In re Jennifer HO, Debtor. Jennifer Ho, Appellant, v. Edwina Dowell, Chapter 13 Trustee, Dai Hwa Electronics, Appellee.
BAP No. CC-01-1345-PBK
United States Bankruptcy Appellate Panel of the Ninth Circuit
March 13, 2002
Bankruptcy No. LA 01-16532 ER. Argued and Submitted Oct. 24, 2001.
273 B.R. 859
John W. Mills, III, Feder & Mills, Los Angeles, CA, for Dai Hwa Electronics.
Before PERRIS, BRANDT and KLEIN, Bankruptcy Judges.
OPINION
PERRIS, Bankruptcy Judge.
The bankruptcy court determined that appellant Jennifer Ho (“Debtor“) had
BACKGROUND
Appellee Dai Hwa Electronics (“DHE“) objected to confirmation of the chapter 13 plan proposed by Debtor, and requested that her case be dismissed. DHE alleged that Debtor was ineligible to be a chapter 13 debtor because her unsecured debts exceeded the dollar limit applicable under
ISSUES
- Whether the bankruptcy court erred in concluding that Debtor‘s unsecured, liquidated debts included a breach of contract claim against a corporation in which Debtor is a shareholder when Debtor was not a party to or guarantor of the contract, but did schedule the corporate creditor as a creditor holding a noncontingent, disputed, unliquidated claim of an unknown amount.
- Whether the court abused its discretion in dismissing Debtor‘s chapter 13 case for bad faith because she filed her petition shortly before the state court set a trial date.
STANDARD OF REVIEW
“Whether a debt is liquidated involves the interpretation of the Bankruptcy Code and is reviewed de novo.” In re Slack, 187 F.3d 1070, 1073 (9th Cir.1999). We review a bankruptcy court‘s finding of bad faith for clear error. In re Leavitt, 171 F.3d 1219, 1222-23 (9th Cir.1999). Clear error exists when, after examining
DISCUSSION
1. Chapter 13 Debt Limitation
As of the date Debtor filed her petition,
Whether Debtor‘s unsecured debts are less than the
The lawsuits are Dai Hwa Electronics (Malaysia) Sdn. Bhd. v. Daiho Electronic, Inc., Jennifer Ho aka Sheng Ho aka Sheng-Jen Ho, and Does 1-100, Los Angeles County Super. Ct., Case No. KC-032523 (filed Feb. 15, 2000) (”Dai Hwa v. Daiho“), and Great Tone Ltd. v. Daiho Electronic, Inc, Los Angeles County Super. Ct., Case No. BC-200289 (filed Nov. 5, 1998) (”Great Tone v. Daiho“).
Debtor is a party defendant in Dai Hwa v. Daiho, allegedly liable on counts of accounting, breach of fiduciary duty, and a shareholders’ derivative action for damages. The demand for damages is “in excess of $50,000.00.” The plaintiff in that case filed a proof of claim in bankruptcy court for $1,387,651.39,5 most of which re
The bankruptcy court fixed $50,000 as the liquidated debt in Dai Hwa v. Daiho. Assuming that any amount could have been “readily ascertained” as a liquidated debt with respect to this lawsuit, the fact that the amount fixed was less than $93,669.50, means that Great Tone v. Daiho also figures in the calculus.
The court evaluated Great Tone v. Daiho as reflecting a liquidated debt of $640,792.50, the amount of the open book account being sued upon. The bankruptcy court stated:
Great Tone‘s claims for breach of contract and common counts for goods sold and delivered are self-evident as arising out of contract. Examination of Great Tone‘s state court complaint against Debtor confirms this determination. Specifically, Great Tone alleges that Debtor is liable for an open book account for goods and merchandise forwarded to Debtor. Consequently, such liability in the approximate amount of $640,792.50 can be readily ascertained and is liquidated for purposes of
§ 109(e) .
Memorandum of Decision and Order Dismissing Chapter 13 Case, 6:12-19 (footnotes omitted; emphasis added).
