In re Thomas M. QUINTANA and Delores J. Quintana, Debtors. Thomas M. QUINTANA and Delores J. Quintana, Appellants, v. INTERNAL REVENUE SERVICE, BUREAU OF LAND MANAGEMENT, Clemons, Cosho & Humphrey, Norman Easterday, Farm City Livestock Supply, Connecticut General Life Insurance Company, et al., Appellees.
BAP No. ID 87-1946 VPR
Bankruptcy No. 87-01240-F
United States Bankruptcy Appellate Panel of the Ninth Circuit
Decided Oct. 27, 1989
107 B.R. 234
Argued and Submitted June 15, 1988.
The second factor to consider is the prejudice to the opposing party. In the instant case, it is evident that the defendant would have been prejudiced by increased attorney‘s fees if the trial would have been postponed for at least an additional hour.
Given these considerations, and under the circumstances of the instant case, the appellant has, in my view, failed to show that the bankruptcy court committed a clear error of judgment in refusing to grant the appellant‘s request for a continuance. See Mission Indians, 824 F.2d at 724.
Richard B. Eismann, Caldwell, Ind., for appellants.
Clifton R. Jessup, Jr., Dixon, Dixon, P.C., Omaha, Neb., for appellees.
Before VOLINN, PERRIS and RUSSELL, Bankruptcy Judges.
BARRY RUSSELL, Bankruptcy Judge:
The debtors’ Chapter 12 case was dismissed because their aggregate debts exceeded the statutory limitations for eligibility to file a Chapter 12 petition. The bankruptcy court rejected the debtors’ argument that, for eligibility purposes, the value of a nonrecourse obligation should be written down to the value of the collateral. The court also rejected the debtors’ argument that their aggregate debts should be reduced by a counterclaim that the debtors had asserted against a creditor. We affirm.
I. FACTS
In May 1979, the debtors Thomas M. and Delores J. Quintana borrowed $1 million from Connecticut General Life Insurance Company. The loan was secured by real property in Idaho. On March 8, 1985, after the debtors defaulted on both notes, Connecticut General brought an action in Idaho state court for a money judgment and for a decree of foreclosure and order of sale of its interest. The debtors answered and counterclaimed, alleging that Connecticut General had wrongfully procured the appointment of a receiver to conduct the debtors’ business, and that the receiver had damaged the debtors’ business by acting in a reckless and grossly negligent manner while acting as an agent of Connecticut
On September 10, 1986, the Idaho state court entered summary judgment in favor of Connecticut General and declined to enter summary judgment on the debtors’ counterclaim, stating that it presented genuine issues of material fact. During the proceedings, Connecticut General waived its right to subsequently pursue a deficiency judgment against the debtors.
On April 17, 1987, the Quintanas filed a Chapter 12 petition. Connecticut General moved to dismiss the case on the grounds that the debtors’ aggregate debts exceeded the statutory limitation of $1.5 million and that the debtors were therefore ineligible to file a Chapter 12 petition. On July 6, 1987, the bankruptcy court held a hearing, found that the Quintanas’ aggregate debts exceeded $1.5 million, and dismissed the case.
The debtors timely appealed. On appeal, it is not disputed that Connecticut General has a claim for an amount in excess of $1.5 million. It is also not disputed that for these purposes the value of the property is about $600,000, an amount substantially less than $1.5 million.
II. ISSUE
Whether the debtors’ aggregate debts exceeded $1.5 million in view of Connecticut General‘s waiver of a deficiency judgment and in view of the debtors’ counterclaim against Connecticut General.
III. STANDARD OF REVIEW
The facts are not in dispute. On appeal is the definition and application of the term “aggregate debts,” as used in
IV. DISCUSSION
individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $1,500,000 and not less than 80 percent of whose aggregate noncontingent, liquidated debts (excluding a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a farming operation), on the date the case is filed, arise out of a farming operation owned or operated by such individual or such individual and spouse, and such individual or such individual and spouse receive from such farming operation more than 50 percent of such individual‘s or such individual and spouse‘s gross income for the taxable year preceding the taxable year in which the case concerning such individual or such individual and spouse was filed.
