In re Blair, Case No. 07-50262 (Bankr.S.D.Ohio 12/13/2007), Case No. 07-50262.

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In re: Richard J. Blair, Chapter 13, Debtor In re: Rowell B. Fernandez, Chapter 13, Debtor.

Case No. 07-50262.

Case No. 07-50540.

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

December 13, 2007.

MEMORANDUM OPINION AND ORDER ON MOTIONS OF THIRD STREET PROPERTIES AND DOWNTOWN PROPERTIES TO DISMISS CHAPTER 13 CASES

KATHRYN PRESTON, Bankruptcy Judge.

I. Introduction

This cause came on for hearing on May 17, 2007 to consider: (i) the joint motions (Case No. 07-50262, Doc. # 44; Case No. 07-50540, Doc. # 35) of Third Street Properties and Downtown Properties (collectively, the "Lessors") to dismiss the Chapter 13 cases of Richard J. Blair and Rowell B. Fernandez (collectively, the "Debtors" or, individually, "Debtor" or "Mr. Blair"or "Mr. Fernandez"); and (ii) the Debtors' responses thereto (Case No. 07-50262, Doc. # 51; Case No. 07-50540, Doc. # 42). Present at the hearing were the Debtors and their counsel, Robert E. Bardwell, and counsel for the Lessors, Geoffrey J. Peters. The Court has jurisdiction over these matters pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).

The Lessors have moved to dismiss the Chapter 13 case of each Debtor pursuant to § 109(e) of the Bankruptcy Code, asserting that each Debtor owed at the inception of his case noncontingent, liquidated, unsecured debts in excess of $307,675, which was the unsecured debt limitation imposed by § 109(e) at the time each bankruptcy case was commenced. Each Debtor maintains that he is eligible for Chapter 13 relief, asserting that the debts he owed to the Lessors were contingent and unliquidated and that the aggregate amount of his noncontingent, liquidated, unsecured debts was less than $307,675.

For the reasons explained below, the Court concludes that each Debtor is ineligible for Chapter 13 relief because each Debtor owed, as of his respective filing date, noncontingent, liquidated, unsecured debts in excess of $307,675.

II. Facts

Based on the evidence adduced at the hearing and the stipulations of the parties, the Court finds as follows:

The Debtors are two of the three equal shareholders of Tri-Source Title Agency, Inc. ("Tri-Source"), a company incorporated in Ohio in 2001 to provide real estate title and escrow closing services to the public.¹ From 2001 to 2003, Tri-Source grew to include three offices in Ohio and one in Colorado. To fund its growth and operate its business, Tri-Source incurred bank debt as well as debt to lessors of real property and personal property. As new business owners often do, the Debtors and Mr. Abrams guaranteed a substantial portion of their company's debt. In particular, the Debtors gave the Lessors written guarantees of Tri-Source's obligations under its nonresidential real property leases with the Lessors. These guarantees were guarantees of payment. Under the guarantees, before pursuing any one of the guarantors for payment, the Lessors were not required to exhaust their remedies against Tri-Source or the other two guarantors. In addition, Tri-Source also incurred, and the Debtors also guaranteed, among other debts, relatively large prepetition debts to U.S. Bank and equipment lessor IKON.

Tri-Source experienced financial difficulties, which the principals attempted to address by closing Tri-Source's Colorado location and consolidating its three Ohio locations into a single location in Franklin County, Ohio. Tri-Source vacated the premises leased from each of the Lessors and ceased paying rent, resulting in default. On or about October 19, 2006, Third Street obtained a judgment against the Debtors from the Franklin County Common Pleas Court in the amount of $157,989.92 on account of the Debtors' guarantees of Tri-Source's obligations under its lease with Third Street. On January 20, 2007, Tri-Source filed a petition for relief under Chapter 11 of the Bankruptcy Code (Case No. 07-50377). On January 16, 2007 and January 26, 2007 (collectively, the "Petition Dates"), respectively, Mr. Blair and Mr. Fernandez filed petitions for relief under Chapter 13 of the Bankruptcy Code.

Each Debtor filed his original schedules of assets and liabilities (collectively, the "Original Schedules") on his Petition Date. Thereafter, on April 1, 2007 and May 15, 2007, respectively, Mr. Blair and Mr. Fernandez filed amended schedules of assets and liabilities (the "Amended Schedules").² On the Original Schedules and on the Amended Schedules, the Debtors listed claims arising from, among other guarantees, the guarantees issued in favor of U.S. Bank, IKON, and the Lessors.

