Court Opinion

ID: 4155910
Source: CourtListenerOpinion
Date Created: 2017-03-28 00:01:23.504633+00
Date Added: 2024-06-11T14:29:14.843204
License: Public Domain

FILED
                                                              MAR 27 2017
 1                          NOT FOR PUBLICATION
                                                          SUSAN M. SPRAUL, CLERK
                                                            U.S. BKCY. APP. PANEL
 2                                                          OF THE NINTH CIRCUIT

 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                         )      BAP No.    NV-16-1099-KuLJu
                                    )
 6   ROBERT COOPER BROWN, III and   )      Bk. No.    3:15-bk-51542
     LAURA ANN BROWN,               )
 7                                  )
                    Debtors.        )
 8   _______________________________)
                                    )
 9   ROBERT COOPER BROWN, III;      )
     LAURA ANN BROWN,               )
10                                  )
                    Appellants,     )
11                                  )
     v.                             )      MEMORANDUM*
12                                  )
     DAVID BEAVER; CATHERINE BEAVER,)
13                                  )
                    Appellees.      )
14   _______________________________)
15                  Argued and Submitted on February 24, 2017
                               at Las Vegas, Nevada
16
                             Filed – March 27, 2017
17
                 Appeal from the United States Bankruptcy Court
18                         for the District of Nevada
19            Honorable Gregg W. Zive, Bankruptcy Judge, Presiding
20   Appearances:      Christopher Burke argued for Appellants; Amy N.
                       Tirre argued for Appellees.
21
22   Before: KURTZ, LAFFERTY and JURY, Bankruptcy Judges.
23
24
25
26        *
           This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may
     have (see Fed. R. App. P. 32.1), it has no precedential value.
28   See 9th Cir. BAP Rule 8024-1.
 1                                INTRODUCTION
 2        Robert and Laura Brown appeal from an order dismissing their
 3   chapter 131 bankruptcy case with respect to Robert only.2    The
 4   bankruptcy court held that, at the time the chapter 13 petition
 5   was filed, Robert’s debt to David and Catherine Beaver was
 6   noncontingent and liquidated in an amount that exceeded
 7   § 109(e)’s eligibility limit for unsecured debt.
 8        On appeal, the Browns argue that a settlement agreement the
 9   parties entered into during the Browns’ prior chapter 7 case
10   liquidated Robert’s debt in the amount of $171,000 and provided
11   for an increase of that debt to $500,000 only upon the occurrence
12   of an extrinsic event (Robert’s uncured default in making
13   settlement payments).     Because this supposed triggering event did
14   not occur before the Browns commenced their chapter 13 case,
15   Robert contends only the lesser amount of $171,000 (less
16   settlement payments made) should have been counted against the
17   § 109(e) unsecured debt eligibility limit.
18        We disagree with the Browns’ interpretation of the
19   settlement.     Under the only reasonable interpretation of the
20   settlement, the Beavers held a noncontingent claim against Robert
21   liquidated in the amount of $500,000 (less settlement payments
22   made) – an amount that exceeded the § 109(e) unsecured debt
23
24        1
           Unless specified otherwise, all chapter and section
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
25   all "Rule" references are to the Federal Rules of Bankruptcy
26   Procedure, Rules 1001-9037. All "Civil Rule" references are to
     the Federal Rules of Civil Procedure.
27
          2
              For ease of reference, we refer to Robert by his first
28   name.     No disrespect is intended.