A debt is defined in
The term “debt” has the same broad meaning as the term “claim.” See, e.g., In re Vaughan, 100 B.R. 423 (Bankr.S.D.Ill.1989). The legislative history to
We recognize the authority supporting the dissent‘s position that the term “debt” is narrower than the term “claim” and that liability on the claim must be established or unchallenged before a claim becomes a debt. See, e.g., In re Lands, 85 B.R. 83 (Bankr.E.D.Ark.1988); In re Carpenter, 79 B.R. 316 (Bankr.S.D.Ohio 1987); In re Lambert, 43 B.R. 913 (Bankr.D.Utah 1984). We believe however that this position is inconsistent with the command of the legislative history that the claims be construed coextensively.
It is a general rule of statutory construction that a term should be construed consistently throughout a statute.
Finally, cases which define the term “debt” narrowly in the context of a Chapter 12 eligibility determination, see In re Williams Land Co., 91 B.R. 923, 927 (Bankr.D.Or.1988); Lands, supra; Carpenter, supra, rely primarily on cases determining Chapter 13 eligibility. See In re Lambert, supra; In re King, 9 B.R. 376 (Bankr.D.Or.1981). Lambert and King in-
volve determinations under
Although Connecticut General‘s proof of claim reflected a debt in excess of $1.5 million and an apparent ineligibility for Chapter 12 relief,6 debtors argue that Con-
A. A Nonrecourse Claim Against The Property Of The Debtors Should Be Treated As A Claim Against The Debtors Personally For Eligibility Purposes.
The main issue present in this appeal is whether Connecticut General‘s claim should be valued at its full amount or at some lower value based on the amount that Connecticut General is likely to receive in collection on it. This issue arises due to Connecticut General‘s waiver of its right to pursue a deficiency judgment. The debtors assert that the value of Connecticut General‘s claim should be valued at the value of the land, because they are no longer personally liable for any deficiency. This issue is important because if this debt were valued at only $600,000 instead of $1.5 million, then the debtors would no longer violate Chapter 12‘s debt-ceiling limitation.
Debtors’ argument, however, ignores
This paragraph [
Section 102(2) ] is intended to cover nonrecourse loan agreements where the creditor‘s only rights are against property of the debtor, and not against the debtor personally. Thus, such an agreement would give rise to a claim that would be treated as a claim against the debtor personally, for the purposes of the Bankruptcy Code.
H.R.Rep. No. 95-595 at 315; S.Rep. No. 95-989 at 28, U.S.Code Cong. & Admin. News 1978, pp. 5814, 6272.
The obligation at issue in this appeal was personally created by the Quintanas. Even though Connecticut General has waived its right to pursue the remedy of a deficiency judgment, under
B. The Amount Of The Quintanas’ Aggregate Debts Should Not Be Reduced By The Value Of Any Of Their Assets, Including Their Counterclaim.
The debtors argue that they should be allowed to set-off their counterclaim against their debt to Connecticut
The debtors’ desire to set-off their counterclaim against their debt to Connecticut General is no different from any other attempt to set-off, with the added practical difficulty inherent in the valuation of an unliquidated counterclaim. The analysis is similar: a counterclaim, if it has some value, is an addition to assets of the estate and not a reduction to its liabilities. The term “aggregate debts” should not be interpreted as aggregate debts less certain assets. In re Sylvester, 19 B.R. at 673. See also In re Stedman, 72 B.R. 49, 53 (Bankr.D.N.D.1987) (Chapter 12 debtors were not allowed to set-off the Federal Land Bank stock that they had been required to purchase as a precondition to incurring debt to the Federal Land Bank against the debt that they did owe to the Bank).8
