Even if a claim is subject to a bona fide dispute, the claim is still included in the calculation to determine whether the debtor has too much debt to be eligible for chapter 13.
The facts would make a nifty final exam question in an introductory bankruptcy course, because the outcome revolves around the definitions of “unliquidated” and “contingent” claims.
The March 16 opinion by the Ninth Circuit Bankruptcy Appellate Panel is useful authority for involuntary petitioners when the debtor claims that the petitioners’ claims are contingent or unliquidated.
Disputed Liability on an Unsecured Note
The debtor admitted she had signed a $1 million note to purchase a home. The lender never recorded the mortgage, however. The debtor sold the home without paying the lender.
The lender sued the debtor on the note in state court and filed a motion for summary judgment. The debtor raised several defenses to the motion, including the statute of limitations. The debtor also argued that the lender did not have possession of the note or standing to sue.
Before the state court ruled on the summary judgment motion, the debtor filed a chapter 13 petition.
In her schedules, the debtor listed $30,000 in other unsecured debt. She scheduled the lender as having a disputed, unliquidated, contingent claim of $1,000. The lender filed a proof of claim for $1.75 million, representing the original principal plus accrued interest.
The lender filed a motion to dismiss the chapter 13 case, alleging that the debtor had more unsecured debt than the cap at the time of about $395,000 under Section 109(e). Bankruptcy Judge Robert J. Faris of Honolulu granted the motion and dismissed the case.
The debtor appealed to the BAP, which affirmed in an opinion by Bankruptcy Judge Scott H. Gan.
Definitions of ‘Unliquidated’ and ‘Contingent’
Section 109(e) provides that an individual is eligible for chapter 13 only if he or she “owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than [$395,000].”
The debtor argued that the lender’s claim was disputed because she alleged that it was barred by the statute of limitations. Judge Gan pointed out that a disputed claim is still a “claim” under Section 109(e). He went on to say that the section “does not exclude debts which are merely disputed.”
Although there had been no determination by the state court about the lender’s ability to enforce the note, Judge Gan said that the lender’s right to payment was shown by the proof of claim attached to the note. The dispute by the debtor, he said, was “not a sufficient basis to exclude the claim for purposes of § 109(e).”
Next, the debtor contended that the bankruptcy court had no reason to look beyond the schedules listing the claim for $1,000.
When the creditor has raised a good faith objection to eligibility, Judge Gan said, “the bankruptcy court can make a limited inquiry outside of the schedules to determine if the Debtor estimated her debts in good faith, and if not, whether she was eligible for chapter 13 relief.”
It “appeared to a legal certainty,” Judge Gan said, that the lender’s claim was not $1,000. He added that the dispute in state court was about the lender’s right to enforce the claim, not the amount of the claim. Therefore, the bankruptcy court was entitled to look beyond the schedules.
Next, Judge Gan addressed contingency.
The debtor argued that the debt was contingent because the state court had not ruled on the debtor’s liability. No, no, said Judge Gan. The claim was not contingent because “all of the events giving rise to Debtor’s liability on the note arose pre-petition.”
The debtor also lost her argument that the claim was unliquidated. Again, Judge Gan disagreed. The BAP’s precedent says that a claim is liquidated if it “is subject to ready determination.”
Judge Gan said that disputed contractual claims are “generally liquidated.” Even if the debtor disputes liability, the claim is liquidated if it “is calculable with certainty,” citing Ninth Circuit precedent.
In the case at hand, Judge Gan said that the amount of the claim was liquidated and properly included in the Section 109(e) analysis because it was “readily determinable by reference to the note.”
Even if a claim is subject to a bona fide dispute, the claim is still included in the calculation to determine whether the debtor has too much debt to be eligible for chapter 13.
The facts would make a nifty final exam question in an introductory bankruptcy course, because the outcome revolves around the definitions of “unliquidated” and “contingent” claims.
The March 16 opinion by the Ninth Circuit Bankruptcy Appellate Panel is useful authority for involuntary petitioners when the debtor claims that the petitioners’ claims are contingent or unliquidated.
Disputed Liability on an Unsecured Note
The debtor admitted she had signed a $1 million note to purchase a home. The lender never recorded the mortgage, however. The debtor sold the home without paying the lender.
The lender sued the debtor on the note in state court and filed a motion for summary judgment. The debtor raised several defenses to the motion, including the statute of limitations. The debtor also argued that the lender did not have possession of the note or standing to sue.
Before the state court ruled on the summary judgment motion, the debtor filed a chapter 13 petition.