This conclusion was erroneous because Debtor was not named as a defendant in the Great Tone v. Daiho complaint and the complaint contains no allegations against her. In fact, the bankruptcy court acknowledged that Debtor was not a named defendant in the Great Tone v. Daiho action. The court stated as follows in footnote 2 of its memorandum decision:
Debtor is not a named defendant in Great Tone‘s complaint. However, Debtor listed Great Tone‘s complaint against [Daiho] in her bankruptcy schedules. Moreover, in Debtor‘s supplemental papers, Debtor concedes she is a party to the pending [Great Tone action].
As this excerpt indicates, the court relied on the fact that Great Tone was listed as a creditor in Debtor‘s schedules and that Debtor filed a cross complaint on behalf of Daiho in the Great Tone action.6 Neither of these reasons is a valid basis for concluding that Great Tone‘s breach of contract claim is a liquidated debt of Debtor.
The problem with counting the $640,792.50 Great Tone v. Daiho debt as a liquidated debt of Debtor‘s is that Debtor is not a party to the Great Tone lawsuit. Great Tone does not allege that Debtor, who was an officer, director, and minority shareholder of Daiho, is individually liable and nothing alleged in the complaint points in that direction.
Not only was Debtor not a party; the court refused to allow her to pursue a cross-complaint on behalf of Daiho. The state court dismissed the cross-complaint for lack of standing, ruling that, as a mi
Debtor says she scheduled Great Tone as a creditor because of her potential liability for a sanctions-type award for having intermeddled in the case. She did not suggest personal liability for the $640,792.50 open book account.
Thus, the prospects for individual liability on the open book account are far-fetched.
Because the court‘s allocation of liability on the open book account was the dispositive reason it concluded that Debtor was ineligible for chapter 13 relief, this appeal reduces itself to the question of whether the probability that a debtor will be held liable plays any role in determining whether the debt should count for purposes of calculating eligibility for chapter 13 relief under
A debt is liquidated if the amount of the debt is readily determinable. In re Slack, 187 F.3d 1070, 1073 (9th Cir. 1999); In re Nicholes, 184 B.R. 82, 89 (9th Cir. BAP 1995). Whether a debt is subject to “ready determination” depends on whether the amount is easily calculable or whether an extensive hearing is needed to determine the amount of the debt. Slack, 187 F.3d at 1074. See also Nicholes, 184 B.R. at 89 (“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.“).
The panel in Slack stated that it was holding that “a debt is liquidated if the amount is readily ascertainable, notwithstanding the fact that the question of liability has not been finally decided.” 187 F.3d at 1075. However, that holding must be tempered by prior Ninth Circuit precedent (which Slack did not overrule) and the facts of that case.
Slack was a motion to dismiss that was granted early in the case on the premise that noncontingent, liquidated, unsecured debt reflected in certain state court litigation by an insurance company suing to recover payments exceeded the then-applicable $250,000 limit. Two events had occurred before bankruptcy: the debtor had stipulated that plaintiff‘s actual damages were $255,954 and the state court had issued a tentative decision that the debtor was jointly and severally liable for $659,971. After the case was dismissed, but while the appeal was pending, the state court entered judgment against the debtor for $854,060 ($455,480 for the relevant plaintiff).
Stripped of its dicta, Slack stands for two straightforward propositions: first, postpetition events are irrelevant to whether a debt is liquidated on the date of filing bankruptcy, 187 F.3d at 1073; and second, a debtor‘s prebankruptcy stipulation in state court that a plaintiff suffered damages of $255,954, liquidated the debt for
Unfortunately, those two straightforward propositions are clouded by the ambiguous discussion in Slack of the effect of disputes over liability. In some places Slack appears to reject any link between liquidation and liability: “Therefore, the concept of a liquidated debt relates to the amount of liability, not the existence of liability. 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
We resolve that question today. 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 Slack, the debtor‘s liability had been all but decided by the prebankruptcy, tentative ruling in state court. Thus, the use of the phrase “finally decided” in referring to liability questions may tacitly recognize that liability was not seriously at issue in that case. The Slack holding, then, does not necessarily resolve the question whether some disputes about liability can render a claim unliquidated. Because the Slack panel was not presented with a situation involving a liability dispute that rendered a debt not capable of ready determination, its apparent broad holding should not be interpreted to sweep so far.
