Mothers Owed Child Support Weren’t Entitled to Notice in Father’s Bankruptcy, Circuit Says

Interpreting Illinois law, the Fifth Circuit narrowly construed the term “creditor” in holding that custodial parents were not entitled to notice of the bankruptcy of the parent who owes child support.

Two women were receiving child support from the same father. Together, they were owed about $300,000 in what presumably would have been priority claims in the father’s chapter 7 case.

Invoking Illinois law, the women used the Illinois department of family services to collect child support arrears. The man did not list the women as creditors in his schedules. Instead, he listed the department, which received both notice of the bankruptcy and notice of the trustee’s summary of the final report. The department did not file a timely claim.

More than 10 days after the filing of the final report, the two women learned about the bankruptcy from another of the man’s former wives. They contacted the department, which only then filed an untimely claim.

Ultimately, the bankruptcy court classified the department’s priority claim as an untimely claim under Section 726(a)(2).

After payment of secured and administrative claims, the trustee held about $70,000, which was not enough to satisfy timely filed priority claims. Therefore, the two women were to receive no distribution in the man’s bankruptcy because their untimely claims came behind timely filed priority claims. The women appealed, but the district court affirmed.

The women then appealed to the Fifth Circuit, contending that the 10-day deadline in Section 726(a)(1) never began to run as to them because they were creditors and did not receive notices of the final report. Even if their claims were untimely, they argued that denial of priority status deprived them of due process under the Fifth Amendment.

The Fifth Circuit affirmed in a per curiam opinion on April 23. The panel included Circuit Judge Carolyn Dineen King.

The appeal turned on the women’s contention that they were “creditors.” Although the panel acknowledged that the term “claim” is given broad interpretation, the circuit nonetheless concluded that the women were not creditors, given the interplay between Illinois law and the Bankruptcy Code.

A “creditor” is defined under Section 101(10) as someone who “has a claim.” In turn, “claim” is defined in Section 101(5) as a “right to payment.” The appeals court cited the Supreme Court’s definition of “right to payment” as “nothing more or less than an enforceable obligation.” Johnson v. Home State Bank, 501 U.S. 78, 83 (1991).

The Fifth Circuit then considered whether the women had enforceable obligations against the debtor.

The circuit panel interpreted Illinois law to mean that the department had the “sole authority” to enforce the child support obligations, because the women had called on the department to collect the arrears. Since the state was collecting child support on their behalf, the panel said that the debtor was required to make all payments to the department, which in turn would pay the women.

Because the debtor was required to pay the department, the panel said that the department was the creditor, “because it has the right to enforce [the two women’s] child support obligations against [the debtor].”

Having found that the department was the creditor entitled to notice, the circuit panel held that the women were not creditors for another reason: they had given the department “the ability to enforce the [debtor’s] child support obligations.”

Because the women were not creditors, they were not entitled to notice, the panel said. Since the department received notices and filed untimely claims, the appeals court upheld the lower courts by ruling that the department’s untimely claims were properly classified under Section 726(a)(2).

In substance, the Fifth Circuit used state law to narrow the Bankruptcy Code’s broad definition of who is a creditor entitled to notice. By ruling that the women were not entitled to notice, they never had an opportunity to participate in the bankruptcy. And who better than former wives might know whether the ex-husband had engaged in transactions that should see the light of day in bankruptcy?

The circuit did not consider whether the women were creditors entitled to notice because they arguably held “disputed” or “unmatured” rights to payment.

As occurred in this case, the narrow definition of “creditor” puts the women at risk of malpractice at the hands of the state.