                                        2
 1   eligibility limit.
 2        Therefore, we AFFIRM.
 3                                  FACTS
 4        The dispute between Robert and the Beavers began over
 5   fifteen years ago when, according to the Beavers, Robert failed
 6   to build them a house as contracted and allegedly used the
 7   construction funds for his own purposes.   In 2004, the parties
 8   reached a settlement in the ensuing state court litigation
 9   pursuant to which “Brown promised to complete construction of
10   the Beavers’ home within two years, at no further cost to
11   Beavers.”   Third Amended Complaint (Feb. 23, 2011) at ¶ 46; see
12   also Answer to Third Amended Complaint (Feb. 13, 2012) at ¶ 1
13   (admitting ¶ 46 of the complaint).3
14        Several years later, the parties reached a further impasse,
15   so the Beavers returned to the state court with an amended
16   complaint alleging a new cause of action for breach of the
17   settlement agreement.   In 2010, the state court entered an order
18   granting the Beavers partial summary adjudication, which did not
19   determine Robert’s liability but did determine that the damages
20   arising from Robert’s failure to build the Beavers’ home per the
21   settlement agreement amounted to $626,568.66, “plus other sums to
22   be determined at trial.”   Third Amended Complaint (Feb. 23, 2011)
23   at ¶ 51; see also Answer to Third Amended Complaint (Feb. 13,
24
          3
           These early facts are drawn from allegations that Robert
25   admitted in the Beavers’ nondischargeability adversary proceeding
26   (Adv. No. 11-05002) against Robert in the Browns’ first
     bankruptcy case, District of Nevada Bankruptcy Case No. 10-54665.
27   The same facts are recited in the Stipulation for Entry of
     Nondischargeable Judgment executed by the parties and approved by
28   court order in 2012.

                                      3
 1   2012) at ¶ 1 (admitting ¶ 51 of the complaint).
 2        In November 2010, on the same day the state court trial was
 3   scheduled to commence, the Browns commenced their chapter 7
 4   bankruptcy case.   The Beavers removed the state court lawsuit to
 5   the bankruptcy court and, with leave of court, filed their third
 6   amended complaint, which effectively converted that lawsuit into
 7   a nondischargeability action on multiple grounds.
 8        Nearly two years later, in 2012, the parties reached a new
 9   settlement.   This second settlement provided for Robert to make
10   15 years of payments in the aggregate sum of $171,000.    The
11   second settlement further provided that, if Robert defaulted on
12   the payments or on his other obligations and did not cure the
13   default within ten days of receipt of written notice of the
14   default, the Beavers could cause to be entered and enforced a
15   $500,000 stipulated nondischargeable judgment.
16        If Robert had timely made all of the required settlement
17   payments, the Beavers would have been required under the second
18   settlement to file a “Satisfaction of Nondischargeable Judgment”
19   and were prohibited from entering the $500,000 stipulated
20   nondischargeable judgment.   But Robert defaulted on the required
21   settlement payments, and the Beavers sent Robert the requisite
22   notice of default.
23        Before the cure period ran, the Browns filed their
24   chapter 13 bankruptcy petition in late 2015.   Shortly thereafter,
25   in January 2016, the Beavers filed a motion seeking relief from
26   the automatic stay to permit entry of the $500,000
27   nondischargeable judgment against Robert and seeking the
28   dismissal of the case based on the debtors’ chapter 13

                                      4
 1   ineligibility under § 109(e).4
 2        Pursuant to the second settlement agreement, the Beavers
 3   asserted that Robert owed them $500,000 (less $9,000 in
 4   settlement payments made), so Robert’s unsecured debt exceeded
 5   the $383,175 unsecured debt eligibility limit.    In response,
 6   Robert argued that, at the time he and his wife filed their
 7   chapter 13 petition, he only owed $171,000 (less settlement
 8   payments made).
 9        The bankruptcy court disagreed with Robert.    As a
10   preliminary matter, the court noted that it had presided over the
11   settlement conference between the parties in the Brown’s prior
12   chapter 7 case, that it also had presided over the hearing on the
13   motion seeking approval of the second settlement, that it had
14   signed the order approving the second settlement agreement and
15   that it had reviewed the transcript from the settlement
16   conference, at which time it had stated on the record, on behalf
17   of the parties, the principal settlement terms.
18        According to the court, the settlement provided for fifteen
19   years of graduated payments totaling $171,000, “[b]ut the amount
20   of the debt was clearly $500,000, which would be reduced to
21   [$171,000] only if the $171,000 was actually paid.”    Hr’g Tr.
22   (March 17, 2016) at 5:5-7.   Alternately stated, the court
23   determined that, under the settlement agreement, “[t]here was a
24   $500,000 non-dischargeable obligation that could be reduced to
25
26        4
           Whereas the Beavers initially sought dismissal against both
27   debtors, they later conceded that only Robert was subject to the
     $500,000 nondischargeable obligation and that his wife was
28   eligible to be a chapter 13 debtor under § 109(e).