The holding in Slack must be read in conjunction with other aspects of the opinion. The court in Slack stated that:
[w]hether the debt is subject to ‘ready determination’ will depend on whether the amount is easily calculable or whether an extensive hearing will be needed to determine the amount of the debt, or the liability of the debtor.
187 F.3d at 1074 (emphasis added). This statement must be viewed as part of the holding, or the opinion is at odds with the precedent on which it relies. The Ninth Circuit cited with approval In re Nicholes, 184 B.R. 82 (9th Cir. BAP 1995), which the panel said is “consistent with the law of this circuit.” Slack, 187 F.3d at 1075. In Nicholes, we held:
Construing [In re Sylvester, 19 B.R. 671 (9th Cir. BAP 1982)] with [In re Wenberg, 94 B.R. 631 (9th Cir. BAP 1988)] and [In re Loya, 123 B.R. 338 (9th Cir. BAP 1991)], 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.
184 B.R. at 90-91 (emphasis added). When the Slack panel quoted from Nicholes in its opinion, however, it omitted the last sentence of our discussion, which made it clear that a dispute about liability could, under certain circumstances, affect whether a debt is liquidated.
The circuit‘s omission of that portion of our decision in Nicholes, along with its brief summary of its holding, which suggests that major liability issues are not relevant to the determination of whether a debt is liquidated, makes it unclear whether the circuit meant to remove any issues of liability from the determination of whether a debt is liquidated or unliquidated.
We conclude that Slack should not be read to remove that issue from the analy
Interpreting Slack as DHE would have us do would lead to gamesmanship and punishment of the diligent. Bankruptcy schedules are supposed to be over-inclusive. Every potential creditor should be listed in order to have notice of the bankruptcy and an opportunity to protect itself.7 If listing a debt that is more theoretical than real would defeat chapter 13 eligibility, then we will have created a powerful disincentive to the accurate, complete and candid schedules that are vital to a bankruptcy system, which relies on self-reporting.
If Slack were interpreted to preclude consideration of the remoteness of liability, we would have created a dilemma that inevitably will lead to schedules that are shaded to omit debts at the margin of liability.
Obviously, in this case, there would need to be allegations of liability and an extensive hearing to determine Debtor‘s liability for the Great Tone contract debt. The amount of the open book account debt allegedly owed to Great Tone can be ascertained to the penny. But not even Great Tone contends that Debtor is personally liable.8 Therein lies the rub. This is not a case where all that is lacking is a final determination as to the debtor‘s liability. In addition, even if Debtor is liable, it is not self evident that she is liable for the entire amount of the debt. While a dispute as to liability will not “necessarily render a debt unliquidated,” Slack, 187 F.3d at 1074, the nature of this dispute does.9
- whether the debtor misrepresented facts in his or her petition or plan, unfairly manipulated the Bankruptcy Code or otherwise filed the Chapter 13 petition or plan in an inequitable manner;
- the debtor‘s history of filings and dismissals;
- whether the debtor‘s only purpose in filing for chapter 13 protection is to defeat state court litigation; and
- whether egregious behavior is present.
In re Leavitt, 171 F.3d 1219, 1224 (9th Cir.1999).
The bankruptcy court found that Debtor filed her petition in bad faith, stating as follows:
Although the two lawsuits against Debtor commenced well before Debtor filed her bankruptcy petition, the court finds that the timing of Debtor‘s filing, just prior to the establishment of a trial date by the state court for the litigation with DHE, supports a finding of bad faith with respect to the filing of the present case. See Eisen v. Curry (In re Eisen), 14 F.3d 469, 470–71 (9th Cir.1994) (finding bad faith where the debtor timed the filing to frustrate a state court action with the automatic stay provisions of
11 U.S.C. § 362 ). Debtor‘s contention that her filing is attributable to lack of funding for the litigation is undermined by her purchase of the 50% interest of her sister‘s real property, secured by the Debtor‘s automobile, just prior to the petition date. These circumstances warrant dismissal of the case with prejudice
Memorandum of Decision and Order Dismissing Chapter 13 Case, 7:18—8:3 (footnote omitted).
