In re Terrell

641 B.R. 888

IN RE: Antonio TERRELL and Angel Marie Terrell, Debtors.

Case No. 18-28674-gmh

United States Bankruptcy Court, E.D. Wisconsin.

Signed July 19, 2022

Rebecca R. Garcia, Oshkosh, WI, Trustee, Pro Se.

Michael J. Watton, Milwaukee, WI, for Debtors.

ORDER ON MOTION TO VACATE MODIFICATION AND DISCHARGE ORDERS

G. Michael Halfenger, Chief United States Bankruptcy Judge

On July 12, 2022, the court of appeals reversed this court's September 21, 2021 order sustaining the debtors’ claim objection, which contested the State of Wisconsin's allegation that its benefits-overpayment claim is entitled to priority under § 507(a)(1)(B) of the Bankruptcy Code. Based on that reversal, the state filed a motion under Civil Rule 60(b)(1) and (5) (made applicable by Bankruptcy Rule 9024) to vacate (a) a November 3, 2021 order granting the debtors’ motion to modify their confirmed plan to reduce the plan term from five years to three and (b) a December 8, 2021 order granting the debtors a discharge under Code § 1328 following their completion of all payments under the modified plan. The state filed and served notice that any objection to the motion must be filed on or before July 27.

I

A

The state did not properly serve the motion. The state's counsel filed proof of service of the motion and notice of the time to object to it but only on the debtors’ counsel and the chapter 13 trustee. Bankruptcy Rule 9014(a) & (b) requires the state to serve its motion on "the party against whom relief is sought" (i.e., the debtors) "in the manner provided for service of a summons and complaint by Rule 7004". In other words, the state must mail a copy of its motion directly to the debtors. Fed. R. Bankr. P. 7004(b)(9) (requiring service "[u]pon the debtor ... by mailing a copy ... to the debtor at the address shown in the petition or to such other address as the debtor may designate in a filed writing") & (g) (requiring service on "the debtor's attorney" in addition to service on the debtor "[i]f the debtor is represented by an attorney"). It does not appear to have done that.

B

The motion is also premature. It contends that the court of appeals’ judgment reversing the September 21 decision means that this court's subsequent orders modifying the plan and granting the debtors discharges must be vacated. But the court of appeals’ judgment becomes effective only once the mandate issues. See Bell v. Thompson , 545 U.S. 794, 800–01, 125 S.Ct. 2825, 162 L.Ed.2d 693 (2005) ; Calderon v. Thompson , 523 U.S. 538, 558, 118 S.Ct. 1489, 140 L.Ed.2d 728 (1998) ; Kusay v. United States , 62 F.3d 192, 193–94 (7th Cir. 1995).

The mandate will issue no earlier than August 2, 2022—21 days after the entry of the judgment. Appellate Rule 41(b) provides, "The court's mandate must issue 7 days after the time to file a petition for rehearing expires, or 7 days after entry of an order denying a timely petition for panel rehearing, petition for rehearing en banc, or motion for stay of mandate, whichever is later." And Appellate Rule 40(a)(1) generally affords parties "14 days after entry of judgment" to file a petition for rehearing.

To request rehearing, a party must timely file a petition that brings to the court's attention any "point of law or fact that the petitioner believes the court has overlooked or misapprehended". Fed. R. App. P. 40(a)(2). As discussed below, there may be plausible grounds for such a petition here. So, even if this court has jurisdiction to act on the state's motion to vacate, doing so before the mandate issues would be unwise.

II

A

The state appealed only this court's September 21 decision and order. That order sustained the debtors’ challenge to the state's assertion that its claim is entitled to priority under § 507(a)(1)(B) —a challenge made "in a claim objection", as expressly authorized by Bankruptcy Rule 3012(b). The September 21 order also required further submissions on the debtors’ then-pending motion to modify their confirmed plan, thus plainly leaving that motion unadjudicated.

The court of appeals decision, however, characterizes the September 21 ruling as adjudicating the debtors’ motion to modify their plan, stating:

The Terrells’ plan was confirmed in February 2019. In June 2019 this court held that excess public-assistance payments are not entitled to priority status under § 507(a)(1)(B). In re Dennis , 927 F.3d 1015 (7th Cir. 2019). The ruling in Dennis raised the possibility that the Terrells’ plan could be cut from 60 to 36 months, which would reduce their total payments. They did not seek the benefit of Dennis , however, until December 2020, when they filed a motion objecting to Wisconsin's claim. The bankruptcy judge sensibly treated the Terrells’ motion not as an objection to the state's claim (the Terrells do not deny owing the money) but as a proposal to amend the confirmed plan to eliminate the debt's priority and cut the length of payments to 36 months. This motion, so understood, was granted over the state's objection.