                                      5
 1   $171,000 so long as the debtor, Mr. Brown, complied with the
 2   [payment] terms of the second settlement . . . .”    Hr’g Tr.
 3   (March 17, 2016) at 16:2-4.   In so determining, the court further
 4   concluded that the debt was neither contingent nor unliquidated
 5   at the time of the Browns’ chapter 13 bankruptcy filing.
 6        The bankruptcy court entered its order dismissing Robert
 7   from the chapter 13 case on March 30, 2016, and the Browns timely
 8   appealed.
 9                              JURISDICTION
10        The bankruptcy court had jurisdiction pursuant to 28 U.S.C.
11   §§ 1334 and 157(b)(2)(A), and we have jurisdiction under
12   28 U.S.C. § 158.
13                                  ISSUE
14        Did the bankruptcy court commit reversible error when it
15   held that, at the time of the Browns’ chapter 13 petition filing,
16   Robert was obligated to the Beavers for a liquidated and non-
17   contingent debt in excess of the chapter 13 unsecured debt
18   eligibility limit?
19                           STANDARDS OF REVIEW
20        The meaning of the statutory terms “liquidated” and
21   “noncontingent” is a question of law we review de novo.    Nicholes
22   v. Johnny Appleseed (In re Nicholes), 184 B.R. 82, 86 (9th Cir.
23   BAP 1995).   Whether a particular debt fits within the statutory
24   terms for debt eligibility purposes similarly is a question of
25   law reviewed de novo.   Id.; see also Guastella v. Hampton
26   (In re Guastella), 341 B.R. 908, 915 (9th Cir. BAP 2006)
27   (“Whether a debt is liquidated involves an interpretation of the
28   Bankruptcy Code and is reviewed de novo.”).

                                      6
 1        Both parties urge that the contingency and liquidation
 2   issues turn on the correct interpretation of the settlement
 3   agreement.   For interpretation purposes, settlement agreements
 4   are treated like contracts and generally are reviewed de novo.
 5   See Commercial Paper Holders v. Hine (In re Beverly Hills
 6   Bancorp), 752 F.2d 1334, 1338 (9th Cir. 1984); Pekarsky v.
 7   Ariyoshi, 695 F.2d 352, 354 & n.1 (9th Cir. 1982); Kittitas
 8   Reclamation Dist. v. Sunnyside Valley Irrigation Dist., 626 F.2d
9   95, 98 (9th Cir. 1980); see also NGA # 2 Ltd. Liab. Co. v. Rains,
10   946 P.2d 163, 167 (Nev. 1997) (stating that construction of
11   contractual terms is a question of law).
12        We can affirm the bankruptcy court’s ruling on any ground
13   supported by the record.   Wirum v. Warren (In re Warren),
14   568 F.3d 1113, 1116 (9th Cir. 2009).
15                               DISCUSSION
16        This appeal for the most part turns on a single issue:
17   whether, at the time of the Browns’ chapter 13 bankruptcy filing,
18   Robert’s debt to the Beavers was noncontingent and liquidated in
19   an amount that exceeded the chapter 13 eligibility limit for
20   unsecured debt.   At the time of the Browns’ chapter 13 filing,
21   the applicable version of § 109(e) provided as follows:
22        Only an individual with regular income that owes, on
          the date of the filing of the petition, noncontingent,
23        liquidated, unsecured debts of less than $383,175 and
          noncontingent, liquidated, secured debts of less than
24        $1,149,525, or an individual with regular income and
          such individual's spouse, except a stockbroker or a
25        commodity broker, that owe, on the date of the filing
          of the petition, noncontingent, liquidated, unsecured
26        debts that aggregate less than $383,175 and
          noncontingent, liquidated, secured debts of less than
27        $1,149,525 may be a debtor under chapter 13 of this
          title.
28

