Obtaining a Nondischargeable Judgment against the Debtor in Chapter 13

In Chapter 7, it is a simple matter to obtain a nondischargeable judgment for securities claims under 11 USC 523(a)(19). It is difficult to obtain a fraud judgment because intent to defraud must be shown.

Chapter 13 is entirely a different matter. Unless there is fraud in the confirmed Chapter 13 plan (concealed assets and other material misrepresentation that defraud creditors), the only means of obtaining a nondischargeable judgment for fraud against the debtor is to win a motion to convert the case to Chapter 7. Misstatements (as opposed to concealment) in the initial filing are not normally actionable because there is no good faith requirement to filing of Chapter 13 case under 11 USCS § 109 (as opposed to confirmation of Chapter 13 plan). In re Taylor (1989, BC ED Pa) 96 BR 584. But the 9th Circuit holds a contrary position (see contrary language in In re Scovis).

Failure to Include Creditor in the Chapter 13 Plan

            Although the language of 11 USC § 1301 I can be read to require inclusion of all creditors claims, the courts hold that it applies to guarantors and co-debtors who file Chapter 13 cases. 11 USC 1301 I provides:

On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided by subsection (a) of this section with respect to a creditor, to the extent that–

(1) as between the debtor and the individual protected under subsection (a) of this section, such individual received the consideration for the claim held by such creditor;

(2) the plan filed by the debtor proposes not to pay such claim; or

(3) such creditor’s interest would be irreparably harmed by continuation of such stay.

(Emphasis added)

The courts have interpreted a plan to not pay creditors as compliance with the statute. By including provision for zero payment on unsecured claims, debtor’s Chapter 13 plan provided for those claims as required by 11 USCS § 1328(a), and those claims are dischargeable. The phrase “provided for” in § 1328(a) simply requires that for claim to become dischargeable plan must make provision for it, that is, deal with it or refer to it. In re Gregory (1983, CA9 Cal) 705 F2d 1118, 10 BCD 1073, 8 CBC2d 605, CCH Bankr L Rptr P 69439.

If the debts are not mentioned by name in the Chapter 13 plan, it is not “provided for.” Unscheduled general unsecured debt was not “provided for” in Chapter 13 plan and was not discharged since creditor was given no notice of case and thus was not afforded procedural due process rights encompassed within the 11 USCS § 1328(a) provision that debts “provided for” in plan are discharged upon completion of plan payments. Since failure to provide for unscheduled creditor was not rendered harmless by plan provision stating, without listing specific creditors by name, that general unsecured creditors would receive no payments under plan. Crites v Oregon ex rel. Roberts (In re Crites) (1996, BC DC Or) 201 BR 277.

Differences between Dischargeability under Chapter 13 and Chapter 7 Bankruptcy

Chapter 13 provides a “super-discharge” to debtors.     Chapter 7 has numerous exceptions (see §523(a)). Chapter 13 provides:

§ 1328. Discharge

(a) Subject to subsection (d), as soon as practicable after completion by the debtor of all payments under the plan, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter [11 USCS §§ 1301 et seq.], the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title [11 USCS § 502], except any debt–

   (1) provided for under section 1322(b)(5) of this title [11 USCS § 1322(b)(5)];

   (2) of the kind specified in paragraph (5), (8), or (9) of section 523(a) [or 523(a)(9)] of this title [11 USCS § 523(a)]; or

   (3) for restitution, or a criminal fine, included in a sentence on the debtor’s conviction of a crime.

 (b) Subject to subsection (d), at any time after the confirmation of the plan and after notice and a hearing, the court may grant a discharge to a debtor that has not completed payments under the plan only if–

   (1) the debtor’s failure to complete such payments is due to circumstances for which the debtor should not justly be held accountable;

   (2) the value, as of the effective date of the plan, of property actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under chapter 7 of this title [11 USCS §§ 701 et seq.] on such date; and

   (3) modification of the plan under section 1329 of this title [11 USCS § 1329] is not practicable.

 I A discharge granted under subsection (b) of this section discharges the debtor from all unsecured debts provided for by the plan or disallowed under section 502 of this title [11 USCS § 502], except any debt–

   (1) provided for under section 1322(b)(5) of this title [11 USCS § 1322(b)(5)]; or

   (2) of a kind specified in section 523(a) of this title [11 USCS § 523(a)].

Chapter 13 only holds the debtor accountable for three §523 exemptions: (5) child support; (8) education loan; and (9) personal injury.

