§ 15.7     Are Prebankruptcy Judgments Contingent?
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 15.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Only “noncontingent” debts (that are also “liquidated”1) are counted toward the secured and unsecured debt limitations for eligibility for Chapter 13 in 11 U.S.C. § 109(e).2 Without regard to the nature of the underlying cause of action—contract, tort, statute, whatever—if a debt has been reduced to a prepetition judgment against the debtor, that debt is noncontingent and counted toward the Chapter 13 debt limitations.3 Debtor’s counsel must schedule prepetition judgments, and characterization of a prepetition judgment as contingent or disputed is not likely to defeat inclusion in the eligibility calculation.

[2]

There is some dispute whether a judgment on appeal at the petition is noncontingent for § 109(e) purposes. The better view is that a prepetition judgment against the debtor is a noncontingent debt notwithstanding a pending appeal.4 It has been said that a prepetition judgment establishes a noncontingent debt because all of the events giving rise to the debtor’s liability occurred prior to the petition notwithstanding that appeal of the judgment may interrupt the usual res judicata effect of the judgment.5 Noticing the appeal of a judgment prior to filing the Chapter 13 petition maximizes the debtor’s argument that the claim is contingent. If appeal of the judgment triggers de novo review under state law, the debtor’s argument is enhanced. If the appeal period expired prepetition, the judgment is most likely conclusive of the noncontingent nature of the debt. If the prepetition judgment was in favor of the debtor and the creditor has appealed, the judgment determining the debtor not liable establishes that there is no right to payment, therefore no claim. Out of an abundance of caution, debtor’s counsel may wish to schedule the appealing party as a contingent claim holder for notice and discharge purposes.

[3]

Discharge in a prior bankruptcy case can affect whether a prepetition judgment is counted toward eligibility but not because the prior discharge affects the contingent or noncontingent nature of the debt. A prepetition judgment discharged in a prior bankruptcy case is voided as a personal liability of the debtor by 11 U.S.C. § 524(a)(1)—there is no right to payment and no debt in a subsequent bankruptcy case.6

[4]

By operation of state law, a prepetition judgment often becomes a lien on property of the debtor that then becomes a lien on property of the Chapter 13 estate. If the prebankruptcy judgment is secured by a lien on property of the Chapter 13 estate, the debt is a secured claim for eligibility purposes in the Chapter 13 case—this is the rule derived from the Supreme Court’s decision (in another context) in Johnson v. Home State Bank.7 This would be true even if the debtor’s personal liability to the judgment lienholder was discharged in a prior bankruptcy case—the judgment lien would be counted as a secured debt for eligibility purposes and would not be rendered contingent by the absence of personal liability of the debtor.

[5]

Things get more interesting when the debtor’s personal liability was discharged in a prior bankruptcy case and the surviving judgment lien can be avoided or stripped off in the subsequent Chapter 13 case—for example, because the lien impairs an exemption for purposes of § 522(f)8 or because there is no value to support the lien in the property to which the lien attaches.9 Good arguments can be made that a void or avoidable lien unsupported by personal liability is not a claim or debt in the Chapter 13 case and should not be counted for eligibility purposes.10

[6]

An unsecured prebankruptcy judgment declared nondischargeable in a Chapter 7 case remains a personal liability of the debtor and is counted for eligibility purposes as a noncontingent (and, typically, liquidated) unsecured debt in a later Chapter 13 case.11 When the prebankruptcy judgment was the subject of unresolved nondischargeability litigation in a simultaneously pending Chapter 7 case, one court held that the judgment was noncontingent for eligibility purposes based on this logic:

Debtor’s liability to the Objecting Creditors was fixed prior to Debtor’s bankruptcy. There is no further event necessary to trigger the Debtor’s liability. The Debtor has not cited any cases to support the argument that his debts are “contingent” in determining eligibility for Chapter 13 cases merely because the debts may eventually be deemed dischargeable in his prior Chapter 7 case. . . . [A] debt is not “released” i.e., does not become ultimately unenforceable, until such time that a Chapter 7 nondischargeable debt litigation is resolved in favor of a debtor. While the discharge of a debt remains in limbo, the debtor remains subject to “debt collection activity or the threat of such activity.” . . . Accordingly, the judgment held by the Objecting Creditors, even though in limbo in the Chapter 7 nondischargeability litigation, constitutes a “debt” within the meaning of § 109(e), and counts toward the eligibility limits for Chapter 13.12
[7]

It has been held that the appeal of a nondischargeability determination pending when a Chapter 13 case is filed does not render the debt contingent.13 In contrast, one court concluded that a discharged tax debt is contingent in a Chapter 13 case filed during the IRS’s appeal of the dischargeability determination.14 This court reasoned that reversal on appeal would be an “extrinsic event” triggering the debtor’s liability after the Chapter 13 petition.15


 

1  See § 14.1  Dollar Amounts and § 16.1  What Is a Liquidated Debt?.

 

