Cite as: Keith M. Lundin, Lundin On Chapter 13, § 15.6, 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 It is not unusual for Chapter 13 debtors to be owners, officers and/or directors of a corporation that has debt. We are not concerned about the debtor who owns 10 shares of AT&T; but we care a lot about the debtor who was doing business as “Cindy’s Hat Shop, Inc.” when it went out of business owing suppliers and taxing authorities.
If corporate formalities have been respected, a Chapter 13 debtor who is an owner, officer or director can expect the same insulation from corporate obligations in a Chapter 13 case as would be available under nonbankruptcy law: the debts of the corporation are ordinarily not attributed to the individual debtor. Corporate debts for which the debtor has no personal liability are not counted toward the eligibility limitations in a Chapter 13 case—not because the corporate debts are “contingent,” but because the corporate debts are not debts of the debtor for any bankruptcy purpose.
It is arguable that corporate debts need not be scheduled unless the debtor otherwise has responsibility for the corporate debt—for example, by guaranty,3 by statute (trust fund taxes) or through ownership of collateral for the corporation’s borrowing. If counsel has any doubt whether the debtor has personal liability, the corporate debts should be scheduled as contingent debts.
Counsel should pay particular attention to state corporate law with respect to the liabilities of officers and directors for the debts of an insolvent corporation. It is the law of some states that officers and directors incur personal liability for corporate debts contracted while the corporation is manifestly insolvent.4 If the debtor’s corporation incurred debts while insolvent, the debtor is best served to schedule those debts as contingent debts of the debtor personally.
Scheduling the liabilities of a debtor’s corporation as disputed will not accomplish exclusion of those corporate debts from the eligibility calculus. In In re Claypool,5 the debtor listed liabilities of the debtor’s corporation as disputed, but nowhere indicated whether the corporate debts were contingent or unliquidated. The court concluded that disputed corporate debts were included in the § 109(e) computation and rendered the debtor ineligible: “[T]he debtor listed specific amounts for each of the corporate debts and disputed liability on them. None of those claims appear to be unliquidated or contingent. A liquidated, noncontingent claim whose validity is in dispute must nevertheless be included in determining eligibility under § 109(e).”6
This holding is consistent with many other decisions that disputed debts are not necessarily contingent or unliquidated and thus are counted toward the Chapter 13 debt limitations.7 However, the real problem in Claypool seems to be that debtor’s counsel failed to characterize the disputed corporate debts as also contingent in the debtor’s schedules. Nothing in the facts in Claypool reveals that the debtor was personally liable for the corporate debts by way of guaranty, judgment or otherwise. Mischaracterization of the corporate debts as merely disputed was fatal to eligibility.
Creditors of a corporation sometimes assert personal liability for corporate debts against individual shareholders, officers or directors. Such “veil-piercing” claims have been held to be contingent in an individual debtor’s Chapter 13 case and not counted toward the debt limitations.8 When a state court action to pierce the veil of the debtor’s corporation produced a prepetition judgment fixing the debtor’s personal liability, those corporate debts were properly scheduled and counted toward the debt limitations of § 109(e).9 One court found the sole operating officer of an incorporated automobile dealership ineligible for Chapter 13 because the debtor sold cars out-of-trust through the dealership and the debtor’s personal liability for that breach of trust caused the debtor’s unsecured debt to exceed the debt limitations.10 This court characterized the claim for breach of trust as noncontingent because the debtor admitted using corporate funds out-of-trust and thus there was no extrinsic event necessary to trigger the debtor’s liability.11 Ordinary claims for breach of contract or tort against a debtor’s corporation either are not debts at all or are contingent debts when the debtor is the sole or controlling shareholder of the corporation.12
If a state court action to pierce the veil of the debtor’s corporation is pending at the petition, the claim should be scheduled as contingent. The same should be done if the debtor failed to respect corporate formalities and, for example, the corporate charter was revoked or forfeited before the petition and state corporate law exposes the debtor to personal liability. If the debtor has failed to respect corporate formalities, creditor’s counsel may accomplish some leverage in the Chapter 13 case by insisting that corporate debts be counted for eligibility purposes.
