Menu    1 ABR 103 

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF ALASKA
605 West 4th Avenue, Anchorage, AK 99501-2296




In re Case No. A90-00520
Chapter 13
MILDRED LOUIS JEWELL, dba 
High Style Salon, and DAN G.MEMORANDUM OPINION RE
JEWELL,QUALIFICATION UNDER §109(e) OF
THE BANKRUPTCY CODE
 
Debtor(s) 


Index Page
1.ELIGIBILITY UNDER §109(e) 104
2. DEBTORS' SCHEDULED UNSECURED DEBT 104
3. CENLAR'S CALCULATIONS OF UNSECURED DEBT 104
 3.1. Transaction Costs 105
 3.2. Cenlar's Undersecured Claim 105
 3.3. IRS Secured Claim 106
 3.4. Cenlar's Calculations 106
 3.5. Disputed Portion of Carr-Gottstein Claim106
4. COURT'S ANALYSIS 106
 4.1. What Debtors Need to Qualify 107
 4.2. Undersecured Cenlar Claim Counted 107
 4.3. IRS "Undersecured Claim" 107
 4.4. "Disputed" Carr-Gottstein Claim 107
 4.5. Should "Transaction Costs" be Deducted?108
5. CONCLUSION 110
TOP    1 ABR 104    Contents        1. ELIGIBILITY UNDER §109(e) - A chapter 13 confirmation hearing was held on August 15, 1990. The court found the plan confirmable, with the possible exception that debtors' unsecured debt might exceed $100,000.00 in noncontingent, liquidated claims. This would disqualify debtors under 11 U.S.C. §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 less than $ 350,000 may be a debtor under chapter 13 of this title.

The court took the eligibility question under advisement to review the testimony, schedules, proofs of claims, and arguments of the parties. The court tentatively denies confirmation, but grants the debtors the right to seek further hearings on this issue.

  Contents        2. DEBTORS' SCHEDULED UNSECURED DEBT - Debtors Chapter 13 Statement showed the following summary of debts, classified as to priority, secured, and general unsecured claims:

Priority Claims$20,786.99
Secured Claims$118,002.82
Unsecured Claims$66,560.52

The total unsecured debt indebtedness shown is $87,347.51, the combination of priority unsecured and general unsecured claims.

TOP    1 ABR 105    Contents        3. CENLAR'S CALCULATIONS OF UNSECURED DEBT -

  Contents        3.1. Transaction Costs - Included among the secured claims, debtor scheduled the claim of Cenlar Federal Savings Bank at $103,000.00 with a value of $78,000.00. The parties have agreed that the value of the home is $78,000.00. Debtors sought to reduce this amount by the estimated costs to Cenlar of foreclosing and selling the home. The court in other cases has allowed a 7% reduction for valuation purposes to account for the estimated transaction costs under In re Malody, 102 B.R. 745, 749 (9th Cir.BAP 1989).

      "Transaction costs" are the estimated reasonable costs of foreclosure, any brokerage fees, closing costs, and other reasonable costs of sale necessary to arrive at the net recovery of a secured creditor who forecloses and resells the property. In a number of cases in which Richard Ullstrom represented the secured creditors in stripdown situations, his clients have stipulated that transaction costs of 7% of the present value of the property is approximately accurate, but dispute that such costs should be deducted in a stripdown situation. Thus, the value of the house would be $72,540.00 (that is, $78,000.00 less the $5,460.00 transaction costs) for purposes of valuing Cenlar's unsecured claim under 11 U.S.C. § 506(a), if it is appropriate to reduce that amount by 7% for transaction costs.

  Contents        3.2. Cenlar's Undersecured Claim - Furthermore, Cenlar filed a proof of claim for $105,928.79, which is almost $3,000.00 more than debtors scheduled Cenlar's debt. Cenlar argues TOP    1 ABR 106  the difference between the $105,928.79 total claim and the $72,540.00 secured claim, or $33,388.79 should be added to the unsecured claims for the Cenlar undersecured claim.

  Contents        3.3. IRS Secured Claim - Next, Cenlar added up all the personal property shown on the schedules and deducted the amount that the debtors listed for exemptions. Cenlar concludes that the IRS secured claim is actually undersecured by $3,495.92, and argues $3,495.92 should be added back to the unsecured total. The calculations are shown on a document Cenlar submitted at the confirmation hearing. A copy is attached as Exhibit "A".

