Cite as: Keith M. Lundin, Lundin On Chapter 13, § 15.5, at ¶ ____, LundinOnChapter13.com (last visited __________).
Only “noncontingent” debts (that are also “liquidated”1) are counted toward the secured and unsecured debt limitations for Chapter 13 eligibility in 11 U.S.C. § 109(e).2 The folks who consult lawyers about filing bankruptcy are perhaps a bit more likely than the general population to have a tort in their history—for example, a car wreck for which they have some fault; a fight in a bar; a fight at home; collateral converted to personal use; a business deal gone bad; some lying, cheating or stealing.
If counsel is fortunate enough to coax the truth out of the debtor on the front end, the potential tort liability almost always includes a “right to payment”3 that must be scheduled as a debt in any bankruptcy case that might be filed. If Chapter 13 is on the table, characterization of the tort liability as contingent or noncontingent, liquidated or unliquidated,4 can be outcome determinative of eligibility—if for no other reason, because tort liability is often quite large relative to other debts.
There is disagreement whether tort claims against the debtor are contingent or noncontingent for purposes of Chapter 13 eligibility. If the debtor is or may be the defendant in a tort action, debtor’s counsel should list the debt in the schedules, but characterization of the debt as contingent or noncontingent is problematic. The better reasoned cases hold that tort claims are noncontingent, and the trend of reported decisions has turned toward this conclusion.
Courts holding that tort claims are contingent have done so without clear statement of what future event must occur before tort liability becomes noncontingent. For example, it has been held that auto accident claims are contingent for Chapter 13 eligibility purposes.5 It has been held that an action by a state government for violations of odometer laws was a contingent claim because, at the petition, no order had been entered fixing or awarding damages.6 Tort liability for spousal assault and battery was held to be contingent at the petition notwithstanding a prepetition plea of nolo contendere to a misdemeanor arising from the same altercation.7 Civil liability for driving while intoxicated was contingent, notwithstanding a prepetition criminal conviction, because “the debtor’s criminal adjudication does not rise to the level of a ‘legal duty to pay.’”8 Similarly, tort liability for embezzlement was held to be contingent, notwithstanding a prepetition plea of guilty by the debtor to related criminal charges.9 The court reasoned that without a final civil judgment, the plea of guilty to embezzlement did not render the claim noncontingent for Chapter 13 eligibility purposes.10 One court held that tort claims against the debtor for improper sexual conduct were contingent because the claims had not been reduced to judgment before the filing of the petition and the debtor had not admitted that any amount was due to the claim holders.11
In contrast, other courts have determined that tort claims are noncontingent based on careful application of the “occurrence of a future event” definition.12 Observing that characterization of a claim as contingent relates to the timing or circumstances under which liability arises, and not to whether the claim has been reduced to judgment, one court held that civil liability for misappropriation of funds was not contingent for purposes of Chapter 13 eligibility, because all the allegations upon which liability would be based related to events that occurred before the petition.13 The court explained:
We are not concerned with the uncertainty that exists over whether or not the finder of fact will ultimately determine that those events actually occurred and imposed liability. Otherwise, every claim, whether in contract or tort, would be contingent until judgment has been entered. . . . Viewed in this manner, tort claims will rarely be contingent. “[T]he events that give rise to the tort claim usually have occurred and liability is not dependent upon some future event that may never happen.”14
Similarly, the Bankruptcy Appellate Panel for the Ninth Circuit determined that malpractice claims against a professional tax preparer are noncontingent when the advice that gave rise to the malpractice claims was given and acted upon prior to the petition.15 The panel reasoned that tort claims ordinarily are not contingent as to liability when the events giving rise to the tort occurred prepetition and liability is not dependent upon a future event—that the malpractice claims have not been reduced to judgment does not render them contingent.16 In In re Ristic,17 damages for burglary and arson were held to be noncontingent debts for eligibility purposes because all the events upon which liability was based occurred before the Chapter 13 petition. The court also observed that a tort claim need not be reduced to judgment to be considered noncontingent in the eligibility calculus.18
It is hard to argue with the logic of the cases holding that tort claims are noncontingent. If all the events necessary to give rise to liability occurred prepetition, then application of the most widely accepted definitions of noncontingent leads to the conclusion that no future event or condition precedent remains. The courts that have found tort claims to be contingent sometimes say or imply that a tort claim remains contingent until a trier of fact finds that the debtor has liability. Nowhere does the Bankruptcy Code require that judgment be entered before liability is noncontingent. Just the opposite is true—most debts have not been reduced to judgment at the filing of a Chapter 13 petition, but the contingent or noncontingent character of those debts is properly determined by other factors. Many of the courts that have articulated definitions for noncontingent in § 109(e) specifically except “entry of judgment” as a condition precedent.19 The better reasoned cases conclude that tort liability is not contingent if the acts that give rise to liability occurred prepetition.
