Court Opinion

ID: 5097
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:02:25+00
Date Added: 2024-06-11T16:41:41.937526
License: Public Domain

United States Court of Appeals,

                                              Fifth Circuit.

                                             No. 91–4731

                                         (Summary Calendar).

 In the Matter of Sam E. FORD and Marcia S. Ford, d/b/a S.E. Ford Cattle Company, d/b/a Jose
Equipment, a/k/a S.E. Ford Oil & Gas, Debtors,

                               FIRST CITY BEAUMONT, Appellee,

                                                    v.

                                    John J. DURKAY, Appellant.

                                             Aug. 6, 1992.

Appeal from the United States District Court for the Eastern District of Texas.

Before POLITZ, Chief Judge, KING and EMILIO M. GARZA, Circuit Judges.

        EMILIO M. GARZA, Circuit Judge:

        This case began as a proof of claim filed in February 1989 by First City National Bank of

Beaumont ("the Bank") in the Chapter 7 bankruptcy proceeding of Sam E. Ford and Marcia Ford.

The trustee for the Fords' estate objected to the Bank's claim on the grounds that it is a "contingent

claim" and that, pursuant to section 502(c)(1) of Title 11, the Fords' estate is therefore liable only for

an estimated portion of the Bank's claim. The bankruptcy court agreed and concluded that the Bank's

claim must be estimated pursuant to section 502(c)(1). The Bank appealed to the United States

District Court for the Eastern District of Texas, which—finding that the Bank's claim is not

contingent and, therefore, that the Fords' liability should not be estimated pursuant to section

502(c)(1)—vacated the bankruptcy court's order and remanded the case back to the bankruptcy

court. 125 B.R. 735. The Fords appeal. Finding that the Bank's claim is not contingent, we affirm.

                                                    I

        On November 14, 1988, the Fords filed a voluntary petition in Bankruptcy under Chapter 7

of Title 11 of the United States Code. The Bank filed a proof of claim against the Fords' estate based
on two notes—a real estate lien note in the original amount of $1,200,0001 and a promissory note in

the original amount of $308,903.672. The Bank's overall claim is for $1,555,489.48—the total

amount outstanding on these notes.

          On October 4, 1989, the trustee for the Fords' estate filed an objection to the Bank's claim

pursuant to section 502(b) of the Bankruptcy Code, asserting that the Bank's claim is a "contingent

claim"—that is, a claim in which, pursuant to section 502(c)(1) of Title 11,3 outstanding liability is

divisible by the number of signatures or makers of the underlying notes, and each maker is then

responsible only for his or her estimated share.4 The bankruptcy court conducted a hearing on this

objection, determined that the Bank's claim is contingent, and concluded that the claim must be

   1
    This real estate note was executed by Mr. Ford and others, both individually and as partners
of the Jefferson Group—a Texas general partnership. The note provides that each of the note's
five co-makers is responsible for the note's entire amount. At the time the Fords filed their
bankruptcy petition, the unpaid balance of this note consisted of $1,095,000.00 in principal and
$165,405.94 in accrued interest, for a total of $1,260,405.94.
   2
   This promissory note was executed by Mr. Ford and J.D. Martin, III. The note provides that
Ford and Martin are jointly and severally liable for repayment of its full amount. At the time the
Fords filed their bankruptcy petition, the unpaid balance due on this note consisted of
$285,495.67 in principal and $9,587.87 in accrued interest, for a total of $295,083.54.
   3
       Section 502(c)(1) provides that:

                         (c) There shall be estimated for the purposes of allowance under this
                  section—

                          (1) any contingent or unliquidated claim, the fixing or liquidation of which,
                  as the case may be, would unduly delay the administration of the case;

