Reinhart FoodService LLC v. Schlundt

646 B.R. 478

REINHART FOODSERVICE LLC, Appellant,

v.David S SCHLUNDT, et al., Appellee.

Case No. 21-cv-1027-bhl

United States District Court, E.D. Wisconsin, EASTERN DISTRICT OF WISCONSIN.

Signed October 27, 2022

Heath G. Mynsberge, Dempsey Law Firm LLP, Oshkosh, WI, for Appellee.

Eric R. von Helms, Kohner Mann & Kailas SC, Milwaukee, WI, for Appellant.

ORDER REVERSING AND REMANDING CASE

BRETT H. LUDWIG, United States District Judge

Under Bankruptcy Code Section 727(b), a Chapter 7 debtor's bankruptcy discharge eliminates the debtor's liability for "all debts that arose before the date of the order for relief." 11 U.S.C. § 727(b) (emphasis added). This appeal concerns the application of that provision to liabilities arising after the bankruptcy but based on the debtor's pre -bankruptcy promise to guarantee the obligations of a third party. The bankruptcy court concluded it was bound by the Seventh Circuit's decision in Saint Catherine Hospital of Indiana, LLC v. Indiana Family and Social Services Administration , 800 F.3d 312 (7th Cir. 2015) to hold the debts in this case were discharged even though it is undisputed that the transactions that gave rise to the debts did not occur until four years after the debtor filed his joint bankruptcy petition. In re Schlundt , No. 14-20454-beh, 2021 WL 3700401, at *2 (Bankr. E.D. Wis. Aug. 19, 2021). Because that conclusion rests on an overbroad reading of Saint Catherine and is contrary to the plain terms of the Bankruptcy Code, this Court will reverse and direct the bankruptcy court to enter declaratory judgment in favor of Reinhart.

BACKGROUND

From 2003 through 2018, David Schlundt was the owner and sole member of The Refuge, LLC, a restaurant in Antigo, Wisconsin. (ECF No. 2-2 at 29; ECF No. 2-3 at 56.) In that capacity, on September 11, 2003, Schlundt signed a supply agreement (Agreement) with Reinhart FoodService LLC (Reinhart). (ECF No. 2-3 at 56.) Under the Agreement, Reinhart agreed to provide Schlundt's restaurant with goods and services subject to enumerated conditions, including payment terms to be set by Reinhart's credit department. (Id. at 34-35.) Among other things, payments not made in accordance with those terms would be subject to a delinquency charge. (Id. at 35.)

Within the same document, Schlundt also signed an "Individual Personal Guaranty." (Id. ) Under this provision, Schlundt agreed that in exchange for Reinhart's extension of credit to his restaurant, he would "personally guarantee prompt payment of any obligation" of The Refuge to Reinhart "whether now existing or hereinafter incurred." (Id. ) He further promised "to pay on demand any sum which is due ... whenever [The Refuge] fails to pay same." (Id. ) And he confirmed that the guaranty was "absolute, continuing, and irrevocable." (Id. )

Ten years after making this commitment, Schlundt and his wife Jennifer filed a joint petition for personal bankruptcy under Chapter 7. (ECF No. 2-2 at 6-8.) In the filings that accompanied their petition, the Schlundts did not identify Reinhart as a creditor. (Id. at 9-61.) They did not list Reinhart on their Schedule F "List of Creditors Holding Unsecured Nonpriority Claims," and they similarly omitted it from the required list or "matrix" of creditors, which serves as the basis for identifying who receives notice of filings in the bankruptcy case. (Id. at 22-26; ECF No. 2-3 at 42.) As a result, Reinhart did not receive official notice of the bankruptcy. (ECF No. 2-3 at 58.)

At the time of the bankruptcy filing, The Refuge owed Reinhart approximately $10,000 for sales of goods and services under the Agreement. (Id. at 40.) The record is unclear whether that amount was overdue as of the petition date. It is also unclear whether The Refuge had " ‘fail[ed] to pay’ " the debt sufficient to trigger Schlundt's liability under the Personal Guaranty.¹ (ECF No. 9 at 9-10.) In any event, on April 11, 2014, the Chapter 7 trustee administering the bankruptcy issued a Report of No Distribution, confirming that the trustee had completed his administration of the debtors’ estate and determined there were no non-exempt assets available to make distributions to creditors. (ECF No. 2-2 at 3-4.) Ten days later, on April 21, 2014, the Schlundts received their bankruptcy discharge, and their case was then closed. (Id. at 4.)

Schlundt continued to operate The Refuge throughout the bankruptcy proceeding and indeed for several years thereafter. (ECF No. 2-3 at 40.) He also continued to purchase supplies for the restaurant from Reinhart under the Agreement. (Id. ) Then, in the summer of 2018, he closed the restaurant. (Id. ) At the time of its closure, The Refuge owed Reinhart $36,839.62 for goods and services purchased earlier that Spring, from March to May 2018. (Id. )

When The Refuge failed to pay this outstanding sum, Reinhart demanded payment from Schlundt under his Personal Guaranty. (Id. ) He refused to pay, citing his 2014 bankruptcy discharge. (ECF No. 4 at 6.)