C. The Debt-Ceiling Limitation Should Be Enforced As Written.
It appears that the Quintanas might be family farmers in every definition of the phrase except for the definition provided by the Bankruptcy Code because the Quintanas fall just beyond the line that
It is not necessarily “inequitable” if the Quintanas do not qualify to file under Chapter 12 because it was never expected that every single family that farms and that wants to file for bankruptcy would be eligible to file a Chapter 12 petition. “It was estimated that 90% of farmers would be eligible for Chapter 12 treatment, based on its $1.5 million debt-limit ceiling.” 5 Bkr-L Ed., Code Commentary & Analysis § 44.1:2 at 7 (1987) (citations omitted). “Congress made it clear that Chapter 12 was not to apply to all farming operations, of whatever size.” In re Stedman, 72 B.R. at 54. See also Norwest Bank Worthington v. Ahlers (In re Ahlers), 485 U.S. 197, 210 n. 9 (1988) (dicta; the Ahlers, who were family farmers in the lay sense of the term, did not qualify for Chapter 12).
Even assuming arguendo that it is somehow “inequitable” for these debtors not to qualify to file a Chapter 12 petition, “[w]e have serious doubts... about the propriety of judges’ declining to enforce statutes that produce inequitable results. Bankruptcy statutes are not special cases.” Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 894 (7th Cir.1988) (citations omitted). Underinclusive legislation, such as Chapter 12, is still valid legislation and should be enforced as written.9
Liberal interpretation of the statute in the manner suggested by the debtors,10 should not be used to circumvent the plain meaning of the statutory language. Chapter 12‘s debt-ceiling limitation has been uniformly interpreted in accordance with the way the ordinary language of the statute. Reiners v. Federal Land Bank of Jackson (In re Reiners), 846 F.2d 1012, 1013 (5th Cir.1988).11
V. CONCLUSION
Congress has defined and limited eligibility to file a Chapter 12 petition in such a fashion as to exclude some who appear to be family farmers in the lay sense of the phrase. That is the prerogative of the legislature.
These debtors do not qualify to file a petition under Chapter 12 because they have more than $1.5 million in aggregate debts. Their debts may not be reduced merely because Connecticut General waived its right to pursue a deficiency judgment; nor may their debts be reduced by a counterclaim against a creditor.
One of the substantial benefits available to Chapter 12 debtors is the ability to write down an undersecured debt to the value of the land used as collateral and, at the same time, to keep the land. Presumably, this is the Quintanas’ goal. However, only those debtors who qualify for relief under Chapter 12 may enjoy any of its substantial benefits. Specifically, Chapter 12 has a debt-ceiling limitation that must be met before a petitioner is allowed to enjoy the benefits of Chapter 12, such as writing down secured debt. The test for eligibility “is simply described and should be simply applied.” Whaley v. United States (In re Whaley), 76 B.R. 95, 97 (N.D.Miss.1987).
We affirm the dismissal of the petition.
VOLINN, Bankruptcy Judge, dissenting:
A. RULING OF THE BANKRUPTCY COURT
The decision of the bankruptcy court was considered in the context of state law. Idaho is a state which follows the lien theory of mortgages. Because the mortgagee under Idaho law does not have legal title to the mortgaged premises and the mortgagor retains full ownership of the property, the mortgagee‘s interest in the property is that of a lienholder or holder of a security interest. Birkeland v. Clearwater Concentrating Co., 64 Idaho 122, 127, 127 P.2d 1047, 1051 (1942); Hannah v. Vensel, 19 Idaho 796, 116 P. 115, 117 (1911). Therefore, the mortgagee must institute foreclosure proceedings in the event of a default in order to sell the property.
Idaho Code § 6-101 is known as the “single action rule.” A real property mortgagee in Idaho must foreclose first on its security before having recourse against a debtor. A deficiency exists where the proceeds of the foreclosure sale are insufficient to satisfy the mortgage debt.1
The judgment of foreclosure and sale determines the parties’ legal rights in the underlying obligation, as well as in the mortgaged property. Thus, it determines the amount of the mortgage indebtedness, the default, the right of the mortgagee to realize upon the security, the time and place of sale of the security, the notice required, and the right of the mortgagee to a judgment of deficiency.