          11 U.S.C. § 502(c)(1) (1988). "Estimation" for the purposes of section 502(c)(1) simply
          means that the bankruptcy court may exercise is discretionary powers to determine the
          allowability of claims in bankruptcy in accordance with the principles of equity. See
          generally In re Corey, 892 F.2d 829 (9th Cir.1989) (holding that, given highly speculative
          nature of claims and undue delay that would result in confirmation of proposed plan, court
          could estimate claims of creditors who voted against proposed reorganization plan), cert.
          denied sub nom., Kulalani Ltd. v. Corey, ––– U.S. ––––, 111 S. Ct. 56, 112 L. Ed. 2d 31
          (1990); In re Continental Airlines Corp., 64 B.R. 865 (Bankr.S.D.Tex.1986) (discussing
          broad discretion of bankruptcy court regarding estimation and liquidation pursuant to
          section 502 of Title 11).
   4
   See, e.g., In re Amatex Corp., 110 B.R. 168, 170 (Bankr.E.D.Pa.1990) ("Pursuant to 11
U.S.C. § 502(c)(1), a contingent claimant is said to generally be entitled to file a claim, but the
amount of the claim is subject to estimation by the bankruptcy court.") (citations omitted).
estimated pursuant to section 502(c)(1).5 The trustee does not argue that the Bank's claim is

"unliquidated" for purposes of section 502(c)(1).

       The Bank appealed the bankruptcy court's final order to federal district court. The district

court held that (1) the outstanding debt giving rise t o the Bank's claim is not contingent, (2) the

bankruptcy court, therefore, had no authority to employ a section 502 estimation of the Bank's claim,

and (3) the Bank is entitled to the full amount of its proof of claim. Accordingly, the district court

vacated the bankruptcy court's order and remanded the Bank's claim to the bankruptcy court. The

Fords appeal.

                                                  II

        While bankruptcy does not wash away a creditor's state law rights and remedies, it does alter

the creditor's ability to enforce claims. See In re Brints Cotton Mrkg., Inc., 737 F.2d 1338, 1341 (5th

Cir.1984) ("[W]hile state law ordinarily determines what claims of creditors are valid and subsisting

obligations, a bankruptcy court is entitled ... to determine how and what claims are allowable....")

(citation omitted). Accordingly, (a) the validity of the Bank's underlying claim and Mr. Ford's status

as co-maker or guarantor is controlled by Texas state law,6 (b) but whether the Bank is allowed to

   5
    The bankruptcy court divided the unpaid balance of the real estate lien note—a note with five
co-makers (see supra note 1)—by five, resulting in an allowed claim of $252,081.19, and divided
the promissory note—a note with two co-makers (see supra note 2)—in half, resulting in an
allowed claim of $147,541.77.
   6
     State law is the appropriate law for determining the validity of an underlying claim. See
Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918, 59 L. Ed. 2d 136 (1979) ("Property
interests are created and defined by state law.... [T]here is no reason why such interests should be
analyzed differently simply because an interested party is involved in a bankruptcy proceeding.");
see also Prudence Realization Corp. v. Geist, 316 U.S. 89, 95, 62 S. Ct. 978, 982, 86 L. Ed. 1293
(1942) ("The court of bankruptcy is a court of equity to which the judicial administration of the
bankrupt's estate is committed, ... and it is for that court—not without appropriate regard for
rights acquired under rules of state law —to define and apply federal law....") (emphasis added)
(citations omitted); In re Chicago, Milwaukee, St. Paul and Pac. R.R., 791 F.2d 524, 532 (7th
Cir.1986) ("Bankruptcy law provides a federal machinery for enforcing creditors' rights but the
rights themselves are created by state law."); In re Christensen, 95 B.R. 886, 890
(Bankr.D.N.J.1988) ("State law must be used to decide whether or not a claim exists.... Once the
existence of the claim is established, questions concerning whether the claim will be administered
through the bankruptcy estate are determined by federal law.") (citations omitted); In re
enforce its claim is a matter of federal law and the bankruptcy court's exercise of equitable powers.

See In re Shelter Enterprises, 98 B.R. 224, 229 ("State substantive law determines the existence of

a claim; however, its allowance or disallowance is a matter of federal law and is left to the

bankruptcy court's exercise of equitable powers."), amended on other grounds, 99 B.R. 668

(Bankr.W.D.Pa.1989) (citations omitted).

