Hendrix, Matter of

• Decision Date: 17 February 1993
• Docket Number: No. 92-1815,92-1815
• Citation: 986 F.2d 195
• Parties: , Bankr. L. Rep. P 75,111 In the Matter of Daniel W. HENDRIX and Cathy L. Hendrix, Debtors. Daniel W. HENDRIX, Debtor-Appellant, v. Sara A. PAGE and Marvin E. Page, Creditors-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 195

986 F.2d 195

25 Fed.R.Serv.3d 969, Bankr. L. Rep. P 75,111

In the Matter of Daniel W. HENDRIX and Cathy L. Hendrix, Debtors.

Daniel W. HENDRIX, Debtor-Appellant, v. Sara A. PAGE and Marvin E. Page, Creditors-Appellees.

No. 92-1815.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 7, 1992.

Decided Feb. 17, 1993.

E. Gerry Barker, Jeffersonville, IN (argued), for appellees.

Donald D. Levenhagen (argued), Hill, Fulwider, McDowell, Funk & Matthews, Indianapolis, IN, for debtors-appellant.

Before CUMMINGS, POSNER, and FLAUM, Circuit Judges.

POSNER, Circuit Judge.

This appeal concerns the effect of a discharge in bankruptcy on litigation against the debtor's liability insurer outside of bankruptcy. In re Shondel, 950 F.2d 1301 (7th Cir.1991), decided well before the appeal briefs were filed yet cited by neither party, dooms the appeal, but we shall not stop with that observation, as there are a few new wrinkles in this case.

On April 6, 1990, an automobile driven by Daniel Hendrix injured Sara Page. Hendrix had liability insurance, but, whether because he feared that his liability to Mrs. Page might exceed his coverage or for some other reason, he and his wife (but we can ignore her) declared bankruptcy under Chapter 7 of the Bankruptcy Code on June 5, 1990. On July 13, Hendrix added to the list of creditors that he had filed in the bankruptcy court the Pages, who at some time (the date is not in the record) between April 6 and July 13 had filed a personal injury suit against Hendrix in an Indiana state court. The Pages, despite being listed and receiving notice, did not file a claim in the bankruptcy proceeding. On September 12, 1990, the bankruptcy court granted Hendrix a discharge from his debts to the listed creditors. A lawyer nominally representing Hendrix, but in fact representing the Atlanta Casualty Company, Hendrix's liability insurer, then filed a motion for summary judgment in the Pages' state court action against Hendrix. The motion was granted, and final judgment in that action was entered in favor of Hendrix on May 22, 1991. None of the motion papers is in the record, or for that matter the order granting summary judgment. But apparently the basis of the order was that any debt that Hendrix might have had to the Pages had been discharged, so that the Pages were barred from trying to collect it by means of a suit in state court.

Shortly afterward, the Pages filed a motion to reopen the bankruptcy proceeding. The motion asked the bankruptcy judge to modify Hendrix's discharge so that they could ask the Indiana state court to reopen their suit for the purpose of proceeding against Hendrix's insurer. The bankruptcy judge granted the relief sought on September 23, 1991, the district judge affirmed, and Hendrix--which is to say Atlanta Casualty Company, for Hendrix has no interest in the matter, his discharge being secure, unmodified, and unchallenged, as far as any effort by the Pages to collect a judgment against him arising from the accident is concerned--appeals. The bankruptcy judge's order terminated a stand-alone proceeding commenced by the filing of the Pages' motion to reopen a closed bankruptcy, and the district judge's order affirming it was therefore a final order appealable to this court under 28 U.S.C. § 158(d).

The discharge had by virtue of 11 U.S.C. § 524(a)(2) the force of an injunction against a suit by any holders of listed debts (such as the Pages) to collect those debts from Hendrix. But as to whether such an injunction extends to a suit only nominally against the debtor because the only relief sought is against his insurer, the cases are pretty nearly unanimous that it does not. In re Shondel, supra, 950 F.2d at 1306-09; Green v. Welsh, 956 F.2d 30 (2d Cir.1992); In re Jet Florida Systems, Inc., 883 F.2d 970 (11th Cir.1989) (per curiam); In re Western Real Estate Fund, Inc., 922 F.2d 592, 601 n. 7 (10th Cir.1990) (per curiam); 3 Collier on Bankruptcy p 524.01 at pp. 524-16 to 524-17 (Lawrence P. King ed., 15th ed. 1991); see also In re Fernstrom Storage & Van Co., 938 F.2d 731, 733-34 (7th Cir.1991); contra, In re White Motor Credit, 761 F.2d 270, 274-75 (6th Cir.1985). The reasoning is that a suit to collect merely the insurance proceeds and not the plaintiff's full damages (should they exceed the insurance coverage) would not create a "personal liability of the debtor," because only the insurance company would be asked to pay anything, and hence such a suit would not infringe the discharge. 11 U.S.C. § 524(a)(2). It would be like a suit against a guarantor of the bankrupt's debt. An alternative line of reasoning proceeds from the statutory reminder that a discharge "does not affect the liability of any other entity on [the debtor's] debt," 11 U.S.C. § 524(e)--and the insurance company is the other. If this is right, the discharge did not in fact prevent the Pages from proceeding in state court against Hendrix, provided they were seeking only the proceeds of his insurance policy.