From this premise, Connecticut General contended that when a judgment has been obtained but a sale has not yet taken place, as in this case, a deficiency is not yet in existence, and therefore it remains entitled to the mortgage indebtedness of $1,527,861.89, regardless of its waiver of a deficiency. Connecticut General also argued that its waiver did not extinguish the debt, and that all it waived was the right to pursue a particular remedy—that of a deficiency judgment. The bankruptcy court agreed with the latter argument of appellee, holding that only the remedy, but not the debt, was affected by the waiver. Thus, the court concluded, in effect, that the mortgage debt should be considered as fully enforceable despite a factual context which, beyond sale of the collateral, rendered such debt unenforceable under the Idaho Code, particularly section 6-101 as herein noted.
B. LEGISLATIVE POLICY UNDER THE BANKRUPTCY CODE
The Bankruptcy Code is to be liberally construed in order to give the debtor the full measure of the relief afforded by Congress. Any ambiguities should be resolved in favor of the debtor. See Wright v. Union Central Ins. Co., 311 U.S. 273, 278-79 (1940) (construing pre-Code Bankruptcy Act provisions for relief of farmer-debtors). The court in Wright stated:
This Act provided a procedure to effectuate a broad program of rehabilitation of distressed farmers faced with the disaster of forced sales and an oppressive burden of debt. Safeguards were provided to protect the rights of secured creditors, throughout the proceeding, to the extent of the value of the property. There is no constitutional claim of the creditor to more than that. And so long as that right is protected the creditor certainly is in no position to insist that doubts or ambiguities in the Act be resolved in its favor and against the debtor. Rather, the Act must be liberally construed to give the debtor the full measure of the relief afforded by Congress, lest its benefits be frittered away by narrow formalistic interpretations which disregard the spirit and the letter of the Act.
Id. at 278-79. For a recent application of this
Similarly, present Chapter 12 of the Bankruptcy Code, encompassed in legislation entitled the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub.L. No. 99-554, § 255, 100 Stat. 3105-3114, “was enacted by Congress as a tool for family farmers to use in reorganizing their business and financial affairs so as to weather the pending financial crisis in much of rural America.” In re Stedman, 72 B.R. 49, 54 (Bankr.D.N.D.1987); see also 132 Cong. Rec. S15076-77 (daily ed. Oct. 3, 1986) (analysis of farmers’ economic plight). Because Chapter 12 is a recent enactment, there is a consequent dearth of judicial interpretation. There can be little doubt, however, that Congress intended this statute to enlarge and liberalize a farmer‘s opportunity to enter into an arrangement with his creditors, particularly those who are secured, whereby he could try to effect a more favorable economic resolution of his problems. Congress found that Chapter 11, the only option for most family farmers, had been “needlessly complicated, unduly time-consuming, inordinately expensive and, in too many cases, unworkable.” H.R.Conf.Rep. No. 958, 99th Cong., 2d Sess. 48 (1986), reprinted in 1986 U.S.Code Cong. & Admin. News 5227, 5249. Present Chapter 12 is
to be used only by family farmers. It is designed to give family farmers facing bankruptcy a fighting chance to reorganize their debts and keep their land. It offers family farmers the important protection from creditors that bankruptcy provides while, at the same time, preventing abuse of the system and ensuring that farm lenders receive a fair repayment.
Id. Under this new chapter, it will be easier for a family farmer to confirm a plan of reorganization.
C. CLAIM VS. DEBT
A “family farmer” is eligible to file a petition for relief with the bankruptcy court under Chapter 12. The Code defines family farmer as an “individual or individual and spouse engaged in farming operations whose aggregate debts do not exceed $1,500,000....”