  Contents        3.4. Cenlar's Calculations - Cenlar's bottom line as shown on Exhibit "A" is that the unsecured claims total $118,772.31 (which would be raised by $5,460.00, the amount of the transaction costs for valuing the home, to $124,232.31):

Undersecured part of Cenlar $27,928.79
General unsecured 66,560.71
Unsecured priority 20,786.99
Undersecured part of IRS 3,495.82
TOTAL $118,772.31
TOTAL (add transaction costs)$124,232.31

  Contents        3.5. Disputed Portion of Carr-Gottstein Claim - Among the unsecured claims, debtors have scheduled the claim of Carr-Gottstein Properties on a rejected lease of space for a beauty parlor business as $21,000.00, of which only $5,045.72 is admitted, and the balance disputed. Cenlar argues that the debtors are not entitled to deduct the "disputed" portion of the Carr-Gottstein claim in calculating compliance with 11 U.S.C. §109(e), relying on In re Sylvester, 19 B.R. 671 (9th Cir.BAP 1982).

TOP    1 ABR 107    Contents        4. COURT'S ANALYSIS -

  Contents        4.1. What Debtors Need to Qualify - Debtors would qualify if they could knock off the IRS, Carr-Gottstein, and transaction costs, as follows:

Undersecured part of Cenlar$33,308.79
General unsecured 66,560.71
Unsecured priority 20,786.99
Undersecured part of IRS 3,495.82
TOTAL $124,232.31
Less IRS undersecured -3,495.82
Less Carr-Gottstein dispute-15,954.28
Less transaction costs -5,460.00
TOTAL $99,341.52

      Also, if the debtors could show that the undersecured portion of Cenlar's total claim should not be added to the unsecured claims for eligibility purposes under §109(e), this $27,928.79 reduction would reduce the claims to less than $100,000.00.

  Contents        4.2. Undersecured Cenlar Claim Counted - The court concurs with adding the undersecured portion of the Cenlar claim to the unsecured total for the purposes of a §109(e) analysis. See In re Bos, 108 B.R. 740 (Bankr.D.Mont. 1989). The undersecured amount of Cenlar's claim is $27,928.92. If the court is incorrect in its conclusion that this amount should be counted as "unsecured" to determine eligibility, debtors would be eligible for chapter 13 since it would reduce the $124,232.31 shown in ¶ 4.1 to below $100,000.00.

  Contents        4.3. IRS "Undersecured Claim" - The IRS liens are not undersecured. The allowed exemptions which Cenlar alludes to on Exhibit "A" were those allowed under 11 U.S.C. §522(d). The TOP    1 ABR 108  property of debtors is, however, subject to the IRS tax liens, notwithstanding the §522(d) exemptions. See 11 U.S.C. §522(c)(2)(B). The only exemptions debtors would be allowed are those listed in 26 U.S.C. §6334. The IRS secured claim appear to be fully secured, and the $3,495.92 shown on Exhibit "A" should not be added to the unsecured claims total.

  Contents        4.4. "Disputed" Carr-Gottstein Claim - The $15,954.28 could possibly be reduced from the unsecured total because the claim of Carr-Gottstein admitted is $5,045.72, and the $21,000.00 total was admitted in an excess of caution by debtors' counsel as a possible maximum claim under 11 U.S.C. §502(b)(6). Mr. Jewell testified that he believed Carr-Gottstein had relet the space.

      Neither party submitted a copy of the Carr-Gottstein lease or any specifics, and based upon that, the court would exclude the $15,954.28. In re Sylvester, 19 B.R. 671 (9th Cir. BAP 1982) indicates that the court must first determine what amount is contingent or unliquidated in order to exclude it from the computation. While debtors merely scheduled the claim as "disputed" in part, it is clear they also feel the amount is "unliquidated" since the rental space may have been relet, mitigating damages. This would require a more extensive evidentiary hearing.

