Wisconsin Dept. of Children and Families v. Terrell (In re Terrell), 39 F. 4th 888 (7th Cir. July 12, 2022)

The following is a case summary written by the Hon. Meredith Jury, Ret., analyzing a recent case of interest;

SUMMARY

The Seventh Circuit Court of Appeals (the Court) recently ruled that a chapter 13 plan may be modified only if a statute, rule or the litigants’ consent provides authority for the modification.  Neither § 1329 of the Bankruptcy Code, which normally applies to allow plan modifications, nor common practice of the courts provide the necessary authority to change a creditor’s status from a priority claimant to a general unsecured claimant when the law on that issue had changed after confirmation.  Although the debtors might have sought relief under Fed. R. Civ. Proc. Rule 60(b)(1)  (adopted by Bankruptcy Rule 9024), their motion to modify was not brought within the “reasonable time” required by that Rule.  Wisconsin Dept. of Children and Families v. Terrell (In re Terrell), 39 F. 4th 888 (7th Cir. July 12, 2022).  

To view the opinion, click here.

FACTS

The State of Wisconsin overpaid debtors Antonio and Angel Terrell (the Debtors) about $30,000 for public assistance.  When the Debtors filed a chapter 13 case in 2018, Wisconsin filed a claim asserting priority status under Bankruptcy Code § 507(a)(1)(B), which gives priority status to “claims for domestic support obligations…owed directly to or recoverable by a governmental unit.”  The Debtors confirmed a chapter 13 plan in February 2019 which recognized the asserted priority status of Wisconsin’s claim.  Later that year, the Seventh Circuit ruled that excess public-assistance payments were not entitled to priority under § 507(a)(1)(B), which raised the possibility the Debtors could reduce the term of their plan as well as the amount of the plan payments.  However, they did not try to take advantage of that benefit until December 2020, almost eighteen months later, when they filed a motion objecting to Wisconsin’s claim.  The bankruptcy court construed the motion to be a motion to modify the plan and granted the motion.  Wisconsin appealed that ruling and the Court granted a direct appeal to the Circuit.  The Court then reversed and remanded, finding that this modification was not authorized by statute, rule or consent and also confirming, consistent with a recent Supreme Court ruling in Kemp v United States, 142 S. Ct. 1856 (2022), that Rule 60(b)(1) refers to all types of mistakes, including legal mistakes.

REASONING

Wisconsin’s primary objection to the modification on appeal was that the provisions of § 1327(a) made the plan binding, but that argument was easily rejected by the Court since the statute on its face says the plan terms are binding unless modified. (emphasis in the opinion).  The Court then looked for authority for the modification.  It concluded that § 1330(a), which allows revocation of a confirmed plan, did not help because such motion must be brought within 180 days of confirmation.  Similarly, § 1329, not relied upon by the bankruptcy court, was no assistance because its lengthy list of authorized changes does not include eliminating the priority of a claim.  The reasoning of the bankruptcy court – that such changes to confirmed plans were done frequently – did not impress the Court either, stating just because “something is done frequently does not explain why it may be done properly.”

The Court’s last resort for authority was Rule 60(b)(1), which permits relief from a judgment that was attributable to “mistake, inadvertence, surprise, or excusable neglect.”  A new twist on the interpretation of the breadth of Rule 60(b)(1) relief is the Supreme Court’s pronouncement in Kemp that legal mistakes are included in the type of mistake addressed by the Rule.  This might have been a fail-safe for the Debtors, but there was one substantial problem:  Rule 60(c) requires a motion for relief under Rule 60(b)(1) to be brought no more than one year after entry of the order in question and within a “reasonable time.”   Since more than a year had passed after confirmation, it was too late.  Moreover, the Court remarked in dicta that waiting eighteen months from the change in the law to act was hardly reasonable.  The motion failed for lack of authority.

AUTHOR’S COMMENTS

Judge Easterbrook, writing for the Seventh Circuit, tried hard to find authority for this modification, which seemed appropriate, given that without it Wisconsin would keep a priority windfall, at the expense of other creditors and the Debtors.   But, as noted by the opinion, a court cannot rule on a modification without authority and the statute provided none.  The practice pointer here is that parties may avail themselves of the relief provided by Rule 60(b)(1) to correct not only factual and procedural mistakes, as most commonly asserted, but also legal mistakes, as Kemp held.  Just act timely and no later than the one year window.

My concern is not so much with the reasoning of Terrell, which is sound, but with the holding of Kemp concerning legal mistakes.  What makes a legal error, normally corrected by an appeal with its short time frame for filing, any different than the legal mistake now covered by Rule 60?  Does this mean parties now have a full year to question whether a judge “made a mistake” when ruling on an issue of law?

These materials were authored by the Hon. Meredith Jury, Ret., a member of the Insolvency Law Committee, with editorial assistance by Summer Shaw of Shaw & Hanover, PC (ss@shaw.law) a member of the ILC.

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