The majority cites the legislative history to the definition of “claim” in
Assuming arguendo that it is relevant to discuss the nature of a waived and unenforceable obligation, the nature of any claim thereon should nevertheless be subject to inquiry. “Debt,” as defined in the Bankruptcy code, means “liability on a claim.”
A claim arising from a creditor‘s demand for repayment, encompasses all obligations against a debtor which may be assertible in a bankruptcy case and thereby potentially affected by the discharge. But a claim is subject to disallowance if it is not a liability cognizable under law. That liability must be established or unchallenged before a claim becomes a debt. For that reason, the debtor‘s good faith indication of its debts generally establishes its eligibility for relief under a specific chapter of the Bankruptcy Code rather than the assertions of creditors by way of claims. See Comprehensive Accounting Corp. v. Pearson (In the Matter of Pearson), 773 F.2d 751 (6th Cir.1985). This Court would add to the finding in Pearson that the omission of a debt by the debtors, even if such omission is not in bad faith, but results from a mistake in law, is properly before the Court for the purpose of establishing eligibility for relief upon an appropriate challenge by a party in interest.
In re Carpenter, 79 B.R. at 320. Therefore, unliquidated, contingent or seriously disputed claims while subject to being counted at face value should nevertheless be subject to review for potentially commensurate enforceability.5 Here, the
D. ALLOWABILITY OF APPELLEE‘S CLAIM
At the outset,
An allowed claim of a creditor secured by a lien on property in which the estate has an interest... is a secured claim to the extent of the value of such creditor‘s interest in such property... and is an unsecured claim to the extent of the value of such creditor‘s interest less the amount of such allowed claim....”
The legislative history states:
Subsection (a) of this section separates an undersecured creditor‘s claim into two parts. He has a secured claim to the extent of the value of his collateral; and he has an unsecured claim for the balance of his claim.
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void...
Based on the foregoing, it is clear that since appellee is undersecured, its claim may be dealt with in its discrete aspects, secured and unsecured, and that its secured claim is viable only to the extent of the value of the collateral.
However, appellee having waived recourse against the debtors, the unsecured portion of its claim cannot be allowed. The claim has no viability as an Idaho judgment, nor under the Bankruptcy Code. And, as indicated, the lien is subject to avoidance in any amount beyond the value of the property. The effect of these provisions on Chapter 12 has been stated as follows:
The essence of Chapter 12 is the ability of the Chapter 12 debtor to “write down” the mortgage securing the farm to the value of the farm and to pay the written-down amount over time. The “write down” is accomplished through use of Code § 506(a) and (d). Code § 506(a) provides that an allowed claim is only a secured claim to the extent of the value of the collateral and is an unsecured claim for the deficiency. Code § 506(d) provides that a lien which secures a claim is void to the extent the claim is not an allowed secured claim...
3 Norton Bankruptcy Law and Practice § 92.09
Connecticut General‘s claim to any amount in excess of the property‘s present value could not be allowed by the court, following objection by the debtors, because “such claim is unenforceable against the debtor and property of the debtor [other than the specific collateral in issue], under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.”
There is a factual distinction between Lands and this case in that the debtor here was obligated to the creditor at the outset, whereas in Lands there was no personal debt at all; nevertheless, as matters now stand, this distinction is not pertinent since the debtor has no more personal obligation to the secured creditor than did the debtor in Lands. In both cases, at the relevant time in question, only the collateral was subject to the creditors’ claims.
Debts of a family farmer, for Chapter 12 eligibility purposes, are to be determined as of the date the case is filed. In re Carpenter, 79 B.R. at 320; In re Labig, 74 B.R. 507, 509 (Bankr.S.D.Ohio 1987); In re Orr, 71 B.R. 639, 641 n. 4 (Bankr.E.D.N.C.1987). The date of filing is also determinative for fixing the value of Connecticut General‘s claim,
By way of contrast, in a Chapter 11 proceeding, such a nonrecourse deficiency claim would be allowed due to the operation of
CONCLUSION
Having waived its right to a deficiency judgment, the relief available to the creditor-mortgagee should be limited to its true
In re Ben L. MARTIN and Patricia A. Martin, Debtors.