In re Terrell , 21-3059, 39 F.4th 888, 890 (7th Cir. July 12, 2022) (emphasis added).

The bankruptcy court record is clear that the September 21 order did not treat the Terrells’ claim objection "as a proposal to amend the confirmed plan" or adjudicate the Terrells’ separate, then-pending request to modify the plan or suggest that it was doing anything of the sort.¹ The September 21 order is expressly limited to adjudicating the debtors’ Rule 3012(b) objection to the assertion of priority in the state's proof of claim and left the then-pending motion to modify the confirmed plan (to which the state had not then objected) for a later day, stating:

For the foregoing reasons, IT IS ORDERED that:

1. The debtors’ claim objection is sustained, and the Department's claim is determined to not be entitled to priority under § 507 in any amount.

2. Unless following this determination the trustee withdraws her objection to the debtors’ pending request to modify the plan, the trustee must file, by no later than October 12, 2021 , a brief that explains, in detail, all remaining bases for her objection to the modification; the debtors must file a response brief by no later than October 28, 2021 .

Terrell I , 633 B.R. at 882–83.²

What is more, the suggestion in the court of appeals’ decision that claim objections can only contest the amount or validity of a claim—the linchpin in recasting the appealed order adjudicating claim priority into an order adjudicating plan modification—is contrary to Bankruptcy Rule 3012(b), which expressly allows, "A request to determine the amount of a claim entitled to priority may be made only by motion after a claim is filed or in a claim objection ."³ (Emphasis added.)

The state's response to the claim objection was that confirmation of the plan precluded any subsequent determination that its claim is not entitled to priority, even though such a determination is expressly authorized by Rule 3012(b) and affects more than just the treatment of the claim under the plan, including whether any unpaid amount of the claim is dischargeable at the end of the case. See § 1328(a)(2); see also 11 U.S.C. § 523(a)(5) ; Dennis , 927 F.3d at 1017 ("In 2018, Dennis filed a Chapter 13 bankruptcy petition. DHS filed a proof of claim, arguing that the $7,962.25 overpayment debt was a priority domestic support obligation under § 507(a)(1)(B). Dennis objected, arguing the overpayment was a general unsecured dischargeable debt." (Emphasis added.)). In rejecting the state's argument that confirmation of the plan precluded the later adjudication of the debtors’ priority-contesting claim objection, the September 21 order followed the court of appeals’ instruction, in In re Hovis , that "issue preclusion has no role within a unitary, ongoing proceeding." 356 F.3d 820, 822 (7th Cir. 2004) (explaining that decisions suggesting otherwise, such as Adair v. Sherman , 230 F.3d 890 (7th Cir. 2000), "that arise from sequential suits are irrelevant within one suit" (emphasis added)). Instead, " ‘[w]hat matter within a single suit’, apart from any ‘deadlines set by statute and rule’, are ‘the law of the case and judicial estoppel.’ " Terrell I , 633 B.R. at 880 (quoting Hovis , 356 F.3d at 822 ). The September 21 decision reasoned that no statute or rule barred the debtors’ claim objection and neither the law of the case nor judicial estoppel prevented adjudication of its merits. See id. at 876 ("no applicable statute or rule sets a deadline on requests to determine the amount of a claim entitled to priority under § 507. The Department ... does not contest this.") & 879–82. (discussing the application of the law-of-the-case doctrine and judicial estoppel).

The court of appeals’ decision considers none of this, since it construes the appealed order as considering plan modification, not the distinct contested matter raised by the debtors’ request to determine priority. The appellate decision states that § 1329(a) of the Bankruptcy Code —the section authorizing the modification of confirmed chapter 13 plans—does not allow the debtors to reduce the plan term to 36 months, because that would require "reclassifying" the state's claim, stating:

Neither [ 11 U.S.C.] § 1327(a) nor [ 11 U.S.C.] § 1330(a) forbids modification. But what authorizes modification? ....

The bankruptcy court considered the possibility that 11 U.S.C. § 1329 supplies the necessary power. But it did not rely on § 1329, and for good reason. That section includes a lengthy list of authorized changes, but eliminating the priority of a claim that the debtor has itself earlier acknowledged is not among the sorts of changes covered by § 1329. Authority must come from elsewhere.

39 F.4th at 891.

The appealed September 21 order did not rely on § 1329, but the November 3 order adjudicating the debtors’ motion to modify the plan did. That order reasons that if the state's claim is not entitled to priority—the actual relief afforded by the September 21 order—then the debtors’ ...