Court Opinion

ID: 4390026
Source: CourtListenerOpinion
Date Created: 2019-04-24 00:00:22.531635+00
Date Added: 2024-06-11T14:50:32.654889
License: Public Domain

Case: 18-20518   Document: 00514927289   Page: 1   Date Filed: 04/23/2019

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT
                                                            United States Court of Appeals
                                                                     Fifth Circuit

                                                                   FILED
                               No. 18-20518                    April 23, 2019
                                                               Lyle W. Cayce
In Re: Daniel Clark, IV,                                            Clerk

             Debtor

ALISHA PATE; YVONNE CLARK-THIGPEN,

             Appellants

v.

RODNEY D. TOW, Trustee; DANIEL CLARK, IV,

             Appellees

                Appeal from the United States District Court
                     for the Southern District of Texas

Before KING, SMITH, and WILLETT, Circuit Judges.
PER CURIAM:
      Alisha Pate and Yvonne Clark-Thigpen assert claims for child support
arrearages against Daniel Clark. Although Clark filed for bankruptcy, Pate
and Clark-Thigpen claim that they never received notice of his bankruptcy
case. As a result, they argue they were denied the opportunity to file timely
proofs of claim. The bankruptcy court found that the Illinois Department of
Healthcare and Family Services, from which Pate and Clark-Thigpen had
sought child support enforcement services, had received timely notice and
ultimately afforded their claims distribution status under 11 U.S.C.
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                                 No. 18-20518
§ 726(a)(2). The district court affirmed the bankruptcy court’s decision. Pate
and Clark-Thigpen now appeal to this court. We AFFIRM.
                                       I.
      Daniel Clark owes Alisha Pate and Yvonne Clark-Thigpen large sums of
child support—$58,257 and $242,550, respectively. Pate and Clark-Thigpen
both sought enforcement services from the Illinois Department of Healthcare
and Family Services (the “Department”) for their child support claims. Thus,
when Clark filed for Chapter 7 bankruptcy, he listed the Department as an
unsecured creditor in his bankruptcy schedules. Clark also listed Pate in his
bankruptcy schedules, but he provided the wrong address. And he omitted
Clark-Thigpen entirely.
      Pate and Clark-Thigpen contend that they never received notice of the
bankruptcy case as required by Federal Rule of Bankruptcy Procedure 2002(a).
Nor did they receive a summary of the trustee’s final report as required by Rule
2002(f). Instead, the Chapter 7 trustee mailed the summary of the trustee’s
final report to all creditors, including the Department, on July 19, 2014. The
report stated that, after the payment of Clark’s secured and administrative
claims, only $71,028.27 remained in his estate. The trustee distributed that
remaining amount to two of Clark’s five unsecured priority creditors who had
timely filed proofs of claim, as required by 11 U.S.C. §§ 507 and 726(a).
      Pate and Clark-Thigpen argue that they should have been included in
this group of priority creditors but were denied the opportunity to participate
in the bankruptcy proceedings because the trustee never provided them with
notice of the bankruptcy case or his final report. Instead, on August 4, 2014,
they each learned of the bankruptcy case from another of Clark’s ex-wives.
Upon learning of the bankruptcy, each woman contacted the Department.
Christine Schmidt, the Department’s bankruptcy manager, told them that the
Department would file the proofs of claim for them. Schmidt filed the claims
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                                 No. 18-20518
on August 12, 2014. On each proof of claim, Schmidt listed the Department as
the creditor and stated that the basis of the claim was “[c]hild support arrears
owed thru [sic] [the Department].”
      The trustee objected to Pate’s and Clark-Thigpen’s proofs of claim as
tardily filed, which the bankruptcy court sustained after a hearing. Thus, the
bankruptcy court denied priority status to Pate’s and Clark-Thigpen’s claims
under § 726(a)(1), but it allowed them to proceed as general unsecured claims
pursuant to § 726(a)(3). Pate and Clark-Thigpen moved for reconsideration.
After another hearing, the bankruptcy court granted the motion in part. It
allowed Pate’s and Clark-Thigpen’s claims as tardily-filed claims entitled to
distribution under § 726(a)(2), as opposed to § 726(a)(3), finding that the
Department had withheld notice of the bankruptcy from them. But it again
declined to allow the claims under § 726(a)(1). During these proceedings, the
Department filed a statement asserting that it was a creditor entitled to file a
proof of claim.
      Classifying Pate’s and Clark-Thigpen’s claims under § 726(a)(2) has the
same effect as classifying them under § 726(a)(3)—they are still unable to
recover due to the lack of funds in Clark’s estate. Pate and Clark-Thigpen
appealed to the district court, which affirmed the bankruptcy court’s decision.
They now appeal to this court.
                                       II.
      When reviewing an appeal from a district court’s review of a bankruptcy
court’s ruling, we apply “the same standard of review to the bankruptcy court
decision that the district court applied.” Living Benefits Asset Mgmt., L.L.C. v.
Kestrel Aircraft Co. (In re Living Benefits Asset Mgmt., L.L.C.), 916 F.3d 528,
532 (5th Cir. 2019) (quoting Galaz v. Galaz (In re Galaz), 765 F.3d 426, 429

