Seventh Circuit Judge Richard A. Posner reassured bankruptcy judges that they do not commit constitutional error by granting a money judgment for a debt declared nondischargeable.
The bankruptcy judge, upheld in district court, ruled that a debt owing by an individual chapter 7 debtor was nondischargeable. Doubting whether he had constitutional power to issue a final judgment, the bankruptcy judge refused to enter a money judgment for the nondischargeable debt and was again upheld on appeal.
Judge Posner said there is jurisdiction to enter judgment for a nondischargeable debt because the proceeding is “related to” the bankruptcy case. That leaves open the question of whether the bankruptcy court has power to enter a final judgment in view of Stern v. Marshall.
Remanding the case, Judge Posner said there are two alternatives the bankruptcy judge “should consider.” First, the bankruptcy court could determine whether the parties consented to entry of a final money judgment, thus invoking Executive Benefits v. Arkison. Second, the bankruptcy judge could make proposed findings of fact and conclusions of law for review in district court.
Indeed, the parties may have already consented, either impliedly or explicitly. The creditor filed the nondischargeability suit and thus may have impliedly or even explicitly consented to entry of judgment for the debt, and the debtor may have impliedly or explicitly consented by filing the chapter 7 petition in the first place. Both raise interesting questions about consent in the wake of Executive Benefits.
Judge Posner’s opinion also establishes a precedent regarding appellate practice, because entering a money judgment in a dischargeability suit is ordinarily considered discretionary. Judge Posner, though, did not say whether he was remanding for abuse of discretion or commission of a legal error.
Judge Posner may have believed, without saying so directly, that doubting the bankruptcy court’s constitutional power to enter a money judgment was legal error not requiring the appellate court to find an abuse of discretion. Or, perhaps Judge Posner believes that failing even to consider entry of a money judgment in itself was an abuse of discretion.
The appeal entailed a separate issue sub judice in the Supreme Court involving dischargeability for actual fraud under Section 523(a)(2)(A). In Husky v. Ritz, the high court will decide whether there must be a misrepresentation made to the creditor to justify a finding of nondischargeability for actual fraud.
Although the Fifth Circuit in Husky required the existence of a misrepresentation to the creditor, a 2000 decision by Judge Posner in McClellan v. Cantrell did not.
In the Seventh Circuit case decided on April 5, the bankrupt arguably made a fraudulent transfer with actual intent to defraud. The creditor was unaware of the transfer, and the bankrupt had made no representation to the creditor about it.
The bankruptcy judge held that a pre-existing debt owing to the creditor was not rendered nondischargeable by the subsequent transfer with actual intent to defraud that made the debtor unable to repay the pre-existing debt.
Judge Posner also remanded the case to the bankruptcy court to await the outcome of Husky. If the Supreme Court reverses the Fifth Circuit and holds that a misrepresentation to the creditor is not required by Section 523(a)(2)(A), the high court will have vindicated Judge Posner’s McClellan decision, and additional debts will become nondischargeable in the case decided this week.