The U.S. Court of Appeals for the Seventh Circuit recently held that a bank’s lawsuit against the husband of a debtor who had filed for bankruptcy did not violate the co-debtor stay because the husband’s credit card debts were not a consumer debt for which the debtor was personally liable.
A copy of the opinion in Smith v. Capital One Bank (USA), NA is available at: Link to Opinion.
A debtor filed for bankruptcy in 2011. During the course of the bankruptcy proceedings, a bank filed suit and obtained a judgment against the debtor’s husband on a credit card debt that he owed.
In 2015, the debtor initiated an adversary proceeding in bankruptcy court against the bank, alleging violations of the co-debtor stay, 11 U.S.C. § 1301(a); the Wisconsin Consumer Act, Wis. Stat. § 427.104; and the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692(d)-(e). The debtor claimed that her husband’s credit card debt was covered by the co-debtor stay due to the operation of Wisconsin marital law, Wis. Stat. § 766.55.
As you may recall, in addition to automatically staying claims against the debtor, the Bankruptcy Code provides protections when co-debtors are involved. See 11 U.S.C. § 1301(a).
For the co-debtor stay to apply: (1) there must be an action to collect a consumer debt (11 U.S.C. §§ 101(8), (12)); (2) the consumer debt must be of the debtor (Id. § 102(2)); and (3) the action to collect must be against an individual that is liable on such debt with the debtor. (11 U.S.C. § 1301(a).)
Here, the parties agreed that the debtor’s husband’s credit card debt was a “consumer debt” and that the bank’s action was against the husband, but disagreed as to whether the credit card bills were a “consumer debt of the debtor,” which triggered the co-debtor stay protections, as opposed to simply being a consumer debt of the husband.
The bankruptcy court granted summary judgment for the debtor, holding that the bank’s lawsuit against the debtor’s husband violated the co-debtor stay due to the operation of Wisconsin marital law, Wis. Stat. § 766.55, which makes marital property available to satisfy certain kinds of debts.
On appeal, the district court reversed the bankruptcy court, holding that the husband’s credit card debt was not the debtor’s consumer debt, and the co-debtor stay did not apply despite the application of Wisconsin marital law. The district court concluded that “consumer debt of the debtor,” as used in 11 U.S.C. § 1301(a), does not include a debt for which the debtor is not personally liable but which may be satisfied from the debtor’s interest in marital property.
The debtor then appealed to the Seventh Circuit, arguing that under a broader definition of “consumer debt of the debtor,” and by operation of Wisconsin marital law, her husband’s credit card debt became her debt for purposes of the co-debtor stay.
The Seventh Circuit disagreed with the debtor, and agreed with the bank that the credit card debt was not covered by the co-debtor stay.
Relying on In re Thongta, 401 B.R. 363, 368 (Bankr. E.D. Wis. 2009), and River Rd. Hotel Partners, LLC v. Amalgamated Bank, 651 F.3d 642, 651 (7th Cir. 2011), and noting that any attempt to collect a judgment from a spouse’s marital property would likely violate the automatic stay that already protects the filing spouse, the Court observed that interpreting the co-debtor stay to eliminate the same liability, and thus providing the same protections against collection, would impermissibly render that co-debtor stay duplicative of the automatic stay applicable to the debtor.
The Court therefore held that because the debtor did not demonstrate that her husband’s credit card debt was her own, the co-debtor stay did not apply.
Moreover, because Wisconsin courts made clear that the state’s marital laws do not give rise to liability on the part of the non-incurring spouse, the Court held that the debtor, as the non-incurring spouse, was not liable for her husband’s credit card debt.
The Court noted that, in Wisconsin, “married individuals can have both individual and marital property.” See Wis. Stat. § 766.55. “Debts incurred during marriage are ‘presumed to be incurred in the interest of the marriage or the family,’ id. § 766.55(1), and ‘[a]n obligation incurred by a spouse in the interest of the marriage or the family may be satisfied only from all marital property and all other property of the incurring spouse’ [the debtor’s husband], id. § 766.55(2)(b).” In addition, “in order to satisfy a judgment for a debt, a successful creditor ‘may proceed against either or both spouses to reach marital property available for satisfaction of the judgment.’ Id. § 803.045(3).”
The debtor contended that once the bank obtained a judgment against her husband, it created a liability on her part under the co-debtor stay.
Again, the Court disagreed. Noting that simply obtaining a judgment against a non-filing spouse who happens to have shared property interests with the filing spouse — without more — did not make the husband’s debts the debts of the filing spouse under Wisconsin law, the Seventh Circuit held that Wis. Stat. § 766.55(2) did not create a direct cause of action against the debtor. See St. Mary’s Hosp. Med. Ctr. v. Brody, 186 Wis. 2d 100, 519 N.W.2d 706, 711 (Wis. Ct. App. 1994).
Here, the bank had not attempted to sue the debtor directly, and had not sought to satisfy its judgment against the debtor’s husband from any of the debtor’s individual or marital property. Accordingly, the Court concluded the debtor had no liability for her husband’s credit card bills.
The debtor next argued that she was liable for a direct cause of action against her for her husband’s credit card debts under Wisconsin’s “doctrine of necessaries,” because Wis. Stat. § 765.001(2) provided a direct cause of action against one spouse for any marital “necessaries” incurred by the other spouse during the marriage. Essentially, the debtor argued that “the possibility of a direct cause of action against her for her husband’s credit card debts brings those debts within the co-debtor stay.”
The Seventh Circuit again disagreed, holding that because she raised this theory for the first time on appeal, it was therefore waived. Even if the argument had not been waived, the Court observed that the debtor provided no evidence that the credit card debt was for necessaries, as opposed to ordinary consumer goods, nor did she explain why this situation would trigger the co-debtor stay, as opposed to the automatic stay.
The Seventh Circuit held that since the bank in the collection proceeding was not a creditor of the debtor and the bank was not seeking payment of the credit card debts under the debtor’s bankruptcy plan, there was no risk of preferential treatment, the bank’s lawsuit against the debtor’s husband did not violate the co-debtor stay, and the debtor’s adversarial proceeding was properly dismissed.
Thus, the Seventh Circuit affirmed the judgment of the district court.