Court Opinion

ID: 3019625
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:21:21.613254+00
Date Added: 2024-06-11T11:47:17.373860
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UNITED STATES BANKRUPTCY APPELLATE PANEL
                              FOR THE EIGHTH CIRCUIT

                                  No. 97-6050 NE

In re:                                               *
                                              *
JOHN WAYNE BARCAL,                            *
                                              *
                          Debtor.             *
                                              *
JOHN WAYNE BARCAL,                            *      APPEAL FROM THE UNITED
                                              *      STATES BANKRUPTCY COURT
                          Appellant,                 *     FOR DISTRICT OF
NEBRASKA
                                              *
v.                                            *
                                              *
KATHLEEN LAUGHLIN, TRUSTEE, and        *
UNITED STATES OF AMERICA,              *
                                              *
                          Appellees.          *

                          Submitted: September 9, 1997
                                Filed: November 14, 1997

Before KRESSEL, SCHERMER and SCOTT, United States Bankruptcy Judges

SCHERMER, United States Bankruptcy Judge:

      The Debtor, John Wayne Barcal, (“Debtor”) appeals the bankruptcy

court1 order dismissing his Chapter 13 bankruptcy case on the basis that

the Debtor’s unsecured, disputed tax liabilities exceeded the statutory

limit for eligibility under § 109(e) of the

      1
       John C. Minahan, Jr., Judge, United States Bankruptcy Court for the District of
Nebraska.
Bankruptcy Code.2      For the reasons outlined below, we affirm the

decision of the bankruptcy court holding that the court should include

disputed claims in considering a debtor’s eligibility for Chapter 13

relief, and we further affirm the bankruptcy court’s determination that

a debtor is not entitled to a full judicial determination of the amount

and validity of disputed claims where the debtor’s schedules and proofs

of claim on file reveal that debts exceed the eligibility limits of

§ 109(e).

                             I.   FACTUAL BACKGROUND

     Debtor filed a petition for relief under Chapter 13 of the United

States Bankruptcy Code on January 21, 1997.         At that time, the Debtor

also filed his Schedules, Statement of Affairs and his Chapter 13 Plan.

The Debtor’s only scheduled claims were unsecured non-priority claims

owed to the United States Internal Revenue Service (the “Service”), and

to the State of California.       In Schedule F, “Creditors Holding Unsecured

Non-priority Claims,” the Debtor listed the Service as holding an

unsecured claim in the amount of $406,720.20 for tax years 1989, and

1990 through 1992.    The Debtor also scheduled two taxing authorities of

the State of California as holding unsecured claims in the amount of

$23,872.22 and $12,446.30.        The Debtor’s total scheduled, unsecured

claims at filing were $443,038.72, of which a maximum of $27,203.19

could have been secured, based upon the Debtor’s valuation of assets.

      2
         The Bankruptcy Code is 11 U.S.C. §§ 101-1330. All future references are to
Title 11 unless otherwise indicated.

                                         2
     The Debtor placed an “X” in the column on his bankruptcy schedules

to declare that he disputed these tax liabilities, but he did not check

the other columns to indicate

                                   3
that he considered the obligations unliquidated or contingent.    The

Chapter 13 trustee, Kathleen A. Laughlin (the “Trustee”), filed a Motion

to Dismiss the Chapter 13 case based upon the Debtor’s ineligibility to

file a Chapter 13 petition under § 109(e) because his non-contingent,

liquidated, unsecured debts exceeded the statutory limit of $250,000.

The Service joined in the Trustee’s Motion.

        In its amended proof of claim, the Service asserted that it held

unsecured non-priority claims against the Debtor in the amount of

$498,992.51; a secured claim in the amount of $2,203.19; and an

unsecured priority claim in the amount of $952.76.   The Debtor objected

to the Service’s proof of claim and responded to the Motion to Dismiss

by asserting that the Court should not count the Service’s claim for

eligibility purposes because the claim was both disputed and fraudulent.

