The cap on claims for breach of a lease of real property is disregarded when deciding whether an individual has too much debt to qualify for chapter 13, according to Bankruptcy Judge Marvin Isgur of Houston.
A couple filed a chapter 13 petition, listing almost $518,000 in uncontested, unsecured debt. Their unsecured debt was therefore well in excess of the maximum of $394,725 permitted by Section 109(e).
About 60% of the debt arose from a pre-petition judgment in state court for breach of lease, and most of the judgment was for future years’ rent.
By applying the one-year cap on lease claims under Section 502(b)(6), the landlord’s $306,000 claim would fall to $62,000, reducing the debtors’ total unsecured debt to $274,000, well under the limit in Section 109(e).
Although the trustee did not challenge the debtors’ eligibility for chapter 13, Judge Isgur raised the question on his own, saying that the “court has an independent duty to assure that an individual is eligible for chapter 13.”
The debtors contended they were eligible because the landlord’s allowable claim made their total debt fall within Section 109(e). In his March 30 opinion, Judge Isgur rejected the debtors’ argument and held they were ineligible for chapter 13 relief.
Finding no policy to construe the eligibility requirements in Section 109(e) broadly in favor of the debtor, Judge Isgur said the statute was “clear and unambiguous.” The section says that the debtor’s uncontested, unsecured debt must be less than $394,725 “on the date of the filing of the petition.”
Eligibility is determined by reference to schedules prepared in good faith showing aggregate debt on the filing date, not after considering the “possibility that the statutory limit under Section 506(b)(6) will eventually cap” a landlord’s claim, Judge Isgur said.
Section 506(b)(6), Judge Isgur said, “is a limit on the allowance of claims against the estate.” Eligibility is computed on the petition date, he said, “not after a hearing on a potential reduction in that claim.”
Questions for the reader: What if there were no pre-petition judgment in favor of the landlord? And what if the debtors had scheduled the lease claim for one year’s worth of rent? Would the result be the same?
Were there no judgment, the landlord’s claim would not have been liquidated, and scheduling the claim at the amount capped by Section 506(b)(6) would seem to be in good faith, thus possibly making the debtor eligible for chapter 13.
Practice point: Ensure that an individual debtor files a chapter 13 petition before judgment on a large lease claim.