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In re Ferguson

United States Court of Appeals, Seventh Circuit.

August 23, 2016

In the Matter of: Jerry Dean Ferguson and Julie Rene Ferguson, Debtors. Appeal of: West Central FS, Inc.

          Argued February 24, 2016

         Appeal from the United States District Court for the Central District of Illinois. No. 14-1071 - James E. Shadid, Chief Judge.

          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 under Chapter 12 of the Bankruptcy Code. This appeal concerns 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) 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. Recovering from the farmland without foreclosure-that is, collecting monthly mortgage payments for years to come- would unnecessarily delay the Bank's recouping its loan, the judge wrote. 2011 Bankr. Lexis 4581 (Bankr. CD. 111. 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 liquidation 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.

         When a senior creditor can seek repayment from sources A and B, and a junior creditor from only B, marshaling under 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, 181111. 279 (1899). The judge initially denied West Central's request 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 remedy would have been appropriate after all, it maintained, because the farm has been sold and the Bank repaid. Marshaling could be applied in retrospect by treating the Bank's recovery 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 generated big tax bills: over $200, 000 that the Fergusons owe to the federal and Illinois treasuries. The tax collectors get priority among unsecured creditors under 11 U.S.C. §507(a)(8), which means that West Central's status-it would be a secured creditor with marshaling, or a general unsecured creditor without it-determines whether the taxes will be paid during the bankruptcy. Because the tax debts are not dischargeable, 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 the statutory right to haunt them after bankruptcy. The trustee, who represents the interests of unsecured creditors, also opposes marshaling.

         The bankruptcy judge approved West Central's second request. 2013 Bankr. Lexis 3386 (Bankr. CD. 111. 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 remedy three years later. In a separate order he awarded West Central post-petition interest on its claim. 2014 Bankr. LEXIS 2676 (Bankr. CD. 111. June 18, 2014). As an oversecured creditor 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 appealed to the district court, which reversed and remanded. 2015 U.S. Dist. Lexis 121096 (CD. 111. Sept. 11, 2015). The court held that marshaling is proper only if two funds exist simultaneously. Because the money from one fund (the proceeds 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 whether we have jurisdiction.

         In bankruptcy cases this court has jurisdiction over appeals 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 bankruptcy 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, ...

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