of a claim against Calumet Farm, Inc. in the prepetition amount of $32,392,565.46, evidenced by the proof of claim in that amount filed by First City National Bank, Houston, Texas on January 2, 1992, Claim No. 54.

Thereafter, Texas Commerce Bank, N.A. transferred to First City Liquidating Trust Loans, LP, the loans it had acquired from New First City National Association. First City Liquidating Trust Loans, LP thereupon became the owner of Claim No. 54.

On August 23, 1995 the debtor in possession and First City Liquidating Trust Loans, LP entered into a settlement agreement whereby Claim No. 54 was allowed as a secured claim in the amount of $7,851,506.19 and as an unsecured claim in the amount of $10,372,150.41 (Document No. 1539). The court approved this settlement agreement by order entered on September 1, 1995. The secured portion of this claim is not in issue, apparently having been satisfied by proceeds realized from the sale of thoroughbred horses and from proceeds of stud fees in which First City National Bank, Houston, Texas held security interests.[1]

On May 3, 1999 First City Liquidating Trust Loans, LP assigned the $10,372,150.41 unsecured portion of Claim No. 54 to Vigilant Insurance Company. This was after Frank Cihak, an officer of First City National Bank, Houston, Texas had been convicted in federal court of criminal charges in connection with loans made by the bank to Calumet Farm. This assignment may have been made in connection with settlement on a claim under an insurance policy issued by Vigilant insuring First City National Bank, Houston against loss due to misconduct of banks officers and employees. As hereinafter noted, Vigilant was the owner of this $10,372,150.41 unsecured claim when an order was entered confirming the debtor’s Liquidating Plan of Reorganization.

Early in the Calumet Farm chapter 11 bankruptcy case Second National Bank and Trust Company, the original Trustee of the Warren Wright, Jr. Trust, filed a claim in behalf of the trust. The claim was filed as a secured claim in the amount of $502,361.11 and as an unsecured claim in the amount of $23,417,609.65. See Proof of Claim No. 33 filed November 18, 1991 in the total amount of $23,919,970.76.

On November 15, 1995 the Warren Wright Jr. Trust amended its claim to reduce the amount of the claim to $23,847,470.76.

On March 29, 1999 the debtor in possession and the Warren Wright, Jr. Trust filed a joint motion for approval of a compromise agreement whereby the claim of the trust would be allowed as an unsecured claim in the amount of $7,500,000 and the remainder of the claim in the amount of $16,347,470.76 would be subordinated as equity (Docket #2006). This joint motion was approved by order of the court entered June 21, 1999 (Docket No. 2026).

On April 13, 2000 the debtor filed a Disclosure Statement and a Liquidating Plan of Reorganization (Docket #2070). On April 14, 2000 the debtor filed an amendment to the Disclosure Statement (Docket #2072).

A hearing on approval of the Disclosure Statement was noticed for May 8, 2000 (Docket #2071).

On May 9, 2000 the court approved the debtor’s Disclosure Statement, as amended, subject to further amendment as agreed upon at the May 8 hearing.

On May 10, 2000, the debtor filed a First Amended Disclosure Statement.

A hearing on confirmation of the plan was noticed for June 12, 2000. However, on June 5, 2000 an order was entered rescheduling the confirmation hearing for June 26, 2000 (Docket #2103).

On June 6, 2000 Donald and Nancy Puckett and Michael Sweeney, creditors, had filed objections to confirmation of the plan (Docket #2103).

On June 27, 2000 an agreed order was entered resolving the objection of the Pucketts and Sweeney to confirmation of the plan (Docket #2118). On the same date an order was entered confirming the plan.

At the time of confirmation of the plan the $10,372,150.41 unsecured claim, the surviving amount of Claim No. 54 originally filed by the defunct First city National Bank of Houston, Texas was owned by Vigilant Insurance Company.

On August 24, 2000 the disbursing agent paid a dividend of $1,551,300.07 on Claim No. 54 to Vigilant Insurance Company and a dividend of $1,121,729.83 to Central Bank and Trust Company as Trustee of the Warren Wright, Jr. Trust. The latter dividend was paid on the $7,500,000 unsecured amount of Claim No. 33 as compromised by the claimant and the debtor in possession.

Vigilant Insurance Company did not object to confirmation of the plan which proposed payment of a dividend on the claim of the Warren Wright Jr. Trust as a Class 4 unsecured claimant along with other claimants in that class, including Vigilant. Vigilant did not raise an issue about or seek enforcement of the subordination agreement executed by the trust in favor of First City National Bank of Houston, the original owner and filer of Claim No. 54.[2]

On February 1, 2001 Firelight Investments Corp., a Delaware corporation, filed notice and documentation of the assignment and transfer of Claim No. 54 to Firelight by Vigilant Insurance Company for a consideration of $100,000.

On March 23, 2001 Firelight commenced the present action in the Fayette Circuit Court against Central Bank and Trust Company to enforce the subordination agreement executed in 1988 by the Warren Wright, Jr. Trust in favor of First City National Bank of Houston. The objective of Firelight’s action is to recover the $1,121,729.83 dividend paid on the claim of the Warren Wright, Jr. Trust, and to be adjudged entitled to receive any future dividends that may be paid on the claim, a result that would follow from enforcement of the subordination agreement.

A further, albeit much smaller dividend, is contemplated on Class 4 unsecured claims pending the resolution of three outstanding controversies, only one of which involves the possible recovery of additional monies for the bankruptcy estate.

