State of Missouri, etc. v. Michael Spencer , 868 F.3d 748 ( 2017 )

United States Court of Appeals
For the Eighth Circuit
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No. 16-3182
No. 16-3183
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In re: Michael Eugene Spencer; Patricia Anne Spencer
lllllllllllllllllllllDebtors
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State of Missouri Department of Social Services
lllllllllllllllllllllAppellee/Cross Appellant
v.
Michael Eugene Spencer; Patricia Anne Spencer
lllllllllllllllllllllAppellants/Cross Appellees
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Appeals from the United States Bankruptcy
Appellate Panel for the Eighth Circuit
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Submitted: April 6, 2017
Filed: August 22, 2017
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Before WOLLMAN and LOKEN, Circuit Judges, and NELSON, District Judge.1
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1
The Honorable Susan Richard Nelson, United States District Judge for the
District of Minnesota, sitting by designation.
LOKEN, Circuit Judge.
Michael and Patricia Spencer filed for Chapter 13 bankruptcy protection. The
Missouri Department of Social Services (“MDSS”) filed a proof of claim in the
amount of $36,026.27 for an unsecured domestic support obligation (“DSO”) to pay
spousal and child support arrears to Michael’s prior spouse. See 11 U.S.C. § 501.
MDSS then determined it had improperly calculated Michael’s support obligations
under the Missouri state court’s divorce decree after the children’s emancipation.
MDSS filed an amended proof of claim for $88,026.27 three months after filing its
initial proof of claim.
The Spencers objected to the amended proof of claim on multiple grounds, see
§ 502(b), including their contention that the greater support payments now claimed
by MDSS had been “waived by acquiescence” under Missouri Law. MDSS
responded to the objection, arguing that Michael should have known he was obliged
to pay the greater amount based on two mailings stating the correct obligation. After
a hearing, the bankruptcy judge sustained the debtors’ objection, disallowing the
amended proof of claim. See § 502(b)(1). MDSS did not appeal that order.
Subsequently, the bankruptcy court confirmed the Spencers’ Chapter 13 plan,
which required $600 per month payments to MDSS on its $36,026.27 allowed claim.
The Division did not object to the plan. After the Spencers completed payments under
the plan, they applied for and received a bankruptcy discharge. See § 1328(a). Six
weeks later, MDSS issued an Income Withholding Order, garnishing Michael’s wages
to collect $52,000 for the past-due, disallowed DSO debt plus additional interest.
Instead of contesting the garnishment under state law, the Spencers’ attorney filed a
motion for sanctions, arguing MDSS’s collection action willfully violated the
discharge injunction. See § 524(a) (effect of discharge). After a hearing, the
bankruptcy judge agreed and ordered MDSS to cease attempting to collect the debt
in violation of the discharge injunction and, as a contempt sanction, to pay the
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Spencers attorney’s fees in the amount of $1,335. MDSS appealed that ruling to the
Bankruptcy Appellate Panel.
The BAP reversed the contempt order sanctions, concluding the bankruptcy
court abused its discretion because a discharge injunction “does not apply to a
nondischargeable domestic support obligation, even the disallowed portion,” and
therefore MDSS’s attempt to collect a prepetition DSO did not willfully violate the
discharge injunction. In re Spencer, 550 B.R. 766, 771 (B.A.P. 8th Cir. 2016). The
Spencers appeal the BAP’s decision to reverse the contempt order sanctions. MDSS
cross appeals, arguing the BAP’s opinion could be interpreted as improperly
modifying a Missouri support decree. As the BAP issued a judgment and mandate,
we have jurisdiction to review its final order under 28 U.S.C. § 158(d). We affirm the
BAP’s order and decline MDSS’s request to further interpret the BAP’s decision.
I.
Subject to exceptions, a bankruptcy discharge imposes an “injunction against
the commencement or continuation of an action, the employment of process, or an act,
to collect, recover or offset any debt as a personal liability of the debtor.” 11 U.S.C.
§ 524(a)(2). One broad exception is a DSO debt. A Chapter 13 discharge “does not
discharge an individual debtor from any debt . . . for a domestic support obligation.”
11 U.S.C. § 523(a)(5); see § 1328(c)(2). The Supreme Court interprets this to mean
that domestic support obligations “are not dischargeable under any circumstances.”
United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 279 n.10 (2010). On
appeal, all parties agree Michael’s support arrears debt is a DSO as defined in 11
U.S.C. § 101(14A). Thus, the BAP correctly ruled that the disallowed portion of
MDSS’s DSO claim was not subject to the discharge injunction imposed when the
bankruptcy court granted the Spencers a discharge. Spencer, 550 B.R. at 771; accord
In re Diaz, 647 F.3d 1073, 1089-90 (11th Cir. 2011). That ruling eliminated the basis
for the bankruptcy court’s sanctions order.