Rather than risk sanctions for trying to collect a potentially discharged debt, Reinhart (prudently) returned to the bankruptcy court to obtain clarity on the parties’ rights and obligations. (ECF No. 2-3 at 10.) Reinhart first moved to reopen the Schlundts’ bankruptcy case and then filed an adversary complaint in which it sought a declaratory judgment that the roughly $37,000 in debt arising from unpaid sales in 2018 was not subject to the Schlundts’ 2014 bankruptcy discharge. (Id. at 2, 10.)

Reinhart moved for summary judgment, and, on March 10, 2021, the bankruptcy court heard oral argument on the motion. (ECF No. 2-5 at 1.) Reinhart's primary argument was that because Schlundt's liability for the $36,839.62 did not arise until 2018—four years after he and his wife filed their joint bankruptcy petition—the debt was not discharged under the plain terms of Section 727(b). (ECF No. 2-3 at 28-30.) Reinhart also argued in the alternative that the debt was excepted from discharge under 11 U.S.C. § 523(a)(3) because the debt was not scheduled in time for Reinhart to file a proof of claim. (Id. at 30-31.) In opposition, Schlundt argued that because he signed the Personal Guaranty in 2003, ten years before he filed for bankruptcy, the debt should be deemed to have arisen prior to the petition date, regardless of when the unpaid sales occurred and the corresponding liability arose. (Id. at 46-51.) He also argued that because his was a "no-asset" case, it did not matter that he had failed to include Reinhart on his schedules for Section 523(a)(3) purposes. (Id. at 51-52.)

In an August 19, 2021 Decision and Order, the bankruptcy court ruled that Reinhart's claim was covered by the Schlundts’ 2014 discharge. In re Schlundt , 2021 WL 3700401, at *7. The court noted the division of authority in the bankruptcy courts over the effect of a debtor's discharge on liabilities arising post-petition under a pre-petition personal guaranty. Id. at *3-4. But it concluded it was bound by the Seventh Circuit's decision in Saint Catherine to hold that the liability Reinhart sought to enforce was a pre-petition debt discharged in the Schlundts’ 2014 bankruptcy. Id. at *5. Citing In re Guseck , 310 B.R. 400, 402-03 (Bankr. E.D. Wis. 2004), the bankruptcy court also rejected Reinhart's Section 523(a)(3) argument. Id. at *5-7. The bankruptcy court concluded that Reinhart's "garden variety" debt was discharged notwithstanding any scheduling failures by the Schlundts because Reinhart had not alleged pre-petition fraud related to Schlundt's entry into the personal guaranty sufficient to take the debt outside the Guseck rule. ( Id. at *5.)

Reinhart then appealed to this Court. (ECF No. 1.)

LEGAL STANDARD

Bankruptcy court decisions are reviewed according to the same standards that govern other appeals. In re Midway Airlines, Inc. , 383 F.3d 663, 668 (7th Cir. 2004). Thus, a bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. See Stamat v. Neary , 635 F.3d 974, 979 (7th Cir. 2011). "As a conclusion of law, a grant of summary judgment by the bankruptcy court is therefore reviewed de novo" and "will be affirmed ‘if there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law.’ " In re Midway , 383 F.3d at 668 (quoting Fed. R. Civ. P. 56(c) ). This Court "may affirm ... on any grounds supported by the underlying record." In re Winters , No. 96-c-7117, 1999 WL 281083, at *11 (N.D. Ill. Mar. 31, 1999) (citing McCarthy v. Kemper Life Ins. Cos. , 924 F.2d 683, 686 n.1 (7th Cir. 1991) ) (other citations omitted).

ANALYSIS

In its appeal, Reinhart offers two challenges to the bankruptcy court's decision. First, Reinhart claims the bankruptcy court incorrectly concluded that Reinhart's $36,839.62 claim was a pre-petition debt subject to the Schlundts’ 2014 discharge. Second, Reinhart contests the bankruptcy court's determination that the Schlundts’ failure to schedule Reinhart as a creditor and provide it notice of their bankruptcy petition did not preclude discharge under 11 U.S.C. Section 523(a)(3). Because the first argument necessitates reversal and remand, the Court will limit its discussion to that argument.²

I. Under the Plain Terms of the Bankruptcy Code, Schlundt's 2018 Liability Under the Personal Guaranty Is a Post-Petition Liability Not Discharged in the Schlundts’ 2014 Bankruptcy.

The dispositive question is whether a 2014 bankruptcy discharge order can extinguish a debt from the sale of goods and services in 2018 based solely on the fact that the promise to guarantee such a debt was made in 2003, prior to the bankruptcy. As with most bankruptcy issues, the analysis begins with the plain terms of the Bankruptcy Code.

Under Section 727(b), the Schlundts’ bankruptcy discharge served to discharge "all debts that arose before the date of the order for relief under this chapter." 11 U.S.C. § 727(b). " ‘[D]ebt’ means liability on a claim." Id. § 101(...