Because of the split of authority, the characterization of a tort claim as contingent or noncontingent may be affected by the stage of litigation against the debtor. For example, if the debtor is a defendant in a car accident lawsuit and judgment has not been rendered, the claim against the debtor will be contingent and not counted toward Chapter 13 eligibility in jurisdictions that require entry of a judgment before tort liability becomes noncontingent. On the other hand, if the debtor delays filing the Chapter 13 case and a judgment is rendered in the tort lawsuit, the debtor’s liability will no longer be contingent in all jurisdictions and will be counted in the Chapter 13 eligibility calculus.20 There is obvious incentive for debtor’s counsel to avoid delay in filing a Chapter 13 petition for a debtor with tort liability.
Plaintiff’s counsel in a pending tort action will sometimes ask for relief from the stay to complete the state court litigation. Because the character of debts is appropriately determined for eligibility purposes as of the date of the Chapter 13 petition,21 relief from the stay to determine whether the debtor has liability for a tort claim should not affect whether the debt is contingent for eligibility purposes.22 Relief from the stay is sometimes granted to liquidate23 the debt and to permit the creditor to proceed directly against an insurance company or to determine the amount of the debt for confirmation purposes.24
It is not always obvious whether an action against the debtor sounds in tort or contract or both. For example, if the debtor has breached a contract, there will often be counts of the complaint against the debtor that allege breach of contract and other counts claiming misrepresentation, conversion, or fraud. Although some authority suggests that claims arising out of a mixed cause of action that includes contract and tort theories are contingent for Chapter 13 eligibility purposes,25 it seems logical that such claims should be noncontingent for the reasons previously discussed. That the cause of action contains both contract and tort claims does not render the claim contingent if all the acts and events necessary to give rise to liability on either theory have occurred before the filing of the Chapter 13 petition.26
3 See the definition of claim in 11 U.S.C. § 101(5).
5 In re Brown, 7 B.R. 529 (Bankr. S.D.N.Y. Aug. 8, 1980) (Galgay). See Craig Corp. v. Albano, 55 B.R. 363 (N.D. Ill. Nov. 7, 1985) (Shadur).
6 In re Hughes, 98 B.R. 784 (Bankr. S.D. Ohio Mar. 17, 1989) (Clark).
7 Mendoza v. Curry (In re Duque), No. CC-05-1069-MaMcB, 2005 WL 6960181 (B.A.P. 9th Cir. Dec. 30, 2005) (unpublished) (Marlar, McManus, Brandt).
8 In re Belt, 106 B.R. 553 (Bankr. N.D. Ind. Aug. 28, 1989) (Dees).
9 In re Bush, 120 B.R. 403 (Bankr. E.D. Tex. Sept. 28, 1990) (Sharp).
10 In re Bush, 120 B.R. 403 (Bankr. E.D. Tex. Sept. 28, 1990) (Sharp). See § 15.7 Are Prebankruptcy Judgments Contingent?.
11 In re Solomon, 166 B.R. 832, 838 (Bankr. D. Md. Apr. 20, 1994) (Derby) (Lawsuits by former patients against doctor for improper sexual conduct are contingent and/or unliquidated notwithstanding that the plaintiffs have filed claims that aggregate more than $160,000 to which the debtor has not objected. “Section 109(e) requires the determination whether a claim is contingent or unliquidated to be made ‘on the date of the filing of the petition.’ . . . On the date of filing, the state tort claims had not been reduced to judgment, and debtor had not admitted an amount was due to the Creditors. . . . Debtor’s pronouncement that he would not object to the Creditors’ claims in this case, thus allowing them to stand deemed allowed for purposes of his plan, did not retroactively liquidate the claims as of commencement of the case.”), rev’d on other grounds, 67 F.3d 1128 (4th Cir. Oct. 23, 1995) (Widener, Wilkinson, Michael). See also In re Allen, 241 B.R. 710, 714 (Bankr. D. Mont. Dec. 3, 1999) (Peterson) (Ex-spouse’s $3,025,000 claim for prepetition assault and battery is “clearly unliquidated and contingent and thus cannot be factored into the eligibility criteria of 11 U.S.C. § 109(e).”).