The Debtor maintained that the claim was fraudulent because it

represented tax liabilities which, in part, the Service abated as a

result of prior civil litigation.   Further, he objected that the Service

released some of the tax liabilities when the Service released certain

prior tax liens.    Other taxes, he asserted, were improper because the

Service sent its notices of assessment and deficiency to incorrect

addresses.    Finally, he contended that the Service overstated some

liabilities because the Service improperly disallowed various

deductions.                  At the hearing on the Motion to Dismiss, the

Service introduced certified Certificates of Assessments and Payments

(“Certificates of Assessment”) which reflected an unpaid balance of tax

assessments in excess of $250,000 for the tax years 1987,1989, 1990 and

1991.    In addition to these assessments, the Service’s proof of claim,

which the court received in evidence, reflected total interest of

                                     4
$170,508.21 and penalties of $110,112.49 on the unsecured claims.   In

opposition, the Debtor introduced

                                    5
various tax records along with his own declaration or affidavit in which

the Debtor enumerated his objections summarized above.

       By order dated May 22, 1997, the bankruptcy court dismissed the

Debtor’s Chapter 13 case, holding that the Debtor’s non-contingent,

liquidated, unsecured debts exceeded $250,000 and concluding that the

Debtor was therefore not entitled to relief under Chapter 13.      The

Debtor now appeals.

                           II.   ISSUES ON APPEAL

       The Debtor asserts three issues on appeal.     First, the Debtor

challenges the bankruptcy court’s legal conclusion that the court should

count disputed tax claims in determining a debtor’s maximum debt for

Chapter 13 eligibility.    Second, the Debtor asserts that the court

erred in its determination that the liabilities were non-contingent and

liquidated.   And, third, the Debtor protests that the court failed to

consider fully the amount and validity of the tax claims, or the merits

of the Debtor’s objection thereto as part of its analysis of the

Debtor’s Chapter 13 eligibility.

                          III.   STANDARD OF REVIEW

       Whether the amount of a disputed debt should be included in an

eligibility determination under Chapter 13 requires examination of the

rules governing statutory construction and is, therefore, a question of

law.    Nicholes v. Johnny Appleseed of Washington (In re Nicholes) 184

B.R. 82, 86 (9th Cir. B.A.P. 1995).   Similarly, whether a debt is

liquidated or unliquidated, contingent or non-contingent is a question

of law.   We review questions of law de novo.   First Nat’l Bank of Olathe

Kansas v. Pontow, 111 F.3d 604, 609 (8th Cir. 1997); Estate of Sholdan v.

Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir.1997).     Finally, the

Debtor’s third challenge asks whether the bankruptcy court

                                      6
has the obligation to fully determine the amount of disputed claims when

determining Chapter 13 eligibility.       This question, too, requires

statutory construction and is a question of law subject to de novo

review.

                                   IV.     ANALYSIS

Chapter 13 Statutory Background

        Section 109(e) of the Bankruptcy Code sets forth the eligibility

requirements for Chapter 13 relief.       That section states in relevant

part:

        (e)   Only an individual with regular income that owes, on the
        date of the filing of the petition, non-contingent,
        liquidated, unsecured debts of less than $250,000 and non-
        contingent, liquidated, secured debts of less than $750,000,
        or an individual with regular income and such individual's
        spouse, . . . may be a debtor under chapter 13 of this title.

11 U.S.C. § 109(e).    The Bankruptcy Code defines a “debt” as “liability

on a claim.” § 101(12).    A “claim” means 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.” § 101(5)(A).       Although the definition of a

“claim” explicitly includes debts that are contingent and unliquidated,

§ 109(e) excludes unliquidated and contingent debts from Chapter 13

eligibility computation.    Nicholes, 184 B.R. at 88.      Section 109(e)

does not, however, exclude from such calculation debts which a debtor

merely disputes.