2  See § 14.1  Dollar Amounts and § 15.1  What Is Noncontingent Debt?.

 

3  Hammers v. IRS (In re Hammers), 988 F.2d 32 (5th Cir. Apr. 13, 1993) (Politz, King, Barksdale) (Tax liability determined by Tax Court to be in excess of $100,000 is fixed, liquidated and determined and exceeds the $100,000 eligibility limitation in § 109(e) notwithstanding that the debtor disputes the tax court judgment and claims that the judgment should be subordinated to the claims of other creditors.); Lindsey v. Cohen (In re Lindsey), No. CC-08-1287-PaDMk, 2009 WL 7751414 (B.A.P. 9th Cir. May 14, 2009) (unpublished) (Pappas, Dunn, Markell) (Prepetition district court default judgment for unpaid federal income taxes totaling $9,559,587 rendered debtors ineligible. All events giving rise to tax liability occurred before petition. Prepetition tax debts are noncontingent.); Nichols v. Whipple (In re Nichols), No. AZ-05-1360-KPaD, 2007 WL 7541002 (B.A.P. 9th Cir. Jan. 3, 2007) (unpublished) (Klein, Pappas, Dunn) (Debtors were not eligible based on prepetition state court judgment. Debtors and their counsel misrepresented amount of state court judgment based on an “immaterial and plainly inadvertent typographical error” in a bankruptcy court order.); In re Heleva, Nos. CIV. A. 00-3434, 98-20358, 2001 WL 1176394, at *2 (E.D. Pa. Oct. 2, 2001) (unpublished) (Waldman) (Confessed judgment based on debtor’s guaranty was noncontingent. “The possibility of a challenge to the validity of a confessed judgment is not an occurrence of an extrinsic event which will trigger the liability of the debtor to the creditor, thereby making it contingent. . . . A confessed judgment does in fact constitute a final judgment.”); In re Miloszar, 238 B.R. 266 (D.N.J. July 27, 1999) (Irenas) ($1.25 million prebankruptcy default judgment is a noncontingent debt because all of the events necessary to establish the debtor’s liability occurred before the petition and the state court judgment is entitled to full faith and credit under 28 U.S.C. § 1738.); Craig Corp. v. Albano, 55 B.R. 363 (N.D. Ill. Nov. 7, 1985) (Shadur) (Prepetition judgment fixing a debtor’s personal liability for corporate debts renders the debts noncontingent.); In re Vinieris, 391 B.R. 707 (Bankr. S.D.N.Y. Aug. 7, 2008) (Glenn) (Prepetition judgment debt causes debtor to exceed noncontingent, liquidated, secured debt limit; creditor renewed its judgment and lien, thereby extending statutory time for collection.); In re Monroe, 282 B.R. 219, 223 (Bankr. D. Ariz. Aug. 8, 2002) (Haines) (“The Monroes’ debt is noncontingent because all of the events occurred several years prior to Mrs. Monroe filing her Chapter 13 bankruptcy petition and the Indiana District Court entered a judgment against Mr. Monroe in 1994.”); In re Snell, 227 B.R. 127 (Bankr. S.D. Ohio Apr. 3, 1998) (Sellers) (State court judgment awarding damages in the amount of $262,248.85 is fatal to debtor’s eligibility.); In re Ennis, 178 B.R. 177 (Bankr. W.D. Mo. Jan. 6, 1995) (See) (State court judgment in favor of former spouse secured by lien on the debtor’s right to receive an inheritance collaterally estops the debtor from contesting liability to the former spouse. If the lien is invalid, the resulting unsecured claim is greater than $100,000, and the debtor is not eligible.); In re Mannor, 175 B.R. 639 (Bankr. E.D. Mich. Dec. 13, 1994) (Spector) (Prepetition state court judgment against the debtor precludes the argument that the underlying debt is owed by a corporation and should not be counted for § 109(e) purposes.); In re Gordon, 127 B.R. 574 (Bankr. E.D. Pa. May 23, 1991) (Scholl) (State criminal court sentence requiring payment of restitution in excess of $700,000 is a claim and is noncontingent for Chapter 13 eligibility purposes. The “contingencies” argued by debtor—potential reduction of ability to pay in the future or debtor’s death before completion of payments—might trigger relief from liability, but liability has already attached and restitution claim is not contingent on occurrence of any future event.); In re King, 126 B.R. 777 (Bankr. N.D. Ill. Apr. 23, 1991) (Schmetterer) (State foreclosure judgment indicating mortgage liens in excess of $350,000 demonstrates that debtor was ineligible.). See also § 138.7  Miscellaneous Claims Issues, discussing the res judicata effect of a state court judgment in claims litigation in Chapter 13 cases.