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On appeal, the Spencers do not defend the bankruptcy court’s sanctions order
based on a violation of the discharge injunction. Rather, citing In re Hann, 711 F.3d
235, 243 (1st Cir. 2013), they contend the bankruptcy court had authority under § 105
of the Code to issue contempt sanctions because MDSS acted in violation of a
confirmed plan and the Spencers’ full payment of the debt by attempting to collect
more than the bankruptcy court had determined was owing. The BAP majority
declined to address this contention for a sound reason -- it was raised for the first time
on appeal. Spencer, 550 B.R. at 772. Though there is discretion to consider a new
argument in exceptional circumstances, see In re Keely & Grabanski Land P’ship, 832
F.3d 853, 858 (8th Cir. 2016), and the dissenting panel member found a basis to
affirm the sanction under § 105(a), we agree with the BAP majority that affirming on
this ground “would require us to change the debtor’s cause of action and change the
remedy from contempt to a sanction on an implied cause of action.”
Section 105(a) provides bankruptcy courts “statutory authority to ‘issue any
order, process, or judgment that is necessary or appropriate to carry out the provisions
of’ the Bankruptcy Code. . . . But in exercising those statutory and inherent powers,
a bankruptcy court may not contravene specific statutory provisions.” Law v. Siegel,
134 S. Ct. 1188, 1194 (2014); see In re Clark, 223 F.3d 859, 864 (8th Cir. 2000)
(“Section 105(a) gives the bankruptcy courts broad power to implement the provisions
of the bankruptcy code”). The bankruptcy court imposed sanctions to remedy
MDSS’s violation of the discharge injunction. The Spencers identify no provision of
the confirmed Chapter 13 plan that prohibited MDSS’s garnishment action, unlike the
specific plan provision in In re Burnett, 646 F.3d 575, 581 (8th Cir. 2011). Based on
Supreme Court authority that DSO obligations “are not dischargeable under any
circumstances,” MDSS had a reasonable basis for believing that the disallowed
portion of the support arrears debt would survive the Chapter 13 bankruptcy case.
Even if MDSS was wrong on the merits, an issue that is not before us, its action did
not warrant a contempt order and sanctions for bad faith abuse of the confirmation
plan or the bankruptcy process. See Diaz, 647 F.3d at 1090-92 (“res judicata and
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collateral estoppel do not preclude [creditors] from arguing the extent of [the debtor’s]
personal liability for child support post-bankruptcy”). This conclusion resolves the
Spencers’ appeal.
II.
MDSS in its cross appeal urges us to address the merits of whether the
disallowed portion of its amended DSO claim survived the bankruptcy court’s
contrary ruling, its confirmation of the Chapter 13 plan, and the Spencers’ discharge.
But this is an appeal from the contempt order, not the claim disallowance order, and
the BAP did not interpret or rely on the claim disallowance order in reversing the
award of sanctions for MDSS’s alleged violation of the discharge injunction. Spencer,
550 B.R. at 772.
We decline to render an advisory opinion on these additional issues. Not only
would that seem to take us beyond the Article III jurisdiction of an appellate court, it
may also risk going beyond the jurisdiction of the bankruptcy court. The Chapter 13
plan has fulfilled its purpose, and the bankruptcy case is closed. A state agency has
begun proceedings within the jurisdiction of the state courts. Thus, a federal court
action to declare that MDSS is precluded by the bankruptcy court’s claim
disallowance ruling may be barred by the State’s sovereign immunity, unless that
action is ancillary to the bankruptcy court’s now-concluded in rem proceeding. See
Cent. Va. Cmty. Coll. v. Katz, 546 U.S. 356, 372-73 (2006).
It may be that the Supreme Court’s reasoning in Local Loan Co. v. Hunt, 292
U.S. 234 (1934), gives the bankruptcy court ancillary jurisdiction to enforce its claim
disallowance order. But the congressional decision to make DSOs “not dischargeable
under any circumstances” puts a very different gloss on the issue. See Siegel, 134 S.
Ct. at 1198. And the absence of federal court jurisdiction would not leave the
Spencers without a forum to test the claim preclusive effect of the claim disallowance
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order -- state courts are fully competent to interpret and apply federal as well as state
preclusion principles. See generally Semtek Int’l, Inc. v. Lockheed Martin Corp., 531
U.S. 497, 507 (2001). These are not easy issues, as the court’s thorough discussion
in In re Fort, 412 B.R. 840, 854-60 (Bankr. W.D. Va. 2009), makes clear. Finally, we
doubt it will be easy to decide whether issues of state law are claim-precluded if the
ambiguous claim disallowance order is entitled to claim-preclusive effect.2 We leave
resolution of these issues to another day.
The judgment of Bankruptcy Appellate Panel for the Eighth Circuit is affirmed.
We express no view on the merits of whether Michael Spencer remains personally
liable for the disallowed portion of MDSS’s bankruptcy claim, nor do we decide what
court or courts may have jurisdiction to decide that issue.
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2
In the claim disallowance order the bankruptcy judge concluded:
Mary Spencer and the Family Support Division waived a portion of the
support payments by acquiescing in lower payments after the children
were emancipated, see Boland v. State of Missouri, [910 S.W.2d 754,
757-59 (Mo. App. 1995),] and . . . Michael Spencer relied on such
acquiescence in not seeking a state court modification to the payment
amounts, [so] allowing the claim in the amended amount would be an
unjust result under the circumstances of this case.
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