13 In re McGovern, 122 B.R. 712 (Bankr. N.D. Ind. Jan. 26, 1990) (Grant).
14 In re McGovern, 122 B.R. at 716 (citation omitted). Accord Rodriguez v. Schmidt, No. 7:13-CV-73, 2014 WL 37290 (S.D. Tex. Jan. 2, 2014) (Alvarez) (Claims for conversion were not contingent and were liquidated when events giving rise to claims occurred prepetition and amount of the claims could be computed with simple arithmetic. That the conversion claims may be subject to defenses goes only to liability, not to the amount of the claim, and does not render them unliquidated for § 109(e) purposes.); In re Guzman, No. 10-10169-8-JRL, 2011 WL 5909522, at *2 (Bankr. E.D.N.C. May 31, 2011) (Leonard) (Workers’ compensation subrogation claim arising out of prepetition tort was not contingent at petition. “Debts arising from tortious conduct are not automatically deemed contingent, but rather, the court must determine whether all of the events that give rise to debtor’s alleged liability occurred prior to the bankruptcy filing.” Automobile accident occurred one year prior to filing. There was no question about underlying negligence claim giving rise to workers’ compensation provider’s subrogation right. Debtor’s liability was not dependent on any future event. Claim of workers’ compensation provider was not contingent.); In re Perez, 400 B.R. 879 (Bankr. S.D. Fla. Sept. 18, 2008) (Isicoff) (Debt for misappropriation of funds is noncontingent when events giving rise to liability, “including the conditions precedent to seeking treble damages, occurred prior to the Debtor’s bankruptcy.”); In re Salazar, 348 B.R. 559 (Bankr. D. Colo. Aug. 15, 2006) (Tallman) (Claims for fraud and misrepresentation were noncontingent because events necessary to give rise to liability occurred prior to petition.); In re Huelbig, 299 B.R. 721, 723 (Bankr. D.R.I. Oct. 1, 2003) (Votolato) (Debt for prepetition insurance fraud is noncontingent because “all events giving rise to the Debtors’ liability occurred in the 1990s, well before the petition was filed.”); In re Mandarino, 312 B.R. 214 (Bankr. E.D.N.Y. May 20, 2002) (Bernstein) (Debt based on allegation that debtor bought 45 pirated de-scrambling devices is noncontingent because the conduct occurred before the Chapter 13 petition.); In re Vaughn, 276 B.R. 323, 325 (Bankr. D.N.H. Apr. 5, 2002) (Vaughn) (Claims for fraud and breach of contract are noncontingent because “‘all events giving rise to liability occurred prior to the filing of the bankruptcy petition.’”); In re Reader, 274 B.R. 893, 896 (Bankr. D. Colo. Mar. 26, 2002) (Brown) (Claims for misappropriation from probate estate are noncontingent because “all events giving rise to liability occurred prior to the debtor’s filing for bankruptcy.”); In re Faulhaber, 269 B.R. 348, 354 (Bankr. W.D. Mich. Nov. 7, 2001) (Hughes) (Claim for churning securities account is noncontingent because debtor conceded that “‘all factual events surrounding Debtor’s alleged misconduct occurred prior to the filing.’”); In re Tabor, 232 B.R. 85, 90 (Bankr. N.D. Ohio Mar. 29, 1999) (Shea-Stonum) (Claims of fraud and conversion are noncontingent because “all events which allegedly gave rise to Mr. Tabor’s liability . . . occurred before the filing of the petition.”); In re McGarry, 230 B.R. 272, 275 (Bankr. W.D. Pa. Feb. 25, 1999) (Bentz) (Claims for fraud and misrepresentation in connection with the unlawful sale of securities are noncontingent. “Contingent liabilities are those which rely on some future extrinsic event to trigger liability. . . . An obligation is noncontingent when all of the events giving rise to liability for the debt occurred prior to a debtor’s bankruptcy filing. . . . Here, all events giving rise to the Debtor’s liability occurred prepetition. The Debtor’s obligations are not contingent.”); In re Johnson, 191 B.R. 179, 181 (Bankr. D. Ariz. Oct. 5, 1995) (Case) (Claim that the debtor fraudulently induced a loan is noncontingent at the petition because “[a]ll the acts that gave rise to the claims have already occurred.” Court grants relief from the stay to allow state court to determine whether the claim was liquidated on the date of the petition.); In re Jordan, 166 B.R. 201, 202 (Bankr. D. Me. Feb. 14, 1994) (Goodman) (Claim that debtor misappropriated approximately $280,000 from a former employer is not contingent because “all events giving rise to liability occurred prepetition.” The debtor listed the former employer with a “disputed” claim of $280,000, and the former employer filed a proof of claim for $288,295.74. “The terms ‘debt’ and ‘claim’ are synonymous. . . . [T]he existence of a dispute over either the underlying liability or the amount of a debt does not automatically render the debt either contingent or unliquidated.”).