We conclude that the bankruptcy court abused its discretion in dismissing Debtor‘s case, because it applied an incorrect standard when it determined that Debtor filed her petition in bad faith. Although the court tangentially mentioned the fourth factor,11 it relied exclusively on
The bankruptcy court relied on Eisen in finding that Debtor filed her petition in bad faith. However, Eisen states that bad faith exists where the debtor‘s only purpose is to defeat state court litigation. 14 F.3d at 470. The bankruptcy court could not have concluded that Debtor‘s only purpose was to defeat state court litigation without considering all of the circumstances surrounding the filing of her chapter 13 petition. In addition, the facts of Eisen are far more egregious and clearly distinguishable from those of this case. The debtor in Eisen filed multiple petitions on the eve of trial and disclosed contradictory and misleading information. Id. at 471. There is no indication that Debtor is guilty of such conduct.
In addition, a finding of bad faith does not mean that dismissal of the chapter 13 case is the appropriate result. A finding of “bad faith” is “cause” either to dismiss the case or to convert it. A court is obligated to choose between the two options based on the best interests of the creditors and the estate.
On remand, if the court determines that Debtor has acted in bad faith, the court should consider whether dismissal would meet the “best interests of creditors and the estate” criterion of
CONCLUSION
We REVERSE the court‘s determination that Debtor‘s unsecured liquidated debts exceed the limit of
KLEIN, Bankruptcy Judge, Concurring.
I join the majority opinion and write separately, first, to address another error—oft-repeated but evading review—in the dismissal order and, second, to emphasize that, if the Ninth Circuit meant everything it said in Slack and Scovis, then our decision regarding chapter 13 eligibility cannot stand, and we will be in a Wonder-
I
This appeal can be comprehended only if one recognizes that there are three separate facets to the order on appeal.
A
First, as this was a plan confirmation that degenerated into dismissal, the order represents a refusal to confirm a chapter 13 plan under
1
Although we take no formal position on the outcome of the “all militating factors” analysis prescribed by Goeb, it is plain that some of the pertinent factors are adverse to confirmation.
It is significant that the chapter 13 case is probably administratively insolvent. The debtor‘s chapter 13 plan calls for her to make plan payments totaling $1,800.00 ($50.00/month x 36 months) that, net of estimated trustee fees, would provide only $1,602.00 to pay all other administrative expenses, with the residue, if any, to creditors. Since administrative expenses include fees for debtor‘s counsel, who bills $300.00 per hour and by now must have consumed his $2,500.00 retainer, the chance of any payment to creditors appears to be very low.
Indeed, the administrative insolvency may make the plan not confirmable as a matter of law due to the predictable insufficiency of funds to pay administrative expenses in full (unless debtor‘s counsel agrees to a different treatment).
Next, the debtor engaged in bankruptcy planning that could be vulnerable to criticism. She executed a deed of trust (as co-debtor with her sister) dated nine days prebankruptcy and a “mortgage” to her sister dated ten days prebankruptcy on an $85,000 loan secured by her 50 percent interest in the residence and by her otherwise-unencumbered 1998 Mercedes Benz.
Moreover, the debtor‘s repayment of a $6,350 debt to her sister six months prebankruptcy that might be avoidable.
Nor is the plan providing nominal payment to creditors being justified on a theory of using chapter 13‘s muscle to cure a default by forcing a secured lender to accept payments over time or to hold an importuning priority creditor at bay. Here, no defaults are being cured and no secured or priority creditors are being otherwise dealt with under the plan.
