Ferguson v. West Central FS, Inc., No. 15-3093 (7th Cir. 2016)

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Justia Opinion Summary

The Fergusons proposed to repay their farm debts under Bankruptcy Code Chapter 12, including a $300,000 loan from First Community Bank, secured by a mortgage plus a lien on farm equipment and crops, and a $176,000 loan from FS, secured by a junior lien on equipment and crops. The bankruptcy judge approved a sale of equipment and crops, which yielded $238,000. The Bank, as senior creditor, demanded those proceeds. FS argued that the Bank should be required to recoup through the mortgage, allowing FS to be repaid from the equipment sale; "marshaling" is not mentioned in the Code, but available under state law. The Fergusons wanted reorganization, to keep their farm. The judge awarded the Bank $238,000. The parties could not agree on a repayment plan. The judge converted the case to a Chapter 7 liquidation. The trustee sold the farm for $411,000, paying the Bank the balance of its claim. About $261,000 remains. FS wanted to be treated as a secured creditor and repeated its request for marshaling. The equipment sale generated federal and state tax bills, with priority among unsecured creditors, 11 U.S.C. 507(a)(8). FS’s status—as a secured creditor with marshaling, or a general unsecured creditor without it—determines whether the taxes will be paid during the bankruptcy. Tax debts are not dischargeable; the Fergusons opposed marshaling. The bankruptcy judge approved FS’s request, stating that he would have approved the original request had he known that the farm would be sold. The district court remanded, stating that marshaling is proper only if two funds exist simultaneously. One fund (equipment and crop proceeds) is gone, only the land sale fund still exists. The Seventh Circuit dismissed an appeal for lack of jurisdiction; the remand was not a final order.

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In the United States Court of Appeals For the Seventh Circuit ____________________ No. 15 3093 IN THE MATTER OF: JERRY DEAN FERGUSON and JULIE RENE FERGUSON, Debtors. APPEAL OF: WEST CENTRAL FS, INC. ____________________ Appeal from the United States District Court for the Central District of Illinois. No. 14 1071 — James E. Shadid, Chief Judge. ____________________ ARGUED FEBRUARY 24, 2016 — DECIDED AUGUST 23, 2016 ____________________ Before EASTERBROOK, ROVNER, and HAMILTON, Circuit Judges. EASTERBROOK, Circuit Judge. Jerry and Julie Ferguson proposed a plan to repay the debts on their family farm un der Chapter 12 of the Bankruptcy Code. This appeal con cerns two of those debts: (a) a loan of $300,000 from First Community Bank, secured by a mortgage on the farm plus a lien on the Fergusons’ farming equipment and crops, and (b) 2 No. 15 3093 a loan of $176,000 from West Central FS, secured by a junior lien on the equipment and crops. The bankruptcy judge approved a sale of the equipment and crops, which yielded $238,000. The Bank, as the senior creditor, demanded those proceeds. But West Central offered an idea that would protect its own security interest: require the Bank to recoup its loan via the mortgage, which would allow West Central to be repaid from the sale of equipment and crops. Both secured creditors would be made whole. This remedy is called marshaling. It is not mentioned in the Bankruptcy Code, but the Supreme Court has said that bankruptcy courts should apply the doctrine according to state law. Meyer v. United States, 375 U.S. 233 (1963); see also Butner v. United States, 440 U.S. 48 (1979). The Fergusons wanted to keep their farm—Chapter 12 provides for reorganization, not liquidation—which made Bankruptcy Judge Perkins reluctant to order foreclosure. Re covering from the farmland without foreclosure—that is, col lecting monthly mortgage payments for years to come— would unnecessarily delay the Bank’s recouping its loan, the judge wrote. 2011 Bankr. LEXIS 4581 (Bankr. C.D. Ill. Nov. 28, 2011). The judge rejected West Central’s proposal and awarded the $238,000 to the Bank, though he noted that he might reconsider his decision if the farm were sold. When the parties to the bankruptcy could not agree on a repayment plan, the judge converted the case to a liquida tion under Chapter 7 and appointed a trustee. The trustee sold the farm for $411,000 and paid the Bank the balance of its claim. About $261,000 remains to be divvied up, and West Central wants to be treated as a secured creditor. No. 15 3093 3 When a senior creditor can seek repayment from sources A and B, and a junior creditor from only B, marshaling un der Illinois law allows a court to order the senior creditor to recover from A so long as that wouldn’t harm the senior creditor. See, e.g., Wyman v. Fort Dearborn National Bank, 181 Ill. 279 (1899). The judge initially denied West Central’s re quest because he thought that