In the Matter of: Jerry Dean Ferguson and Julie Rene Ferguson, Debtors. Appeal of: West Central FS, Inc.
February 24, 2016
from the United States District Court for the Central
District of Illinois. No. 14-1071 - James E. Shadid, Chief
Easterbrook, Rovner, and Hamilton, Circuit Judges.
Easterbrook, Circuit Judge.
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.
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.
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.
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.
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.
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?
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
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.
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.
Central has appealed, asking us to reinstate the bankruptcy
court's decision. But first we must decide whether we
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, ...