                                                   A

        We begin by determining the validity of the Bank's claim and Mr. Ford's status under Texas

law. Mr. Ford signed the real estate lien note bot h individually and as a partner of the Jefferson

Group.7 Moreover, the real estate lo an explicitly provides that each maker is liable for the entire

amount of the note. The Bank's promissory note states on its face that each maker is jointly and

severally liable. Under Texas law, this makes Mr. Ford—along with his partners—a "co-maker"

jointly and severally liable for the entire amount of the real estate note,8 and Mr. Ford and Martin are

Continental Airlines Corp., 64 B.R. 865, 871 (Bankr.S.D.Tex.1986) ("The legal standards for
measuring the value of a bankruptcy claim for contract breach are therefore the same as those
which would be applied if the bankruptcy had not occurred."); In re Skelly, 38 B.R. 1000, 1001
(D.Del.1984) ("The nature of a creditor's property rights in bankruptcy is defined by state law, not
federal law.") (citation omitted).
   7
    Because this real estate note does not specify whether Mr. Ford signed it as a co-maker or
guarantor, under Texas law he is deemed to have signed as a co-maker. See TEX.BUS. &
COM.CODE ANN. § 3.118(5) (West 1968) (emphasis added):

               Unless the instrument otherwise specifies two or more persons who sign as maker,
               acceptor or drawer or indorser and as a part of the same transaction are jointly
               and severally liable even though the instrument contains such words as "I promise
               to pay."

       See also Retamco, Inc. v. Dixilyn–Field Drilling Co., 693 S.W.2d 520, 521
       (Tex.App.—Houston [14th Dist.] 1985, no writ) (although note stated that only principal
       was "maker" and agent signed as agent and also in his individual capacity, holding that
       agent was individually liable as co-maker since note did not specify that principal and
       agent were not to be jointly and severally liable).
   8
     In fact, pursuant to section 15 of article 6132b of the Texas civil statutes, each of these
Jefferson Group partners is jointly and severally liable for all partnership debts. Section 15 states
that "all partners are liable jointly and severally for all debts and obligations of the partnership
including those under Sections 13 [Partnership Bound by Partner's Wrongful Act] and 14
[Partnership Bound by Partner's Breach of Trust]." TEX.REV.CIV.STAT.ANN. art. 6132b §
15 (West 1970 & Supp.1992).
each fully liable for the entire amount of their promissory note. See TEX.BUS. & COM.CODE ANN.

§ 3.118(5) (West 1968) (quoted supra note 7);             Clark v. Dedina, 658 S.W.2d 293, 298

(Tex.App.—Houston [1st Dist.] 1983, writ dism'd) ("A co-maker's liability to the payee is joint and

several."), citing Caldwell v. Stevenson, 567 S.W.2d 278 (Tex.Civ.App.—Austin 1978, no writ);

Dittberner v. Bell, 558 S.W.2d 527, 534 (Tex.Civ.App.—Amarillo 1977, writ ref'd n.r.e.) ("While

each signer of a note is liable to the payee for the entire amount, ... generally, as between two signers,

each is liable for one-half of the amount.") (citations omitted).

                                                    B

         Notwithstanding that state law controls the validity of this claim, what constitutes a

"contingent" claim for bankruptcy purposes is a bankruptcy law question. See Shelter, 98 B.R. at

229. As acknowledged by the district court, t his case is one of first impression—that is, the

Bankruptcy Code does not define "contingent claim" and no court has produced a conclusive

definition of this term as it is employed in section 502(c)(1) of Title 11.9 However, we are not

completely without guidance: "contingent" has been judicially defined for other sections of the

Bankruptcy Code. Specifically, courts have held that

        claims are contingent as to liability if the debt is one which the debtor will be called upon to
        pay only upon the occurrence or happening of an extrinsic event which will trigger the
        liability of the debtor to the alleged creditor and if such triggering event or occurrence was
        one reasonably contemplated by the debtor and creditor at the time the event giving rise to

   9
    This question was previously posed in another case before a bankruptcy court, but was not
resolved; the court requested further briefing, and no follow up opinion was ever issued. See
generally In re Andrews, 78 B.R. 420, 424–25 (Bankr.E.D.Pa.1987). Specifically, the issue
before the Andrews court was whether the policies that underlie the definition of contingent claim
for section 109(e) and section 303(b)(1) purposes should also apply to section 502(c)(1). The
court framed two possibilities—(1) that the narrow interpretation of "contingent" may be due to a
policy of restricting the use of those code sections, and that (2) the paucity of cases interpreting
section 502 may be due to an unwillingness to classify them as contingent. See id. A more
obvious explanation for the paucity of case law on this issue is that co-makers who find
themselves in bankruptcy are likely to be passed over by creditors seeking to target the
co-maker(s) most capable of paying the entire outstanding obligation. Hence, co-makers in
bankruptcy may find themselves the subject of indemnification or contribution proceedings from
their fellow co-makers who are targeted by creditors for collection. See infra note 15 and
accompanying text.
          the claim occurred.