                                      7
 1   (Footnote Omitted.)
 2        While the terms noncontingent and liquidated are not defined
 3   in the statute, the Ninth Circuit Court of Appeals has given them
 4   fixed meanings.   “A claim is ‘contingent’ when ‘the debtor will
 5   be called upon to pay [it] only upon the occurrence or happening
 6   of an extrinsic event which will trigger the liability of the
 7   debtor to the alleged creditor,’” and “[a] claim is
 8   ‘unliquidated’ when it is not ‘subject to ready determination and
 9   precision in computation of the amount due.’”   Picerne Constr.
10   Corp. v. Castellino Villas, A. K. F. LLC (In re Castellino
11   Villas, A. K. F. LLC), 836 F.3d 1028, 1033 (9th Cir. 2016)
12   (citing Fostvedt v. Dow (In re Fostvedt), 823 F.2d 305, 306 (9th
13   Cir. 1987)).
14        Before we consider whether Robert’s debt falls within the
15   definition of these terms, we first must resolve a threshold
16   issue.   Generally speaking, chapter 13 eligibility “should
17   normally be determined by the debtor’s originally filed
18   schedules, checking only to see if the schedules were made in
19   good faith.”   Scovis v. Henrichsen (In re Scovis), 249 F.3d 975,
20   982 (9th Cir. 2001).    In Scovis, the Court of Appeals reversed a
21   decision of this panel regarding chapter 13 eligibility because
22   we did not adhere to this rule. Id.    Nonetheless, the Scovis
23   rule is not absolute.   Scovis acknowledged that, when the good
24   faith of the debtors in filing their schedules is challenged, the
25   bankruptcy court can consider evidence beyond the schedules.
26   Id.; see also In re Guastella, 341 B.R. at 918-21 (applying good
27   faith exception and looking beyond schedules to determine that
28   debtor improperly listed debt at $0 for eligibility purposes).

                                       8
 1        More importantly, although it enunciated a simple rule, that
 2   the schedules govern for purposes of determining eligibility,
 3   Scovis also recognized an important exception: the schedules do
 4   not govern when it is clear to a legal certainty that a different
 5   result should obtain.    Scovis, 249 F.3d at 983-84.   In Scovis,
 6   one of the scheduled claims at issue was secured by a lien
 7   potentially avoidable as an impairment of the Scovis’s homestead
 8   exemption.   Id.   Scovis held that it was appropriate to depart
 9   from the schedules’ listing of the claim as secured because the
10   effect of the scheduled homestead exemption on the scheduled
11   secured claim was “readily ascertainable” and was subject to “a
12   sufficient degree of certainty.”       Id. at 984.
13        In a similar vein, we do not construe Scovis as requiring
14   the bankruptcy court, in reading the schedules for eligibility
15   purposes, to ignore what it knows based on prepetition events
16   that occurred before the same bankruptcy court in a prior
17   bankruptcy case.    In the parlance of Scovis, if the undisputed
18   occurrence of events during the prior bankruptcy case: (1) are
19   “readily ascertainable”; (2) are subject to “a sufficient degree
20   of certainty”; and (3) unequivocally establish that the claims as
21   scheduled are wrong, then the bankruptcy court should not be
22   bound to the face of the schedules for purposes of determining
23   the debtors’ chapter 13 eligibility.
24        Our reading of Scovis is bolstered by its observation –
25   distilled from Comprehensive Accounting Corp. v. Pearson
26   (In re Pearson), 773 F.2d 751, 756-57 (6th Cir. 1985) – that the
27   rule for determining § 109(e) eligibility “is similar in nature
28   to the subject matter jurisdiction context for purposes of

