In re Clark, Bankruptcy No. 87-B-14668-M.
| Decision Date | 14 October 1988 |
| Docket Number | Bankruptcy No. 87-B-14668-M. |
| Citation | 91 BR 570 |
| Parties | In re Stephen F. CLARK and Lori B. Clark, Debtors. |
| Court | U.S. Bankruptcy Court — District of Colorado |
Thomas O. Murphy, Longmont, Colo., for debtors.
K. Preston Oade, Golden, Colo., for Alpine Associates, Inc.
Sally Zeman, Denver, Colo., Chapter 13 Trustee's Office.
THIS MATTER comes before the Court on the Debtor's Motion to Confirm their Chapter 13 Plan and Alpine Associates, Inc.'s ("Creditor" or "Alpine") Objection to confirmation. Hearings were held on June 17 and August 17, 1988.
The Court took under advisement the threshold issue raised by the objecting Creditor as to whether or not these Debtors qualify as Chapter 13 Debtors pursuant to 11 U.S.C. § 109(e). The Creditor maintains that the Debtors' noncontingent, liquidated, unsecured debts exceed $100,000.00 and the Debtors thus do not qualify as Chapter 13 debtors pursuant to Section 109(e) of the Bankruptcy Code. This Opinion addresses that issue.1
BACKGROUND AND FINDINGS OF FACT RELEVANT TO 11 U.S.C. § 109(e)
1. Debtors filed their Petition for relief pursuant to Chapter 13 on December 3, 1987.
2. Debtors initially scheduled unsecured debt of $83,618.00 at the "Summary of Debts and Property" on their bankruptcy Schedules. Debtors also concurrently scheduled total unsecured debt of $93,618.00 at "Paragraph 12(c) Unsecured Debts," which list of debt included a $10,000.00 entry for a debt owing to the Bank of Boulder ("Bank") with a notation "Mortgage (Return Condo)." Additional amended Schedules and Statements were subsequently filed by the Debtors which included inconsistent and confusing entries for the amount of unsecured debt and the amount of the Bank's claim.2
3. Debtors also identified as an asset on the original December 3, 1987 Schedules, a condominium located at 635 Walnut in Boulder, Colorado and a debt owing to the Bank in the amount of $82,784.00 secured by the condominium valued at $82,785.00. A notation appears: "(Condo Return)."
4. On June 9, 1988, Stephen Clark conveyed to the Bank, by Warranty Deed and estoppel agreement, the condominium unit he owned at 635 Walnut, Unit 4, Boulder, Colorado. The transaction was acknowledged to be a Deed in Lieu of Foreclosure and the property was accepted by the Bank in full and final satisfaction of its claim against Stephen Clark.
5. Alpine and the Debtors have engaged in extended, costly, and bitter litigation pursuant to the allegations of Alpine that Stephen Clark, when serving as an employee or independent sales representative for Alpine, deceived and damaged Alpine. Alpine maintains that as a result of Stephen Clark's dishonesty, evidenced by a series of sales effected by Stephen Clark for Alpine's business competitor Royal Supply Company, Inc. while he was still working for Alpine, Alpine lost substantial sales opportunities and profits. Alpine claims lost sales and profits of perhaps $333,831.00 as damages, but the pre-petition state court litigation pertaining to that claim and the amount of the claim has not been resolved or concluded, as of this time.3 Debtors scheduled Alpine as a creditor with a $1.00 claim, and indicated the consideration or basis of the claim was "lawsuit."
6. Stephen Clark has admitted to "deceiving" Alpine. Stephen Clark has not, however, conceded that Alpine's claim, if any, would not be dischargeable pursuant to 11 U.S.C. § 523 or a bar to discharge pursuant to 11 U.S.C. § 727 if this were a Chapter 7 case. Alpine maintains the claim would be non-dischargeable or a bar to discharge in Chapter 7.
7. Travelers Insurance Company ("Travelers") paid to Alpine, by check dated July 2, 1987, the sum of $22,500.00 "in full settlement of Clark Fidelity claim" pursuant to an insurance policy which insures against "fraudulent or dishonest acts of employees. . . ." Travelers also filed a $22,500.00 Proof of Claim in this case on June 2, 1988. Debtors did not originally list, and have not yet listed, Travelers as a creditor.
8. The parties stipulated to the accuracy and the introduction of Alpine's Exhibit 6, which was an itemized list of Debtors' creditors and "actual debt" as of December 3, 1987, except that Debtor disputed certain claims as follows: (a) Bank of Boulder mortgage of $10,291.45, (b) City of Boulder, Treasurer of Real Estate tax on condominium of $688.90), (c) City of Boulder claim of $477.00, and (d) 1984 Honda Accord debt. Exhibit 6 indicates Debtors' total debt at time of filing the Petition was $105,722.43, not including Alpine's or Travelers' claims. After deducting the contested claims, Exhibit 6 reflects "actual debt" admitted by the Debtors of $91,364.08.
