Opinion
Case No. 97-19167-SSM
June 10, 1998
Klinette H. Kindred, Esquire, VA, for the debtor
Gerald M. O'Donnell, Esquire, Alexandria, Virginia, Chapter 13 trustee
MEMORANDUM OPINION
This matter is before the court on the debtor's motion to determine his eligibility to be a debtor under chapter 13 of the Bankruptcy Code. The controversy arises because the debtor lists $342,125 of liquidated and noncontingent unsecured claims on his schedules. The debtor, however, maintains that $178,000 of those claims, which he scheduled as "disputed," are unenforceable under Virginia law because they arise from the purchase of "Comcheks" used to gamble at casinos. The issue before the court, therefore, is whether debts, arguably unenforceable under Virginia law and therefore "disputed," can be excluded from the debt limits for chapter 13 eligibility established by § 109(e), Bankruptcy Code.
This is the amount the debtor asserts is disputed in his motion; as noted below, Schedule F lists $329,255 in unsecured claims as disputed.
After several continuances of the debtor's motion in order to allow the bar date for filing claims to pass and to permit the debtor to object to any claims, a hearing was held on May 19, 1998, at which counsel for the debtor, counsel for one of the creditors, and the chapter 13 trustee appeared. At the conclusion of the hearing, the court took the matter under advisement to review the applicable law. For the reasons stated herein, the court concludes that the disputed debts must be included in the limitations on the amount of unsecured debt under § 109(e), and that the debtor is not eligible for chapter 13 relief.
Facts
The debtor, Richard M. Powers, a self-employed delivery contractor, filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code in this court on December 10, 1997. Relevant to the present motion, the debtor lists on his schedules $342,125 in liquidated, noncontingent, nonpriority unsecured claims. These claims are held by 80 different creditors, and the vast majority of the claims consist of credit card obligations. Of the total amount, $329,255 is listed as "disputed" on Schedule F. In the motion and the chapter 13 plan, however, the debtor challenges only $178,000 of the claims, which he argues are void under Va. Code. Ann. § 11-14 because they are loans made for the purpose of gambling. Specifically, the debtor asserts that he incurred $178,000 of the charges on his numerous credit cards to purchase "Comcheks" for use at various casinos to gamble. The debtor contends that if this amount is declared void under Va. Code Ann. § 11-14, he has only $172,000 of enforceable unsecured debts, well within the statutory limit of $250,000 under § 109(e), Bankruptcy Code, and thus he is eligible to be a chapter 13 debtor.
The debtor has proposed a repayment plan which provides for payment to the chapter 13 trustee of $800.00 per month for 36 months, about a third of which would go to pay secured claims and administrative expenses, and the balance to pay a 5% dividend to unsecured creditors. That plan has not been confirmed.
To date, 71 creditors have filed proofs of claim. The deadline for filing proofs of claim by non-governmental entities expired on April 7, 1998. The debtor has objected, at least in part, to 16 of the claims.
Section 11-14 of the Virginia Code provides:
All wagers, conveyances, assurances, and all contracts and securities whereof the whole or any part of the consideration be money or other valuable thing won, laid, or bet, at any game, horse race, sport or pastime, and all contracts to repay any money knowingly lent at the time and place of such game, race, sport or pastime, to any person for the purpose of so gaming, betting, or wagering, or to repay any money so lent to any person who shall, at such time and place, so pay, bet or wager, shall be utterly void.
"Comcheks" are a type of guaranteed funds, similar to a money order, provided by a company called Comdata Network, Inc. Comcheks are typically used in two situations: by truck drivers at truck stops (which allows the trucking company to provide for the trucker's living expenses without the need for large cash advances or company credit cards), and by patrons at gambling casinos. See United States v. Stafford, 136 F.3d 1109, 1111 (7th Cir. 1998) (truck drivers), modified, 136 F.3d 1115 (7th Cir. 1998); United States v. Tanksley, 35 F.3d 567 (table), 1994 WL 502659, at *1 (6th Cir. 1994) (unpublished) (same); Comdata Network, Inc. v. United States, 21 Cl.Ct. 128, 129 (Cl.Ct. 1990) (same). With regard to Comchek facilities at casinos, a typical transaction is described as follows:
Every casino has a large number of Comchek machines strategically located near the cash cages. An individual who wants to obtain a cash advance on his credit card swipes the card through the Comchek machine and punches in the desired amount. Comchek verifies the account and the available balance and generates a check behind the cash cage window. In order to obtain his cash, the patron need only show the cashier his credit card and a drivers' license. The Comchek check is cashed and the patron receives his cash advance.