It has to be admitted that treating veil-piercing claims as contingent is not altogether consistent with the logic of some of the tort cases discussed above.13 Typically, all of the events that may give rise to the debtor’s liability for a corporate debt occurred before the petition. Though the debtor stridently contests liability for corporate debt, disputed liability does not necessarily render the debt contingent for eligibility purposes.14 As discussed in more detail below,15 when all the events necessary to render a debtor personally liable for the debts of a corporation occurred before the petition but the debtor disputes liability for the corporation’s debt, some courts characterize the debt as unliquidated for § 109(e) purposes.16
The existence of a corporation under state law, liability for the obligations of a nonexistent defunct corporation and veil piercing quickly become complicated questions. Most bankruptcy courts will decline to litigate such questions at the eligibility stage of a Chapter 13 case.17
If the debtor has been doing business in corporate form, counsel may avoid eligibility trouble by checking whether the corporation is in good standing with the state of incorporation. Getting the corporate filings up to date and tending to other formalities before filing the Chapter 13 petition positions the debtor to argue that corporate debts are not imputed to the debtor. Prebankruptcy planning by transferring assets to or isolating obligations in a debtor’s corporation must be undertaken carefully to avoid the appearance of bad faith by the debtor.18
Characterization of corporate debt requires special attention when the debtor owns a professional corporation and has incurred debt in both corporate and personal capacities. The obligations of even a wholly owned professional corporation are not the debts of the individual stockholder and are (at most) contingent in the owner’s Chapter 13 case.19 That the debtor is secondarily liable by guaranty, for example, should not change the contingent nature of the debts of the debtor’s professional corporation.20
Direct liabilities of the debtor are noncontingent and are counted for Chapter 13 eligibility purposes, notwithstanding that the debtor’s corporation is also liable to the same creditor.21 For example, the 100 percent penalty assessment in 26 U.S.C. § 6672 is noncontingent and is counted as an unsecured claim for eligibility purposes under § 109(e), even though primary liability rests with the debtor’s corporation.22 The 100 percent penalty assessment is noncontingent because the debtor’s liability for the penalty is separate and independent of the obligation of the debtor’s corporation to remit withholding taxes—the government can collect the penalty directly from the debtor, from the debtor’s corporation or from both (subject to one satisfaction), and the corporation’s failure to pay is not a precondition to the debtor’s liability. In this same vein, the Bankruptcy Appellate Panel for the Ninth Circuit held that a claim for the failure of a debtor’s wholly owned corporation to pay for agricultural goods and trucking services was noncontingent because the debtor’s personal liability was independent of the corporation’s liability under federal statutes regulating agricultural commodities, and the events giving rise to that liability occurred before the Chapter 13 petition.23
4 See Berres v. Bruning (In re Bruning), 143 B.R. 253 (D. Colo. July 22, 1992) (Kane) (Colorado’s common-law fiduciary relationship between director and insolvent corporation’s creditors creates a technical trust within the meaning of § 523(a)(4). The trust arises upon insolvency of the corporation and not at the time of the director’s alleged wrongdoing. Where corporation is insolvent, director’s defalcation makes debts nondischargeable.); Bay 511 Corp. v. Thorsen (In re Thorsen), 98 B.R. 527 (Bankr. D. Colo. Mar. 28, 1989) (Clark) (Fiduciary relationship between director and creditors is created under Colorado law when corporation is insolvent.).
5 142 B.R. 753 (Bankr. E.D. Va. Dec. 31, 1990) (Tice).
6 In re Claypool, 142 B.R. at 755.
7 See § 17.1 Disputed Debts.
8 Holland v. DePaulis (In re DePaulis), No. 3:07cv75, 2008 WL 4446999, at *7, *8 (W.D.N.C. Sept. 26, 2008) (unpublished) (Reidinger) (Debt based solely on piercing corporate veil is contingent for Chapter 13 eligibility purposes. “Courts have held that since [veil-piercing claims] are in the nature of tort claims that they are to be considered contingent, even though the underlying claims for which liability is asserted may be in contract.” Agreeing with In re Blehm, 33 B.R. 678 (Bankr. D. Colo. Oct. 5, 1983) (Brumbaugh), and In re Robertson, 143 B.R. 76 (Bankr. N.D. Tex. Feb. 28, 1992) (McGuire), “[i]f veil piercing cases were to be treated as non-contingent, then every Chapter 13 debtor who owned a controlling interest in a corporation or limited liability company would be subject to having his eligibility to file under Chapter 13 challenged simply by the assertion of such a claim, whether or not the claim is well founded.” Bankruptcy court was correct that “‘[t]here is no right to collect against an individual unless you are successful in establishing a legal right to pierce the corporate veil, which is unusual and not an ordinary kind of proceeding. So it is contingent essentially on the establishment of a legal right.’”.); Craig Corp. v. Albano, 55 B.R. 363 (N.D. Ill. Nov. 7, 1985) (Shadur); In re Blehm, 33 B.R. 678 (Bankr. D. Colo. Oct. 5, 1983) (Brumbaugh).
