Matter of Bowers

• Decision Date: 30 December 1981
• Docket Number: Bankruptcy No. 2-81-00314.
• Citation: 16 BR 298
• Parties: In the Matter of Donald D. BOWERS, Alleged Debtor.
• Court: U.S. Bankruptcy Court — District of Connecticut

16 B.R. 298 (1981)

In the Matter of Donald D. BOWERS, Alleged Debtor.

Bankruptcy No. 2-81-00314.

United States Bankruptcy Court, D. Connecticut.

December 30, 1981.

Martin Chorches, and Donald MacKie, West Hartford, Conn., for alleged debtor.

Joel N. Sable, of Berman & Sable, Hartford, Conn., for Hartford Nat. Bank.

Michael S. Schenker, Hartford, Conn., and Ronald Abramson, New York City, for U.S. Pioneer Electronics Corp.

Thomas Gugliotti, of Schatz & Schatz, Ribicoff & Kotkin, Hartford, Conn., for United Bank and Trust Co.

Thomas J. Shortell, Hartford, Conn., for H.H. Scott, Inc.

MEMORANDUM AND DECISION

ROBERT L. KRECHEVSKY, Bankruptcy Judge.

This proceeding raises as its main issue the circumstances under which creditors may be disqualified as petitioners in an involuntary chapter 7 petition.

BACKGROUND

An involuntary petition was initiated against Donald D. Bowers (Bowers), a resident of Burlington, Connecticut, on March 3, 1981, by three creditors, Hartford National Bank and Trust Co. (HNB), United Bank and Trust Co. (UBT), both located in Hartford, Connecticut, and H.H. Scott, Inc. (Scott), located in Wilburn, Mass.¹ The petition alleged that HNB is the holder of a promissory note in the amount of $92,499.00 executed by Tunxis Corporation (Tunxis),² that UBT is the holder of four Tunxis promissory notes and one installment loan contract totalling $142,609.16 and that Scott is owed $133,261.62 on open account by Tunxis. All of these obligations are stated to be endorsed or personally guaranteed by Bowers. The petition claims that Bowers is generally not paying his debts as such debts become due and prays that the court enter an order for relief against him pursuant to 11 U.S.C. § 303.³

Bowers moved to dismiss the involuntary petition on the grounds that the petitioners are holders of "extraordinary" debt instruments and he has been paying his "ordinary" debts as they become due, that Scott does not qualify as a petitioning creditor because its claim is contingent as to liability, and that UBT is fully secured. Thereafter, pursuant to 11 U.S.C. § 303(c) and Bankruptcy Rule 104(e),⁴ U.S. Pioneer Electronics Corp. (Pioneer) located in Moonachie, New Jersey intervened as a petitioning creditor, claiming that Bowers had guaranteed the payment of defaulted Tunxis notes with a balance due of $91,000.00.

In his answer and special defenses to the amended involuntary petition, Bowers repeated the allegations in his motion to dismiss and further claimed that Scott and Pioneer lack standing to be petitioners because of their failure to register with the Connecticut Secretary of State as foreign corporations transacting business in Connecticut pursuant to Conn.Gen.Stat. § 33-396 (1980).⁵ Hearings on the involuntary petition and the motion to dismiss were held on July 2, 1981 and August 12, 1981, and post-hearing briefs have been submitted.

DISCUSSION

A. Whether Scott has a claim contingent as to liability.

Bowers admits that Tunxis owes Scott over $110,000.00 for equipment purchases and that he signed a guaranty agreement (guaranty) with Scott on February 20, 1980, which provided that he would pay the amounts due Scott arising out of sales of Scott products to Tunxis. He argues that Scott's claim is contingent as to liability, because of a provision in the guaranty, thereby disqualifying Scott from being a petitioning creditor. The guaranty in paragraph 9(c) requires Scott to obtain a judgment against Tunxis before Scott can proceed against Bowers as guarantor.⁶ Since Scott does not claim that it has received a judgment against Tunxis, Bowers contends that Scott's claim against him remains contingent as to liability. In the schedules of debts filed by Tunxis in its bankruptcy case, Scott is listed as an unsecured creditor in the amount of $109,753.68 and the debt is not claimed to be disputed, contingent or unliquidated.

