* District Judge for the Eastern District of Texas, sitting by designation. 

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 07-50912

In the Matter of: SI RESTRUCTURING, INC.; SRE RESTRUCTURING,

INC.

Debtors

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

JOHN C. WOOLEY; JEFFREY J. WOOLEY

Appellants

v.

DENNIS FAULKNER, Plan Administrator of SI Restructuring, Inc.

Appellee

Appeal from the United States District Court 

for the Western District of Texas 

Before DAVIS and SOUTHWICK, Circuit Judges, and CLARK, District Judge.*

W. EUGENE DAVIS, Circuit Judge:

This is an appeal from a district court order affirming a bankruptcy court’s

order granting a Plan Administrator’s motion (“motion”) authorizing disbursal

of a reserve fund in the amount of $500,000.00, which had been established to

United States Court of Appeals

Fifth Circuit

F I L E D

August 28, 2008

Charles R. Fulbruge III

Clerk
No. 07-50912

1 No. 07-50872, 532 F.3d 355 (5th Cir. 2008).

2 The Wooleys also have unsecured claims against the estate, but those claims are not

the subject of this appeal. 

3 The Wooleys posted a letter of credit in the amount of $2,939,200.00 with the Plan

Administrator which the Administrator was authorized to liquidate if the Wooleys’ secured

claims were subordinated.

2

pay the additional secured claims of John and Jeffrey Wooley (“Appellants” or

“the Wooleys”). Because the bankruptcy court erred in granting the motion, we

vacate the district court order and remand this case to the bankruptcy court with

instructions to reinstate the reserve through disgorgement of Appellee’s

attorneys’ fees in an amount necessary to compensate Appellants for their

additional allowed secured claims, up to $500,000.00. The amount Appellants

are entitled to receive from the reserve fund is to be determined by the

bankruptcy court on remand. 

I.

This appeal is closely related to Wooley v.Faulkner (In re SI Restructuring,

Inc.)(Wooley I),

1 which we decided on June 20, 2008. By way of background, in

that case, we held that the bankruptcy and district courts erred in equitably

subordinating the Wooleys’ claims from secured claims to unsecured claims.2

During the pendency ofthe equitable subordination litigation,the plan provided

partial protection to the Wooleys by requiring a distribution to the Wooleys of

$2,867,600.00.3 The plan provided protection for the remainder of Appellant’s

claims in a reserve fund. This plan provision provides:

Notwithstanding the foregoing, pending further order ofthe [C]ourt

after notice and a hearing in [the] Adversary Proceeding [to

determine, in part, whether the Wooleys’ secured claims should be

equitably subordinated] . . .the Debtors shall segregate and hold not

less than $500,000.00 in the Distribution Reserve for satisfaction of

any of the Wooleys’ Claims that become Allowed Secured Claims.

The Plan Administrator may seek to reduce the amount held for
No. 07-50912

3

satisfaction of the Wooleys’ Claims or seek to spend or otherwise

disburse such funds through motion to the Bankruptcy Court. The

final allowance or disallowance of the Wooleys’ Claims and the

validity, extent[,] and priority of the liens securing the Wooleys’

Claims shall be determined by the Bankruptcy Court in Adversary

Proceeding 05–5055 . . . .

This paragraph in the plan was primarily designed to preserve no less than

$500,000.00 in the estate for payment of the Wooleys’ allowed secured claims

against the estate. Secondarily, this paragraph recognized the right of the Plan

Administrator to seek the approval of the bankruptcy court to disburse funds

from the fund for other purposes. 

After the bankruptcy court rendered judgment in favor of the Plan

Administrator and equitably subordinated the Wooleys’ claims, the Plan

Administrator moved the bankruptcy court for permission to disburse the

$500,000.00 reserve fund to pay the Plan Administrator’s attorneys’ fees. The

bankruptcy court granted the motion. The bankruptcy court reasoned that it

was no longer necessary to maintain the reserve fund for satisfaction of the

Wooleys’ claims. The court concluded that, even if the Wooleys were to prevail

on appeal, they had already been paid in full on their secured claims. In

summary,the bankruptcy court granted the motion because it reasoned that the

Wooleys had no allowed secured claims and, therefore, the $500,000.00 reserve

was “superfluous.” 

