If the law changes, neither judicial estoppel nor law-of-the-case prevents the debtor from objecting to the classification of a claim that was treated as having priority in a confirmed chapter 13 plan, according to Chief Bankruptcy Judge G. Michael Halfenger of Milwaukee, Wis.
A couple filed a chapter 13 petition and confirmed their plan in February 2019. They owed about $30,000 to the state welfare department for overpayment of public assistance benefits. They scheduled the claim as a domestic support obligation owing to the government entitled to priority under Section 507(a)(1)(B).
Because they were paying all of their disposable income under a five-year plan, Section 1322(a)(4) allowed them to confirm a plan without full payment of the domestic support obligation they scheduled as a priority claim.
The plan was structured to provide full payment for administrative creditors, a secured auto loan, and priority tax claims. The plan would only pay the domestic support obligation, or DSO, if anything were left after paying those three categories of claims. It appeared as though there would be nothing left for the DSO claim, let alone unsecured creditors.
A few months after confirmation, the debtors gave up a car and modified the plan to omit payment on the secured auto loan. Giving up the car freed up cash available for the DSO claim. Payment toward the DSO claim would have eaten up everything and left nothing for unsecured creditors.
Also a few months after confirmation, the Seventh Circuit decided In re Dennis, 927 F.3d 1015 (7th Cir. 2019), narrowly defined DSOs, and held that overpayment of public assistance to the government is not a DSO entitled to priority under Section 507(a)(1). To read ABI’s report on Dennis, click here.
As a prelude to modifying their plan to shorten the term, the debtor objected to the $30,000 DSO claim, contending it was not entitled to priority. The state conceded that the DSO was not a priority claim following Dennis but argued that the confirmed plan, res judicata, law-of-the-case, or judicial estoppel barred the debtors from taking away priority.
Judge Halfenger sided with the debtors in his September 21 opinion.
With regard to the preclusive effect of the confirmed plan, Judge Halfenger observed that plans are confirmed quickly and that objection to a governmental priority claim “may of necessity be raised and resolved long after confirmation.” He also said that neither the Bankruptcy Code nor the Bankruptcy Rules sets a deadline for claim objections, “another indication that the claims adjudication process may proceed apart from and after plan confirmation when that process is not needed to determine whether the court may confirm the debtor’s plan.”
Originally, there was no cause for objecting to the DSO claim because the first plan would have left nothing for the DSO claim after payment of claims that must be paid in full as a condition to confirmation. Furthermore, Section 1322(a)(4) allowed the debtors to confirm a plan without full payment of the domestic support obligation, even if it were entitled to priority.
If the debtors had not objected to the DSO claim after giving up the car, all of the plan payments would have gone toward the DSO claim, leaving nothing for general unsecured claims.
Judge Halfenger rejected the idea that confirmation “forecloses all later disputes over the allowance or priority status of that claim.” He went on to say that objecting to the priority of the claim did not require amending the plan.
Regarding law-of-the-case, he cited the Seventh Circuit for saying that invocation of the doctrine is discretionary, not mandatory. Even if plan confirmation was a “ruling” that might imply the doctrine, he cited the Second Circuit for holding that an intervening change in law is a “potential good reason” to depart from an earlier ruling.
Even if confirmation were a determination about the DSO claim’s priority, Judge Halfenger said that “Dennis renders that determination clearly erroneous, and under these circumstances, using the law-of-the-case doctrine to foreclose adjudicating whether the claim is entitled to priority threatens to work a manifest injustice — foreclosing the debtors’ ability to discharge the claim after completing the plan.”
Judge Halfenger thus held that law-of-the-case did not require denying the claim objection.
Similarly, judicial estoppel is an equitable doctrine employed in the court’s discretion.
Judicial estoppel was inapplicable because confirmation did not depend on the priority status of the claim, and the parties did not “debate” priority before confirmation. By conceding that the claim was not entitled to priority, Judge Halfenger said that the state was “not well positioned to argue that the debtors stand to gain an unfair advantage from such a determination.”
Judge Halfenger sustained the objection and held that the claim was not entitled to priority.
The successful claim objection means that the DSO claim will be discharged when the debtors complete their plan payments. Were it otherwise, they would remain saddled with the $30,000 debt after discharge.
If the law changes, neither judicial estoppel nor law-of-the-case prevents the debtor from objecting to the classification of a claim that was treated as having priority in a confirmed chapter 13 plan, according to Chief Bankruptcy Judge G. Michael Halfenger of Milwaukee, Wis.
A couple filed a chapter 13 petition and confirmed their plan in February 2019. They owed about $30,000 to the state welfare department for overpayment of public assistance benefits. They scheduled the claim as a domestic support obligation owing to the government entitled to priority under Section 507(a)(1)(B).
Because they were paying all of their disposable income under a five-year plan, Section 1322(a)(4) allowed them to confirm a plan without full payment of the domestic support obligation they scheduled as a priority claim.
The plan was structured to provide full payment for administrative creditors, a secured auto loan, and priority tax claims. The plan would only pay the domestic support obligation, or DSO, if anything were left after paying those three categories of claims. It appeared as though there would be nothing left for the DSO claim, let alone unsecured creditors.
A few months after confirmation, the debtors gave up a car and modified the plan to omit payment on the secured auto loan. Giving up the car freed up cash available for the DSO claim. Payment toward the DSO claim would have eaten up everything and left nothing for unsecured creditors.