In re Spencer

IN RE: DAVID MARK SPENCER, YLVA SOFI ROGLER, Debtors.

CASE NO. 20-60203

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION

November 14, 2020

The court incorporates by reference in this paragraph and adopts as the findings and orders of this court the document set forth below. This document was signed electronically at the time and date indicated, which may be materially different from its entry on the record.

CHAPTER 13

JUDGE RUSS KENDIG

MEMORANDUM OF OPINION

(NOT FOR PUBLICATION)

This matter is before the court to consider Debtors' eligibility under 11 U.S.C. § 109(e). The eligibility issue was raised in Mark Porter's ("Creditor") objection to confirmation, Debtors' objection to Creditor's proof of claim, and the chapter 13 trustee's ("Trustee") motion to dismiss. The court held a hearing on Debtors' objection on August 5, 2020, after which a briefing schedule was issued. The matter is now ready for ruling.

The court has subject matter jurisdiction of this case under 28 U.S.C. § 1334 and the general order of reference issued by the United States District Court for the Northern District of Ohio. Gen. Ord. No. 2012-07 (N.D. Ohio April 4, 2012). This matter is a core proceeding and the court has statutory authority to enter final orders and judgments. 28 U.S.C. § 157(b)(2)(A), (B), (O). And because the matter "stems from the bankruptcy itself," the court also has constitutional authority to enter final orders and judgments. Stern v. Marshall, 564 U.S. 462, 499 (2011). Pursuant to 28 U.S.C. §§ 1408 and 1409, venue in this court is proper. This opinion constitutes the court's findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure.¹

This opinion is not intended for publication or citation. The availability of this opinion, in electronic or printed form, is not the result of a direct submission by the court.

BACKGROUND

This eligibility dispute arises from a prepetition business purchase agreement (the "Agreement") between Creditor, Debtor-Spencer, and Brian Keller ("Keller").

A. The Agreement

On February 20, 2019, the parties executed the Agreement, under which Debtor-Spencer and Keller agreed to purchase In-Transit Trailer, LLC (the "Business") from Creditor. The provision of the Agreement labeled "Consideration" states:

As total consideration for the purchase and sale of the Business (including its tangible and intangible assets as described above), and Buyer's assumption of the assumed obligations and all other liabilities provided for in this Agreement, the Buyer shall pay to the Seller the sum of $350,000.00, and such total consideration to be referred to in this Agreement as the 'Purchase Price.'

(Claim No. 2-1 pt. 2, at 2.) Creditor is identified as "Seller" and Debtor-Spencer and Keller are identified as "Buyer" in the Agreement. (Id. at 1.)

The Agreement also contains an indemnification clause, which provides in relevant part that: "Buyer shall indemnify and hold Seller harmless from any and all liabilities and obligations arising from Buyer's operation of the Business after the Closing." (Id. at 5.) The Agreement is signed by Creditor, Debtor-Spencer, and Keller. (Id. at 8-10.) The closing date was February 20, 2019. (Id. at 2.)

B. The State Court Case

On December 18, 2019, Creditor filed a lawsuit in the Stark County Court of Common Pleas (the "State Court"), seeking $746,123.70 against Debtor-Spencer and Keller jointly and severally for damages arising from the Agreement. Creditor raises numerous claims in the State Court case, including breach of contract, unjust enrichment, fraud/misrepresentation, and indemnification. Relevant to this case are Creditor's breach of contract claims. First, Creditor alleges that Debtor-Spencer and Keller breached the Agreement by failing to pay Creditor the $350,000.00 purchase price, and Creditor seeks damages in this amount. (Ex. A. to Creditor's Am. Obj. to Conf., ECF No. 74-1, at 2-3.) Second, Creditor alleges that after the Agreement wasmade, Debtor-Spencer and Keller, while operating the Business, incurred outstanding accounts with third parties as follows:

AAA Freight, Inc.

$295,981.70

DDH Trucking, LLC

$68,869.00

Trimble Corp.

$11,880.04

JF Young Trucking

$9,270.00

Central Mutual

$8,045.76

People Net

$1,097.20

Provt Inc.

$980.00

(Id. at 3, 4.) Creditor alleges that the third parties have sought payment from him on these accounts, and Debtor-Spencer and Keller have breached the Agreement by failing to indemnify him. (Id. at 4.) Creditor seeks damages in the total amount of these accounts, $396,123.70. (Id.)