The district court affirmed the bankruptcy court. The district court

explained that because the Wooleys lost in the Adversary Proceeding in the

bankruptcy court (which ruling was affirmed by the district court) they had no

allowed secured claims, and the bankruptcy judge was justified in granting the

Plan Administrator’s motion to begin disbursing the reserve fund. Although the

district court acknowledged that the Wooleys’ appeal of the Adversary
No. 07-50912

4 U.S. Dep’t of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003) (citing

Total Minatome Corp. v. Jack/Wade Drilling, Inc. (In re Jack/Wade Drilling, Inc.), 258 F.3d

385, 387 (5th Cir. 2001)). 

5

Id. (citing Williams v. IBEW Local 520 (In re Williams), 337 F.3d 504, 508 (5th Cir.

2003)). 

4

Proceeding was still pending in this Court, it concluded that Appellants could

not show a likelihood of success on the merits of the appeal. 

By reversing the judgment of the district court in Wooley I, this Court

determined that the Wooleys’ secured claims should be fully recognized. 

The question that remains for this Courtto decide is whether the Wooleys’

allowed secured claims exceed the $2,867,600.00 they have already received and,

if so, whether disbursal of the $500,000.00 reserve was in error. For reasons we

discuss below, we conclude that the Wooleys are so entitled, and the district

court should not have affirmed the bankruptcy court’s order allowing for

disbursal of the $500,000.00 reserve. 

II.

This Court reviews the decision of a district court, sitting as an appellate

court, by applying the same standards of review to the bankruptcy court’s

findings of fact and conclusions of law as applied by the district court.4

Generally, a bankruptcy court’s findings of fact are reviewed for clear error, and

its conclusions of law are reviewed de novo.

5

A.

We deal first with Appellee’s argument that this Court does not have

jurisdiction to hear the appeal. The jurisdictional argument has four premises:

(1) that the appeal is untimely, (2) that Appellants failed to exhaust remedies in

the bankruptcy court, (3) that this action is a collateral attack on the judgment

in the Adversary Proceeding and (4) that the action is equitably moot.
No. 07-50912

6 FED. R. BANKR. P. 8005.

5

Appellee argues first that this appeal is untimely. The bankruptcy court

entered the order allowing disbursal of the reserve funds on April 23, 2007.

Upon counsel’s oral request,the bankruptcy court granted the Wooleys a ten-day

stay to give them time to seek a stay from the district court. The Wooleys sought

such a stay from the district court, which was denied on May 30, 2007. On July

13, 2007, the district court entered an order affirming the bankruptcy court’s

order allowing disbursal of the reserve funds. The Wooleys filed their notice of

appeal to this Court on July 18, 2007. Appellee argues that the Wooleys’ appeal

came more than thirty days after the district court’s denial of a stay. This

appeal, however, is not from the order denying the stay; it is an appeal of the

district court’s order affirming the bankruptcy court’s order permitting the

disbursal of the $500,000.00 reserve. The appeal is timely and this argument

has no merit. 

Appellee argues next that Appellants failed to exhaust their remedies in

the bankruptcy court. Appellee contends that Appellants did not comply with

Bankruptcy Rule 8005, which requires that a motion for stay be presented to the

bankruptcy judge in the first instance.6 Appellants initially moved for a stay in

the bankruptcy court, and the bankruptcy judge granted a ten-day stay, adding

that Appellants would need to then seek further affirmative stay relief.

Appellants accordingly filed a motion for a stay in the district court, which was

denied. The district court explained that, technically, Rule 8005 was not

complied with, but it noted that when the bankruptcy court granted a ten-day

stay, it was “abundantly clear that no stay, other than a ten[-]day stay to allow

appellate review” would be granted by the bankruptcy court. Thus, we agree

with the district court that, under the circumstances, the Appellants’ failure to
No. 07-50912

7 Manges v. Seattle-First Nat’l Bank (Matter of Manges), 29 F.3d 1034, 1039 (5th Cir.

1994). 

8

Id.