A contingent claim is one where liability attaches upon the occurrence of a future event. In re Duty Free Shops Corp., 6 B.R. 38, 39 (Bkrtcy., S.D.Fla.1980). Claims which are disputed as to amount are not contingent. Id. at 39; In re All Media Properties, Inc., 5 B.R. 126, 131-32, 6 B.C.D. 586, 587-88 (Bkrtcy., S.D.Tex.1980). The Bankruptcy Act of 1898 (Act) in § 59(b) required that petitioning creditors in involuntary petitions have "provable claims not contingent as to liability." From 1952 to 1962, § 59(b) read slightly differently and required that petitioning creditors have "provable claims liquidated as to amount and not contingent as to liability." In a case arising under that earlier section, the court distinguished between contingent and conditional claims and held that "the fact that the payment of a note may be conditional does not mean that the liability for that payment is contingent." In re Trimble Co., 339 F.2d 838, 844 (3rd Cir. 1964). In Trimble, the petitioning creditors held notes due from the alleged debtor corporation which could not be enforced because the corporation was insolvent and the notes represented stock redemptions. Under state law such notes could not be paid until the corporation had a sufficient earned surplus. The alleged debtor claimed that these claims were therefore contingent. The Trimble court concluded that the requirement of an earned surplus was a condition of payment only and that the petitioning creditors did not hold claims that were contingent as to liability. I believe the same analysis is appropriate in this proceeding and that the requirement of a judgment against Tunxis, like the requirement of an earned surplus, is a condition of payment only. Furthermore, when Tunxis filed its chapter 11 petition and listed Scott's debt as liquidated, noncontingent and undisputed, the requirement that Scott first obtain a judgment against Tunxis before seeking payment from Bowers became useless.⁷ I conclude that Scott's claim against Bowers is not contingent as to liability.

B. Whether failure to obtain a certificate of authority disqualifies Scott and Pioneer.

Bowers next contends that both Scott and Pioneer lack standing as petitioners because they were foreign corporations doing business in Connecticut and admittedly have not obtained a certificate of authority from the Secretary of State pursuant to Conn.Gen.Stat. § 33-396 (1980).⁸ The penalty for transacting business without first obtaining such a certificate includes not being "permitted to maintain any action, suit, or proceeding in any court of this state." Id. § 33-412(a).

In his brief, Bowers cites cases which stand for the proposition that federal courts sitting in diversity of citizenship cases must apply the substantive law of the state in which they sit. Erie R.R. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938); Armor Bronze & Silver Co. v. Chittick, 221 F.Supp. 505 (D.Conn.1963). He then says that since Scott and Pioneer failed to obtain a certificate of authority according to state law and would be unable to maintain an action in state court, they should be barred from bringing an involuntary petition in a bankruptcy court. Scott and Pioneer contend that noncompliance with § 33-396 is immaterial since that statute cannot bar a foreign corporation from maintaining an action in a federal court based on federal law.

Although no published opinions appear to have dealt with this specific issue under the Bankruptcy Reform Act, there is authority that a failure to qualify as a foreign corporation conducting intrastate business does not impair a creditor's ability to exercise the rights of a petitioning creditor under chapter X of the former law. In re Diversified Development Corp., 341 F.2d 58, 59 (7th Cir. 1965). See also In re Leeds Homes, Inc., 332 F.2d 648, 650 (6th Cir. 1964); In re V-I-D, Inc., 198 F.2d 392 (7th Cir. 1952), cert. denied, Kelley, Glover & Vale v. Kramer, 344 U.S. 914, 73 S.Ct. 337, 97 L.Ed. 705 (1953). The rationale is that while a federal court sitting in diversity cases must act like a state court, Woods v. Interstate Realty Co., 337 U.S. 535, 69 S.Ct. 1235, 93 L.Ed. 1524 (1949); Trane Co. v. Trane Manufacturing, Inc., 190 F.Supp. 443, 444 (D.Conn.1960), a bankruptcy court does not sit as if it were only another state court when it considers who may be petitioning creditors. Rather, bankruptcy courts are created pursuant to Art. 1, § 8 of the U.S. Constitution as federal courts to take original and exclusive jurisdiction of bankruptcy cases. Provisions for the qualifications of those filing cases and claims in the bankruptcy court are governed by federal legislation. State law is utilized only to determine if the creditor holds a claim, not how and what claims shall be allowed. Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162 (1946). The Diversified case noted that while the Illinois doorclosing statute rendered a claim unenforceable in state courts, such claims are not void. 341 F.2d at 60. The same is true under the Connecticut statute.⁹ Based on this authority, I hold that Pioneer and Scott are not disqualified as petitioning creditors in this proceeding because of their failure to obtain a certificate of authority.¹⁰

C. Whether United Bank is a fully secured creditor.

Bowers avers that UBT is fully secured and therefore lacks standing as a petitioner because a UBT note signed by him and his wife, Florence Bowers (Florence), in the sum of $49,000.00 is fully secured by a second mortgage on real property owned by Florence.¹¹ In addition to this note, Bowers guaranteed four other notes which he argues are adequately secured by the proceeds of the liquidation of Tunxis's assets and various attachments UBT obtained against Bowers' property.¹²

Bowers' argument as to UBT's fully secured status fails. The bulk of the property presently securing the notes in question belongs to Tunxis or Florence rather than to Bowers. Section 303(b)(1) provides that an involuntary case is commenced only if claims held by...