C. The Bankruptcy Case

On January 31, 2020, Debtors filed a joint petition for relief under chapter 13 of the Bankruptcy Code. On Schedule F, Debtors listed noncontingent, liquidated, and unsecured claims in the total amount of $139,751.46. Creditor is identified on Schedule F as holding a contingent, unliquidated, disputed, and unsecured claim in an unspecified dollar amount. Creditor's claim is described as "potential liability arising out of corporate contract." (ECF No. 1, at p. 33.)

Creditor filed a wholly unsecured proof of claim (the "Claim") in the amount of $746,123.70 on February 25, 2020. The Claim is based on the Agreement. Creditor breaks his Claim down as follows: (1) $350,00.00 for failure to pay the purchase price; and (2) $396,123.70 for failure to indemnify pursuant to the Agreement. (ECF No. 83, at 2.) Although Creditor has raised fraud claims in the State Court case, Creditor contends that his $746,123.70 Claim falls under an obligation to pay this amount pursuant to the Agreement. (Id.)

Debtors objected to the Claim on June 12, 2020, disputing the enforceability of the Agreement. Debtors argue that since the Claim is contingent and unliquidated, it is not an allowed claim for distribution purposes. They also contend that they would have answered Creditor's complaint and disputed Creditor's allegations if the State Court case had not been stayed.

Creditor filed an amended objection to confirmation on May 6, 2020, alleging, among other things, that Debtors' unsecured debts exceed the debt limit imposed by § 109(e). Debtors responded to the objection on May 12, 2020, arguing that Creditor's Claim was properly scheduled as contingent and unliquidated because the subject of the Claim was pending in the State Court case on the petition date. On July 23, 2020, Trustee filed a motion to dismiss, arguing that Debtors exceed the unsecured debt limit in § 109(e) and are therefore ineligible for relief under chapter 13 of the Bankruptcy Code.

DISCUSSION

Section 109(e) of the Bankruptcy Code provides in relevant part:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $419,275 and noncontingent, liquidated, secured debts of less than $1,257,850 . . . may be a debtor under chapter 13 of this title.

§ 109(e). The purpose of § 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); Comprehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751, 753 (6th Cir. 1985) ("Congress desired to give small sole proprietors the benefit of Chapter 13, but also established dollar limits to prevent larger businesses from taking advantage of the provisions.").

"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. However, even if filed in good faith, a debtor's schedules are not dispositive:

(1) the schedules are unquestionably the starting point of the eligibility inquiry, but may also be the ending point under certain circumstances; (2) the word 'normally' used with respect to reliance on schedules implies exceptions for the proper application of a court's discretion so long as the determination focuses on determining debts 'on the date of filing,'; and (3) given the need for parties in interest to know § 109(e) eligibility early in a case, the eligibility determination should not depend on the claims allowance process (based on the Sixth Circuit's quoting with approval a case that states that the court considers debts as they exist at the time of filing, 'not after a hearing') and turn into separate satellite litigation that dominates and delays the Chapter 13 proceedings . . . [A] court must make an independent determination apart from Debtor's schedules whether debts are contingent and unliquidated.

In re Perkins, No. 08-33352, 2009 Bankr. LEXIS 2885, at *4-5 (Bankr. N.D. Ohio Sept. 14, 2009) (citations omitted); In re Bosserman, 587 B.R. 668, 674 (Bankr. N.D. Ohio 2018); In re Smith, 365 B.R. 770, 780-81 (Bankr. S.D. Ohio 2007). The party challenging a debtor's eligibility under § 109(e) has the initial burden of going forward with the evidence. Smith, 365 B.R. at 780 (citing In re Pike, 258 B.R. 876, 882 (Bankr. S.D. Ohio 2001)). The court may dismiss or convert a debtor's case if the debtor fails to meet § 109(e)'s eligibility requirements. Smith, 365 B.R. at 780 (citing In re White, 216 B.R. 232, 234 (Bankr. S.D. Ohio 1997)).

In this case, there is no dispute that Debtors' secured debt is within § 109(e)'s limits. The issue is whether Debtors' noncontingent, liquidated, unsecured debts are less than $419,275. OnSchedule F, Debtors listed noncontingent, liquidated, and unsecured claims in the total amount of $139,751.46. Creditor is listed as holding a contingent, unliquidated, disputed, and unsecured claim in an unspecified dollar amount. However, Creditor argues that he held a noncontingent, liquidated, unsecured claim in the amount of $746,123.70 as of the petition date. Thus, Creditor argues that Debtors exceed the unsecured debt limit in § 109(e), and Trustee seeks to dismiss Debtors' case on this basis.

A. Creditor Has an Unsecured Claim...