Opinion ID: 71013
Heading Depth: 2
Heading Rank: 3

Heading: Liquidated Debt for Purposes of Section 109(e)

Text: 11 Black's Law Dictionary defines a liquidated debt as one where it is certain what is due and how much is due. 11 Black's Law Dictionary 930 (6th ed. 1990). A liquidated debt is that which has been made certain as to amount due by agreement of the parties or by operation of law. Id. Therefore, the concept of a liquidated debt relates to the amount of liability, not the existence of liability. See In re McGovern, 122 B.R. 712, 715 (Bankr.N.D.Ind.1989); see also C. McCormick, Handbook on the Law of Damages, § 54 at 213 (1935). 12 If the amount of the debt is dependent, however, upon a future exercise of discretion, not restricted by specific criteria, the claim is unliquidated. See 1 T. Sedgwick, Measure of Damages, § 300 at 570 (9th ed. 1912). 13 12 Verdunn maintains that his tax liabilities were not liquidated debts on the petition date because: the notice of deficiency was insufficient to enable a court to readily ascertain the amount of his debt to the United States; he vigorously disputed the fraud penalties asserted by the Commissioner; and extensive and contested evidentiary hearings before the Tax Court were necessary in order to determine his tax liability. 14 13 The Commissioner contends that a notice of deficiency is analogous to a contract, i.e., it furnishes data that, if believed, make it possible to compute the amount of the claims without reliance upon opinion or discretion. See McCormick, supra at 213. He contends that, similar to a contract, the function of a notice of deficiency is to specify the amount of the tax liability determined by the Commissioner and enable the taxpayer to petition the Tax Court for a redetermination of a deficiency. See I.R.C. §§ 6212(a), 6213(a); Hempel v. U.S., 14 F.3d 572, 578 (11th Cir.1994); Benzvi v. Commissioner, 787 F.2d 1541, 1542 (11th Cir.1986). Further, the Commissioner argues that as the amount of the debt is ascertainable through the application of fixed legal standards, it is a liquidated debt, i.e., the deficiency determination is based on criteria established in the Internal Revenue Code, see I.R.C. § 6211(a), and the bases for calculating the underpayment and penalties are set forth in the notice. See, e.g., In re Madison, 168 B.R. 986, 990 (D.Hawai'i 1994) (a deficiency notice itemizes the amounts of the taxpayer's liabilities); In re Lamar, 111 B.R. 327 (D.Nev.1990). 14 In support of this analysis, the Commissioner cites the Seventh Circuit's recent decision in In re Knight, 55 F.3d 231 (7th Cir.1995). Knight involved a debtor, the town court judge of Mooresville, Indiana, who was required, and failed, to report a total of 915 traffic convictions to the Indiana bureau of motor vehicles, at a ($100 per incident) civil penalty cost of $91,500. 15 The state attorney general issued a demand letter for payment. The debtor filed for Chapter 13 relief. The bankruptcy court, affirmed by the district court, dismissed the bankruptcy petition on the ground that the debtor's outstanding liabilities exceeded the limit established in section 109(e). The Seventh Circuit agreed. Rejecting the debtor's argument that the claim was not liquid because he disputed the underlying liability, the court held that the amount of the claim was readily ascertainable because it was fixed in the state's demand letter and could be calculated from the relevant state statute. Id. at 235. 15 Under a de novo review, our case is indistinguishable from the Knight case. Like the relevant state statute in Knight, established Internal Revenue Code criteria were used to calculate Verdunn's tax debt. Like the demand letter in Knight, the amount of Verdunn's tax liability was evident from a document, the statutory notice of deficiency. See e.g., McCormick, supra, at 213; Sedgwick, supra, at 570. Like the $91,500 sum in Knight, the amount of Verdunn's $297,000 deficiency was easily ascertainable, i.e., it was computed through the application of fixed legal standards set forth in the tax code. Id. 16 We conclude, therefore, like the penalties for failing to report traffic offenses in Knight, Verdunn's federal income tax liabilities and penalties, as asserted, were liquidated unsecured debts to be included in the section 109(e) eligibility calculation. As the bankruptcy and district courts improperly excluded these claims from the computation, Verdunn is ineligible for Chapter 13 relief and his petition should be dismissed.