marshaling would have harmed the senior creditor. After the bankruptcy was converted to a liquidation, West Central repeated its request for marshaling. That rem edy would have been appropriate after all, it maintained, be cause the farm has been sold and the Bank repaid. Marshal ing could be applied in retrospect by treating the Bank’s re covery as having come from the sale of the farmland, and treating $238,000 of the money now in the estate as having come from the equipment and crops. Money is fungible, West Central reasoned, so why not use this accounting method to satisfy both secured creditors? Though the Bank no longer has an interest in fighting marshaling (after all, it has been paid in full), the Internal Revenue Service does. The sale of equipment and crops gen erated big tax bills: over $200,000 that the Fergusons owe to the federal and Illinois treasuries. The tax collectors get pri ority among unsecured creditors under 11 U.S.C. §507(a)(8), which means that West Central’s status—it would be a se cured creditor with marshaling, or a general unsecured cred itor without it—determines whether the taxes will be paid during the bankruptcy. Because the tax debts are not dis chargeable, see 11 U.S.C. §523(a)(1)(A), the Fergusons also oppose marshaling—they aren’t going to get any money from the sales, so they’d prefer satisfying the creditors with 4 No. 15 3093 the statutory right to haunt them after bankruptcy. The trus tee, who represents the interests of unsecured creditors, also opposes marshaling. The bankruptcy judge approved West Central’s second request. 2013 Bankr. LEXIS 3386 (Bankr. C.D. Ill. Aug. 20, 2013). The judge wrote that he would have approved the original request had he known that the farm was going to be sold, and he saw no obstacle to applying the equitable reme dy three years later. In a separate order he awarded West Central post petition interest on its claim. 2014 Bankr. LEXIS 2676 (Bankr. C.D. Ill. June 18, 2014). As an oversecured credi tor West Central is entitled to interest while the bankruptcy is pending, but even with interest it cannot receive more than the value of its collateral. 11 U.S.C. §506(b). Interest has taken its claim from $176,000 to $250,000, so the judge awarded West Central the value of the collateral—$238,000. The United States, the trustee, and the Fergusons ap pealed to the district court, which reversed and remanded. 2015 U.S. Dist. LEXIS 121096 (C.D. Ill. Sept. 11, 2015). The court held that marshaling is proper only if two funds exist simultaneously. Because the money from one fund (the pro ceeds from the equipment and crops) had been paid out years ago, only the other fund (the proceeds from the land) still exists. Seeing no precedent in Illinois to support West Central’s proposal, the district court told the bankruptcy judge to resolve the case without marshaling. West Central has appealed, asking us to reinstate the bankruptcy court’s decision. But first we must decide wheth er we have jurisdiction. No. 15 3093 5 In bankruptcy cases this court has jurisdiction over ap peals from “final decisions, judgments, orders, and decrees” of the district court. 28 U.S.C. §158(d)(1). (Subsection (d)(2) gives us discretion to accept interlocutory appeals certified as meeting certain prerequisites, but no one has requested such an appeal.) It isn’t enough, then, to say that the bank ruptcy court’s order was final—we must consider the district court’s order. That inquiry may be straightforward when the district court affirms a final order of the bankruptcy court; not so when the district court remands a case, as it did here. A remand is not final, and therefore is not appealable, unless only ministerial acts remain for the bankruptcy court. See, e.g., In re Rockford Products Corp., 741 F.3d 730, 733 (7th Cir. 2013); In re XMH Corp., 647 F.3d 690, 693–94 (7th Cir. 2011). So we asked at oral argument: What will or must the bank ruptcy court do on remand? As far as we can tell—even with the benefit of the parties’ supplemental memoranda—no one is sure. The question eludes West Central. Its memo discusses only the finality of the bankruptcy court’s order. The joint memo of the United States and the trustee also focuses on the bankruptcy court’s order. The Fergusons’ memo is super ficially more helpful: it says that “only ministerial matters” are left to be resolved. But it does not explain why, and when a court needs facts it can ignore naked conclusions such as this one. Our review of the record, including the most recent pro posed distribution (filed February 5, 2014) leaves us unsure what will happen on remand. We expect that the trustee will propose allocating $26,000 in compensation and expenses for herself and $208,000 to pay the tax collectors. That would 6 No. 15 3093 leave $27,000 for the unsecured creditors, whose allowed claims (including West Central’s) total $246,000. No unsecured