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In re Kilgus

decided: February 9, 1987.


Appeal from the United States District Court for the Central District of Illinois, Peoria Division, No. 86-1122, Michael M. Mihm, Judge.

Author: Easterbrook

Before POSNER and EASTERBROOK, Circuit Judges, and PARSONS, Senior District Judge.*fn*

EASTERBROOK, Circuit Judge.

United States Fire Insurance Co. issued to David Reichman a policy of insurance on a DC-3 airplane. The airplane was stolen promptly after the policy issued in July 1982 and later was impounded by Colombia as an instrumentality of the drug trade. Andrew Kilgus filed a petition in bankruptcy in September 1982, and the next month the trustee of Kilgus's estate filed an adversary proceeding against Reichman and U.S. Fire. The complaint alleged that Reichman and Kilgus were joint owners of the airplane and that Reichman had defrauded Kilgus by obtaining the insurance policy in Reichman's name alone. (Reichman and Reichman Enterprises, Inc., were the named insureds; for simplicity we ignore the corporation.) The trustee asked the bankruptcy court to fix the interests of the estate and Reichman in the proceeds of the policy. U.S. Fire filed an answer, and a cross-claim against Reichman in December 1982. It maintained that the policy was void because Reichman had lied about both the ownership of the plane and its intended use. U.S. Fire sought a declaration that it owed nothing. A stamp on the cross-claim states that U.S. Fire served counsel of record.

Reichman had been served with the trustee's complaint but had not answered or appeared in the case. Because Reichman had not appeared, the language in the certificate of service of the cross-claim, taken literally, meant that Reichman had not been served. On January 21, 1983, U.S. Fire moved for a default judgment against Reichman, serving Reichman personally. Although Reichman had not appeared, he must have been discussing settlement with the trustee, because on January 28, the trustee's lawyer sent a letter to Reichman containing the following information:

United States Fire has filed motions requesting the court to disapprove of the settlement and to enter a default judgment against you upon its crossclaim. . . . All of these matters are set for hearing before Judge Lipkin on March 7, 1983 at 10:00 a.m. Neither the bankruptcy court nor the trustee is in a position to advise you as to whether you should retain counsel in this case to represent your position with regard to those controversies. You should, however, be advised that you are now in default under the rules, since you have not filed an answer to the United States Fire crossclaim against you. In view of that fact, you should obtain advice from independent counsel as to the manner in which you should proceed. If you do not want to go to the expense of retaining local counsel in Peoria, at least consult your attorney in New York, Mr. Gould, and show him the documents filed in this proceeding.

The reference to Reichman's attorney in New York was prompted by the fact that Reichman had filed suit against U.S. Fire in state court in New York, seeking to compel U.S. Fire to compensate Reichman for the stolen airplane. The same controversy therefore was before two courts simultaneously.

Despite receiving the motion and letter, Reichman neither answered U.S. Fire's cross-claim nor appeared on March 7. On March 16, the bankruptcy judge proposed to enter a default judgment against Reichman. Because the local rules at the time, issued in the wake of Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 73 L. Ed. 2d 598, 102 S. Ct. 2858 (1982), did not allow a bankruptcy judge to enter final judgment in an adversary proceeding, the bankruptcy judge's proposal went before the district judge for approval. On March 31, 1983, the district judge withheld his approval of the default judgment for the time being.

All of this must have gotten Reichman's attention, because on April 1 his counsel finally appeared with a motion for leave to answer the cross-claim. At a hearing on April 25, the bankruptcy judge peremptorily declined to allow Reichman to file an answer. The judge treated the motion as one to set aside the default and denied it because the letter of January 28 had given Reichman ample notice of the cross-claim, motion, and hearing. Reichman now "appealed" this decision to the district court, although so far as the local rules were concerned there was nothing to appeal - for nothing could happen in the adversary proceeding without being confirmed by an Article III judge. Reichman's "statement of issue to be presented on review" was "Did the Bankruptcy Judge correctly decide that [Reichman] should have a default judgment entered against [him] on the cross-complaint?"

The question was briefed before the district judge, who then issued the Delphic order: "After a hearing in which oral arguments were heard by this Court, the Order of the Bankruptcy Judge is AFFIRMED." The "Order" must be the order refusing leave to file an answer, because a preamble to this disposition had treated the default judgment and the order as separate matters. The district judge gave no reasons - either for refusing to allow the answer or for ignoring the default judgment, which, because of the decision of March 31, still had not been entered.

Back in the bankruptcy court, Reichman paid $4,000 to settle his dispute with the trustee. U.S. Fire prevailed against the trustee. That made the dispute between Reichman and U.S. Fire irrelevant from the trustee's point of view. The adversary proceeding and the Kilgus bankruptcy were terminated by a final judgment on September 27, 1985. The judgment dismissed "all causes of action" and, everyone believes, implicitly contains the formal default. Reichman appealed again. The district judge "dismissed" the appeal on the ground that he had approved the default judgment back in 1983. Reichman has appealed to us.

The case contains a skein of procedural blunders - complaints and cross-complaints not served and ignored, "judgments" disregarded by the district court and not entered by the bankruptcy court, an order "affirmed" in 1983 when there was no outstanding order to affirm (as opposed to enter initially), an appeal "dismissed" in 1986 when the court plainly had jurisdiction. The mess we have been served up contains questions about your own jurisdiction. U.S. Fire contends that we have none because Reichman, having appealed once to the district court, could not appeal a second time but had to appeal the order of September 27, 1985, directly to this court. He didn't, and therefore U.S. Fire insists that the appeal is jurisdictionally untimely. Flapdoodle. No statute authorizes an appeal from a bankruptcy judge to the court of appeals.*fn1 The only way to us was through the district court, and Reichman had to proceed as he did.

A related question is what to make of the district court's order "dismissing" the appeal. The bankruptcy court had entered a final order, and parties may appeal to the district court as of right from final orders. 28 U.S.C. ยง 158(a). The district judge must have meant to affirm the bankruptcy court's decision on the basis of the law of the case. It would be pointless to send the case back for such a ministerial correction. We modify the district court's disposition from "dismissal" of the appeal to affirmance, which gives us something to review.

The next thorn on the bush concerns the subject to be reviewed. Reichman did not make a motion to set aside the default, so nothing new has happened since 1983. The only thing that could be reviewed is the propriety of the district court's decision in 1983, which the district judge declined to revisit. If the decision in 1983 was interlocutory, then the appeal from the final judgment presents the merits of the default. An appeal from the final judgment brings up all antecedent issues. United States v. Clark, 445 U.S. 23, 25-26 n.2, 63 L. Ed. 2d 171, 100 S. Ct. 895 (1980); Exchange National Bank v. Daniels, 763 F.2d 286, 290 (7th Cir. 1985). But if the decision in 1983 was "final" and appealable at the time, then Reichman had to appeal at once. If the time to appeal ran out, there is nothing to review and we must dismiss the appeal for want of jurisdiction. See Browder v. Director, Department of Corrections, 434 U.S. 257, 54 L. Ed. ...

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