  Contents        4.5. Should "Transaction Costs" be Deducted? - Finally, should the court continue to adhere to its prior rulings in allowing the reduction in transaction costs under the holding in TOP    1 ABR 109  In re Malody? Malody concerned the valuation of an automobile which was not necessary for those debtors' plan. It was not used in a business, per se, but only to go to and from work. The vehicle could have been replaced with another without affecting debtors' plan. Id at 749. Malody held that the bankruptcy court correctly valued a vehicle at "wholesale" and not "replacement" value ("wholesale" value presumably being net of the costs of disposition).

      In a chapter 12 case decided last month, involving farm property to be used as part of a plan, the Bankruptcy Appellate Panel in In re Case, 115 B.R. 666, ____, (9th Cir.BAP 1990) said:

      Accordingly, valuation for the different purposes of determining adequate protection under § 361, or to determine if the Debtor has met the "best interest of creditors" test under chapters 11, 12, or 13, may require the Court to employ different valuation criteria than for "cramdown" purposes under § 1225(a)(5), § 1325(a)(5) or § 1129(b). That is, the focus of inquiry as to any value determination must be made on the interests that a particular Code section is designed to protect and valuation must be made with regard to those purposes. 3 Collier on Bankruptcy, § 506.04 (15th Ed.1986). Thus, the treatment of secured creditors and the valuation of property subject to liens in a "cramdown" hearing to confirm a plan over the objections of a secured creditor under chapter 11, 12, and 13 must be distinguished from valuation for adequate protection purposes which covers the period between the date of the petition and the confirmation of the plan.

      If we were attempting to value FmHA's interest in the property for adequate protection purposes, the possibility of forced liquidation would be assumed and a deduction for selling costs would be logical. However, we conclude that for the purposes of § 1225(a)(5)(B)(ii) valuation, when the debtor plans to retain the property, selling costs should not be deducted from the fair market value of the property when valuing the creditor's interest in the property. [emphasis added]

TOP    1 ABR 110  It is not crystal clear that a debtor seeking to stripdown a secured claim on a residence under In re Hougland, 886 F.2d 1182 (9th Cir. 1989) should automatically be entitled to Malody treatment of the transaction costs. I have ruled that way in prior cases and have been awaiting an appellate case to tell me if the treatment is proper.

      In the case at bar, the debtors said they did not consider bankruptcy initially to take advantage of Hougland, but because of a tax problem. Thus, they have a better argument that the stripdown was not "necessary" to their reorganization. Unfortunately, in this case, the additional unsecured claim may put them over the $100,000.00 limit.

  Contents        5. CONCLUSION - To qualify for chapter 13 relief, the debtors must show that they can reduce the unsecured debt to below $100,000.00.

      Debtors, for example, could seek to obtain a release from Carr-Gottstein, or have a hearing to establish or liquidate the lease rejection claim.

      Also, if debtors can show that the Cenlar claim should be judged as scheduled, secured at its full amount of about $103,000.00, for determining their eligibility under §109(e), they would qualify.

      To allow debtors some time to analyze their situation, the court will deny confirmation for failure to comply with 11 U.S.C. §109(e) if the debtor does affirmatively seek, by Friday, TOP    1 ABR 111  August 31, 1990, to establish that they are entitled to eligibility by:

(a)filing a brief citing legal authority that the court does not have to bifurcate the Cenlar claim for eligibility analysis, and/or
(b)presenting a brief regarding the appropriateness of "transaction costs" being deducted in a stripdown case, and evidence regarding the limitation of the Carr-Gottstein debt (debtors would have to win both these arguments to get under the $100,000.00 limit; see ¶ 4.1).

Thus, debtors must file a legal brief on the issues and/or file a calendar request by August 31, 1990 for a further evidentiary hearing.

      Debtors indicated they may, instead, seek to convert to chapter 11. They may face an Ahlers problem in a chapter 11. The court is offering the debtors the alternative to try, if they feel they have legally sound legal and factual arguments, to persuade the court that they have chapter 13 eligibility.



DATED: August 20, 1990 
  
 __/s/ Herbert A. Ross__
 HERBERT A. ROSS
 Bankruptcy Judge


Serve: 
Diane Vallentine, Esq., for Debtors 
Richard Ullstrom, Esq., for Cenlar Federal 
Beatrice Furman, Trustee 
Jamilia George, Chief Deputy ClerkH3114