9

Id. at 1043 (citing Frito-Lay, Inc. v. LTV. Steel Co., (In re Chateaugay Corp.), 10 F.3d

944, 952 (2d Cir. 1993) (citing In re AOV Ind., 792 F.2d 1140, 1148 (D.C. Cir. 1986))). 

6

seek an additional stay from the bankruptcy court in this case did not violate

Rule 8005. 

Appellee argues next that Appellants’ claim to funds in the reserve is a

collateral attack on the judgment in the Adversary Proceeding. Because this

Court has reversed the lower court’s judgmentin the Adversary Proceeding,this

argument is without merit. 

Appellee argues finally that this appeal is equitably moot because the

reserve fund has been disbursed, the plan has been substantially consummated

and the relief Appellants seek would undermine the plan. “The concept of

[equitable] ‘mootness’ from a prudential standpoint protects the interest of nonadverse third parties who are not before the reviewing court but who have acted

in reliance upon the plan as implemented.”7 The ultimate question to be decided

is whether the Court can grant relief without undermining the plan and,

thereby, affecting third parties. For the doctrine of equitable mootness to apply,

the Court must determine: “ . . . (i) whether a stay has been obtained, (ii)

whether the plan has been ‘substantially consummated,’ and (iii) whether the

relief requested would affect either the rights of parties not before the court or

the success of the plan.”8

Assuming a stay of the bankruptcy court’s disbursal order was not

obtained, we examine the second and third prongs. At this juncture, the plan

has indisputably been substantially consummated. “Substantial consummation

of a . . . plan is a momentous event, but it does not necessarily make it

impossible or inequitable for an appellate court to grant effective relief.”9 Thus,
No. 07-50912

10 See id. at 1040. 

11 See Focus Media, Inc. v. Nat’l Broad. Co. (In re Focus Media, Inc.), 378 F.3d 916,

923–24 (9th Cir. 2004) (citing S.S. Retail Stores Corp. v. Extreme (In re S.S. Retail Stores

Corp.), 216 F.3d 882, 884 (9th Cir. 2000)). 

12 In re AOV Ind., 792 F.2d at 1149. 

13 Hicks, Muse & Co., Inc. v. Brandt (In re Healthco Int’l, Inc.), 136 F.3d 45, 49 (1st Cir.

1998). 

7

the third prong — whether granting Appellants’ requested relief would unravel

the plan or “unscramble the eggs,”10 so to speak, — is our concern. The relief

requested by Appellants is a return to the reserve fund of monies which were

paid to Appellee’s counsel. They do not seek any return of money to the estate

from third party creditors. 

It is clear that Appellee’s counsel, who was paid from the reserve fund, is

not a party who is not before the court. Further, Appellants cite persuasive

authority supporting their argument that equitable mootness ought not prevent

the disgorgement and return to the estate of attorneys’ fees. The Ninth Circuit

stated the rule as follows: “[A]n order compelling disgorgement of [attorneys’]

fees and expenses would not require the bankruptcy court to unravel a

complicated bankruptcy plan” but instead “would require only that one party

disgorge the money it has received, money that would then be distributed

pursuant to the bankruptcy court’s final decree.”11 The D.C. Circuit has also

found that a challenge to the disbursement of fees to attorneys is still capable of

resolution, regardless ofthe degree of plan consummation.12 Similarly, the First

Circuit has held that where monies disbursed to a Trustee could be recovered

with relative ease, equitable mootness ought not apply.13

In a recent opinion, this Court held that dismissal for equitable mootness

was inappropriate where the appeal dealt only with aspects of a Chapter 11 plan

confirmation that solely concerned professional compensation, reasoning thatin
No. 07-50912

14 Hilal v. Williams (Matter of Hilal) No. 07-20571, 2008 WL 2655796, at *2 (5th Cir.,

July 8, 2008) (citing, inter alia, In re Zenith Elecs. Corp., 329 F.3d 338, 346–47 (3d Cir. 2003)

(appeal seeking disgorgement of fees paid to professionals not equitably moot), In reS.S. Retail

Stores Corp., 216 F.3d at 884–85 (appeal seeking disgorgement of attorneys’ fees not equitably

moot), and In re Int’l Envtl. Dynamics, Inc., 718 F.2d 322, 325–26 (9th Cir. 1983) (appeal

challenging award of counsel fees not equitably moot)). 

