Knight, Matter of

• Decision Date: 03 May 1995
• Docket Number: No. 94-1965,94-1965
• Citation: 55 F.3d 231
• Parties: 33 Collier Bankr.Cas.2d 825, Bankr. L. Rep. P 76,493 In the Matter of Frank E. KNIGHT, Debtor-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 231

55 F.3d 231

33 Collier Bankr.Cas.2d 825, Bankr. L. Rep. P 76,493

In the Matter of Frank E. KNIGHT, Debtor-Appellant.

No. 94-1965.

United States Court of Appeals, Seventh Circuit.

Argued Nov. 8, 1994.

Decided May 3, 1995.

Arend J. Abel, Daniel B. Dovenbarger, Matthew R. Gutwein, Martha J. Arvin (argued), Office of Atty. Gen., Indianapolis, IN, for State of Ind., State Bd. Accounts.

Gary L. Hostetler, Laura A. Briggs (argued), Hostetler & Kowalik, Indianapolis, IN, for Frank E. Knight.

Before COFFEY and RIPPLE, Circuit Judges, and SKINNER, District Judge. ^*

RIPPLE, Circuit Judge.

The case before us concerns the eligibility of a person filing a bankruptcy petition for relief under chapter 13 of the Bankruptcy Code. An individual may qualify as a chapter 13 debtor only if he has regular income, his noncontingent and liquidated unsecured debts do not exceed $100,000, and his noncontingent and liquidated secured debts do not exceed $350,000. See 11 U.S.C. Sec. 109(e). In this case, the bankruptcy court concluded that Frank E. Knight was not entitled to chapter 13 relief because he had more than $100,000 in unsecured debt. Mr. Knight appeals the district court's affirmance of the bankruptcy court's dismissal of his chapter 13 petition. Our review confirms that Mr. Knight's unsecured debts exceed the statutory limitation under chapter 13. We therefore affirm the district court's decision. ¹

I BACKGROUND

A. Facts

Mr. Knight was the Town Court Judge of Mooresville, Indiana; he resigned on October 15, 1990. On November 7, 1991, Mr. Knight filed a voluntary chapter 13 petition. The State of Indiana, State Board of Accounts ("SBA"), timely filed an unsecured claim for $108,949.50. The SBA's claim was based on its audit of the Mooresville Town Court operations for the period from January 1, 1987 to October 15, 1990. In the report of the audit results, the SBA explained that its examiners had discovered 915 instances in which Town Court Judge Knight had failed to report traffic convictions to the Indiana Bureau of Motor Vehicles ("BMV"). For each reporting failure, the SBA report stated, the Judge incurred a liability of $100.00, based upon Indiana Code Sec. 9-4-7-9(c) and (e). ² The SBA examiners also discovered that Mr. Knight had misappropriated, diverted or failed to account properly for $17,449.50. It After discussing the contents of the audit report with Mr. Knight's attorney on July 29, 1991, the SBA certified the audit report to the Office of the Indiana Attorney General on September 20, 1991, charging Mr. Knight with a total liability to the SBA of $108,949.50. The certified audit report noted that the State Police had confiscated the court records on August 21, 1990 (less than two months prior to Judge Knight's resignation) and that criminal charges of theft and official misconduct had been filed against Mr. Knight in the Morgan County Superior Court on May 9, 1991. Id. at 8. On June 7, 1991, Mr. Knight had pleaded guilty to one count of theft, a Class D felony, and one count of official misconduct, a Class A misdemeanor. According to the audit report, under the terms of the plea agreement, Mr. Knight was required to pay $3,000 in restitution to the State of Indiana, and the prosecutor agreed not to file "any additional charges arising out of this same fact situation on which these charges are based."

itemized its total claim against Mr. Knight as follows:

On October 29, 1991, the Attorney General, on behalf of the State of Indiana, sent Mr. Knight a demand letter requiring that he pay his liability to the State. On November 7, 1991, Mr. Knight sought chapter 13 bankruptcy protection in the United States Bankruptcy Court for the Southern District of Indiana.

After filing its proof of claim in Mr. Knight's bankruptcy proceedings, the State filed a motion to dismiss his bankruptcy petition or to convert it to a chapter 7, on the ground that his unsecured debt exceeded the allowable amount under 11 U.S.C. Sec. 109(e). Mr. Knight conceded then, as he does before us on appeal, that the $17,449.50 amount attributable to excessive fines, alternative sentencing and contributions was based on claims in existence and enforceable at the time he filed his bankruptcy petition. However, he contested, and continues to contest, the SBA's $91,500 "penalty debt" for failure to report the 915 convictions. He submits that the claim is contingent and unliquidated because no action was brought against him by the Attorney General to recover the penalty, and therefore no civil judgment has established a duty on his part to pay that debt.

B. Prior Judicial Determinations

By order of October 16, 1992, the bankruptcy court dismissed Mr. Knight's chapter 13 petition. The court held that the $91,500 penalty debt arising from the unreported traffic violations constituted a noncontingent and liquidated debt on the date of the bankruptcy filing that, when added to his other unsecured debts, would make Mr. Knight ineligible for chapter 13 relief.