On Schedule D of the Original Schedules (listing creditors holding secured claims) each Debtor listed a claim of Third Street in the amount of $157,989.92 arising from the payment guarantee that the Debtors issued to Third Street. The guarantee, which was admitted into evidence during the hearing, is entitled "Unconditional and Continuing Guarantee" and provides that each guarantor "absolutely and unconditionally guarantees the prompt and punctual payment" of any debt to Third Street. On the Original Schedules, the Debtors characterized the claim of Third Street as contingent but did not characterize the claim as unliquidated. On the Amended Schedules, each Debtor again included the guarantee claim of Third Street on Schedule D in the amount of $157,989.92, but re-characterized the claim as both contingent and unliquidated. Although Schedule D purports to be a list of secured claimants, each Debtor described the claim as entirely unsecured. Moreover, Third Street filed a proof of claim as an unsecured nonpriority claim in its entirety.

On Schedule F of the Original Schedules (listing creditors holding unsecured nonpriority claims) each Debtor listed Downtown Properties, with a claim in the amount of $129,711.49, arising from the payment guarantee that the Debtors issued to Downtown Properties. The guarantee, which was admitted into evidence during the hearing, is substantially similar to the guarantee that the Debtors issued to Third Street. The guarantee is entitled "Unconditional and Continuing Guarantee" and provides that each of the guarantors "absolutely and unconditionally guarantees the prompt and punctual payment"of the claims of Downtown Properties.³ In their objection to dismissal, the Debtors calculate the amount owing under the Downtown Properties lease for periods prior to the Petition Dates as follows: "A review of the lease attached to DT's claim reveals that the sum of $136,281.33 [sic] was due under the lease between January of 2005 and January of 2007 (5 mos. @ $5,186.37, 12 mos. @ $5,430.76 and 8 ms. @ $5,639.63 = $136,218.33." On the Original Schedules the Debtors characterized the debt to Downtown Properties as contingent but not unliquidated. On the Amended Schedules, the Debtors again included the claim of Downtown Properties on Schedule F in the amount of $129,711.49, but re-characterized the claim as both contingent and unliquidated. Downtown Properties has filed a proof of claim in each case, asserting an entirely unsecured nonpriority claim against each Debtor.

On Schedule F of the Original Schedules and of the Amended Schedules, the Debtors scheduled other claims on account of their guarantees of Tri-Source debt. U.S. Bank and IKON hold the largest of these claims. On Schedule F, each Debtor listed a claim of U.S. Bank in the amount of $100,000, and a claim of IKON in the amount of $209,480.78. U.S. Bank and IKON attached to their proofs of claim the guarantees issued to them by the Debtors.⁴ The guaranty issued to U.S. Bank is entitled a "Continuing Guaranty (Unlimited)" and provides that the guarantor "hereby absolutely and unconditionally jointly and severally guarantees prompt payment" of the debt. Each guarantee issued to IKON also is a guaranty of payment. On the Original Schedules the Debtors characterized the claims of U.S. Bank and IKON as contingent but did not characterize the claims as unliquidated. On Schedule F of the Amended Schedules, the Debtors again included the claims of U.S. Bank and IKON in the amounts of $100,000 and $209,480.76, respectively, but re-characterized the claims as contingent and unliquidated. The Debtors scheduled the claims of U.S. Bank and IKON as unsecured, and U.S. Bank and IKON asserted that their claims are entirely unsecured in their proofs of claim.

III. Discussion

A. Eligibility for Chapter 13 Relief

As of each Petition Date, § 109(e) provides as follows:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $307,675 and noncontingent, liquidated, secured debts of less than $922,975 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 $307,675 and noncontingent, liquidated, secured debts of less than $922,975 may be a debtor under chapter 13 of this title.

11 U.S.C. § 109(e).⁵

The purpose of the limits set forth in § 109(e) is "[t]o ensure that only relatively small debtors invoke the protections of Chapter 13," Glance v. Carroll (In re Glance), 487 F.3d 317, 319-20 (6th Cir. 2007), and "to separate those small [business owners] who should have the benefit of Chapter 13 from those larger businesses who should not." Comprehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751, 753-54 (6th Cir. 1985).

Applying § 109(e) is a straightforward process. "Chapter 13 eligibility should normally be determined by the debtor's schedules checking only to see if the schedules were made in good faith." Pearson, 773 F.2d at 757; see also Glance, 487 F.3d at 321; In re Smith, 365 B.R. 770, 780 (Bankr. S.D. Ohio 2007). However, even schedules filed in good...