In re All Media Properties, Inc., 5 B.R. 126, 133 (Bankr.S.D.Tex.1980) (emphasis added), aff'd per

curiam, 646 F.2d 193 (5th Cir.1981).10 Our task is to determine whether the district court correctly

applied the definition of contingent claim developed and discussed for these other sections of the

Bankruptcy Code to section 502(c)(1).11

          The Fords ask us to split the concept of contingency in two, limit application of the

established definition of contingent claim applied by the district court as "contingent as to liability,"

push that definition aside for the Fords, and reco gnize a second type of contingency—that is,

contingency as to amount or collection.12            If adopted, this approach would result in (1)

   10
     See also In re Albano, 55 B.R. 363, 366 (N.D.Ill.1985) (quoting All Media definition); In re
Duty Free Shops Corp., 6 B.R. 38, 39 (Bankr.S.D.Fla.1980) ("A contingent claim is one which
may arise upon the occurrence of a future event."); COLLIER ON BANKRUPTCY, par. 303.08 at
303–33 (15th ed. 1990) ("When the duty to pay a claim does not rest upon the occurrence of a
future event, the claim is not contingent.... A note which is in default ... [is an] example of [a
claim] not contingent as to liability.").
   11
        The district court held that

                   [t]he lack of a definition of "contingent" under the Code may signify Congressional
                   satisfaction with the judicial construction of the term under other Bankruptcy Code
                   sections. Further, the definition of a term in the Code should be consistent
                   throughout the Code, absent any indication in the Code or caselaw that different
                   definitions should be used. For all of the foregoing reasons, this court finds that
                   the [B]ank's claim was not "contingent" and should not have been estimated under
                   section 502(c)(1) of the Bankruptcy Code.

          In re Ford, 125 B.R. 735, 738 (E.D.Tex.1991).
   12
        Specifically, the Fords assert that,

                   [t]he Federal District Court, in its memorandum opinion, cites the often-cited
                   definition of "contingent claim" to be found in In re All Media Properties, Inc., 5
B.R. 126 (Bankr.S.D.TX.1980), aff'd per curiam, 646 F.2d 193 (5th Cir.1981) ...
                   [Quoted supra in text accompanying note 10.]

                            As the All Media court made ... clear, this is a definition of "contingent as
                   to liability", a term found in 11 U.S.C. § 303, the provision of the code which
                   provides for the filing of involuntary bankruptcy petitions by three or more
                   creditors holding claims not contingent as to liability. Id.

                          But the commentators have often recognized that a second type of
                   contingency can exist, contingency as to amount or contingency as to collection.
recharacterizing all joint-obligation promissory note debts as contingent, (2) augmenting the

discretion of bankruptcy judges by allowing them to dice up debtors' liability for such notes, and (3)

benefiting the other creditors of these debtors—that is, debtors who borrowed on the commitment

of joint and several liability and find themselves protected against full liability by filing for

bankruptcy—and/or the debtors themselves.13

          We cannot oblige. Such an approach would strip creditors such as the Bank of the

joint-and-several-liability protection they originally bargained for to secure their investment—that is,

protection that is likely to have been a necessary precondition for their making such loans.14 It would

          Brief of Appellant at 5, In re Estate of Ford, No. 91–4731 (5th Cir. filed Dec. 31, 1991).
          As stated by the district court,

                  [o]nly one case has adopted the position taken by the trustee in this case. In re
                  Elsub Corp., 66 B.R. 172 (Bankr.N.J.1987). The Elsub case, in the context of
                  section 303(b) of the code, draws a distinction between contingency as to liability
                  and contingency as to payment. No other case cites the Elsub reasoning, and
                  because it does not comport with the traditional definition of what a contingent
                  claim is, this court respectfully declines to follow Elsub.

