The following is a case update written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., analyzing a recent decision of interest:

SUMMARY

In re Bello, 2019 WL 6826007 (Bankr. E.D. Mich. Dec. 13, 2019) shows that in applying the unsecured debt limit for Chapter 13 eligibility, a debt may be regarded as both liquidated and unliquidated at the same time. The court in Bello reasoned that if the Debtor admits that he or she owes a certain amount of money to a creditor, the admitted portion of an otherwise disputed debt should be taken into account in applying the debt limit. However persuasive this logic might be, it has not been applied in cases involving involuntary bankruptcy, in which any dispute as to the amount of a debt will disqualify a petitioning creditor.

To view the opinion, click here.

Facts

Mark Bello and his company Lawsuit Financial Corp. were defendants in an action commenced in the United States District Court for the Eastern District of Michigan on behalf of plaintiff Judith Michaelian. On March 20, 2019, the District Court entered an Order granting partial summary judgment to Michaelian on a claim for damages under the Federal Securities Act of 1933. The Order left unresolved, for later determination, the amount of damages to be awarded. Supplemental briefs were later filed on the issue of damages. In his brief, Bello asserted that the damages should be computed to be $310,750. Plaintiff Michaelian argued for a higher amount.

Nine days after filing his supplemental brief on the issue of damages, Bello filed his Chapter 13 bankruptcy petition. He listed the debt to Michaelian as “contingent” and “unliquidated,” stating the amount to be “Unknown.” Michaelian appeared as a creditor in the bankruptcy case and objected that Bello was not eligible for relief under Chapter 13. because, as of the petition date, his “noncontingent, liquidated, unsecured debts” exceeded $419,275.00, then the maximum allowed under 11 U.S.C. § 109(e). The Bankruptcy Court held that the debt to Michaelian was noncontingent and liquidated, and that Bello was not eligible for relief under Chapter 13. The ruling stated that Bello had the option of filing a motion to dismiss the bankruptcy case or to convert it to one under Chapter 11 or Chapter 7. The online docket reflects that Bello’s motion to convert the case to one under Chapter 11 was granted by an Order entered January 15, 2020.

Reasoning

The Court held that the Michaelian claim was “noncontingent” because “all events giving rise to liability…occurred prior to the filing of the bankruptcy petition” (quoting In re Kwiatkowski, 486 B.R. 409 (Bankr. E.D. Mich. 2013)). In holding that the debt was “liquidated” the Court relied on the Debtor’s admission in the District Court supplemental brief. The Court noted that Michaelian contended that the debt was much higher, but it concluded that “[i]t is enough for this Court, in ruling on the § 109(e) eligibility issue, that the Debtor’s debt…is at least $310,750.00, because that amount puts the Debtor’s relevant unsecured debt well above the § 109(e) limit.”

Author’s Comment

The Court’s ruling that the Michaelian claim was “noncontingent” is in line with case law which draws the distinction between disputed liability on a claim and contingent liability. See, In re Mazzeo, 131 F.3d 295, 303 (2d Cir. 1997). At the time that Bello’s petition was filed, the District Court had entered an interlocutory order granting partial summary judgment. Bello’s liability on the claim had not therefore been finally determined, but the facts creating that liability had already occurred.

The Bankruptcy Court ruled that the Michaelian claim was “liquidated” in the amount of $310,750, but “unliquidated” as to the higher amount alleged by Michaelian. The Court omitted to mention in its opinion that it had already granted the motion of Michaelian for relief from the automatic stay to complete the District Court litigation, for the purpose of determining the amount of the claim (that is, to “liquidate” the claim).

The notion that a claim may be both liquidated and unliquidated at the same time might be regarded as contrary to a recent Ninth Circuit holding, Dep’t of Revenue v. Blixseth, 942 F.3d 1179, 1186 (9th Cir. 2019). Blixseth concerned the requirements for eligibility as a petitioning creditor in an involuntary bankruptcy case. 11 U.S.C. §303(b)(1) requires that each petitioning creditor be the “holder of a claim…that is not contingent as to liability or the subject of a bona fide dispute as to liability or amount…[italics added].” In Blixseth, the petitioning creditor, Montana Department of Revenue, had conducted a tax audit, during which the Debtor, as part of an “informal review process” conceded one of the audit issues, thereby admitting liability for about $200,000 in taxes. The Debtor disputed the remainder of the claim and argued that because a portion of the debt was disputed, the Department of Revenue could not qualify as a petitioning creditor. The Ninth Circuit agreed.

In the Blixseth opinion the Ninth Circuit acknowledged that the Department of Revenue was “not alone in suggesting that treating fully and partially disputed claims alike might lead to anomalous results in some circumstances” As an example of such an anomaly, the Court cited In re Gen. Aeronautics Corp., 594 B.R. 442, 465-66 (Bankr. UT 2018) as “asserting that allowing a dispute over the threshold amount to qualify as a bona fide dispute as to amount would lead to the absurd result of a $100 dispute barring a creditor holding a $100,000 claim $99,900 of which was undisputed.” The Blixseth opinion abrogated In re Clignett, 567 B.R. 583 (Bankr. C.D. Cal. 2017). The Court in Clignett had observed that “[i]t appears illogical . . . that a bona fide dispute as to value could render a creditor ineligible to file an involuntary petition when the underlying, undisputed claim exceeds the statutory requirement.”

On the other hand, Blixeth is in line with Fustolo v. 50 Thomas Patton Drive, LLC, 816 F.3d 1, 9 (1st Cir. 2016) which holds that a dispute as to the claim amount need not be material in order to disqualify a petitioning creditor.

It is likely, in the author’s opinion, that the approach taken in Bello, to regard a claim as being both liquidated and unliquidated in applying the formula for chapter 13 eligibility, may continue to be applied notwithstanding cases like Blixseth and Fustolo. These latter cases are in the involuntary bankruptcy context, in which the courts, and Congress, have been concerned about creditor abuse. The language “as to liability or amount” was added to 11 U.S.C. §303(b)(1) in 2005 by BAPCPA, with the apparent intent of tightening the requirements for filing an involuntary petition. That amendment is discussed in In re Green Hills Dev. Co., L.L.C., 741 F.3d 651, 656 (5th Cir. 2014).

To compare, 11 U.S.C. §109(e) only requires that a debt be “liquidated” in order to figure in the Chapter 13 liability limit. It seems quite possible that the two different approaches to partially disputed claims will both survive in separate contexts.

These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomas Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomas Reuters.