        The Bankruptcy Code, does not provide definitions for the terms

“contingent,” “liquidated” or “disputed.”       While courts have assigned

different meanings to these terms, their definitions often overlap,

                                      7
thereby enabling a disputed claim to be both unliquidated and

contingent. See In re Lambert, 43 B.R. 913, 920 (Bankr. D. Utah 1984).

                                   8
 Indeed, it is the Debtor’s assertion that the Service’s claims are both

unliquidated and contingent because of the nature of the Debtor’s

dispute.

      As an initial matter, consistent with the majority of courts, we

hold that disputed, non-contingent and liquidated debts must count

toward the debt limitations for Chapter 13 eligibility.                United States

v. Verdunn, 89 F.3d 779, 801 n. 9 (B.A.P. 9th Cir. 1996).                Accord In re

Sylvester, 19 B.R. 671 (B.A.P. 9th Cir. 1982); Vaughn v. Central Bank of

the South (In re Vaughn) 36 B.R. 935 (N.D. Ala. 1984); Albano v. Craig

Corp. (In re Albano) 55 B.R. 363 (N.D. Ill. 1985); In re Madison, 168

B.R. 986 (D. Hawaii 1994); In re Jordan, 166 B.R. 201 (Bankr. D. Me.

1994); In re Ekeke, 198 B.R. 315 (Bankr. E.D. Mo. 1996).                In other

words, a court should not exclude from the computation of debts for

Chapter 13 eligibility an obligation that the debtor merely disputes.

      The Court in Vaughn explained the rationale behind such policy, and

we adopt that explanation here.

      Congress sets the limits as to who qualifies to file for
      bankruptcy under Chapter 13. This Court cannot find in any
      legislative history where Congress contemplated allowing
      disputed claims to be excluded from the calculation of the
      maximum allowable debt. This Court can only speculate that
      any such statutory language would cause a flood of “disputes”
      over liabilities which, if allowed to translate a claim into
      an unliquidated claim could utterly thwart the judicial
      process in bankruptcy proceedings. It is easy to envision
      debtors regularly using such a “dispute” technique as a
      stalling device. If such a device were given judicial
      recognition it would create havoc. The unscrupulous would
      file a Chapter 13 petition and then “dispute” the unsecured
      debts, allow the litigation to continue under Chapter 13, and
      then after months of costly delay the bankruptcy court would
      find that all had been in vain because the “disputes” were
      only imagined and that the bankruptcy court lacked
      jurisdiction to adjudicate the claims.”3

       3
        While we agree with the rationale stated by the bankruptcy court in Vaughn, we
note that the Eighth Circuit has stated that the question of eligibility under Chapter 13 is

                                            9
 Thus, unless the debts to the Service are contingent or unliquidated,

although the Debtor disputes those debts, they must be counted for

Chapter 13 eligibility purposes and, when counted, they render the

Debtor ineligible.

Are the Debts Contingent?

     While the terms contingent and liquidated are not statutorily

defined, case law has developed an established definition of each term.

With respect to “contingent,” “[I]t is generally settled that ‘if all

events giving rise to liability occurred prior to the filing of the

bankruptcy petition,’ the claim is not contingent.”              In re Keenan, 201

B.R. 263, 264-65 (Bankr. S.D. Calif. 1996), quoting In re Nicholes, 184

B.R. 82, 88 (B.A.P.     9th Cir. 1995).     Accord In re Loya, 123 B.R. 338,

340 (B.A.P. 9th Cir. 1991); In re Albano, 55 B.R. 363, 366 (N.D. Ill.

1985).    In Albano, the court provided the following conceptual

distinction between contingent and disputed debts, observing that the

determinant factor is whether the challenge involves conditions

subsequent or conditions precedent.

           1. Contingent debts (in the sense of dependency on a
     future event) involve no liability unless the condition
     precedent occurs (e.g., in the case of a guarantee–default by
     a principle).

           2. Disputed debts involve presumptive liability unless
     cut off by a condition subsequent (e.g. entry of a judgment
     for the debtor).