15 Loya v. Rapp (In re Loya), 123 B.R. 338 (B.A.P. 9th Cir. Feb. 11, 1991) (Ollason, Jones, Perris).
16 Loya v. Rapp (In re Loya), 123 B.R. 338 (B.A.P. 9th Cir. Feb. 11, 1991) (Ollason, Jones, Perris). But see Mendoza v. Curry (In re Duque), No. CC-05-1069-MaMcB, 2005 WL 6960181 (B.A.P. 9th Cir. Dec. 30, 2005) (unpublished) (Marlar, McManus, Brandt) (Tort liability for spousal assault and battery was contingent notwithstanding prepetition plea of nolo contendere to misdemeanor arising from same altercation.).
17 142 B.R. 856 (Bankr. E.D. Wis. July 6, 1992) (Shapiro).
21 See § 14.2 Time for Determining Debt.
22 But see In re Johnson, 191 B.R. 179, 182 (Bankr. D. Ariz. Oct. 5, 1995) (Case), and In re Johnson, 191 B.R. 184, 185 (Bankr. D. Ariz. Jan. 12, 1996) (Case) (Grants relief from the stay to permit state court to determine summary judgment motion with respect to a creditor’s claim against the debtor. State court entered summary judgment for the creditor. Based on that postpetition judgment, debtor is ineligible. “[T]his Chapter 13 case was filed on the day before continued summary judgment proceedings on the Russoli claims. The summary judgment proceedings could have, and could still, determine whether the Russoli claims were liquidated on the filing date—i.e. whether the Russoli claims are capable of ready computation. The fact that those proceedings were not finished on the bankruptcy filing date does not mean that the Russoli claims will forever be deleted from the Section 109(e) calculus. Rather, the state court can still decide today whether the debt was liquidated, and in what amount, on the filing date. . . . Therefore, the stay will be lifted to allow that determination to be made.” After the grant of relief from the stay, “the state court granted summary judgment in favor of the Russoli’s [sic] and against Debtor . . . . The summary judgment order from the state court on the Russoli claim establishes that the [Russolis] have a liquidated, noncontingent claim of at least $175,000, not including interest, attorney’s fees or treble damages.” When added to other noncontingent, liquidated, unsecured claims, the debtor does not qualify for Chapter 13 relief.). See also Elliott v. Papatones (In re Papatones), 143 F.3d 623, 626 (1st Cir. May 13, 1998) (Boudin, Bownes, Cyr) (Unsecured debt exceeded $250,000 where state court orally announced judgment for $276,606.87 earlier in the day on which the Chapter 13 petition was filed and clerk docketed the judgment one day after the petition. Court assumed without deciding that the debt did not become “liquidated” until the judgment was docketed. However, docketing was “essentially clerical in nature.” “As the mere docketing of the Elliott judgment did not violate the automatic stay, . . . and it is conceded that an unsecured debt becomes ‘liquidated’ in amount once reduced to judgment, . . . the $276,606.87 unsecured, liquidated debt owed Elliott on the date of the filing of the Chapter 13 petition rendered Papatones ineligible for Chapter 13 relief as provided in Bankruptcy Code § 109(e).”).
24 See In re O’Connell, 334 B.R. 312 (Bankr. D. Mass. Apr. 14, 2005) (Somma) (Confirmation is deferred pending state court litigation to determine contingent and unliquidated debt arising from automobile accident; debtor might employ § 502(c) claims estimation to pursue confirmation.).
25 See Craig Corp. v. Albano, 55 B.R. 363 (N.D. Ill. Nov. 7, 1985) (Shadur); In re Monaco, 36 B.R. 882 (Bankr. M.D. Fla. Nov. 2, 1983) (Paskay).
26 See In re Vaughn, 276 B.R. 323, 325 (Bankr. D.N.H. Apr. 5, 2002) (Vaughn) (Claims for fraud and breach of contract are noncontingent because “‘all events giving rise to liability occurred prior to the filing of the bankruptcy petition.’”).