In re Smith, 05-74493.

• Decision Date: 12 February 2007
• Docket Number: No. 05-74493.,05-74493.
• Citation: 365 B.R. 770
• Parties: In re Bradley T. SMITH, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

365 B.R. 770

In re Bradley T. SMITH, Debtor.

No. 05-74493.

United States Bankruptcy Court, S.D. Ohio, Eastern Division at Columbus.

February 12, 2007.

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W. Mark Jump, Columbus, OH, for Debtor.

Steven J. Levine, Chicago, IL, for U.S. Securities and Exchange Commission.

Frank M. Pees, Worthington, OH, Chapter 13 Trustee.

MEMORANDUM OPINION ON MOTION TO DISMISS OR CONVERT CHAPTER 13 CASE

JOHN E. HOFFMAN, JR., Bankruptcy Judge.

Section 109(e) of the Bankruptcy Code provides that only a debtor who "owes, on the date of the filing of the [bankruptcy] petition, noncontingent, liquidated, unsecured debts of less than $307,675" is eligible for Chapter 13 relief. 11 U.S.C. § 109(e).¹ On October 14, 2005 ("Petition Date"), Bradley T. Smith ("Smith" or "Debtor") filed his Chapter 13 petition. On the Petition Date, Smith was a defendant in a pending civil enforcement action brought by the United States Securities and Exchange Commission ("SEC") in the United States District Court for the Southern District of Ohio ("District Court"). In the District Court action,² the SEC alleged that Smith had violated the anti-fraud provisions of federal securities laws and sought, in addition to other forms of relief, recovery from the Debtor of more than $2 million. Less than two months after the Petition Date, the District Court entered judgment against Smith in the amount of $2,095,517.93, plus prejudgment interest in the amount of $198,679.79, for a total of $2,294,197.72. The District Court also imposed a civil penalty against Smith in the amount of $120,000.

Arguing that Smith is ineligible to be a Chapter 13 debtor because his noncontingent, liquidated, unsecured debts on the Petition Date exceeded the $307,675 limitation imposed by § 109(e), the SEC seeks dismissal or conversion of this case. The SEC also asserts that Smith acted in bad faith by failing to list the amount of its claim in his schedules. Smith maintains that he is eligible for Chapter 13 relief, asserting that, as of the Petition Date, the SEC's claim remained both contingent and unliquidated. Smith also argues that, because the amount of the SEC's claim was not readily ascertainable on the Petition Date, he did not act in bad faith by listing its amount as "unknown."

Although the terms "noncontingent" and "unliquidated" are not defined in the Bankruptcy Code, case law from the Sixth Circuit and elsewhere establishes that a debt is noncontingent if all events giving rise to liability occurred prior to the filing of a debtor's bankruptcy petition. A debt is deemed liquidated if, on the date of filing, its amount is readily determinable by simple mathematical calculation; it is deemed unliquidated if a determination of the debt amount depends upon the future exercise of discretion by a court or finder of fact. As explained below, because the District Court made a prepetition liability determination against Smith — by entering summary judgment in favor of the SEC on its securities fraud claims — his debt to the SEC was noncontingent on the Petition Date. However, as of the Petition Date, the District Court had deferred a ruling on the remedies to be imposed against Smith and his co-defendants — and had scheduled a four-day trial on the issue of remedies. Because resolution of the remedies issues would have required the District Court's exercise of judgment and discretion — rather than a mathematical calculation — the amount of the SEC's claim was not readily determinable and, thus, it remained unliquidated on the Petition Date. Excluding the SEC's unliquidated Smith's liquidated, unsecured debts did not exceed the debt limitation imposed by § 109(e) on the Petition Date. The Debtor is accordingly eligible for Chapter 13 relief.

I. Jurisdiction

The Court has jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. 28 U.S.C. § 157(b)(2).

II. Procedural Background

A. The Chapter 13 Case

Smith filed his schedules, his Statement of Financial Affairs, and a proposed Chapter 13 plan ("Plan") (Doc. 10) on the Petition Date. On his Schedule F (Creditors Holding Unsecured Nonpriority Claims), Smith listed the SEC as a general, unsecured creditor. The amount of the SEC's claim, which was scheduled as contingent and unliquidated, was listed as "unknown." The remaining debts listed on Schedule F, none of which were scheduled as contingent, unliquidated or disputed, totaled $258,184.13.