More than $307,675 of Unsecured Debt

            11 USC §1109(e) provides that the Chapter 13 debtor must have less than $307,675 of noncontingent, liquidated debt as of the date of filing the Chapter 13 petition. Eligibility limitations of 11 USCS § 109(e) are not jurisdictional and bankruptcy court properly concluded it had jurisdiction over bankruptcy case even though state court judgment against debtor exceeded $ 250,000 limit. Nikoloutsos v Nikoloutsos (1998, ED Tex) 222 BR 297, revd, remanded (2000, CA5 Tex) 199 F3d 233, CCH Bankr L Rptr P 78081.

The Bankruptcy Code does not define “noncontingent” or “liquidated” so the definitions have been left to the courts. Generally the definition of “liquidated” is:

As used by 11 USCS § 109(e), “liquidated” debt is one whose dollar amount (1) is determined, fixed, settled, adjusted, and made certain mathematically and with precision, (2) is agreed upon, or (3) is fixed by operation of law; debt is not certain to extent there is bona fide dispute as to its amount and as to underlying liability of debtor to pay debt.

In re Lambert (1984, BC DC Utah) 43 BR 913, 12 BCD 762, 11 CBC2d 693, CCH Bankr L Rptr P 70121 (criticized in In re Pearson (1985, CA6 Mich) 773 F2d 751, 13 CBC2d 749, CCH Bankr L Rptr P 70787) and (criticized in In re Vaughan (1989, BC SD Ill) 100 BR 423) and (criticized in In re Loya (1991, BAP9 Cal) 123 BR 338, 91 CDOS 1186, 91 Daily Journal DAR 1836, CCH Bankr L Rptr P 73894) and (criticized in In re Knight (1995, CA7 Ind) 55 F3d 231, 33 CBC2d 825, CCH Bankr L Rptr P 76493) and (criticized in In re Mitchell (2000, BC DC Mass) 255 BR 345) and (criticized in In re Huelbig (2004, DC RI) 313 BR 540).

From the In re Lambert quote it would be expected that disputes with the IRS would not be considered “liquidated.” This is generally not true:

Debtor’s tax debts exceeding $ 290,525 were noncontingent, as all events creating debt had already occurred, and were liquidated, as they were computed in accordance with tax code; thus, debtor was ineligible for Chapter 13 bankruptcy relief under 11 USCS § 109(e); fact that debtor contested tax proof of claim filed by Internal Revenue Service did not remove it as claim under § 109(e) or render it unliquidated.

In re Hounsom (2003, BC MD Fla) 294 BR 399, 50 CBC2d 644, 91 AFTR 2d 2749, 16 FLW Fed B 161. Note how the court does not even consider whether the dispute with the IRS is in good faith.

“Liquidated and Noncontingent” in the 9^th Circuit

Oregon and Washington are in the 9^th Federal Circuit and look to its decisions for the law on the subject. Probably the best description of the issues raised by the “liquidated, noncontingent” language is Nicholes v. Johnny Appleseed (In re Nicholes), 184 B.R. 82. Starting a page 88 the 9^th Circuit BAP wrote:

 Distinguishing Contingent Debts

It is also settled that a debt is noncontingent if all events giving rise to liability occurred prior to the filing of the bankruptcy petition. In re Fostvedt, 823 F.2d 305, 306 (9^th Cir. 1987). As the Ninth Circuit Court of Appeals held:

The rule is clear that a contingent debt is “one which the debtor will be called upon to pay only upon the occurrence or happening of an extrinsic event which will trigger the liability of the debtor to the alleged creditor.”

Id. (quoting Brockenbrough v. Commissioner, 61 Bankr. 685, 686 (W.D. Va. 1986)). Thus, debts of a contractual nature – i.e. claims for goods or services – are not contingent. In re Albano, 55 Bankr. 363, 366-67 (N.D. Ill. 1985) (liability on contract is “noncontingent” once contract is made, even if liability is subject to being avoided by some later occurrence). Furthermore, the fact that a claim has not been reduced to judgment does not render it contingent. See In re Dill, 30 Bankr. 546, 549 (9^th Cir. BAP 1983), aff’d, 731 F.2d 629 (9^th Cir. 1984).

* * *

[Liquidated Debts]

A debt is liquidated if it is capable of “ready determination and precision in computation of the amount due.” Fostvedt, 823 F.2d at 306 (citing Sylvester, 19 Bankr. At 673). The test for “ready determination” is whether the amount due is fixed or certain or otherwise ascertainable by reference to an agreement or by a simple computation. Sylvester, 19 Bankr. At 673 (citing In re Bay Point Corp., 1 Bankr. Ct. Dec. (CRR) 1635 (D.N.J. 1975)); In re Kaufman, 93 Bankr. 319, 322 (Bankr. S.D.N.Y. 1988); In re Pulliam, 90 Bankr. 241, 244 (Bankr. N.D. Tex. 1988). Thus, debts arising from a contract are generally liquidated. Sylvester, 19 Bankr. At 673. On the other hand, debts based on unlitigated tort and quantum meruit claims are generally unliquidated because damages are not based on a fixed sum. See Sylvester, 19 Bankr. At 673; see also Matter of Belt, 106 Bankr. 553, 558 (Bankr. N.D. Ind. 1989).