Meredith A. Cot, The Case of the Collusive Cardholders, 1996 NOV NAAG Fin. Crimes Rep. (National Association of Attorneys General: Financial Crimes Report) 8 (Oct-Nov 1996) (available on WESTLAW).
In response to a question on the Statement of Financial Affairs that asks the debtor to list all losses from, among other causes, gambling, the debtor listed $178,800 of "gambling losses," not otherwise described.
Conclusions of Law and Discussion.
Chapter 13 of the Bankruptcy Code offers an alternative to liquidation under chapter 7 by allowing a financially-strapped debtor with regular income to keep his or her assets and establish a plan to pay creditors out of future income. In re Crippin, 877 F.2d 594, 596 (7th Cir. 1989). Section 109(e) of the Bankruptcy Code, however, restricts the availability of chapter 13 relief to individuals whose debts do not exceed a specific ceiling:
Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, secured debts of less than $750,000 . . . may be a debtor under chapter 13 of this title.
(Emphasis added). Eligibility for chapter 13 relief is restricted because chapter 13 is intended to provide reorganization-type relief to consumers and small sole proprietors under a simpler, speedier, and less-expensive process than chapter 11 provides. Comprehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751, 753 (6th Cir. 1985); Craig Corp. v. Albano (In re Albano), 55 B.R. 363, 365 (N.D. Ill. 1985); 2 Collier on Bankruptcy ¶ 109.06, at 109-34 (Lawrence P. King, ed., 15th ed. rev. 1998). The ceiling on the amount of debt — both secured and unsecured — is intended to ensure that those persons for whose benefit chapter 13 is directed are those who utilize its provisions. 2 Collier on Bankruptcy ¶ 109.06, at 109-34.
Effective for cases filed after April 1, 1998, the Judicial Conference of the United States was required to adjust certain dollar amounts used in the Bankruptcy Code to reflect changes in the Consumer Price Index, including the dollar limitations present in § 109(e). See § 104(b), Bankruptcy Code. Accordingly, the Judicial Conference adjusted, for the dollar amounts listed in § 109(e), the $250,000 limitation for unsecured debt to $269,250 and the $750,000 limitation for secured debt to $807,750. See 63 Fed. Reg. 7179, 7179 (1998). Because this case was filed before April 1, 1998, however, the new dollar limitations do not apply.
The issue before the court may be simply stated: whether debts for which the debtor disputes any liability — in the present case, the credit card debts incurred to purchase Comcheks for gambling — must be included for purposes of the debt ceilings of § 109(e). As to this issue, courts have divided. The majority position is that a liquidated, non-contingent claim whose validity is subject to a bona-fide dispute nevertheless is included in the calculation under § 109(e) for determining eligibility to be a chapter 13 debtor. E.g., In re Claypool, 142 B.R. 753, 755 (Bankr. E.D. Va. 1990) (Tice, J.); Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 304-05 (2d Cir. 1997), aff'g, In re Mazzeo, 213 B.R. 625 (E.D.N.Y. 1996); United States v. Verdunn, 89 F.3d 799, 802 n. 9 803 (11th Cir. 1996); In re Knight, 55 F.3d 231, 234-35 (7th Cir. 1995); Barcal v. Laughlin, (In re Barcal), 213 B.R. 1008, 1012, 1014-15 (Bankr. 8th Cir. 1997); United States v. Dallas, 157 B.R. 912, 913 (S.D. Ala. 1993); Vaughan v. Central Bank of the South (In re Vaughn), 36 B.R. 935, 938-39 (N.D. Ala. 1984), aff'd, 741 F.2d 1383 (11th Cir. 1984); Sylvester v. Dow Jones and Company (In re Sylvester), 19 B.R. 671, 673 (Bankr. 9th Cir. 1992); In re Solomon, 166 B.R. 832, 837 (Bankr. D. Md. 1994) (noting that it is irrelevant for purposes of § 109(e) whether the debtor "disputes" a debt), aff'd, 173 B.R. 325 (D. Md. 1994), rev'd on other grounds, 67 F.3d 1128 (4th Cir. 1995); In re Pennypacker, 115 B.R. 504, 506-07 (Bankr. E.D. Pa. 1990); Albano, 55 B.R. at 368. These courts reason that to hold otherwise "would allow debtors to bootstrap themselves into chapter 13 eligibility simply by disputing liability on the requisite amount of their claims." Claypool, 142 B.R. at 755; see also Mazzeo, 131 F.3d at 305; Albano, 55 B.R. at 368. As noted by the court in Albano:
Because the issue is not squarely presented by the present motion, the court expresses no opinion on the ultimate allowability of such claims. The court notes that the debtor has filed a number of objections to claims on the ground that they represent gambling debts and are void. Hearings have been set on two of those objections.