                                        9
 1   determining diversity jurisdiction.”    Scovis, 249 F.3d at 982.
 2   Discussing the test for determining the amount in controversy in
 3   the diversity jurisdiction context, the Supreme Court in St. Paul
 4   Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288-90 (1938),
 5   articulated a test analogous to the Scovis test used in
 6   chapter 13 cases.    Under the St. Paul Mercury test, as restated
 7   in Pearson, “the amount claimed in good faith by the plaintiff
 8   controls unless it appears to a legal certainty that the claim is
 9   for less than the jurisdictional amount or the amount claimed is
10   merely colorable.”   Pearson, 773 F.2d at 757 (emphasis added)
11   (citing St. Paul Mercury, 303 U.S. at 288–90).
12        As more fully explained in St. Paul Mercury:
13        [I]f, from the face of the pleadings, it is apparent,
          to a legal certainty, that the plaintiff cannot recover
14        the amount claimed or if, from the proofs, the court is
          satisfied to a like certainty that the plaintiff never
15        was entitled to recover that amount, and that his claim
          was therefore colorable for the purpose of conferring
16        jurisdiction, the suit will be dismissed. Events
          occurring subsequent to the institution of suit which
17        reduce the amount recoverable below the statutory limit
          do not oust jurisdiction.
18
19 303 U.S. at 288–90 (emphasis added).5
20
21        5
           Some courts have characterized the legal certainty
     exception to following the schedules as being subsumed within the
22
     good faith inquiry. See, e.g., In re Smith, 419 B.R. 826, 829
23   (Bankr. C.D. Cal. 2009), aff'd in part, 435 B.R. 637 (9th Cir.
     BAP 2010) (“Bad faith, in this context, exists when it appears to
24   a legal certainty that the claim is not what the debtor
     reported.”). But we think it is more faithful to Scovis, Pearson
25   and St. Paul Mercury to conceive of the legal certainty exception
26   as a separate and independent inquiry that may affect whether it
     is appropriate to accept at face value the debtor’s schedules for
27   § 109(e) eligibility purposes. As this panel determined in its
     decision affirming in part the Smith bankruptcy court’s ruling,
28                                                      (continued...)

                                      10
 1        Indeed, when a rule of law would make it “virtually
 2   impossible” for the plaintiff to establish the requisite amount
 3   in controversy, the legal certainty rule permits the court to
 4   depart from the amount of damages alleged in the plaintiff’s
 5   complaint.    See Pachinger v. MGM Grand Hotel-Las Vegas, Inc.,
 6   802 F.2d 362, 364 (9th Cir. 1986).    And the court “may go beyond
 7   the pleadings for the limited purpose of determining the
 8   applicability of the rule [of law].”    Id.
 9        Returning to the undisputed facts in the record before the
10   bankruptcy court here, those facts established that Robert and
11   the Beavers entered into the second settlement agreement which
12   fixed the amount of Robert’s nondischargeable obligation to the
13   Beavers.   Thus, figuring the amount and status of Robert’s debt
14   at the time of the Browns’ chapter 13 bankruptcy filing is a
15   relatively straightforward matter of construing the parties’
16   rights and liabilities under the second settlement agreement.
17       We apply Nevada law in interpreting the second settlement
18   even though the agreement was brokered and approved in a
19   bankruptcy court.    See Cannon v. Haw. Corp. (In re Haw. Corp.),
20   796 F.2d 1139, 1143 (9th Cir. 1986); Commercial Paper Holders v.
21   Hine (In re Beverly Hills Bancorp), 649 F.2d 1329, 1332–33 (9th
22   Cir. 1981).   Under Nevada law, our contract interpretation
23   efforts must strive to give effect to the parties’ intended
24   meaning as manifested by the contract’s express terms.    Galardi
25
26        5
           (...continued)
27   the “principle of certainty” may apply even if the debtor’s good
     faith in filing its schedules has not been challenged. 435 B.R.
28   at 646-47.

                                      11
 1   v. Naples Polaris, LLC, 301 P.3d 364, 367-69 (Nev. 2013);
 2   Campanelli v. Conservas Altamira, S.A., 477 P.2d 870, 872 (Nev.
 3   1970).    That meaning typically is derived from the terms the
 4   parties chose and in light of the context in which the terms were
 5   used.    Galardi, 301 P.3d at 367; see also Mohr Park Manor, Inc.
 6   v. Mohr, 424 P.2d 101, 105 (Nev. 1967) (“A court should ascertain
 7   the intention of the parties from the language employed as
 8   applied to the subject matter in view of the surrounding
 9   circumstances.”).    The ordinary and reasonable meaning of
10   contract terms is preferred.    Galardi, 301 P.3d at 368.
11        Here, the patent meaning of the parties’ settlement
12   agreement terms is straightforward.    By way of the second
13   settlement, the parties sought to fully and finally resolve the
14   questions regarding Robert’s liability to the Beavers and
15   regarding the nondischargeability of that debt.    If Robert timely
16   paid all of the required settlement payments in the aggregate
17   amount of $171,000, his obligations to the Beavers would be
18   treated as fully satisfied.    On the other hand, if Robert
19   defaulted on his settlement payments – and did not timely cure
20   the default – the Beavers were entitled to have entered against
21   Robert a judgment for $500,000 in nondischargeable debt (less any
22   settlement payments made).
23        There is only one reasonable interpretation of these
24   settlement agreement terms.    By way of the second settlement, the
25   parties agreed that Robert’s debt to the Beavers would be
26   nondischargeable in the amount of $500,000, subject to a
27   condition subsequent: if Robert timely paid the $171,000 in
28   settlement payments, the entire nondischargeable obligation would