It is the term “disputed” that creates the most confusion in characterizing debts as liquidated or unliquidated. Debts which are merely disputed are presumably included in the § 109(e) limitation calculation. See, e.g., In re Hutchens, supra; In re Williams, 51 Bankr. 249, 251 (Bankr. S.D. Ind. 1984); In re DeBrunner, 22 Bankr. 36, 37 (Bankr. D. Neb. 1982). However, the term “disputed” is broad and can encompass either liquidated or unliquidated debts. It can also involve the liability for a claim, the amount of a claim, or both. Although courts agree that a claim is liquidated if the amount is readily determinable, courts are divided over whether a debt is unliquidated when there is a dispute as to liability or amount. See In re Teague, 101 Bankr. 57, 59 (Bankr. W.D. Ark. 1989); Matter of Pearson, 773 F.2d 751, 754 (5^th Cir. 1985). The issue boils down to whether a dispute over liability or amount precludes the ready determination of a debt.

At least three views have been expressed. The first and most expansive view holds that a dispute as to liability or amount renders a debt unliquidated. In re Lambert, 43 Bankr. 913 (Bankr. D. Utah 1984) (liquidated debt is certain as to amount and liability but debt cannot be certain to extent there is a bona fide dispute as to amount or underlying liability); In re King, 9 Bankr. 376 (Bankr. D. Or. 1981) (debt is not liquidated if there is substantial dispute regarding liability or amount). This view appears to equate “disputed” debt with “unliquidated” debt. See In re Vaughan, 36 Bankr. 935, 938 (N.D. Ala. 1984), aff’d, 741 F.2d 1383 (11^th Cir. 1984). The second view, a more rigid approach to Chapter 13 eligibility, holds that a dispute over liability or amount does not render a debt unliquidated. In re Jerome, 112 Bankr. 563, 566 (Bankr. S.D.N.Y. 1990). This view suggests that a dispute never affects the liquidated amount of a claim. The third view strikes a balance between the aforementioned approaches. This view, enunciated in In re Wenberg, supra, at 634-35, holds that a dispute may render a debt unliquidated if it prevents the ready determination of a claim. Accord In re Lamar, 111 Bankr. 327, 328 (D. Nev. 1990) (court considered reasons why claim was not readily ascertainable, but acknowledged that fact of dispute itself would not render debt unliquidated).

In concluding that a dispute could render a debt unliquidated, the Ninth Circuit Bankruptcy Appellate Panel relied on its decision in Sylvester. See Wenberg, 94 Bankr. At 633-34. In Sylvester, the Panel held that disputed debts are nonetheless liquidated if the amount due is readily determinable[1] or “capable of ascertainment by reference to an agreement or by simple computation.” 19 Bankr. At 673. In reaching its conclusion, Sylvester also expressly rejected the liberal view of In re King, supra, which held that “a debt is not liquidated if there is a substantial dispute regarding liability or amount.” Id. At 673-74. The Panel reasoned that King’s definition of unliquidated debt “has the effect of excluding disputed claims from the section 109(e) computation, contrary to the express language of the section.” Id. At 674 (emphasis added). Although Sylvester stated that “disputed unsecured debt is not excluded” when calculating eligibility under § 109(e), the Sylvester panel still appeared to recognize that a dispute may preclude the ready determination of a debt, effectively rendering the debt unliquidated. Id. At 673.

The theory on which claims have been held insufficient is that they were open, unliquidated claims (e.g., tort or quantum meruit claims requiring proof as to liability, reasonable value, damages, etc.) which by their very nature are not fixed until juridical award to fix liability and amount.

Id. (citations omitted) (emphasis added). This language implicitly rejects the more rigid view that a dispute never renders a debt unliquidated.

The Ninth Circuit Bankruptcy Appellate Panel expanded Sylvester’s definition of “ready determination” and analyzed the interplay between “disputed” debts and “unliquidated” debts in Wenberg. The Panel in Wenberg held that

the definition of “ready determination” turns on the distinction between a simple hearing to determine the amount of a certain debt, and an extensive and contested evidentiary hearing in which substantial evidence may be necessary to establish amounts or liability. On this issue, the bankruptcy judge has the best occasion to determine whether a claim will require an overly extensive hearing or whether the claim is subject to a bona fide dispute; therefore not subject to “ready determination.”