Pursuant to Article XI of the debtor’s plan the court retained jurisdiction “to determine any and all claims objections” and “to determine all controversies, suits, and disputes that may arise in connection with the interpretation, enforcement or consummation of the Plan.”

Paragraph 5 of the Subordination Agreement of September 27, 1988, which is attached as an exhibit to Firelight’s complaint, is as follows:

5. In the event of any receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization or arrangement with creditors, adjustment of debt, whether or not pursuant to bankruptcy laws, the sale of all or substantially all of the assets, dissolution, liquidation, or any other marshalling of the assets and liabilities of Borrower, the Subordinated Creditor will at Lender’s request file any claim, proof of claim, proof of interest or other instrument of similar character necessary to enforce the obligations of Borrower in respect of the Subordinated Debt and will hold in trust for Lender and pay over to Lender, in the form received (together with any necessary endorsement), to be applied on the Superior Indebtedness, any and all monies, dividends or other assets received in any such proceedings on account of the Subordinated Debt unless and until the Superior Indebtedness shall be paid in full. In the event that the Subordinated Creditor shall fail to take any such action requested by Lender, Lender may, as attorney-in-fact for the Subordinated Creditor, take such action on behalf of the Subordinated Creditor, and the Subordinated Creditor hereby appoints Lender as attorney-in-fact for the Subordinated Creditor to demand, sue for, collect and receive any and all such monies, dividends or other assets and give acquittance therefor and to file any claim, proof of claim, proof of interest or other instrument of similar character and to take such other proceedings in Lender’s own name or in the name of the Subordinated Creditor as Lender may deem necessary or advisable for the enforcement of this Subordination Agreement. The Subordinated Creditor will execute and deliver to Lender such other and further powers of attorney or other instruments as Lender may request in order to accomplish the foregoing.

CONCLUSIONS OF LAW:

In Browning v. Levy, 283 F.3^rd 761 (6^th Cir., 2002), the Court of Appeals for this circuit ruled that an order of the bankruptcy court confirming a chapter 11 plan has the effect of a final judgment of the district court and is res judicata with respect to any issue raised or that could have been raised in the confirmation proceeding, citing In re Chattanooga Wholesale Antiques, Inc., 930 F.2d 458, 463 (6^th Cir., 1991).

Firelight contends, based on the language of paragraph 5 of the Subordination Agreement of September 27, 1988, that its cause of action against Central Bank and Trust Company, as successor trustee of the Warren Wright, Jr. Trust, did not arise until Central Bank received the $1,121,729.93 dividend on claim no. 33, and failed to account for and turn over the dividend to Firelight, as successor in interest to First City National Bank of Houston, as required by paragraph 5 of the Subordination Agreement. Firelight argues therefore that its claim against Central Bank and Trust Company could not have been litigated in the confirmation proceedings because the distribution of the dividend to Central Bank and Trust Company, as trustee of the Warren Wright, Jr. Trust occurred after confirmation of the plan.

This argument overlooks the applicability of Title 11 U.S.C. §502(b)(1), as follows:

(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a claim is made, the court, after notice and a hearing, shall determine the amount of such claim as of the date of the filing of the petition, and shall allow such claim in lawful currency of the United States in such amount, except to the extent that –

(1) such claim is unenforceable against the

debtor and property of the debtor, under any

agreement or applicable law for a reason other than because such claim is contingent or unmatured;

…

Under this provision of the Bankruptcy Code, the filing of the petition accelerates contingent and unmatured claims. Such claims are provable and allowable except for unmatured interest. Allowance of contingent and unmatured claims is permitted in order that such claims may be dischargeable in bankruptcy. The argument that Vigilant, Firelight’s predecessor in interest, could not have asserted its claim against Central Bank and Trust Company under the Subordination Agreement during the confirmation proceedings because its subrogation claim was contingent or unmatured is simply fallacious.

Vigilant Insurance Company could have laid claim “against the debtor and property of the debtor” for the money on hand in the bankruptcy estate awaiting distribution to Central Bank and Trust Company prior to or during the confirmation proceedings. 11 U.S.C. § 510(a).

The other elements barring a claim on grounds of res judicata (1) a final decision on the merits by a court of competent jurisdiction; (2) a subsequent action between the same parties or their successors in interest, and (3) an identity of the cause of action, are obviously present in this matter.

The court is of the opinion Central Bank and Trust Company is entitled to summary judgment dismissing Firelight’s complaint on the grounds the relief sought is barred by principles of res judicata.

Dated this 10th day of January 2003

By the Court –

_______________________________

JOE LEE, U.S. BANKRUPTCY JUDGE

Copies to:

Gregory R. Schaaf, Esq.

Brian M. Johnson, Esq.

David L. Bohannon, Esq.

Kevin G. Henry, Esq.

Elizabeth Thompson, Esq.

[1] The Settlement Agreement excluded from its coverage claims of First City Liquidating Trust Loans, LP against third parties liable on the indebtedness. In view of the obvious applicability of title 11 U.S.C. § 502(b)(1) the court finds it unnecessary to determine whether the Settlement Agreement nullified the Subordination Agreement.

[2] The predecessors in interest of Vigilant did not object to the compromise between the debtor in possession and the Warren Wright, Jr. Trust whereby the major portion of the claim of the trust was subordinated to equity. The plan gave notice of subordination of the claim.

DEBTOR

FIRELIGHT INVESTMENTS CORPORATION PLAINTIFF

MEMORANDUM OPINION

JUDGMENT