The Eighth Circuit arguably narrowed a June 2016 opinion from its Bankruptcy Appellate Panel that could have been interpreted to mean that a decision in bankruptcy court reducing the amount of a nondischargeable debt is not enforceable outside of bankruptcy, the rules of res judicata or collateral estoppel to the contrary notwithstanding.
In chapter 13, a man listed 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. Believing it had incorrectly calculated the claim, the Division later filed an amended claim for over $88,000.
The debtor objected to the amended claim. The bankruptcy court disallowed the $88,000 claim and allowed the $36,000 claim, having concluded that the Department waived the excess under Missouri law by acquiescing to lower payments after the children were emancipated.
The debtor completed his five-year plan and got a discharge. The Department never appealed the disallowance order or the plan confirmation order.
After discharge, the Department began garnishing the debtor’s salary to collect the disallowed $52,000. The bankruptcy court held the Department in contempt of the discharge injunction.
The BAP reversed, holding that the “discharge injunction does not apply to a nondischargeable domestic support obligation, even the disallowed portion.” The debtor appealed and lost once more in an Aug. 22 opinion for the Eighth Circuit authored by Circuit Judge James B. Loken.
Judge Loken ducked the more significant issue regarding the preclusive effect of the bankruptcy court’s ruling that the Department had waived the $52,000 claim under state law, because, he said, it was an appeal only from the contempt order, not the disallowance order.
With regard to contempt, Judge Loken said that the bankruptcy court could not use Section 105(a) to impose sanctions in contravention of specific statutory provisions, citing Law v. Siegel, 134 S. Ct. 188 (2014). He referred to Sections 523(a)(5) and 1328(c)(2) for the proposition that domestic support obligations “are not dischargeable under any circumstances,” citing United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010).
Together, those principles “eliminated the basis for the bankruptcy court’s sanctions order,” Judge Loken said.
In simple terms, the Eighth Circuit seems to say there is no contempt power available to enforce a bankruptcy court order reducing a nondischargeable claim.
Judge Lokens sidestepped the larger issue by refusing to “render an advisory opinion” on the preclusive effect of the bankruptcy court’s order disallowing the additional claim for $52,000. Consequently, the circuit court expressed “no view on the merits of whether [the debtor] remains personally liable for the disallowed portion of [the Department’s] bankruptcy claim.” “These are not easy issues,” he added.
With regard to whether the bankruptcy court even had jurisdiction to enforce its prior claim disallowance order, Judge Lokens said that Local Loan v. Hunt, 292 U.S. 234 (1934), “might give the bankruptcy court ancillary jurisdiction to enforce” that order. On the other hand, he said, the fact that domestic support claims are not dischargeable under any circumstances “puts a very different gloss on the issue,” citing Siegel.
In substance, Judge Lokens might be saying that provisions of the Bankruptcy Code making some types of debt automatically nondischargeable may somehow divest the bankruptcy court of jurisdiction. Or, perhaps, the power of the bankruptcy court regarding nondischargeable claims does not extend beyond the bankruptcy case itself.
Although it is cold comfort for the debtor, Judge Lokens said that the state court was “fully competent” to rule on the preclusive effect of the bankruptcy court’s disallowance order.
The opinion lends itself to a petition for rehearing en banc.
To read ABI’s discussion of the BAP opinion and the dissent, click here.
The opinion is Spencer v. State of Missouri Department of Social Services, 16-3182 (8th Cir. Aug. 22, 2017).