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(5th Cir. 2014)). “Thus, this court reviews factual findings for clear error and
legal conclusions de novo.” Id. (quoting Galaz, 765 F.3d at 429).
                                       III.
      Pate and Clark-Thigpen first contest the bankruptcy court’s application
of § 726(a)(1), which states:
      (a) Except as provided in section 510 of this title, property of the
      estate shall be distributed--

            (1) first, in payment of claims of the kind specified in, and in
            the order specified in, section 507 of this title, proof of which
            is timely filed under section 501 of this title or tardily filed
            on or before the earlier of--

                   (A) the date that is 10 days after the mailing to
                   creditors of the summary of the trustee’s final report;
                   or

                   (B) the date on which the trustee commences final
                   distribution under this section . . . .

Pate and Clark-Thigpen argue that the ten-day deadline to file proofs of claim
only begins to run when the creditor receives the summary of the trustee’s final
report; thus, because the trustee did not mail them the summary, they argue
that § 726(a)(1)’s ten-day filing deadline did not begin to run against them.
Although they concede that the report was properly mailed to the Department,
they argue that they did not appoint the Department as their agent for the
purpose of accepting the trustee’s report. And regardless of whether their
proofs of claim were timely, they contend that their claims must be classified
under § 726(a)(1) because they are priority claims under § 507. Finally, if the
court determines that their claims were untimely filed, they argue that
§ 726(a)(1) violates their right to due process under the Fifth Amendment
because it can be interpreted to deny priority status to a known creditor who
was not given notice of the bankruptcy case.
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                                 No. 18-20518
      These arguments are all predicated on the assumption that Pate and
Clark-Thigpen were Clark’s creditors. Although Pate and Clark-Thigpen
stated at oral argument that there was no dispute over whether they were
creditors, we do not find the answer to be so clear. The Code defines “creditor”
as an “entity that has a claim against the debtor that arose at the time of or
before the order for relief concerning the debtor.” 11 U.S.C. § 101(10). The Code
defines “claim” as the “right to payment, whether or not such right is reduced
to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured.” § 101(5)(A).
Interpreting § 101(5)(A), the Supreme Court has instructed that the “‘right to
payment’ [means] nothing more nor less than an enforceable obligation.”
Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (alteration in original)
(quoting Pa. Dep’t of Pub. Welfare v. Davenport, 495 U.S. 552, 559 (1990),
superseded by statute on other grounds, Criminal Victims Protection Act of
1990, Pub. L. No. 101-581, § 3, 104 Stat. 2865). Accordingly, we must consider
whether Pate and Clark-Thigpen had enforceable obligations against Clark.
This determination “requires an analysis of interests created by non-
bankruptcy substantive law.” Lemelle v. Universal Mfg. Corp., 18 F.3d 1268,
1274 (5th Cir. 1994) (quoting In re Nat’l Gypsum Co., 139 B.R. 397, 405 (N.D.
Tex. 1992)).
      During the bankruptcy court’s hearing, Pate and Clark-Thigpen argued
that they are creditors because after the Department collects the money, the
Department gives the money to Pate and Clark-Thigpen. But the ultimate
right to receive the funds is not dispositive to our analysis; instead we must
consider whether Pate and Clark-Thigpen could enforce Clark’s child support
obligation against him.
      Illinois law suggests that the Department, rather than Pate and Clark-
Thigpen, has the sole authority to collect money from Clark. Illinois provides
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                                  No. 18-20518
child support obligation enforcement services through the Department. See