On December 20, 2005, Frank M. Pees, the standing Chapter 13 Trustee, filed an objection to confirmation of the Plan (Doc. 16), asserting that (1) the Plan did not comply with 11 U.S.C. § 1325(a)(1) because the Debtor had failed to file a complete list of creditors, Statement of Financial Affairs, and schedules as required by 11 U.S.C. § 521, (2) the Plan failed to meet the "best-interest-of-creditors test," which is set forth in § 1325(a)(4) of the Code, because the return to creditors under the Plan was less than they would receive in a Chapter 7 liquidation, and (3) the Plan was not feasible, thus violating 11 U.S.C. § 1325(a)(6). Because the Plan was not in a posture for confirmation prior to the scheduled January 10, 2006 hearing date, an order resetting the confirmation hearing for February 14, 2006 at 2:00 p.m. was entered by the Court (Doc. 18). Smith then filed an amended Chapter 13 plan on February 13, 2006 ("Amended Plan") (Doc. 21).

On February 13, 2006 — approximately four months after the Petition Date — the SEC filed its motion to dismiss or convert the Debtor's case ("Dismissal Motion") (Doc. 23 and Doc. 24). The SEC also filed a motion requesting that the Court establish an expedited briefing schedule and set an expedited hearing on the Dismissal Motion (Doc. 25). The Court denied that request by order entered on February 23, 2006 (Doc. 28) and set the Dismissal Motion for hearing on March 21, 2006 — the same date that the Court was scheduled to consider confirmation of the Amended Plan. Smith filed his response to the Dismissal Motion ("Response") on March 6, 2006 (Doc. 32), and the SEC filed a reply brief on March 17, 2006 ("SEC Reply Br.") (Doc. 33).

On March 3, 2006, the Trustee filed an objection to confirmation of the Amended Plan (Doc. 31). In his objection, the Trustee — in addition to opposing confirmation of the Amended Plan on other grounds — joined the SEC in challenging Smith's eligibility for Chapter 13 relief. The Trustee's eligibility argument was presumably based on the SEC's filing of a proof of claim on February 9, 2006 (Claim No. 3), in the amount of $2,414,197.72. The filing of the SEC's proof of claim also created another bar to confirmation — if the SEC's claim were allowed in its full amount, Smith would be unable to complete payments under the Amended Plan within the 60-month period prescribed by 11 U.S.C. § 1322(d).

The Debtor filed a second amended plan ("Second Amended Plan") on March 21, 2006 (Doc. 34). The Second Amended Plan calls for graduated payments over a 57-month period and provides for payment of a 1.5% dividend to holders of general, unsecured claims. The hearing on confirmation of the Second Amended Plan was continued until May 16, 2006 by agreement of the Debtor and the Trustee. The hearing on the Dismissal Motion also was continued to that date. Yet another objection to the Second Amended Plan was filed by the Trustee on April 7, 2006 (Doc. 40). The Trustee's objection to the Second Amended Plan again raised the issue of Smith's eligibility for Chapter 13 relief under § 109(e), noted that the length of the Second Amended Plan exceeded § 1322(d)'s 60-month tithe limitation, and asserted that the Second Amended Plan was not feasible.

The Court conducted a hearing on the Dismissal Motion on May 16, 2006. Following oral arguments, counsel for the Debtor sought leave to file a supplemental brief on the issue of Smith's eligibility for Chapter 13 relief. The Debtor filed his Brief in Support of His Oral Argument and in Opposition to the SEC's Reply Memorandum on June 15, 2006 ("Debtor's Final Br.") (Doc. 49). On July 21, 2006, the SEC filed its Brief in Response to Debtor's Post Oral-Argument Brief Concerning the SEC's Motion to Dismiss or Convert Debtor's Bankruptcy Petition ("SEC's Final Br.") (Doc. 58). The confirmation hearing was continued pending the Court's determination of whether Smith is eligible to be a Chapter 13 debtor.

B. The SEC Civil Enforcement Action

The SEC commenced its civil enforcement action in District Court on August 11, 2004, seeking relief from Smith and certain entities under his control — Continental Midwest Financial Inc. ("Continental"); Scioto National Inc. ("Scioto"); Bancshareholders of America, Inc. ("BSA"); and Bancshare Investors Brokerage, Inc. ("BSIB") (collectively, "Corporate Defendants"). In the District Court action, the SEC alleged violations of federal securities laws in connection with the private offerings of Scioto and Continental stock. Specifically, the SEC alleged violations of § 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a); § 10(b) of the Securities and Exchange Act ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b(5) thereunder, 17 C.F.R. § 240.10b-5; § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); and § 20(e) of the Exchange Act, 15 U.S.C. § 78t(e). According to the SEC's complaint, the Continental and Scioto stock offerings — and the fraudulent conduct by Smith that gave rise to the alleged violations of federal securities law — occurred sometime between early 2002 and July 2004. The SEC's complaint requested injunctive and equitable relief, including the disgorgement of ill-gotten gains generated from the two offerings in an amount exceeding $2 million. Smith and the other defendants filed a joint answer on September 10, 2004 (Dist. Ct.Doc. 16).

The District...