9 Craig Corp. v. Albano, 55 B.R. 363 (N.D. Ill. Nov. 7, 1985) (Shadur).
10 In re Lewis, 157 B.R. 253 (Bankr. E.D. Va. Aug. 9, 1993) (Bonney).
11 In re Lewis, 157 B.R. at 255.
12 See In re Baird, 228 B.R. 324, 331 (Bankr. M.D. Fla. Jan. 7, 1999) (Proctor) (Claim against debtor as officer and controlling shareholder of a freight-forwarding corporation is contingent. Debtor’s corporation converted funds owed to carriers. State court complaint made claims against the debtor and the corporation totaling $96,606.81, trebled to $289,820.40 pursuant to a civil theft statute. “[T]he claim is contingent if the liability depends on some future event which may or may not occur, and which, therefore, makes it wholly uncertain whether ultimately there ever will be a liability. . . . Debtor alleges he does not owe money to IDS. Debtor produced evidence that the contract between IDS and TLM was made for the corporation and not for the Debtor individually. Debtor has not been adjudged liable for any amount in favor of IDS. . . . Debtor has not admitted to personally owe any portion of IDS’ claim, nor has it been deemed owed by operation of law. Since IDS’ disputed claim is not certain as to liability on the part of Debtor, its claim is contingent.”); In re Ramus, 37 B.R. 723 (Bankr. N.D. Ga. Jan. 18, 1984) (Norton) (Tort action against debtor’s corporation is a contingent debt notwithstanding that debtor is sole shareholder.).
16 See, e.g., Ho v. Dowell (In re Ho), 274 B.R. 867 (B.A.P. 9th Cir. Mar. 13, 2002) (Robles) (Claim against corporation in which debtor was an officer and minority shareholder was unliquidated because the debtor contested liability and the corporation’s creditor did not allege that the debtor was individually liable.).
17 See, e.g., In re Odette, 347 B.R. 60, 62–64 (Bankr. E.D. Mich. Aug. 7, 2006) (Shapero) (Challenge to eligibility based on debts of the debtors’ corporation and veil-piercing theories is rejected because determining whether corporate debts are personal liabilities would require extended evidentiary hearing. Citing Comprehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751 (6th Cir. Oct. 9, 1985) (Engel, Keith, Jones), “the threshold eligibility issue . . . should not be one that is lengthy, involved, or so deeply evidentiary as to go to the point of having the Court substantially dispose of the question of whether or not the Debtors or either of them are [sic] ultimately and legally liable for each of the debts . . . . [W]here eligibility depends in whole or in part upon the extent to which the debts of a corporation owned by that individual are also to be considered debts of that individual, utilizing piercing the corporate veil theories, it would be a rare case indeed where such could be concluded as a matter of legal certainty, without a full blown trial on the issue. A full blown trial is exactly what the case law says is inappropriate in an eligibility inquiry.”). Compare In re Leggett, 335 B.R. 227 (Bankr. N.D. Ga. Aug. 19, 2005) (Bonapfel) (Debtor’s liability for $1.9 million debt of corporation must be determined in district court litigation, since eligibility hinges upon liability.).
19 See also Vocque v. IRS, 60 B.R. 84 (Bankr. W.D. La. Jan. 15, 1986) (Smallenberger) (Postpetition earnings of a Chapter 13 debtor’s wholly owned professional corporation are not property of the estate and are not protected by the automatic stay.).
21 See Nelson v. Meyer (In re Nelson), 343 B.R. 671 (B.A.P. 9th Cir. May 15, 2006) (Klein, Ryan, Brandt), on remand, No. 05-10660, 2006 WL 2091899 (Bankr. N.D. Cal. July 26, 2006) (unpublished) (Jaroslovsky) (Chapter 7 filing for debtor’s corporation did not impact eligibility of individual debtor in separate Chapter 13 case because personal liability was not resolved in corporation’s case. Corporation did not receive a discharge, and many claims in corporate case are personal to debtor—arising from the debtor’s failure to pay former employees.); In re Tabor, 232 B.R. 85, 90 (Bankr. N.D. Ohio Mar. 29, 1999) (Shea-Stonum) (Debtors’ liability on notes signed ambiguously, “DBK Consultants, Inc.” is noncontingent because “Mr. Tabor’s liability under Notes was established once the Schumachers made the loans, and no further event was required to trigger Mr. Tabor’s liability. . . . Mr. Tabor did not qualify his signature on the Notes and the maker of the Notes is referred to by the personal pronoun ‘I’ . . . . [T]he indebtedness arising under the Notes is properly included when calculating whether or not Mr. Tabor’s unsecured indebtedness exceeds the limitation for filing a Chapter 13 case pursuant to 11 U.S.C. § 109(e).”).