Id. at 366.

not a question of jurisdiction. Rudd v. Laughlin, 866 F.2d 1040, 1042 (8th Cir. 1989)
(holding a bankruptcy court did not lack jurisdiction to convert a Chapter 13 proceeding
to Chapter 7 where debts exceed Chapter 13 eligibility limits).

                                          10
Contingent liabilities therefore are a class of liabilities in which the

obligation to pay does not arise until the occurrence of a “triggering

event or occurrence . . . reasonably

                                   11
contemplated by the debtor and creditor at the time the event giving

rise to the claim occurred.” Id. quoting In re All Media Properties, 5

B.R. 126, 133 (Bankr. S.D. Tex. 1980) aff’d per curiam, 646 F.2d 193 (5th

Cir. 1981).

     In this matter, the Debtor’s liabilities to the Service do not

await a “triggering event” or some condition precedent for the debts to

exist.   Rather, the obligations presently exist with liability having

been determined at the time of assessment.    While the Debtor disputes

the amount of his tax liability, the Service’s    Certificates of

Assessment established the amount owed.    Those certificates listed not

only the dates and amounts of assessment by the Service for each of the

tax years in issue, but also contained the dates on which the Debtor

made payments, or on which credits were applied to the various

assessments.   Additionally, the Debtor’s Schedules admitted the

existence of these tax liabilities.    On such facts, the court correctly

determined that the Service’s claims were non-contingent liabilities.

Are the Debts Liquidated?

     Bankruptcy courts have consistently held that a debt which is

“readily calculable,” or “readily determinable” is a    liquidated debt,

regardless of whether the debtor disputes the obligation. In re Keenan,

201 B.R. 263, 266 (Bankr. S.D. Calif. 1996). See In re Nicholes, 184

B.R. 82, 91 (B.A.P. 9th Cir. 1995); In re Loya, 123 B.R. at 340-41

(B.A.P. 9th Cir.   1991); In re Wenberg, 94 B.R. 631, 634 (B.A.P. 9th Cir.

1988).   The question of whether the claim is liquidated then turns on

whether the Debtor’s disputed debts were “readily calculable.”

                                      12
     In an attempt to define what is meant by “readily calculable” or

“readily determinable,” some courts have focused on the extent of the

evidentiary hearing

                                   13
required to resolve the dispute.         For example, In re Wenberg, the Ninth

Circuit Bankruptcy Appellate Panel explained that “[t]he definition of

‘ready determination’ turns on the distinction between a simple hearing

to decide the amount of a certain debt, and an extensive and contested

evidentiary hearing in which substantial evidence may be necessary to

establish amounts or liability.” Id. at 634.            Similarly, in Nicholes,

the court attempted a clarification by stating that “. . . 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.”           Id. at 91 (emphasis added).

Based upon such definitions, the Debtor in the instant matter contends

that his tax liabilities are not “readily calculable” (and therefore are

not liquidated) because the tax liabilities have been, and are still,

the subject of extensive and protracted litigation disputing the amount

of the tax assessments.4

      We hold that the key factor in distinguishing liquidated from

unliquidated claims is not the extent of the dispute nor the amount of

evidence required to establish the claim, but whether the process for

determining the claim is fixed, certain, or otherwise determined by a

specific standard.       This definition is in accord with the early

distinction between contract and tort claims addressed in In re

Sylvester, 19 B.R. 671 (B.A.P. 9th Cir. 1982).           There, the court

      4
          The Debtor challenged the disallowance of certain deductions concerning his
1987 and 1988 returns in Barcal v. United States, Civil No. CIV-S-93-1267(E.D. Calif.).
He thereafter filed a second action, Barcal v. Unites States, Civil No. CIV-S-94-1462(E.
D. Calif.) to challenge, among other matters, the ineffectiveness of the Service’s notice
of deficiency for subsequent years.