8

such a case, there is “no potential adverse effect on the plan or third parties.”14

We agree with these authorities and conclude that equitable mootness does not

prevent our consideration of the merits of this appeal. 

B.

Turning to the merits of the appeal, our first task is to interpret the

language of the plan in order to determine the reason the $500,000.00 reserve

fund was established. Appellants contend that the fund was created for the

purpose of satisfying their allowed secured claims. Appellee argues that the

reserve had a dual purpose — that it was also intended to be used by the Plan

Administrator, upon his motion. Based on the plain language of the plan

provision quoted supra, both parties are correct. The primary purpose of the

reserve fund provision was to satisfy the Wooleys’ allowed secured claims.

Secondarily, the Plan Administrator was also allowed to move the bankruptcy

court to allow disbursal of that reserve for other purposes. Appellants do not

contend that the Plan Administrator had no authority to move the bankruptcy

court to disburse the funds to pay counsel. The issue for decision is whether the

district court erred in affirming the bankruptcy court’s grant of the Plan

Administrator’s motion allowing disbursal of the reserve funds to pay counsel.

Appellee contends that under this Court’s opinion in Wooley I, the Wooleys

have no allowed secured claims in excess of the $2,867,600.00 they have

received. Appellants contend, however, that the amount they received satisfies

only part of their allowed secured claims for two reasons. First, they argue that

their claim exceeded the amount paid to them and it was understood that the

amount of their claim would be resolved after the subordination issue was
No. 07-50912

15 11 U.S.C. § 506(2)(b). 

16 11 U.S.C. § 506 (West 2004) (Historical and Statutory Notes) (Revision Notes and

Legislative Reports; 1978 Acts).

17 U.S. v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989). 

18 William L. Norton, Jr., 7 NORTON BANKRUPTCY LAW & PRACTICE § 146:11 (3d ed.

2008). 

9

decided. Second, they contend that they are also entitled to interest and

attorneys’ fees which should also be recognized as secured claims. We consider

first the Wooleys’ claim for interest and attorneys’ fees. 

Section 506(b) of the Bankruptcy Code provides that:

[t]o the extent that an allowed secured claim is secured by property

the value of which . . . is greater than the amount of such claim,

there shall be allowed to the holder of such claim, interest on such

claim, and any reasonable fees, costs, or charges provided for under

the agreement or State statute under which the claim arose.15

The Revision Note andLegislative Reports for this provision state that a creditor

with an oversecured claim is entitled to reasonable fees (including attorneys’

fees), costs, or charges and specifies that these fees, costs, and charges “are

secured claims to the extent that the value of the collateral exceeds the amount

ofthe underlying claim.”16 The United States Supreme Court has explained that

“[r]ecovery of postpetition interest is unqualified. Recovery of fees, costs, and

charges, however, is allowed only if they are reasonable and provided for in the

agreement under which the claim arose.”17 NORTON BANKRUPTCY LAW AND

PRACTICE states that: 

The Bankruptcy Code and Rules do not indicate how the holder of

an oversecured claim should assertits rightto accumulated interest,

fees, etc. Presumably, the creditor could indicate on the face of its

proof of claim thatit claims interest or other costs incurred after the

filing of the proof of claim.18
No. 07-50912

10

Our record review confirms that the Wooleys were oversecured and that

they claimed interest and attorneys’ fees on their proofs of claim and

attachments thereto. The proofs of claim filed by the Wooleys clearly show the

amounts the Wooleys claimed, the value of the collateral (over)securing their

claim, the interest through the date of filing, and the promissory notes’

provisions for attorneys’ fees. Although no explicit agreement between the

parties or express ruling by the bankruptcy court deferred the determination of

interest and attorneys’ fees until after the subordination hearing, we are

persuaded from the record thatthe parties and the court were proceeding on this

assumption.

First, Local Bankruptcy Rule 7054(d) lays down the general rule that

statements of attorneys’ fees shall be submitted by motion after entry of

judgment. This is a sensible general rule that recognizes that it is inefficient to

hear evidence on fees and consider an award of attorneys’ fees before the court

has decided who is the prevailing party.