Bankruptcy No. A89-00258
United States Bankruptcy Court, D. Alaska
Oct. 12, 1989
Robert D. Miller, Asst. U.S. Trustee, Spokane, Wash.
David S. Rankine, Law Offices of William L. McNall, Anchorage, Alaska, for debtors.
MEMORANDUM DECISION DENYING UNITED STATES TRUSTEE‘S § 707(b) MOTION TO DISMISS
HERBERT A. ROSS, Bankruptcy Judge.
The United States Trustee moved to dismiss this chapter 7 case unless debtors agree to convert to chapter 13. The motion was filed under the “substantial abuse” provision in
After notice and a hearing, the court, on its own motion or on a motion by the United States trustee, but not at the request or suggestion of any party in interest, may dismiss a case filed by an individual debtor under this chapter whose debts are primarily consumer debts if it finds that the granting of relief would be a substantial abuse of the provisions of this chapter. There shall be a presumption in favor of granting the relief requested by the debtor.
The issue is whether the court must dismiss a chapter 7 case, unless a debtor agrees to convert to a chapter 13 case, where there is evidence that some percentage of a debtor‘s unsecured debt could be paid in a feasible chapter 13 plan, but no other evidence of manipulation of the system or disregard for creditors is present.
The three circuit courts which have ruled on the merits of
HERBERT A. ROSS
Bankruptcy Judge
Notes
There can be but one action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real estate which action must be in accordance with the provisions of this chapter. In such action the court may, by its judgment, direct a sale of the encumbered property (or so much thereof as may be necessary) and the application of the proceeds of the sale to the payment of the costs of the court and the expenses of the sale, and the amount due to the plaintiff; and sales of real estate under judgments of foreclosure of mortgages and liens are subject to redemption as in the case of sales under execution; (and if it appears from the sheriff‘s return that the proceeds are insufficient, and a balance still remains due, judgment can then be docketed for such balance against the defendant or defendants personally liable for the debt), and it becomes a lien on the real estate of such judgment debtor, as in other cases on which execution may be issued.
No court in the state of Idaho shall have jurisdiction to enter a deficiency judgment... in any amount greater than the difference between the mortgage indebtedness, as determined by the decree, plus costs of foreclosure and sale, and the reasonable value of the mortgaged property, to be determined by the court in the decree upon the taking of evidence of such value.
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured;
The second Bankruptcy Appellate Panel case, In re Sylvester, 19 B.R. 671, 673 (9th Cir. BAP 1982), also concerned eligibility for Chapter 13 and whether a disputed debt was liquidated. Debtors argued that their counterclaim rendered the debt unliquidated until after trial. The court disagreed. Again, a dispute over a set-off is a dispute over the amount of a debt, rather than its existence.
Note, An Analysis of the Family Farmer Bankruptcy Act of 1986, (quoting 132 Cong.Rec. § 15092 (daily ed. Oct. 3, 1986) 15 Hofstra L.Rev. 353, 376 (1987)).it is clear that Chapter 12 has rekindled the ability of a debtor with a substantially undercollateralized mortgage debt to write down the debt to the current depressed value of his land. The debtor, under chapter 12, is allowed to keep his land, pay the former secured debtor only “liquidation value” on the newly created unsecured debt, and receive a bankruptcy discharge on the rest of the debt, while the creditor is precluded from sharing in any future reappreciation of the land. As Senator DeConcini duly noted: “Why won‘t every farmer with a substantially undercollateralized loan against his farm declare bankruptcy.... I fear that we have created a legal atmosphere that may well encourage farm bankruptcies and that farmers who can now manage to work things out with their creditors in some satisfactory manner to both will no longer have that incentive to reach mutual agreement.”