The state court, however, evidently thought that the discharge did apply to a suit effectively against Hendrix's insurer only; and we do not understand the Pages--who cite neither Shondel nor any other case which holds that the injunction automatically created by a discharge does not run in favor of the debtor's insurer--to be contesting the Indiana state court's determination; or, more precisely, to be contending that they have a shot at getting the Indiana judge to change his mind, or his judicial superiors to reverse him. If, moreover, that is all that the Pages had wanted--a chance to argue that the discharge never was applicable to their suit because it was a suit to impose liability on the insurance company rather than on the debtor--they wouldn't have had to move in the bankruptcy court. They didn't need the leave of that court to ask a state court judge to construe, or rather reconstrue, the scope of an injunction. It is not as if the bankruptcy court had impressed its own interpretation upon the injunction, so that the Pages would be risking contempt in asking a state court to interpret it differently. Rather, they accept that the injunction runs in favor of Atlanta Casualty Company as well as Hendrix but hope that if the bankruptcy court's action in lifting the injunction stands, they can induce the state court to withdraw its judgment, since the judgment was premised on the injunction or, what comes to the same thing, on the state judge's understanding of the injunction's scope.

Although the Pages never filed a claim or an appearance in the bankruptcy proceeding, as persons bound by the injunction that issued automatically upon the discharge of the listed debts they have standing to ask the bankruptcy court to lift it. "A defendant may move to dissolve an injunction if it injuriously affects his interests, although the order is not against him," Hall v. Orlikowski Construction Co., 24 Ill.App.3d 60, 62, 321 N.E.2d 23, 25 (1974)--and it is against the Pages, because they were on the list of creditors whose claims were discharged. A bankruptcy proceeding is in rem, and its orders can therefore bind nonparties, and actually the Pages were defendants, by virtue of their being listed as creditors, of the discharge, and of the automatic injunction, created by section 524, protecting the discharge. A variety of provisions allow such a defendant to obtain a dissolution or other modification of equitable relief in a bankruptcy matter. 11 U.S.C. §§ 105(a), 350(b), 727(d); Bankr.R. 5010. No doubt it is misleading, though it is the standard parlance, to speak of the Pages' petition as one "to reopen" the bankruptcy proceeding. Discharge brought into existence a perpetual injunction, making the bankruptcy proceeding a continuous, ongoing proceeding as to anyone bound by the injunction. 11 U.S.C. §§ 524(a)(2), (3); cf. Transgo, Inc. v. AJAC Transmission Parts Corp., 768 F.2d 1001, 1030 (9th Cir.1985). And although the Bankruptcy Code does not expressly authorize the modification of a discharge, as distinct from its revocation, 11 U.S.C. § 727(d), which is equivalent to the dissolution of the section 524 injunction created by the discharge, any court that issues an injunction can modify it for good cause on the motion of a person adversely affected by it. Transgo, Inc. v. AJAC Transmission Parts Corp., supra, 768 F.2d at 1030; Winterland Concessions Co. v. Trela, 735 F.2d 257, 260 (7th Cir.1984).

Until recently, however, the standard for modification of injunctions was the "grievous wrong" standard of United States v. Swift & Co., 286 U.S. 106, 119, 52 S.Ct. 460, 464, 76 L.Ed. 999 (1932) (Cardozo, J.). Lower courts, including our own, were restive under this confining standard. See, e.g., Alliance to End Repression v. City of Chicago, 742 F.2d 1007, 1020 (7th Cir.1984) (en banc); Duran v. Elrod, 760 F.2d 756, 758 (7th Cir.1985); New York State Ass'n for Retarded Children, Inc. v. Carey, 706 F.2d 956, 970 (2d Cir.1983) (Friendly, J.). Last year the Supreme Court gave it the coup de grace in Rufo v. Inmates of Suffolk County, --- U.S. ----, ---- - ----, 112 S.Ct. 748, 758-60, 116 L.Ed.2d 867 (1992); see also Board of Education v. Dowell, 498 U.S. 237, 111 S.Ct. 630, 112 L.Ed.2d 715 (1991). Although, as the Court emphasized in Rufo, that case, like the lower-court cases that had expressed dissatisfaction with the standard of Swift, involved institutional reform litigation, the "flexible standard" adopted in Rufo, --- U.S. at ----, 112 S.Ct. at 765, is no less suitable to other types of equitable case. Rufo assimilates the standard for modification to Fed.R.Civ.P. 60(b)(5), which, so far as pertinent to this case, authorizes relief from a judgment whenever "it is no longer equitable that the judgment should have prospective application." So now a court can modify an injunction that it has entered whenever the principles of equity require it do so. Of particular importance to ...