Karen Smith v. Kohn Law Firm, S.C.

Citation: Not availableDocket: 16-1423

Court: Court of Appeals for the Seventh Circuit; December 21, 2016; Federal Appellate Court

Original Court Document: View Document

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In the case before the Seventh Circuit, Karen Smith (plaintiff-appellant) appealed a district court ruling concerning bankruptcy proceedings related to her husband’s credit card debt. After Smith filed for Chapter 13 bankruptcy in July 2011, Capital One Bank, represented by Kohn Law Firm, initiated a lawsuit against her husband for debt collection. Smith claimed that this violated the co-debtor stay under 11 U.S.C. § 1301, arguing that Wisconsin marital law (Wis. Stat. § 766.55) made her husband’s debt subject to the co-debtor stay due to shared marital property. 

The bankruptcy court initially ruled in favor of Smith, granting her summary judgment and stating that the debt should be treated as hers under the co-debtor stay. However, on interlocutory appeal, the district court reversed this decision, ruling that the husband's credit card debt was not Smith's consumer debt as defined by 11 U.S.C. § 1301(a), since she was not personally liable for it. The district court's decision effectively dismissed Smith’s claims, which relied on the co-debtor stay. Smith subsequently appealed the district court's ruling.

Jurisdiction for appeals from final district court decisions is established under 28 U.S.C. § 158(d)(1), requiring both bankruptcy and district court decisions to be final. A district court's ruling on an interlocutory order from a bankruptcy court may be considered final if it resolves all substantive issues, leaving only ministerial tasks. In this case, the district court's reversal of the bankruptcy court's summary judgment exhausted Smith's causes of action, allowing for appellate review. Summary judgment decisions are reviewed de novo, favoring the non-moving party.

Regarding co-debtor protections, the Bankruptcy Code's § 362 automatically stays claims against the debtor, and § 1301(a) provides narrower protections for co-debtors. For the co-debtor stay to apply, three conditions must be met: 1) an action to collect a consumer debt, 2) the debt must belong to the debtor, and 3) the action must be against an individual liable for that debt with the debtor. While it is agreed that Smith's husband’s Capital One credit card debt qualifies as a consumer debt and that the action was against him, there is a dispute over whether this debt is also considered Smith's for co-debtor stay purposes. Smith contends that, under Wisconsin marital law, her husband's credit card debt should be treated as her own. However, the court aligns with the appellees, stating that the debt does not meet the criteria for the co-debtor stay. The term "consumer debt of the debtor" is not defined in the Bankruptcy Code, and Smith's broad interpretation conflicts with the explicit protections provided to debtors against claims. The court emphasizes that legislative intention is inferred from the inclusion or exclusion of specific language in different sections of the statute.

A statute should be interpreted to avoid rendering any part superfluous or insignificant. Attempting to collect a judgment from a spouse’s marital property would likely violate the automatic stay protecting the filing spouse during bankruptcy proceedings, as established in 11 U.S.C. § 362 and In re Thongta. The automatic stay prevents appellees from claiming any right to payment from the appellant's marital property, meaning the appellant bears no liability on the claim. Interpreting the co-debtor stay to eliminate the same liability would make it redundant, which is not permissible. The co-debtor stay is intended to protect non-filing co-debtors from collection actions on the debts of the filing spouse, and since the appellant did not demonstrate that her husband's credit card debt was her own, the co-debtor stay does not apply.

Regarding Wisconsin marital law, even if the appellant’s interpretation of § 1301 were accepted, Wisconsin law does not convert her husband’s debts into her own. In Wisconsin, both individual and marital property can exist, and debts incurred during marriage are presumed to be for the benefit of the marriage or family. A creditor can pursue debts against either spouse but can only satisfy a judgment from marital property if the spouses are not under Chapter 13 protections. Due to the automatic stay, creditors could not collect on the husband’s debts from marital property, leaving the appellant without any liability for those debts. Simply obtaining a judgment against a non-filing spouse does not make those debts the responsibility of the filing spouse under Wisconsin law. Sections 766.55(2) and 803.045 do not impose direct liability on a non-contracting spouse; rather, they establish procedural guidelines for creditors to pursue property. Wisconsin courts have clarified that marital laws do not create direct causes of action against the non-incurring spouse for consumer debts.

Appellant Smith, identified as the non-incurring spouse, is not liable for her husband's credit card debt. She contends that liability could arise under Wisconsin's doctrine of necessaries, which allows for a direct cause of action against one spouse for necessary expenses incurred by the other during marriage, as outlined in Wis. Stat. § 765.001(2). However, she raises this argument for the first time on appeal, leading to its waiver, as established in Domka v. Portage Cty. Furthermore, Smith fails to provide evidence that the credit card debt qualifies as necessaries rather than ordinary consumer goods, and does not clarify why this situation would invoke the co-debtor stay rather than an automatic stay. 

The co-debtor stay is designed to protect third parties, such as co-signers, from creditor actions related to the debts of a debtor who has filed for bankruptcy. In this case, the creditor (Capital One) is not pursuing Smith directly, negating any risk of preferential treatment that the stay aims to prevent. As such, the lawsuit against Smith's husband did not breach the co-debtor stay, leading to the proper dismissal of Smith's adversarial proceeding. Consequently, the judgment of the district court is affirmed.