                                           14
contrasted the unliquidated nature of tort claims with the liquidated

nature of contract claims and held that a disputed contract liability

                                   15
was liquidated even though adjudication of the debt required submission

of evidence at trial.    While tort claims were not fixed as to liability

or amount until a juridical award, the court stated that contract claims

were subject to      “. . . ready determination and precision in

computation of the amount due . . . . [and] the amount due [was] capable

of ascertainment by reference to an agreement or by simple computation.”

Id. at 673.

     Under such test, the instant Debtor’s tax liabilities were indeed

readily determinable and liquidated because at the time of filing, the

liabilities had already been fixed or established by the Service’s

Certificates of Assessment.   The assessment of a tax liability is

essentially a bookkeeping function whereby a representative of the

Service establishes an account against the taxpayer on the Service’s tax

rolls.   Hempel v. United States, 14 F.3d 572, 572 n. 1 (11th Cir. 1994)

citing Laing v. United States, 423 U.S. 161, 170 n. 13, 96 S. Ct. 473,

479 n. 13, (1976).   The “assessment” sets in motion the collection

powers of the Service, and once the Service makes an assessment, the

taxpayer’s only recourse is to pay the tax and bring a suit for refund.

Hempel, 14 F.3d at 573 n. 1 and n. 2.     Prior to making an assessment,

however, the Service is required to send the taxpayer a statutorily

required notice of deficiency, or “90-day letter.”    Id. at 573.

     While the Debtor disputes receipt of the Service’s deficiency

notices, the Service’s Certificates of Assessment state the date on

which the Service issued such notices for each year at issue as a

preliminary step in its assessment process.     A notice of deficiency is a

statutorily authorized document that the Service must send whenever its

agents determine that the taxpayer owes a deficiency. Benzvi v.

                                     16
Commissioner of Internal Revenue, 787 F.2d 1541, 1542 (11th Cir. 1986).

The Internal Revenue Code

                                   17
defines a “deficiency” as the difference between the taxpayer’s

liability and the liability shown on the taxpayer’s return. Id.    Thus,

to send a notice of deficiency, an agent of the Service must first have

examined the taxpayer’s return and determined (or calculated) the amount

of the deficiency. Id. (citations omitted).   The notice of deficiency

then states that a definite sum of money is owed by the taxpayer to the

Service, and that the stated amount is payable unless the taxpayer can

prove otherwise.   In re Lamar, 111 B.R. 327, 329 (D. Nevada 1990).

     For each tax year involved in the instant case, the Certificates of

Assessment state the date the Debtor filed his tax return, the date

thereafter that the Service issued its deficiency notices, and the

determined amount of the deficiency which the Service then assessed.

Whether or not the Debtor agrees that he properly received notices of

deficiency for each year does not alter the fact that the taxes were

determined or liquidated through the Service’s process of assessment.

Accordingly, the Debtor’s tax liabilities, having been determined, are

liquidated debts which were properly included in   calculating the

Debtor’s Chapter 13 eligibility at the time of filing.   See also In re

Madison, 168 B.R. 986 (D. Hawaii 1994) (rejecting similar arguments

concerning eligibility for Chapter 13 where tax liabilities were

disputed).

Is the Debtor Entitled to have the Bankruptcy Court Resolve the Tax
Claim Dispute and Fully Determine his Tax Liability?

     The Debtor lastly contends that the court erred in failing to

conduct a full evidentiary hearing to determine the amount of his tax

liabilities and in failing to fully consider the merits of his

objections to the Service’s proof of claim.   We hold that the

                                   18
court appropriately refused to resolve the tax dispute or determine the

merits of the tax claim, and we further conclude that the court’s

canvassing of the evidence at hearing on the Motion to Dismiss

constituted an appropriate review of the claims for § 109(e) eligibility

purposes.   The purpose of Chapter 13 debt limitations is “to limit the

availability of a Chapter 13 adjustment of debts to individual wage

earners and ‘small sole proprietor[s], for whom a chapter 11

reorganization is too cumbersome a procedure.’” In re Albano, 55 B.R.

363, 365 (N.D. Ill 1985), quoting H.R.Rep. No. 595, 95th Cong., 1st Sess.