Additionally, the pretrial order does not list interest or attorneys’ fees as

issues or list witnesses to testify about the reasonableness of those fees. This

pretrial order is consistent with the Appellants’ argument that the parties and

the court contemplated following the general rule and litigating this issue after

it determined which party prevailed. In sum, the record does not support

Appellee’s argument that the Appellants were required to establish the amount

of its claim for interest and attorneys’ fees in the Adversary Proceeding. 

We are also persuaded that a genuine unresolved dispute existed over the

amount of the Wooleys’ claim exclusive of interest and attorneys’ fees. The

Wooleys filed a Motion for Relief from Automatic Stay, or for Adequate

Protection, Regarding Secured Claims on May 18, 2005 and asserted that the

creditor's committee and the Wooleys "have agreed to a distribution of

$3,180,000.00 and the posting of a letter of credit in the amount of
No. 07-50912

19 Also in the hearing before the district court in which the Wooleys were seeking a stay

of the bankruptcy court order disbursing the reserve fund, counsel for the Plan Administrator

sought to make the point that a stay should not be granted: 

First, the – the creditors made a decision a couple of years ago to go ahead and

enter into this agreement whereby a letter of credit would be posted and the

Wooleys would be paid the lion’s share of their asserted claim. In our view, it’s

the entire amount oftheir asserted claim. There’s a dispute over whether or not

11

$3,250,000.00" and that "[t]he actual amount of the secured claims of the

Wooleys will be determined in a future proceeding following the conclusion ofthe

adversary proceeding brought by the Creditors Committee.”

The Plan Administrator responded to that motion questioning "the

necessity and wisdom of paying disputed claims". The response stated further

that"however to the extent the Wooleys meet their burden of proof and convince

the Court that the relief requested is not harmful to the estate, the Debtors

acquiesce."

The court ruled on the Wooleys' motion by essentially granting it and

ordering debtors “to distribute up to the amount of $2,867,500.00 (Two Million

Eight Hundred Sixty-Seven Thousand Five Hundred Dollars and No Cents) as

directed by the Wooleys in exchange for an irrevocable letter or letters of credit

in the aggregate amount of $2,939,200.00 (Two Million Nine Hundred

Thirty-Nine Thousand Two Hundred Dollars and No Cents).” The only

explanation in the record for the variance in the amount of the Wooleys' claim

set forth in the motion ($3,180.000.00) and the amount transferred to the

Wooleys ($2,867,500.00) is from the Wooleys' filings asserting that they were

only able to obtain a letter of credit in the amount of $2,939,200.00 so that the

distribution to them was correspondingly reduced. Without commenting on

when the amount of the secured claims would be resolved, the court stated that

"[f]urther, such arrangement shall remain in place until the resolution of the

secured claims asserted against the Debtors' estates by the Wooleys pursuant

to a final order of this [c]ourt . . . ."19
No. 07-50912

it was. They’ve had that money for a couple of years ostensibly to invest

however they want. It hasn’t been in the control of the plan administrator. 

(Emphasis added).

12

Because we have determined that the Wooleys were oversecured and are

entitled to litigate the amount of their secured claims including post petition

interest and attorneys’ fees, we conclude thatthe bankruptcy and district courts

erred in determining that the reserve fund expressly negotiated by the parties

to protect the Wooleys’ secured claims in excess of the amount paid to them was

“superfluous.” For the reasons explained above, the bankruptcy court and the

district court erred in concluding that the Wooleys had no secured claims for

sums in excess of the amount paid to them.

Based on the foregoing, we conclude that the district court erred in

affirming the bankruptcy court’s order authorizing disbursal ofthe reserve fund

to pay the Plan Administrator’s counsel. Therefore, we vacate the judgments of

the district court and the bankruptcy court and remand this case to the

bankruptcy court with instructions to: (1) determine the amount of the Wooleys’

remaining allowed secured claims for attorneys’ fees and interest pursuantto 11

U.S.C. § 506(b); and (2) order disgorgement of Appellee’s counsel’s attorneys’ fees

paid out of the reserve fund not to exceed $500,000.00, in order to satisfy the

Wooleys’ allowed secured claims. 

VACATED.

REMANDED.