creditor (other than West Central, which was treated as secured at the time) objected to the most re cent proposed distribution before the deadline that the bank ruptcy judge set. Arguments that could have been raised ear lier are forfeited on remand, but it isn’t surprising that no one objected to claims of the unsecured creditors—the estate was $149,000 short of having anything to distribute to them. Objecting to an unsecured claim would have been a futile exercise because it could not have changed the distribution. While the Bankruptcy Code and corresponding procedural rules mandate deadlines for some objections, see, e.g., Taylor v. Freeland & Kronz, 503 U.S. 638 (1992) (deadline to object to debtor’s claimed exemptions under 11 U.S.C. §522(l) and Fed. R. Bankr. P. 4003(b)), they don’t do so for objections to claims or to proposed distributions. See Schwab v. Reilly, 560 U.S. 770 (2010). A new proposal provides a new opportunity for the judge to consider objections. And no party has told us that there will be no objections. The trustee suggested to the district judge that West Cen tral would get about $17,000 without marshaling. By our cal culations, West Central’s pro rata share if there are no objec tions will be more than $19,000. This difference doesn’t look like a rounding error, though we don’t know how the trustee got to $17,000. That’s because she didn’t take advantage of the opportunity we gave her to explain what the distribution will be on remand. Neither did any of the other parties. We therefore cannot treat the remand as a final decision. The United States contends that West Central’s request for marshaling is a “discrete dispute,” appealable as soon as No. 15 3093 7 it is decided without regard to ordinary notions of finality. Indeed, every “core proceeding” listed in 28 U.S.C. §157(b), the United States suggests, is a dispute that may be appealed piecemeal. This confuses disputes with issues. The Supreme Court clarified those terms last year in Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (2015). The debtor in that case proposed a plan to repay his debts, but the bank ruptcy court refused to confirm the proposal and told the debtor to come up with a new plan. The debtor appealed, noting that “confirmations of plans” are on the list of core proceedings, §157(b)(2)(L). When a judge rejects a plan, the debtor argued, that ends the “dispute” over whether to con firm that plan and is appealable. The Supreme Court unanimously rejected that view. The dispute in Bullard was over how the debts would be repaid. Whether a particular plan would appropriately resolve that dispute is an issue. And deciding an issue without resolving the underlying dispute, the Court held, is not final. Here the parties contest how the remaining $261,000 should be divided. West Central offered an argument that would have resolved that dispute, but the district court re jected it. The issue of marshaling has been finally resolved in the district court, but the dispute—Who gets how much money?—remains open. And according to Bullard it’s the dispute that matters to appellate jurisdiction. Imagine that West Central had made alternative argu ments to resolve the estate’s disbursement: the Bank’s lien was invalid, or if it wasn’t then the liens should be mar shaled, or if not then the Bank’s lien should be equitably sub rogated. And imagine that the bankruptcy court had decided 8 No. 15 3093 these questions one at a time over the course of a few weeks. The United States believes that each decision would be a fi nal resolution of a “discrete dispute” that could be appealed. The Solicitor General made just this argument in Bullard; the Court labeled it “implausible.” 135 S. Ct. at 1694. West Central makes hay of a case, In re Bulk Petroleum Corp., 796 F.3d 667 (7th Cir. 2015), in which we identified a dispute narrower than the final distribution of the estate. But the parties to Bulk Petroleum had stipulated that there would be no further arguments between them once the appeal was resolved—the entire contested amount belonged either to the estate or the creditor, and the appeal would fix the par ties’ rights to the money. Cf. Bullard, 135 S. Ct. at 1692–93. There was no chance that the dispute would return to us on a successive appeal. Here the parties have had multiple chances to stipulate similarly. They haven’t. That leaves us to wonder what they have in store for the bankruptcy court now. Every litigant tells us that Bullard is inapplicable because it involved a filing under Chapter 13. But Bullard interprets §158, which sets out the rules of appellate jurisdiction for bankruptcy cases—all bankruptcy cases. The parties offer no argument that §158 bears a distinct meaning for each chapter of the Bankruptcy Code. Bullard interprets §158, which ap plies to this appeal no less than to a Chapter 13 proceeding. This appeal is dismissed for want of jurisdiction.