                                      12
 1   be deemed satisfied.   The concept of a condition subsequent – a
 2   specific subsequent event that can extinguish a prior binding
 3   contractual obligation – is recognized under Nevada law.      See,
 4   e.g., Am. Bank Stationery v. Farmer, 799 P.2d 1100, 1102 (Nev.
 5   1990); Prudential Ins. Co. of Am. v. Lamme, 425 P.2d 346, 348
 6   (Nev. 1967).
 7        The Browns contend on appeal that Robert’s nondischargeable
 8   obligation of $500,000 was not subject to a condition subsequent
 9   but rather was subject to a condition precedent: an uncured
10   default in settlement payments.    We reject this interpretation of
11   the second settlement as unreasonable.   The Browns point to the
12   settlement term providing for the entry of a $500,000
13   nondischargeable judgment only upon the occurrence of an uncured
14   default.   However, this settlement term on its face deals with
15   enforcement of the debt and not with its creation.
16        More importantly, the Browns’ posited interpretation of the
17   second settlement and their contention that the $500,000 debt was
18   subject to a condition precedent is unreasonable because it would
19   render invalid one of the key terms of the settlement – the term
20   providing for entry of the $500,000 nondischargeable judgment.
21   Under Nevada law, a contractual term providing for a $500,000
22   debt as a consequence for not timely paying a $171,000 obligation
23   typically would constitute an unenforceable penalty.    See
24   generally Hubbard Bus. Plaza v. Lincoln Liberty Life Ins. Co.,
25   649 F. Supp. 1310, 1316–17 (D. Nev. 1986), aff’d, 844 F.2d 792
26   (Mem. Dec.) (9th Cir. April 4, 1988) (applying Nevada law and
27   holding that a so-called liquidated damages provision constituted
28   an unenforceable penalty when the adverse party demonstrated that

                                       13
 1   the agreed liquidated damages were disproportionate with the
 2   actual damages suffered by the proponent).
 3        Nevada law requires us to prefer a contract interpretation
 4   that renders the contract’s terms lawful, valid and enforceable.
 5   Mohr, 424 P.2d at 104-05; see also Restatement (Second) of
 6   Contracts § 203(a) (1981).   By interpreting the timely payment of
 7   the $171,000 in settlement payments as a condition subsequent
 8   that would extinguish the entire, pre-existing $500,000
 9   obligation, we comply with this contract construction
10   requirement.
11        Accordingly, on the date of the Browns’ chapter 13
12   bankruptcy filing, the Beavers held a noncontingent claim
13   liquidated in the amount of $500,000 (less $9,000 in settlement
14   payments made).   This claim was not subject to a contingency
15   within the meaning of § 109(e) because the parties to the second
16   settlement did not contemplate that any further act or event was
17   necessary to trigger the liability.   In re Fostvedt, 823 F.2d at
18   306-07.   By its very nature, the condition subsequent was not
19   necessary to trigger the liability.   Thus, the liquidated amount
20   of this noncontingent debt exceeded the § 109(e) eligibility
21   limits for unsecured debt, and the bankruptcy court correctly
22   determined that Robert was ineligible to be a chapter 13 debtor.
23                                CONCLUSION
24        For the reasons set forth above, the bankruptcy court’s
25   order dismissing Robert’s chapter 13 bankruptcy case is AFFIRMED.
26
27
28

                                      14