22 Mazzeo v. United States (In re Mazzeo), 131 F.3d 295, 303–04 (2d Cir. Dec. 3, 1997) (Kearse, McLaughlin, Godbold) (Responsible person liability for withholding taxes for the debtor’s corporation for quarters ending prior to the Chapter 13 petition is noncontingent debt. “[T]hat the taxing authority may attempt to collect the withheld taxes from the corporation rather than from a responsible person does not make the debt contingent . . . . Mazzeo, [Westfield Financial Corporation’s] president, either was a responsible person or he was not; but his status did not depend on any event that had not occurred prior to the time he filed his Chapter 13 petition.”); McVey v. United States (In re McVey), No. 08-5283, 2010 WL 724366 (Bankr. D. Kan. Feb. 23, 2010) (unpublished) (Nugent) (Because debtor was responsible person and liable for unpaid payroll taxes, unsecured debt exceeded § 109(e) debt limit and debtor was ineligible.); In re Brown, 302 B.R. 913, 915 (Bankr. D. Or. Aug. 13, 2003) (Alley) (100% penalty for failure to remit withholding taxes is noncontingent because all the events giving rise to the debtor’s liability—“namely withholding by a corporation controlled by the Debtor without remission to the government”—occurred before the petition.); In re Maxfield, 159 B.R. 587 (Bankr. D. Idaho Oct. 27, 1993) (Hagan) (That a corporation controlled by the debtor is also liable to the IRS for unpaid withholding taxes “is not relevant” to the debtor’s personal liability for the full amount of those taxes for purposes of eligibility in a Chapter 13 case. The possibility that the corporation might pay some or all of the taxes in the corporation’s Chapter 11 case does not affect the eligibility calculus for the individual Chapter 13 debtor. The 100% penalty in 26 U.S.C. § 6672 is a direct liability of the debtor as the controlling officer. “Because no extrinsic act or event” is necessary to trigger the debtor’s liability, the debt is noncontingent in the individual debtor’s Chapter 13 case.); In re Stinchfield, 126 B.R. 251 (Bankr. E.D. Tex. June 12, 1990) (Sharp). Compare In re Robertson, 143 B.R. 76 (Bankr. N.D. Tex. Feb. 28, 1992) (McGuire) (Statutory tax penalties assessed against the debtor under §§ 6700 and 6701 of the Tax Code are contingent and unliquidated debts because civil tax penalties of this sort are akin to tort claims.).
23 Nicholes v. Johnny Appleseed of Wash. (In re Nicholes), 184 B.R. 82, 88–89 (B.A.P. 9th Cir. June 23, 1995) (Russell, Meyers, Jones) (Debts of debtor’s wholly owned corporation are not contingent because all events giving rise to the debtor’s liability (if any) occurred prior to the filing of the petition. “The issue of whether or not a debt is contingent is a question of law. . . . None of the debts listed on debtor’s schedules as ‘contingent’ rely on some future extrinsic event to trigger liability. Rather, all events giving rise to liability for these debts arose when Boss Fruit [the debtor’s wholly owned corporation] received the agricultural goods and trucking services. Furthermore, debtor’s potential personal liability stems from Boss Fruit’s failure to pay for the PACA obligations. All of these events occurred prior to the debtor’s bankruptcy filing. . . . Debts of a corporation listed on an individual debtor’s schedules are not rendered contingent simply because the individual debtor’s liability for the corporation’s debts is at issue. . . . [I]t makes no difference that the debts are those of the corporation; debtor’s dispute over liability for Boss Fruit’s debts does not render such debts ‘contingent.’ Since the acts which may give rise to the debtor’s personal liability for the corporation’s debts occurred prior to the filing of the petition, no future event need occur to impose liability. The debts are therefore not contingent.”).