305 Ill. Comp. Stat. 5/12-1. Under Illinois law, when a custodial parent receives
enforcement services from the Department, the non-custodial parent must
make all child support payments to the state disbursement unit, rather than
to the custodial parent. 750 Ill. Comp. Stat. 5/507.1.
        At the bankruptcy court’s hearing, Schmidt testified that when a
custodial parent requests enforcement assistance, all child support must be
paid to the Department. The Department confirmed this interpretation in its
separately filed statement, averring that “[u]nder Illinois law, the Department
itself must collect child support for later disbursement to parents, so the
Department was properly a ‘creditor’ on [Pate’s and Clark-Thigpen’s] [c]laims.”
Although Schmidt also testified that a custodial parent receiving enforcement
assistance with child support could receive payments directly from the
noncustodial parent, she noted that these payments are a “one-time credit” and
if a noncustodial parent tried to make a direct payment a second time, “a credit
would not be given on his child support case and he would been [sic] sent a
letter stating it has to go judicially.” This conforms with our reading of Illinois
law.
        Both Pate and Clark-Thigpen sought enforcement of their claims
through the Department, and they admit in their briefing that they have
authorized the Department to “receive and disburse child support payments.”
Pate and Clark-Thigpen could not seek child support payments from Clark by
themselves; under Illinois law, Clark would have had to make any payments
to the Department. And tellingly, when Pate and Clark-Thigpen first learned
of the bankruptcy, they turned to the Department, rather than filing proofs of
claim on their own. Thus, the Department is the creditor because it has the
right to enforce Pate and Clark-Thigpen’s child support obligations against
Clark. Cf. Fezler v. Davis (In re Davis), 194 F.3d 570, 574-75 (5th Cir. 1999)
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                                  No. 18-20518
(recognizing that a creditor may be a person who pursues a debt on another’s
behalf, even though the payment will ultimately be distributed to another
party).
      Pate and Clark-Thigpen argue that they are also creditors entitled to
notice. But again, Pate and Clark-Thigpen have handed to the Department the
ability to enforce Clark’s child support obligations. Thus, they cannot be his
creditor as defined by the Bankruptcy Code. We acknowledge that “Congress
intended the term ‘claim’ to be given broad interpretation.” Lemelle, 18 F.3d at
1275. But we have also stated that the purpose of this breadth is “so that ‘all
legal obligations of the debtor, no matter how remote or contingent will be able
to be dealt with in the bankruptcy case.’” Id. (quoting H.R. Rep. No. 95-595, at
309 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 6266). Clark’s legal
obligation to Pate and Clark-Thigpen is “dealt with” by the Department.
Therefore, the Department is properly the creditor for the purposes of Clark’s
child support obligations to Pate and Clark-Thigpen.
      Finally, Pate and Clark-Thigpen argue that § 726(a)(1)(A)’s ten-day
claim filing deadline restarted when the Chapter 7 trustee filed his amended
report and, therefore, the Department’s proofs of claim should be given
priority. To adopt Pate and Clark-Thigpen’s approach would render § 726(a)(1)
meaningless, giving every claim priority status upon amendment of the
trustee’s final report. Thus, we decline to find that the trustee’s amendment to
his final report restarted the filing deadline.
      In sum, Pate and Clark-Thigpen were not creditors, and the clerk was
not obligated to provide them with notice. There is no dispute that the clerk
properly notified the Department of the pending bankruptcy. And the
Department’s proofs of claim were untimely. Thus, the bankruptcy court
appropriately declined to classify Pate’s and Clark-Thigpen’s claims under
§ 726(a)(1).
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                             No. 18-20518
                                  IV.
    For the foregoing reasons, the judgment of the district court is
AFFIRMED.

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