94 Bankr. At 634-35. In other words, it is the nature of the dispute, and not the existence of the dispute, that makes a claim unliquidated. Like tort claims and other claims requiring juridical awards before liability and amount are established, some disputed claims cannot be readily determined because they require additional processing by the court.

More recently, the Panel followed Sylvester and Wenberg when it found that since only the briefest of hearings would be necessary, the claims were readily determinable and, thus, liquidated. In re Loya, 123 Bankr. 338, 340-41 (9^th Cir. BAP 1991). As the Panel in Loya stated:

Whether a debt is liquidated or not for purposes of 11 U.S.C. § 109(e) does not depend strictly on whether the claim sounds in tort or in contract, but whether it is capable of ready computation. For the same reason, whether a debt is liquidated does not depend on whether it is disputed.

Id. At 340.

Construing Sylvester with Wenberg and Loya, we hold that the fact that a claim is disputed does not per se exclude the claim from the eligibility calculation under § 109(e), since a disputed claim is not necessarily unliquidated. So long as a debt is subject to ready determination and precision in computation of the amount due, then it is considered liquidated and included for eligibility purposes under § 109(e), regardless of any dispute. On the other hand, if the dispute itself makes the claim difficult to ascertain or prevents the ready determination of the amount due, the debt is unliquidated and excluded from the § 109(e) computation.

Under this test, even though disputed, debts of a contractual nature are generally liquidated. Sylvester, 19 Bankr. At 673; see also In re Pennypacker, 115 Bankr. 504, 507 (Bankr. E.D. Pa. 1990); Vaughan, 36 Bankr. At 938. Likewise, a debtor’s dispute over liability for a corporation’s debts, which have been specifically listed on the debtor’s schedules, does not in itself render such debts “unliquidated.” Claypool, 142 Bankr. At 754-55.

It is important to emphasize today that the bottom line is that § 109(e) calculations depend on “ready determination,” not upon the existence or absence of disputes. If a debt is not readily determinable, whether as a result of a dispute or otherwise, then the claim is unliquidated. This approach encourages administrative efficiency, recognizes that Congress deliberately limited the availability of Chapter 13, and helps prevent potential abuse of the “superdischarge” provisions of Chapter 13.

In any event, the bankruptcy court must determine whether the debts in question are subject to ready determination and whether computation of the amount due is a simple matter. If the court determines that such debts are readily determinable, then they are liquidated and included in the debtor’s eligibility tally. If they are not readily determinable, then they are unliquidated and excluded from the eligibility tally. Since such determinations depend on an analysis of the facts, the Panel will remand this case to the bankruptcy court for the necessary factual determinations pursuant to Fed. R. Bankr. P. 8013. See also Wenberg, 94 Bankr. At 634-35.

The 9^th Circuit BAP in Nicholes v. Johnny Appleseed (In re Nicholes) chose the middle road: the mere existence of a dispute does not make a claim unliquidated but if the dispute requires a lengthy hearing to determine the amount owing, the claim is unliquidated. In many situations, the test is determined by the quality of the debtor’s lawyer. A good lawyer could make even the simplest case into a lengthy hearing.

The 9^th Circuit ignored the distinctions made by the BAP in its In re Slack, 187 F.3d 1070 (1999) decision. Although it seems to give lip service to the reasoning of the BAP (even citing Nicholes v. Johnny Appleseed (In re Nicholes)) it does not set out the three choices. It seems to hold that only in the most complicated cases are the claims unliquidated because of a dispute. It could even be said that the 9^th Circuit in Slack took the third option: a dispute does not render a claim unliquidated. Slack involved tort claims for wrongful death, one of the most difficult to set a value. The court wrote at 1075:

We hold that a debt is liquidated if the amount is readily ascertainable, notwithstanding the fact that the question of liability has not been finally decided.

In a later case, In re Scovus, the 9^th Circuit seems to conclude that the issue is decided:

In In re Slack, 187 F.3d at 1074-75, we stated:

If the amount of the creditor’s claim at the time of the filing the petition is ascertainable with certainty, a dispute regarding liability will not necessarily render a debt unliquidated. . . . Even if a debtor disputes the existence of liability, if the amount of the debt is calculable with certainty, then it is liquidated for the purposes of § 109(e). . . . [A] debt is liquidated if the amount is readily ascertainable, notwithstanding the fact that the question of liability has not been finally decided.

Securities Claims are Liquidated

State securities claims should be considered liquidated because they are determined by a statutory formula: the amount paid plus interest less the amount received plus attorney fees. Federal claims should likewise be considered liquidated because they are easier to fix the amount owing than wrongful death claims (In re Slack).

Conclusion

It is nearly impossible to obtain a nondischargeable fraud judgment against a properly qualified Chapter 13 debtor who files a reasonably honest petition.