In re Hovis

• Decision Date: 02 February 2004
• Docket Number: No. 02-2450.,02-2450.
• Citation: 356 F.3d 820
• Parties: In the matter of: James E. HOVIS and James E. Hovis Trust No. 90, Debtors-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

356 F.3d 820

In the matter of: James E. HOVIS and James E. Hovis Trust No. 90, Debtors-Appellants.

No. 02-2450.

United States Court of Appeals, Seventh Circuit.

Argued October 24, 2003.

Decided February 2, 2004.

Rehearing Denied February 25, 2004.

John J. Voorhees, Jr. (argued), Mayer, Brown, Rowe & Maw, Chicago, IL, for Appellee.

Bradley T. Koch (argued), Holmstrom & Kennedy, Rockford, IL, for Debtors — Appellants.

Before BAUER, EASTERBROOK, and RIPPLE, Circuit Judges.

EASTERBROOK, Circuit Judge.

James Hovis borrowed more than $2 million from the National Bank & Trust Company of Sycamore. The debt was secured by pledged stock plus liens on other assets. Hovis repeatedly fell behind in repayment, and the Bank repeatedly agreed to extend and restructure the repayment schedule. When Hovis failed to meet the latest restructured schedule, and the market price of some stock pledged to secure the loan fell, the Bank attempted to foreclose. Before it could do so, however, Hovis commenced this federal bankruptcy proceeding, and the automatic stay blocked the foreclosure. (James E. Hovis Trust No. 90 is a second debtor, which for simplicity we disregard.) Hovis proposed to reorganize and eventually pay all debts under Chapter 11, but to pay more slowly than the most recent schedule allowed. The Bank proposed immediate liquidation, contending that someone who repeatedly failed to pay despite schedule extensions should not be relied on to pay with yet another extension. Eventually the bankruptcy court confirmed Hovis's plan. But he did not commence payments. Instead he sought yet again to balk the Bank's claims.

As far as we can discern, the bankruptcy judge never set a bar date for filing proofs of claim. Hovis had listed the Bank as a creditor to the tune of about $2.1 million. On June 2, 2000, two business days before the date set for the start of the hearing on the competing plans (Hovis's plan of reorganization versus the Bank's plan of liquidation), the Bank filed a formal proof of a claim for $2,083,427.92. This was a little less than Hovis's estimate, so it is unsurprising that he did not protest. But on February 9, 2001, about a month after the bankruptcy court confirmed Hovis's plan he objected to the Bank's claim — and, having filed an objection, apparently deemed himself liberated from any need to make payments under the plan. Miffed by this turn of events, which it saw as demonstrating that Hovis could not be relied on to keep his promises to repay, the Bank objected to the objection and argued that Hovis is estopped by confirmation of the plan to deny the amount of any creditor's claim. The bankruptcy judge agreed with the Bank, as did the district judge on appeal. See 2002 U.S. Dist. LEXIS 8285, 2002 WL 976014 (N.D.Ill. May 3, 2002). Both the bankruptcy and the district courts also concluded that Hovis had failed to substantiate his objection, so that it failed independently of any estoppel.

Like Bankruptcy Judge Barbosa, the district judge held that Adair v. Sherman, 230 F.3d 890 (7th Cir.2000), gives rise to issue preclusion (collateral estoppel). The creditor in Adair filed a claim that did not draw an objection in a Chapter 13 proceeding. Later the debtor sued under the Fair Debt Collection Practices Act, contending that the creditor and its law firm routinely overstated the value of their collateral. We held that contention barred by the debtor's failure to object in the bankruptcy itself. Once the bankruptcy proceeding came to a conclusion, the accuracy of the creditor's claim was established. Adair, like its predecessor D & K Properties Crystal Lake v. Mutual Life Insurance Co., 112 F.3d 257 (7th Cir.1997), treats the amount of a debt (or collateral) established within bankruptcy as conclusive between the same parties in subsequent litigation. This is a normal application of preclusion. But issue preclusion has no role within a unitary, ongoing proceeding. Adair and similar decisions that arise from sequential suits are irrelevant within one suit.

What matter within a single suit are the deadlines set by statute and rule, plus the law of the case and judicial estoppel. Law of the case has no bearing here, for the amount of the Bank's claim has yet to be assessed by any tribunal. Nor does any statute or rule require objection to precede confirmation. Setting dates for filing of claims, and objecting to them, is within the discretion of the bankruptcy judge. Leeway is sensible, because sometimes the best means to administer an estate is to sell the assets quickly in order to maximize their value and only then turn to determining which creditors are entitled to how much. In re Qualitech Steel Corp., 276 F.3d 245 (7th Cir.2001), is an example. In "prepackaged" bankruptcies, evaluation of some claims similarly is deferred until the cash-flow problems have been solved by reducing payment obligations to the principal creditors. The plans of reorganization in quick-sale and prepack cases alike provide for payment of other claims whose value will be determined later. And in still other cases it may not be possible to present or evaluate the claims before confirmation. When any large-scale business is reorganized, tort and warranty claims may not come in for months or years. It would greatly and needlessly disrupt ordinary, efficient means of reorganization to adopt a rule that all claims must be filed and litigated to conclusion before a plan of reorganization is confirmed.

The bankruptcy judge initially appeared to recognize that much. The plan of reorganization he confirmed provides:

Any and all objections to claims shall be filed with the Court by the Debtors and...