319-20, reprinted in 1978 U.S. Code Cong. & Ad. News 5963, 6276-77.

Such limited eligibility is intended to implement the expeditious

administration of Chapter 13 reorganizations.   To require the bankruptcy

court to decide the merits of disputed claims before determining

eligibility imposes an impractical burden and delay upon the Chapter 13

court.   In re Madison, 168 B.R. 986, 989 (D. Hawaii 1994).

Alternatively, it has been said that requiring the bankruptcy court to

pass on the merits of all claims before the proceeding could even get

under way, would generate a circular and self-defeating barrier to the

prompt administration of Chapter 13 proceedings.   In re Albano, 55 B.R.

at 368. See Comprehensive Accounting Corp. v. Pearson, 773 F.2d at 751,

756 (6th Cir. 1985).   Thus, the bankruptcy court was not obligated to

fully determine the amount of the tax claims, and in fact, to do so

would have been contrary to Chapter 13 policy of expediency.

     Rather than making final determinations on disputed liabilities, it

is appropriate for a court considering eligibility to rely primarily

upon a debtor’s schedules and proofs of claim, checking only to see if

these documents were filed in good faith.   Comprehensive Accounting

                                     19
Corp., 773 F.2d at 756.   In so doing, however, the court should neither

place

                                    20
total reliance upon a debtor’s characterization of a debt nor rely

unquestionably on a creditor’s proof of claim, for to do so would place

eligibility in control of either the debtor or the creditor.   In re

Madison, 168 B.R. at 989.   At a hearing on eligibility, the court

should thus, canvass and review the debtor’s schedules and proofs of

claim, as well as

other evidence offered by a debtor or the creditor to decide only

whether the good faith, facial amount of the debtor’s liquidated and

non-contingent debts exceed statutory limits.

     In light of this standard, the bankruptcy court correctly reviewed

the proof of claim and the evidence offered by the Service as well as

the Debtor’s Schedules and declaration tendered at hearing on the Motion

to Dismiss.   Such evidence showed that the Service made its deficiency

determination and assessed taxes due the United States in an amount

which exceeded Chapter 13 eligibility limitations.   While the court

correctly refrained from making a final determination of the amount of

the Debtor’s tax liabilities, the court did not clearly err in

determining that the Debtor’s unsecured claims exceeded the statutory

limits for eligibility at the time of filing.   A subsequent resolution

of the tax dispute before an appropriate tribunal may result in a

determination that the Debtor’s tax liability is less than $250,000;

however, for the purposes of Chapter 13 eligibility at the time of

filing, such a final resolution is immaterial where the Debtor’s

schedules and proofs of claim on file reveal that the debts exceed the

limits of § 109(e). Comprehensive Accounting, at 758.

                                    21
      The foregoing conclusion is further supported by the fact that §

109(e) does not require a hearing to determine eligibility5 and by the

fact that Chapter 13 must move very quickly with the debtor filing a

plan within 15 days of the petition.            Comprehensive Accounting, at 756.

Further, to afford a debtor a full determination on the merits

concerning his disputed tax liabilities would permit, and indeed

encourage, improper forum shopping.          Clearly, this Debtor was already

litigating the subject tax liabilities in two proceedings in district

court at the time he filed his Chapter 13 petition, and given that the

only debts to be treated in this Chapter 13 proceeding were tax

obligations owed to the United States and the State of California,

litigating on the merits before the bankruptcy court would condone such

forum shopping and delay prompt and appropriate administration of the

Chapter 13 proceeding.

                                    V. Conclusion

      For the foregoing reasons, the decision of the bankruptcy court is

affirmed.

      A true copy.

            Attest:

                   CLERK, U.S. BANKRUPTCY APPELLATE PANEL,
                   EIGHTH CIRCUIT

      5
         The issue is properly raised as an objection to confirmation of the debtor’s
plan or preferably, as it was here, by a motion to dismiss.

                                           22