2
It would be reasonable to infer, having eliminated the usual reasons for legitimate nominal payment plans, that this plan was designed to preempt litigation before entry of judgment that might make the debtor ineligible under
Any judgment in excess of $93,669.50 would push total unsecured debt over the $269,250 limit. In the action in which the debtor is a party, there is a demand of “in excess of $50,000.00,” and a $1,387,651.39 proof of claim, with allegations that would make the debt nondischargeable in chapters 7 and 11.
Thus, the timing of the filing of this chapter 13 case looks like a simple race to the courthouse so as to collect a “super-
3
These aspects of Goeb‘s “all militating factors” analysis of “good faith” under
While these factors are not necessarily fatal, I doubt that the court would have confirmed the plan if it had performed the Goeb analysis. If plan confirmation had been the sole issue in this appeal, then I might be urging affirmance on the theory that the record supports the result despite the absence of findings.
B
The second facet of the order represents a determination of “cause” under
While the circumstances are the same, the question of dismissal or conversion has more at stake than mere denial of plan confirmation. This extra dimension warrants careful analysis by the bankruptcy court.
C
The third facet of the order declares the debtor ineligible to file another bankruptcy case for 180 days and does so in the form of an injunction. Here, our decision is silent. Unlike the majority I would decide its merits, as the court‘s “180-day bar to refiling in any chapter” is at odds with the Bankruptcy Code and usually evades review.
1
The bankruptcy judge reasoned that a mere finding of “bad faith” warranted application of
if (1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or (2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362[.]
Not only does
2
Although the court cited the Ninth Circuit‘s Eisen decision as authority to apply
The question of the debtor‘s eligibility to file bankruptcy was not an issue in Eisen. The 180-day bar had long since been mooted by the passage of time. The per curiam opinion does not discuss
I doubt that, if the Eisen panel had considered the issue, it would have said that a “bad faith” choice of chapter 13 in one case should slam the door to legitimate chapter 7 relief or preclude other creditors from filing an involuntary case, both of which are consequences of debtor ineligibility.
This appeal illustrates the problem. It cannot be said that the debtor had no legitimate bankruptcy purpose in filing her case. In addition to the debt that may be nondischargeable, she has $171,042.98 in unsecured debt that appears eligible for discharge in chapters 7 or 11. This was not a serial filing. At worst, her “bad faith” transgression was selecting the chapter 13 remedy over the chapter 7 remedy in circumstances in which she was either ineligible for chapter 13 or doomed to fail.
The debtor has the non-waivable right to convert a chapter 13 case to chapter 7 “at any time.”
3
Moreover, the bankruptcy court imposed its 180-day bar with what looks like an injunction. It is not settled that this is the correct manner of proceeding. If another case were to be filed within 180 days and assigned to another judge, the usual procedure is to move for dismissal in the later-filed case rather than to ask the earlier judge to enforce the injunction.
The better way to make the
II
If the Ninth Circuit really meant everything it said in Slack and Scovis, then our decision on chapter 13 eligibility cannot stand and counterproductive pleading formalism will reign.
A
Read together, Slack and Scovis paint chapter 13 eligibility matters into a neat corner entirely in the debtor‘s control by virtue of a nearly immutable focus on the initial schedules.
On one hand, a debt is liquidated for purposes of
Scovis says, “[w]e now simply and explicitly state the rule for determining Chapter 13 eligibility under
These two precedents, treacherously simple in their statement, mask complexity that invites abuse and confusion.
B
I do not claim to have a comprehensive solution to this multi-dimensional puzzle and cannot pretend that our solution today is faithful to the letter of Slack and Scovis. We indulge in the liberty of construing the problematic portions of those decisions as dicta. The court of appeals may see it differently.
We should be striving toward a rule of chapter 13 eligibility analysis that is comprehensible by lawyers and judges, promotes full, candid, and complete disclosure in schedules, distinguishes between the objective and subjective dimensions of eligibility, settles the objective issues, and leaves to the bankruptcy judges the subjective issues so that we may fulfill the intent of Congress, as reflected in the fact that it prescribed specific debt limits in
Those who are entitled to the special protections of chapter 13 relief should have it, while the undeserving are excluded.