The court need not enter into the thicket of the distinctions among "contingent," "non-liquidated" and "disputed" debts. See generally Mazzeo, 131 F.3d at 301-05; Albano, 55 B.R. at 365-68. In the present case, the debtor's schedules reflect that all of the debts are both "non-contingent" and "liquidated", with a vast majority of the amounts being "disputed." Hence, the sole question before the court is whether "disputed" debts are taken into account in determining eligibility under § 109(e).
Section 109(e) erects a threshold limitation on persons or sole proprietorships eligible for filing under Chapter 13. Inevitably some claims presented to a Chapter 13 trustee will be disallowed if the debtor has a valid defense against them. But it would tend to generate a circular (and self-defeating) barrier to administration of Chapter 13 proceedings if the bankruptcy court had to pass on the merits of all claims before the proceeding could even get under way. . . . [I]f a "bona fide dispute" were alone sufficient to take a debt out of the Section 109(e) calculation, the bankruptcy court would have to look into each dispute to determine whether it is bona fide.
Albano, 55 B.R. at 368; see also Pennypacker, 115 B.R. at 506 (noting the "impractical burdens" that would be placed upon the court if each disputed debt must be litigated before determining chapter 13 eligibility). Furthermore, allowing the debtor to "dispute" the claim while in chapter 13 would promote costly litigation and delay — delay that is antithetical to the chapter 13 process — only for the bankruptcy court to potentially conclude in the end that the debtor was never eligible to be a chapter 13 debtor. Vaughn, 36 B.R. at 939.
Other courts, however, disagree, and hold that debts that are the subject of a bona-fide dispute are "unliquidated" claims for purposes of § 109(e) and accordingly are not taken into account in determining the debtor's eligibility. E.g., In re Lambert, 43 B.R. 913, 921 (Bankr. D. Utah 1984); In re King, 9 B.R. 376, 378 (Bankr. D. Or. 1981); see also United States v. May, 211 B.R. 991, 996-97 (M.D. Fla. 1997) (noting that a disputed debt can be an unliquidated debt); Nicholes v. Johnny Appleseed of Washington, (In re Nicholes), 184 B.R. 82, 90-91 (Bankr. 9th Cir. 1995) (holding that "the fact that a claim is disputed does not per se exclude the claim from the eligibility calculation under § 109(e)" but rather the court should determine whether the debt "is subject to ready determination and precision in computation of the amount due"); 2 Collier on Bankruptcy ¶ 109.06[2][c], at 109-40 ("A debt is not liquidated if there is a substantial dispute regarding liability or amount"). These courts conclude that "disputed" debts should not be counted as liquidated debts for purposes of determining chapter 13 eligibility because the entire debt is unliquidated until the underlying liability is resolved. Lambert, 43 B.R. at 919, 921. For example, in Lambert, the court looked to a multitude of factors in reaching this conclusion. First, it looked to the use of the term "debt" as opposed to "claim" under § 109(e) and concluded that Congress choose the term "debt" because it intended that the debtor's eligibility hinge upon "an actual obligation to pay as it exists in the contemplation of applicable law" or "the obligation to pay as asserted to the court by the debtor in its schedules or otherwise." Id. at 919. Furthermore, the court reasoned that the absence of the term "disputed" or "undisputed" from § 109(e) is not significant and does not necessarily mean that such debts are included when tallying a debtor's chapter 13 eligibility. Id. at 920.
