Pearson, Matter of
| Citation | 773 F.2d 751 |
| Decision Date | 09 October 1985 |
| Docket Number | No. 84-1045,84-1045 |
| Parties | , 13 Collier Bankr.Cas.2d 749, Bankr. L. Rep. P 70,787 In the Matter of Timothy R. PEARSON and Mary T. Pearson, Debtors. COMPREHENSIVE ACCOUNTING CORPORATION, Plaintiff-Appellant, v. Timothy R. PEARSON and Mary T. Pearson, Defendants-Appellees. |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
Robert J. Franzinger, Dykema, Gossett, Spencer, Goodnow and Trigg, Kathleen McCree Lewis, Leland L. Bull (argued), Detroit, Mich., for plaintiff-appellant.
Louis P. Rochkind, Jonathan S. Green (argued), Jaffe, Snider, Raitt & Heuer, Detroit, Mich., for defendants-appellees.
Before ENGEL, KEITH and JONES, Circuit Judges.
Comprehensive Accounting Corporation (Comprehensive) appeals from the order of the United States District Court for the Eastern District of Michigan affirming the order of the bankruptcy court that confirmed the Chapter 13 plan of debtors Timothy R. Pearson and Mary T. Pearson. Comprehensive contends that the Pearsons are not eligible for relief under Chapter 13 because the Pearsons owed, on the date of the filing of their petition, noncontingent, liquidated, unsecured debts in excess of the $100,000 limit of section 109(e), 11 U.S.C. Sec. 109(e). We affirm.
Comprehensive is in the business of supplying accountants with bookkeeping, accounting and tax service clients (accounts), marketing services, and data processing services. Timothy R. Pearson is an accountant who, with his wife Mary, entered into a series of agreements with Comprehensive in March of 1981 whereby Timothy R. Pearson, Inc. (Pearson, Inc.), a corporation created by the Pearsons, purchased a portion of Comprehensive's accounting practice. To insure payment, Comprehensive took a security interest in the accounting practice so purchased. Comprehensive also required and obtained from Timothy and Mary their guarantee of Pearson, Inc.'s payments of the purchase price.
Pearson, Inc. defaulted on the sales contract. On August 20, 1982, the Pearsons and Pearson, Inc. filed a complaint in Oakland County, Michigan Circuit Court seeking rescission of the agreements with Comprehensive and other relief on grounds of On March 16, 1983, Timothy Pearson notified the clients of Pearson, Inc. by letter that Pearson, Inc. would soon be filing a petition in bankruptcy and would no longer be able to serve them. The letter, however, stated that Timothy Pearson individually would be starting an accounting practice and would be pleased to serve them. On March 18, 1983, the Pearsons filed a petition in bankruptcy under Chapter 13 of the Bankruptcy Code, and on March 28 filed their Chapter 13 statement. The Chapter 13 statement listed Comprehensive as having both a secured and an unsecured debt, but stated that the amount of each was unknown and in dispute.
fraud and unconscionability. Meanwhile, Comprehensive initiated arbitration proceedings pursuant to the mandatory and binding arbitration clauses of the agreements. Subsequently, the civil suit, but not the arbitration proceedings, was dismissed. The arbitrator on December 20, 1982, rendered an award including attorneys' fees in favor of Comprehensive and against the Pearsons and Pearson, Inc. jointly and severally for $127,450.12. The award also provided that the collateral--the accounts receivable, work papers, etc.--was to be transferred to Comprehensive upon failure of the Pearsons or Pearson, Inc. to satisfy the judgment within thirty days. On December 28, 1982, Comprehensive instituted a civil action in Cook County, Illinois Circuit Court to confirm the arbitration award.
On May 5, 1983, Comprehensive filed its proof of claim stating that its claim was secured by the accounts "transferred" by Pearson, Inc. to Timothy Pearson. Comprehensive also sought relief from the automatic stay to foreclose on the security interest given by Pearson, Inc. in the collateral described in the agreements. The Pearsons disputed the amount of Comprehensive's claim, the secured nature of the claim, and their possession of the collateral. In addition, the Pearsons on March 28, 1983, filed a complaint to avoid, as a preference, an agreement with Comprehensive which was recorded as a mortgage against the Pearsons' residence. The bankruptcy court set aside the agreement as a preference on May 24, 1983.
