In a split decision, the Eighth Circuit Bankruptcy Appellate Panel seemingly held that the holder of a priority domestic support claim can ignore a bankruptcy court order reducing the amount of the claim and, after discharge, collect the disallowed portion of the claim without violating the discharge injunction.

The majority opinion on June 13 was written by Bankruptcy Judge Robert J. Kressel of Minneapolis. The dissenter was Bankruptcy Judge Thomas L. Saladino of Lincoln, Neb.

The opinion could be read as encouraging priority creditors to ignore bankruptcy court orders reducing or disallowing their claims. On the other hand, the opinion might be understood more narrowly to mean that the creditor was able to collect a disallowed debt only because the bankruptcy court failed to formulate its opinion and order correctly.

A man filed a chapter 13 petition, listing his former wife as the holder of a priority unsecured domestic support obligation. The Missouri Division of Child Support Enforcement initially filed an unsecured priority claim for about $36,000. Later, the Division learned that it had incorrectly calculated the monthly support obligation and filed an amended claim for more than $88,000.

The debtor objected to the amended claim. The bankruptcy court held a hearing and disallowed the $88,000 claim while allowing the claim for $36,000, ruling that the Department had waived the excess under Missouri law by acquiescing to the lower payments after the children were emancipated.

The debtor confirmed his plan, paid the entire $36,000 allowed claim over his five-year plan and got a discharge. The Department never appealed the disallowance order or the plan confirmation order, so those orders became final.

After discharge, the Department began garnishing the debtor’s salary to collect the disallowed portion of the domestic support claim. The debtor filed a contempt motion in bankruptcy court.

Finding the Department in willful contempt of the discharge injunction, the bankruptcy court held that the support obligation had been paid in full and directed the Department to cease collection activities. The bankruptcy court also imposed a $1,300 sanction on the state in compensation for the debtor’s attorney’s fees. The Department appealed and persuaded the majority on the B.A.P.

In a holding with which some may disagree, Judge Kressel for the majority said that the “discharge injunction does not apply to a nondischargeable domestic support obligation, even the disallowed portion.”

The debtor argued that the doctrines of res judicata and collateral estoppel barred the state from contesting the amount of the claim. “While that may be true,” the majority said they would not reach those theories “based on our conclusion that the Division did not violate the discharge injunction.”

“Why even have a claim determination, then?,” Prof. Bruce A. Markell asked after reading the majority’s opinion. In a note to ABI, he mentioned how the appellate panel explicitly held, “[T]he bankruptcy court had jurisdiction to determine the Division’s claim.” He also noted that “the court precluded the debtor, as appellee, from raising an issue contained in the record because he hadn’t raised it before the bankruptcy court. That’s contrary to standard appellate practice; while appellants don’t get to raise new issues on appeal, appellees usually can raise any issue found in the record that supports the judgment.” Prof. Markell is the Professor of Bankruptcy Law and Practice at Northwestern Pritzker School of Law. He was a member of the Ninth Circuit B.A.P. before he returned to teaching.

Even though the bankruptcy court had jurisdiction to fix the amount of the claim for plan purposes, the B.A.P. majority evidently believe that the disallowed portion of the debt was a nondischargeable claim that survived bankruptcy.

The B.A.P. majority based their holding on the notion that the bankruptcy court only ruled about contempt of the discharge injunction and did not base its decision on violation of the prior order disallowing the claim. The dissenter, Judge Saladino, criticized the majority for characterizing the debtor’s motion and the bankruptcy court’s order “too narrowly.” He said the bankruptcy court was clearly sanctioning the Division for trying to collect a debt that was fully paid, whether it was dischargeable or not.

The majority did not discuss the Supreme Court’s 2010 Espinosa opinion, which held that a bankruptcy court order discharging student loan debt was enforceable even though the court employed the incorrect procedure.

The B.A.P. should consider granting rehearing at least to clarify the opinion, even if the result is the same. Did the B.A.P. mean to say that a bankruptcy court can trim down the amount of a nondischargeable priority claim only with respect to payments under a plan, leaving the creditor free to litigate the amount of the claim again in another court after the discharge is entered? The B.A.P. might also explain why the bankruptcy court, if it has jurisdiction, cannot determine the amount of a priority claim with binding force.

Or, if the majority only meant to say that contempt was improper, then the B.A.P. should consider narrowing the language in its opinion.