This conclusion is simply contrary to the Bankruptcy Code's definition of "debt" as "a liability on a claim." § 101(12), Bankruptcy Code. Accordingly, this court does not find such reasoning persuasive.
The Fourth Circuit has not ruled on this issue. Nevertheless, having reviewed the applicable law, this court believes that the better reasoned approach — and the position the Fourth Circuit would adopt — is the majority position that holds that disputed debts are nevertheless taken into account in determining a debtor's eligibility for chapter 13 relief under § 109(e). The position of the court in Lambert that the omission of any reference to a "disputed" (or undisputed) debt in § 109(e) is not significant does not account for other provisions of the Bankruptcy Code. As the Supreme Court has noted, statutory construction is a holistic endeavor. United Savings Association of Texas v. Timbers of Inwood Forest Associates, 484 U.S. 365, 371, 108 S.Ct. 626, 630, 98 L.Ed.2d 740 (1988). Presumably, Congress could have excluded disputed debts — as it did contingent and unliquidated debts — from the calculation of debts when determining a debtor's chapter 13 eligibility under § 109(e). In other sections of the Bankruptcy Code, Congress has drawn a distinction between disputed debts and other classifications of "debts." See §§ 101(5)(A) ("`claim' means right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured") (emphasis added); 303(b)(1) ("An involuntary case against a person is commenced by the filing with the bankruptcy court of a petition under chapter 7 or 11 of this title by three or more entities, each of which is either a holder of a claim against such person that is not contingent as to liability or the subject of a bona fide dispute") (emphasis added); 702(a)(1) ("A creditor may vote for a candidate for trustee only if such creditor holds an allowable, undisputed, fixed, liquidated, unsecured claim") (emphasis added). If Congress has intended for disputed claims to be excluded from the determination of eligibility to be a debtor under chapter 13, it presumably would have done so. See Field v. Mans, 516 U.S. 59, 67, 116 S.Ct. 437, 442, 133 L.Ed.2d 351 (1995) ("`[W]here Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion'") ( quoting Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 300, 78 L.Ed.2d 17(1983)).
This court finds that the omission of "disputed" from the language of § 109(e) is significant. Section 109(e) requires that the debtor have "noncontingent, liquidated, unsecured debts of less than $250,000[.]" (Emphasis added). A "debt" is defined under the Code as a "liability on a claim"; a claim in turn is defined as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured[.]" §§ 101(5), (12), Bankruptcy Code (emphasis added). Section 109(e) limits the universe of debts that apply to the debt ceiling for chapter 13 eligibility by specifically excluding contingent and non-liquidated debts from the calculation. As a simple matter of statutory construction, the term "debt" in § 109(e) encompasses those claims which are disputed. See Barcal, 213 B.R. at 1012; Solomon, 166 B.R. at 837. Accordingly, because the debtor's non-contingent and liquidated unsecured debts exceed the maximum amount under § 109(e), the debtor is presently ineligible for relief under chapter 13 of the Bankruptcy Code. In order to give the debtor an opportunity to decide whether to convert his case to one under chapter 7 or 11 of the Bankruptcy Code, the court will stay the effect of this ruling for 10 days. If no notice of conversion is filed, however, the clerk will be directed to dismiss this case.
Of course, this court's holding that the debtor is ineligible for chapter 13 relief does not wholly foreclose reorganization-type relief. He can convert his case to one under chapter 11 of the Bankruptcy Code and propose a repayment plan under that chapter. See Toibb v. Radloff, 501 U.S. 157, 111 S.Ct. 2157 (1991) (individual not engaged in business is eligible to file a chapter 11 petition). Or, in the alternative, if his case is dismissed, he can assert any defenses to the Comchek claims in state court. If he is successful in lowering his debt to the statutory ceiling under § 109(e), he may then be eligible for chapter 13 relief.
A separate order will be entered consistent with this opinion.