On May 23, 1983, the Pearsons amended their Chapter 13 statement listing Comprehensive as an unsecured creditor with a claim of $127,450.12. The Pearsons amended the statement to comport with the proofs of claim filed by the creditors, but reserved the right to contest the validity and amount of any such claim. At the confirmation hearing on May 25, 1983, Comprehensive objected to the confirmation of the Pearsons' Chapter 13 plan on the ground that the Pearsons did not meet the threshold eligibility standard set forth in section 109(e) of the Bankruptcy Code. Comprehensive contended that the Pearsons had more than $100,000 of noncontingent, liquidated, unsecured debt as shown by the amended Chapter 13 statement. The bankruptcy court held that at the time of filing the bankruptcy petition the unsecured debt was less than $100,000 and the subsequent amended statement did not cause the Pearsons to then become ineligible. The district court affirmed holding that the Pearsons met the eligibility standard at the time the bankruptcy petition was filed, and that events subsequent to the filing of the petition cannot disqualify the Pearsons.
The issue in this case is whether the Pearsons met the Chapter 13 eligibility requirement of section 109(e) which provides:
(e) Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $100,000 and noncontingent, liquidated, secured debts of less than $350,000, or an individual with regular income and such individual's spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $100,000 and noncontingent, liquidated, secured debts of 11 U.S.C. Sec. 109(e). Comprehensive claims that the Pearsons had more than $100,000 of noncontingent, liquidated unsecured debts because the Pearsons' amended statement listed Comprehensive as an unsecured creditor with a claim of $127,450.12. The Pearsons contend that Comprehensive's claim was not liquidated on the date of filing because at that time there was a substantial dispute regarding liability and whether the claim was secured or unsecured. Whether the Pearsons had on the date of filing their petition noncontingent, liquidated, unsecured debts in excess of $100,000 is a difficult issue because the Bankruptcy Code defines neither "contingent" nor "liquidated."
less than $350,000 may be a debtor under chapter 13 of this title.
The purpose of Chapter 13 is to enable an individual, under court supervision and protection, to develop a repayment plan under which creditors would be paid over an extended period rather than having the individual liquidate his assets under a straight Chapter 7 bankruptcy. Congress was especially concerned with individuals who are able to keep up with their obligations in normal times, but did not prepare for emergencies or unexpected events such as a serious illness in the family or a breadwinner being laid off from his or her job. H.R.Rep. No. 595, 95th Cong., 1st Sess. 116 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5963, 6077. Chapter 13 allows the debtor to retain his property and avoid the stigma of a straight bankruptcy. The benefit to creditors is that their losses will be significantly less than if their debtors opt for straight bankruptcy. H.R.Rep. No. 595 at 118, reprinted in 1978 U.S.Code Cong. & Ad.News at 6079.
Although consumer debtors would have rather paid creditors over an extended period of time, the "overly stringent and formalized Chapter XIII" of the old Bankruptcy Act discouraged overextended debtors from doing so. H.R.Rep. No. 595 at 117; reprinted in 1978 U.S.Code Cong. & Ad.News at 6077. The Bankruptcy Reform Act of 1978 altered Chapter XIII to make it more accessible, attractive, and easier for consumers to work out repayment plans. First, Congress eliminated the requirement that a plan be approved by a majority of creditors by conferring upon the bankruptcy judge the sole authority to confirm or reject any plan. 11 U.S.C. Sec. 1325; H.R.Rep. No. 595 at 123-24; reprinted in 1978 U.S.Code Cong. & Ad.News at 6084-85. Second, Congress provided additional incentives for a debtor to file under Chapter 13 rather than Chapter 7. Virtually all debts provided for in the Chapter 13 plan are discharged, but this is not so under Chapter 7. 11 U.S.C. Secs. 523 and 1328; H.R.Rep. No. 595 at 118; reprinted in 1978 U.S.Code Cong. & Ad.News at 6079. Third, Congress expanded the class of individuals who are eligible for Chapter 13 relief. Under the old Act, Chapter XIII was available only for wage earners. Under the new Code individuals with stable and regular income and individuals who operate businesses as sole proprietors became eligible.
Although primarily designed for consumers who overburdened themselves with debt, the Bankruptcy Reform Act of 1978 extended Chapter 13 eligibility to small businessmen who are self-employed because H.R.Rep. No. 595 at 119; reprinted in 1978 U.S.Code Cong. & Ad.News at 6079. Generally, Chapter 13 is simpler, speedier, and less expensive than Chapter 11. Congress desired to give small sole proprietors the benefit of Chapter 13, but also established dollar limits to prevent...
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