The issue before the Court is whether or not the Debtors' unsecured debt as of the date of filing the Petition exceeded $100,000.00 in noncontingent, liquidated claims. If the answer is yes, Debtors cannot qualify under the filed Petition for relief pursuant to Chapter 13. If the answer is no, then the Debtors do qualify and they may file an Amended Plan in accordance with this Court's prior Findings of Fact and Conclusions of Law.
The answer to the question will be determined by the nature, amount, and classification of the two principal disputed claims, those of (1) the Bank of Boulder and (2) the Travelers Insurance Company.
With regard to the Bank of Boulder claim, Debtors maintain, first, that because the Bank accepted its collateral on June 9, 1988 in full and final satisfaction of its claim, no claim can be counted against the Debtors as of December 3, 1987, the date of filing. Debtors argue, second, that there was no deficiency claim as of December 3, 1988 which is, in part, demonstrated by the Bank's subsequent acceptance of the Deed in Lieu of Foreclosure.
As a matter of law and as a matter of logic and fairness, calculation of bona fide deficiency claims of undersecured creditors is appropriate in determining total unsecured debt of a Chapter 13 debtor.
Pursuant to 11 U.S.C. § 506(a),4 a creditor with a claim secured by a lien on property has a secured claim only to the extent of the value of the property and an unsecured claim for the balance, or for the amount of the claim which exceeds the value of the property. This Court will follow the majority of courts on this issue and apply Section 506(a) in calculating the amount of secured and unsecured debt held by a Chapter 13 debtor. Matter of Day, 747 F.2d 405, 406 (7th Cir.1984); Matter of Martin, 78 B.R. 928 (Bankr.S.D.Iowa 1987); In re Potenza, 75 B.R. 17, 18 (Bankr.D. Nev.1987).
Courts have consistently examined the true value of collateral securing a debt when evaluating a debtor\'s eligibility for Chapter 13 relief under 11 U.S.C. section 109(e). In re Day, 747 F.2d 405, 406 (7th Cir.1984). The Day Court affirmed the district court\'s finding that a section 506(a) valuation is appropriate when determining eligibility under section 109(e). In re Potenza, supra at 18.
I reject the ruling, as well as the logic and consequences, of those courts which hold that the entire debt listed as secured by a debtor shall be considered secured debt irrespective of the amount or value of collateral securing the claim. See, In re Morton, 43 B.R. 215 (Bankr.E.D.N.Y.1984); In re King, 9 B.R. 376 (Bankr.D.Or.1981). To rely exclusively on Debtors' characterization of the debt as secured, only, and ignore the realities of collateral value and undersecured claims is to disregard the Code language and its intent. The potential consequences of treating truly undersecured claims as fully secured claims allows for distortion, misuse, and abuse of Chapter 13. See, Matter of Day, supra at 407.
The application of Section 506(a) and determination of unsecured and secured portions of debt is to be established as of the date of filing the Petition in bankruptcy. In re Potenza, supra at 18; See, Matter of Pearson, 773 F.2d 751, 757 (6th Cir.1985).
Under this holding, the Debtors in this case must recognize the Bank of Boulder claim, as of the time the Debtors filed their Petition, including the Bank's deficiency, if any. Debtors argue there was no deficiency. On the contrary, all evidence produced at trial and the Debtors' initial sworn Schedules reflect a deficiency of approximately $10,000.00. Debtors' original Schedules list a $10,000.00 unsecured Bank claim, which Schedules presumably were accurate and reliable when signed and filed by Debtors, and reflect a recognition of a deficiency claim. Exhibit 6 reflects a $10,291.45 deficiency claim. Two offers to purchase the condominium in the winter of 1987 were evidently made for $75,000.00 (Reynolds) and for $68,000.00 (DeLuca). Appraisals conducted for the Bank valued the property at $75,000.00 and $81,000.00. As testified to by a Bank officer, as of December 3, 1987, the amount of the Bank's claim was $85,291.45 and there existed an expected $10,000.00 deficiency claim of the Bank.
The post-petition transfer of the collateral to the Bank by a Deed in Lieu, which was accepted by the Bank in full and final satisfaction of its claim, does not retroactively extinguish the Bank's deficiency claim as of the date the Petition was filed.
Thus, this Court finds that as of December 3, 1987, there was an unsecured claim of the Bank in the amount of $10,000.00 which amount is to be added to the sum of debt admitted by the Debtors and reflected in Exhibit 6. This results in total unsecured debt of $101,364.08. This amount exceeds the $100,000.00 limit set forth in Section 109(e) and Debtors are thus disqualified as Chapter 13 Debtors by virtue of the Bank's claim.
With regard to the second disputed claim, that of Travelers for $22,500.00, the Debtors argue that it is not to be included in the Section 109(e) calculation. Debtors rely on an assertion that the Travelers' claim, as subrogee...
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