          Ford, 125 B.R. at 738.
   13
        As displayed in its most positive light by the Fords,

                          The characterization of all joint obligation promissory note debt as
                  contingent would 1) authorize the bankruptcy judge to look behind the paper to
                  the actual loss the note holder is likely to be subjected to; 2) produce a fairer
                  division of the limited assets of the chapter 7 estate among all of the claimants; 3)
                  improve the efficiency and administration of the chapter 7 bankruptcy process;
                  and 4) produce no unjust consequence to the claimant.

          Brief of Appellant, supra, at 4. We agree that such a change would enhance the discretion
          of the bankruptcy judge and benefit the Fords' other creditors, but we do not agree that
          such a change would "produce no unjust consequences to the claimant." Id.; see infra
          notes 14–15 and accompanying text.
   14
        This was recognized by the district court:

                  In addition, from a purely equitable standpoint, it would appear to be unfair to
                  deprive the bank creditor of the joint and several liability protection originally
                  negotiated for on the part of this debtor by estimating the claim at something less
                  than its full amount.

          Ford, 125 B.R. at 738.
also shift the transaction cost of collecting on such outstanding obligations—a cost which presently

enhances the incentive of debtors to undertake considerable joint obligations with caution—away

from debtors and onto creditors.15 And finally, beyond creating a general disincentive for those who

demand the security of joint and several liability against all co-makers before extending credit, such

a change would create an incentive for co-makers to file for bankruptcy as a means of shattering their

bargained-for liability, thereby avoiding the cost of collecting from one another altogether.

        Moreover, the trustee's contention that the amount of the debtor's liability is uncertain focuses

on the debtor's right to (and likelihood of) contribution from the other co-makers. Under Texas law,

a co-maker's right to contribution arises only after the co-maker has paid off the note in full. See

Caldwell v. Stevenson, 567 S.W.2d 278, 280 (Tex.Civ.App.—Austin 1978, no writ); see also

Dittberner v. Bell, 558 S.W.2d 527, 534 (Tex.Civ.App.—Amarillo 1977, writ ref'd n.r.e.) ("While

each signer of a note is liable to the payee for the entire amount, generally, as between two signers,

each is liable for one-half of the amount.") (citations omitted). Here, the debtor's right to pursue the

other co-makers is independent of the creditor's right to payment of the debt, and in no way affects

the creditor's right to pursue its claim for the full amount against any co-maker, including the debtor.

        We note that section 502(c)(1) is intended to permit estimation of claims the fixing of which

might unduly delay the closing of the estate. This section of the Code serves at least two purposes.

First, it is designed to avoid the need to await the resolution of outside lawsuits to determine issues

of liability or amount owed by means of anticipating and estimating the likely outcome of these

actions. By so doing, the trustee can more rapidly determine the payout to each creditor who, in the

   15
      As the law now stands, creditors such as the Bank are able to collect the entire amount due
for jointly-made obligations from any one co-maker holding assets sufficient to settle the entire
debt. Trustees for debtors such as the Fords—debtors who borrowed jointly with others only to
find themselves forced to pay more than their proportionate share of that obligation—may then
file contribution or indemnification actions to collect from their fellow co-makers. By making the
creditors of such jointly-made debts collect proportionate shares from each individual co-maker in
order to realize the entire outstanding amount, the change the Fords propose would shift this
collection cost away from the debtors and onto creditors.
meantime, receives no interest on its claim. Second, section 502(c)(1) is designed to promote a fair

distribution to creditors through a realistic assessment of uncertain claims. We recognize that our

holding today appears to frustrate section 502(c)(1)'s goal of accelerated payout to creditors. It is

clear, however, that in cases such as the one before us where a claim, premised upon the debtor's joint

and several liability as co-maker of a note, is neither "contingent" nor "unliquidated," estimation

pursuant to section 502(c)(1) is simply inappropriate. The Bank, as well as all other creditors of this

estate, must await payout on its claim until resolution of the trustee's suits against the other

co-makers for contribution. Accordingly, we find that the Bank's claim is no contingent, and we
                                                                            t

affirm the decision of the district court.

                                                  III

        For the foregoing reasons, we AFFIRM.

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