Although the Debtor's liability for the Penalty Debt was not determined pre-petition by a civil lawsuit, all of the events needed to establish or give rise to liability did occur pre-petition. The Penalty Debt was noncontingent on the date of the bankruptcy filing, because the Audit Report states that the Debtor failed to report 915 traffic offenses, and because Indiana Code Section 9-4-7-9(e) imposed a fine of $100.00 for each failure to report a traffic offense. Similarly, the Penalty Debt was liquidated on the date of the bankruptcy filing. It is not necessary to use judgment or discretion in arriving at the amount of the Penalty Debt; simple arithmetic, i.e., 915 times $100.00, suffices.

Bankr. R.9 at 6-7.

On March 4, 1994, the district court affirmed the decision of the bankruptcy court. It approved the court's application of the standards set out in In re McGovern, 122 B.R. 712 (Bankr.N.D.Ind.1989), for analyzing Sec. 109(e) eligibility, because they "are the standards applied by the majority of courts that have addressed the issues of liquidated and noncontingent debt." Id. at 5. Accordingly, the district court then upheld the dismissal

of Mr. Knight's chapter 13 petition. Mr. Knight has appealed that ruling.

II DISCUSSION

On appeal Mr. Knight submits that the $91,500 penalty debt claimed by the SBA is a disputed debt, and also that the debt, if there is one, is contingent and unliquidated. Under his analysis of the SBA's claim, therefore, he meets the eligibility requirements of a chapter 13 debtor found in 11 U.S.C. Sec. 109(e):

Only an individual with regular income that owes, on the date of filing of the petition, noncontingent, liquidated, unsecured debts of less than $100,000 and noncontingent, liquidated, secured debts of less than $350,000, ... may be a debtor under chapter 13 of this title.

Section 109(e) does not mention "disputed" debts, and neither the Bankruptcy Code nor the legislative history defines "contingent" and "liquidated." 1 William I. Norton, Jr., Bankruptcy Law & Practice Sec. 18:12 (2d ed. 1994). In our consideration of each of Mr. Knight's submissions, therefore, we review de novo the conclusions of law of the bankruptcy court, later affirmed by the district court. In re C & S Grain Co., 47 F.3d 233, 236 (7th Cir.1995); In re Love, 957 F.2d 1350, 1354 (7th Cir.1992).

A.

Mr. Knight first disputes altogether that he owes a "debt" to the State of Indiana. He contends that a "debt," defined in the Bankruptcy Code at 11 U.S.C. Sec. 101(12) as a "liability on a claim," is narrower than a "claim"; it is, instead, the obligation to pay under applicable law. Mr. Knight then asserts that he is under no obligation to pay the State. Because, under Mr. Knight's plea agreement, the State prosecutor agreed to forego any additional charges, Mr. Knight contends that he is no longer liable to the State. According to Mr. Knight, therefore, the first question before the court is whether this disputed claim properly can be included in calculating Sec. 109(e) unsecured debt limitations.

Bankruptcy proceedings are seldom free of disputes about the claims filed against the debtor. Challenging the SBA claim filed in his bankruptcy case, Mr. Knight acknowledged that the Bankruptcy Code definition of "debt" is "liability on a claim," but then he misconstrued the relationship between debt and claim. In enacting the Bankruptcy Code, the Congress elaborated on that relationship when it defined "debt."

The terms "debt" and "claim" are coextensive: a creditor has a "claim" against the debtor; the debtor owes a "debt" to the creditor.

S.Rep. No. 989, 95th Cong., 2d Sess. 23, reprinted in 1978 U.S.C.C.A.N. 5787, 5809; H.R.Rep. No. 595, 95th Cong., 2d Sess. 310, reprinted in 1978 U.S.C.C.A.N. 5963, 6267. The same breadth of definition is found in the Code's definition of a "claim": a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, ... disputed, undisputed,...." 11 U.S.C. Sec. 101(5)(A) (emphasis added). Thus the Code expressly recognizes that a disputed claim is nevertheless a claim. "[B]y defining a debt as a 'liability on a claim,' Congress gave debt the same broad meaning it gave claim." In re Rosteck, 899 F.2d 694, 696 (7th Cir.1990) (quoting In re Energy Co-op, Inc., 832 F.2d 997, 1001 (7th Cir.1987)).

By this broadest possible definition ... the bill contemplates that all legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case.

S.Rep. No. 595, 95th Cong., 2d Sess. 22, reprinted in 1978 U.S.C.C.A.N. 5787, 5808; H.R.Rep. No. 95-595, 95th Cong., 2d Sess. 309, reprinted in 1978 U.S.C.C.A.N. 5963, 6266. In light of the virtual synonymy of "debt" and "claim," therefore, we conclude that a disputed claim is a debt to be included when calculating the Sec. 109(e) requirements. See Norton, Bankruptcy Law & Practice Sec. 18:12 at 18-43 ("Most c...