1
In a well-managed chapter 13 regime, one would expect that there would be two occasions for inquiring into whether the debtor had, on the date of filing, noncontingent, liquidated unsecured and secured debts within the
First, early in the case the limits could be tested by way of a motion to dismiss or convert. The stakes of immediate importance to creditors early in the case are whether the debtor should be allowed to remain in control of property of the estate and whether the unique chapter 13 co-debtor stay should continue to apply.
Second, at the time of confirmation, the debtor‘s
In this respect, it is worth remembering that chapter 13 is fundamentally in the nature of a remedy—a remedy more potent than other remedies in the Bankruptcy Code. Any individual can file a chapter 7 or 11 bankruptcy case, but only an individual whose debts are below the statutory limits can maintain a chapter 13 case in which more debts can be discharged, with creditors being held at bay by the automatic stay for the life of the plan. The trade-off for creditors is that the debtor must adhere to a regime of supervised payments that will pay creditors more than what they would receive under other Bankruptcy Code chapters.
While it is tempting to analogize
The amount-in-controversy requirement for diversity jurisdiction is part of the determination of the existence of the court‘s jurisdiction, which needs to be resolved early in a civil action. It would be dysfunctional judicial administration to permit the initial determination that there is jurisdiction to be routinely revisited and second-guessed later in the litigation.
In contrast, federal jurisdiction is not at stake in an eligibility determination under
In short, while failure to have $75,000 in controversy precludes federal diversity jurisdiction, deviation from the debt limits of
Thus, no dysfunction results from permitting
3
Since a finding of
If it is determined later in the chapter 13 case that the debtor was ineligible for chapter 13 at the time of filing, then the case is easily converted to a chapter for which the debtor is eligible, without defeating federal jurisdiction. The debtor can convert as of right under
Just as the stakes differ at the two pertinent stages of
As motion practice early in the case, sound judicial management discourages diversionary sideshows. In the absence of an apparent risk of dissipation of property of the estate, little harm, relative to being in chapter 7, results from permitting the chapter 13 case to proceed toward plan confirmation.
Thus, there is considerable logic in deferring to a debtor‘s schedules in early motion proceedings designed to short-circuit the chapter 13 process and in placing the burden on a moving creditor to present
The equation shifts, however, at the plan confirmation stage. The debtor has the burden of proof on all essential elements for confirmation, including that “the plan complies with the provisions of this chapter [13] and with the other applicable provisions of this title [11]” and whether “the plan has been proposed in good faith and not by any means forbidden by law.”
In view of the fact that the negotiation dynamic of chapter 11 is not present in chapter 13 cases because creditors are not allowed to vote to accept or reject the plan, plan confirmation is the primary occasion for chapter 13 creditors to have their Due Process opportunity to contest the plan.
Thus, in principle, one would expect a plan confirmation hearing could include a more careful evidentiary inquiry into the “ready determinability” of the nature and amount of the putative liquidated debt as it appeared as of the date of the filing of the petition, which is then an issue at the heart of two essential elements of plan confirmation, and no longer a diversionary sideshow.
That balance between interests of debtor and creditor was at the foundation of our position in the Nicholes decision, which was an appeal from denial of chapter 13 plan confirmation:
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.
Nicholes, 184 B.R. at 91 (emphasis supplied).
After Slack and Scovis, I am no longer confident that the law of the circuit is consistent with this construct.
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In sum, the chapter 13 system in this circuit is in disequilibrium if our decision today is not correct.
If that turns out to be the case, then the problem will have to be sorted out in some other way. One, or a combination, of two things will happen. Either, the genius of counsel, which knows no bounds, will devise new theories—perhaps challenging chapter 13 schedules as not prepared in good faith—to resolve festering chapter 13 eligibility issues. Or, the court of appeals will more cogently restate the law of the circuit.