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Debtor's Ch. 7 to Ch. 13 Conversion Denied; Title Dispute Claims Exceed Debt Ceiling

Monday, January 27, 2014
By Diane Davis

Jan. 24 --The U.S. District Court for the Southern District of Texas Jan. 2 denied a debtor's motion to convert a case from Chapter 7 to Chapter 13 because the amount of debt exceeds the debt ceiling under Bankruptcy Code Section 109(e) and, when coupled with the debtor's income-to-assets ratio, causes the debtor to fail the best interests test under Section 1325(a)(4) (Rodriguez v. Schmidt, 2014 BL 3827, S.D. Tex., No. 7:13-cv-00073, 1/2/14).

Affirming the judgment of the bankruptcy court, Judge Micaela Alvarez concluded that Sections 109(e) and 1325(a)(4) bar the debtor from confirming a Chapter 13 plan.

Looking beyond the debtor's Schedule F to assess the total worth of the claims against the debtor, the court found that the dispute over liability for the civil conversion claims does not render those claims unliquidated, and they total more than $1.2 million. That amount, the court said, exceeds the Section 109(e) debt ceiling.

In addition, the court said the debtor's income-to-assets ratio causes the debtor to fail the Section 1325(a)(4) best interests test. 

Title Dispute

In 1943, Maria de la Pena willed most of her land to her nephew Santiago Rodriguez. In the event her nephew died “without lawful issue of his body,” Maria granted a remainder to her sister and her sister's heirs.

Santiago adopted the debtor Gabriel Rodriguez and died without any bodily offspring of his own. As a result, a 21 year legal battle has ensued for title to the land.

Several oil companies, including Oryx Energy Company and Dewey Bellows Operating Company, paid the debtor royalties derived from the disputed lands' mineral estates.

Subsequently, Maria's sister and heirs filed a petition for partition of the land, and for return of the royalties the debtor received from the harvest of the mineral estates. Ultimately, Maria's sister and heirs won title to the land. 

Involuntary Chapter 7 Filing

The bankruptcy court granted Maria's sister and heirs' involuntary Chapter 7 petition against the debtor. The debtor listed claims on his schedules in excess of $1.2 million. The bulk of the claims related to the royalties the debtor received during the title dispute.

The debtor later filed an amended Schedule F listing claims against him in excess of $1.2 million. The debtor amended the schedules again to list the worth of all royalties claims as “unknown.” 

Conversion Denied

Subsequently, the debtor filed a request with the bankruptcy court to convert the case from Chapter 7 to Chapter 13. The bankruptcy court found that the debtor exceeded the debt limitation of Section 109(e), and could not propose a Chapter 13 plan that could meet the liquidation test under Section 1325(a)(4). Thus, the court denied the conversion.

The debtor appealed to the district court, arguing that conversion claims should be counted as contingent because they have not yet been adjudicated. The Chapter 7 trustee contended that the court should rely on the debtor's schedules but offered evidence that the debtor failed to list on his schedules certain non-exempt assets, including farm equipment, real estate, and legal claims.

Typically, a court will rely on the debtor's schedules, the district court said, but given the evidence of bad faith, the court looked to the record as a whole to determine the debtor's actual debts. 

'Liquidation' or 'Best Interests' Test

Chapter 7, the court explained, is known as “straight bankruptcy,” and takes a snapshot portrait of the debtor's estate at the time of filing, liquidates the estate, and pays the creditors with the proceeds. Chapter 13, the “wage-earner's bankruptcy,” puts the debtor and the estate on a repayment plan, the court said. For a Chapter 13 plan to be confirmed, it must pass, among other tests, the Section 1325(a)(4) liquidation or best interests test. Before a debtor may confirm a plan under Chapter 13, the court must be assured the confirmation is in the best interest of unsecured creditors, the court said. Looking at creditors with allowed unsecured claims, this test compares the amount they would receive under Chapter 7 to the amount they would receive under Chapter 13, the court said. Chapter 13 must provide these creditors with at least as much payment as would Chapter 7, according to the court.

The debtor's proposed plan would yield $18,900 over five years, according to the court. Without Maria's sister and heirs' claims for conversion, the debtor owes unsecured debts of only $15,203, the court said, and the debtor's repayment plan would quite nearly satisfy the remaining claims of $15,000. Without the conversion claims, Chapter 13 would be a viable option, the court said, because the heirs would be paid the same amount either way.

With the heirs' claims for conversion, however, the debtor owes more than $1.2 million, the court said. The non-exempt property that would become available under Chapter 7 is worth about 21 times the debtor's proposed repayment plan, the court said. Thus, the creditors would be paid much more under Chapter 7 than under Chapter 13. The outcome of the Section 1325(a)(4) best interests test depends on the amount of claims levied against the debtor, the court said. 

Debt Ceiling

Under Section 109(e), for a Chapter 13 plan to be confirmed, the amount of noncontingent, liquidated, unsecured debt cannot equal or exceed the statutory debt ceiling of $383,175, the court said. Thus, the amount of debts must be determined to see if they exceed the debt limitations provision. Section 109(e) excludes unliquidated and contingent debts from Chapter 13 eligibility computation, the court said, but it does not exclude debts which a debtor merely disputes.

According to the court, if the heirs' conversion claims are included, at $1.2 million the debts will exceed the debt ceiling and will cause the best interests test to point toward Chapter 7.

A debt is liquidated if the amount due and the date on which it was due are fixed or certain or when they are ascertainable by reference to an agreement or to a simple mathematical formula, the court said. “A dispute over liability does not render a debt unliquidated,” the court said.

Certain tort claims are assigned worth only at trial, which means that the dispute over the debt affects its liquidation, the court said. Contract claims, however, have a definite worth from the beginning, with the practical result that the dispute over the debt does not affect its liquidation, the court said. If the amount of the claim -- tort or contract -- can be computed upfront simply and clearly, then the claim is liquidated and can be counted under Section 109(e), the court said.

The court concluded that the conversion claims rest simply on the amounts of oil and gas royalties the debtor fraudulently received. The court can simply add up the numbers on the heirs' spreadsheet compiling their claims and arrive at the claimed amount, the court said. Thus, the amount of debt in this case clearly surpasses the Section 109(e) debt ceiling, the court said.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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