 

4  See Gould v. Gregg, Hart, Farris & Rutledge, 137 B.R. 761 (W.D. Ark. Feb. 5, 1992) (Waters) (Disputed debt for attorneys’ fees in a state court judgment is noncontingent notwithstanding appeal of that award.); Craig Corp. v. Albano, 55 B.R. 363 (N.D. Ill. Nov. 7, 1985) (Shadur) (Judgment on appeal is not contingent.); In re Scott, No. 06-80176-G3-13, 2006 WL 3166841, at *3 (Bankr. S.D. Tex. Nov. 1, 2006) (unpublished) (Clark) (“A judgment on appeal represents a liability that is fixed and noncontingent and remains a final, enforceable judgment until it is reversed, if ever, on appeal”; prepetition judgment for $605,750 renders debtor ineligible to convert from Chapter 7 to Chapter 13 notwithstanding that judgment is on appeal.); In re Rohl, 298 B.R. 95 (Bankr. E.D. Mich. Sept. 3, 2003) (Shefferly) (Prepetition judgments are not rendered contingent or unliquidated by the debtor’s appeals.); In re Hanson, 275 B.R. 593 (Bankr. D. Colo. Apr. 3, 2002) (Brown) (Prepetition domestic relations court awards are not contingent or unliquidated notwithstanding that debtor disputes the debts and has appealed.); 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) (That the debtor intends to appeal a state court summary judgment that fixed the liability and amount of a claim against the debtor makes no difference in the eligibility calculation because “[t]he fact that the claim will be further disputed on appeal does not make it unliquidated or contingent.”); In re Cluett, 90 B.R. 505 (Bankr. M.D. Fla. Aug. 22, 1988) (Paskay) (Judgment is noncontingent until it is reversed on appeal.). Contra Smith v. Martinez, 51 B.R. 944 (Bankr. D. Colo. Aug. 15, 1985) (Clark).

 

5  See In re Mitchell, 255 B.R. 345, 358–60 (Bankr. D. Mass. Nov. 15, 2000) (Feeney) (Judgment for $275,000 renders the debtors ineligible for Chapter 13 notwithstanding that under California law a judgment on appeal is not entitled to res judicata effect. “Although under California law that judgment is not entitled to res judicata effect, it is not a nullity and cannot be ignored. . . . [A]ll events giving rise to the Debtors’ liability . . . occurred prior to the filing of the Chapter 13 petition. Thus, the California judgment is not a contingent debt.”). But see In re Musaelian, No. 02-11458, 2002 WL 31863836, at *1 (Bankr. N.D. Cal. Aug. 26, 2002) (unpublished) (Jaroslovsky) (Prebankruptcy default judgment for $488,000 does not render debtor ineligible because trial court subsequently conducted a full trial and entered judgment for only $81,000; collateral estoppel does not apply to the default judgment because “some scrutiny of the basis for [the state court] claim is proper . . . .” “[S]urvival of the larger judgment is contingent on a finding that [sic] by the state court that this is the proper judgment amount, even though it subsequently held a full trial and determined that the damages . . . were far less.”).

 

6  See also § 85.5  Debts Discharged in Prior Bankruptcy and Nonrecourse Debts and § 138.4  Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case.

 

7  501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (June 10, 1991). See In re Cavaliere, 194 B.R. 7 (Bankr. D. Conn. Apr. 1, 1996) (Shiff) (Secured portions of judgment liens that survive discharge in a prior Chapter 7 case are counted toward the secured debt limitation for eligibility in a subsequent Chapter 13 case.), rev’d on other grounds, 208 B.R. 784 (D. Conn. May 30, 1997) (Arterton). See also § 14.2  Time for Determining Debt, § 14.4  Are Claims Split under 11 U.S.C. § 506(a)?, § 85.5  Debts Discharged in Prior Bankruptcy and Nonrecourse Debts and § 138.4  Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case.

 

8  11 U.S.C. § 522(f) is discussed in § 49.1  Available in Chapter 13 Cases, § 49.2  Procedure for Lien Avoidance, § 49.3  Limitations on Lien Avoidance, § 49.4  Section 522(f) after BAPCPA: Household Goods Corrupted and § 49.5  Protecting Lienholder after Lien Avoidance.

 

9  See § 76.1  Valuation, Claim Splitting and Dewsnup, § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA, § 85.5  Debts Discharged in Prior Bankruptcy and Nonrecourse Debts and § 138.4  Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case.

 

10  See § 14.2  Time for Determining Debt, § 14.3  Use of Statements and Schedules in Eligibility Calculations, § 14.4  Are Claims Split under 11 U.S.C. § 506(a)? and § 23.1  Eligibility of a Serial Filer: “Chapter 20” and Beyond.

 

11  See In re Weiss, 251 B.R. 453 (Bankr. E.D. Pa. Aug. 9, 2000) (Scholl) (Portion of tax debt declared nondischargeable in prior Chapter 7 case is noncontingent and is counted toward Chapter 13 eligibility.); In re Slomnicki, 250 B.R. 531 (Bankr. W.D. Pa. July 19, 2000) (Fitzgerald) (State court judgments declared nondischargeable in prior Chapter 7 case are noncontingent and preclude eligibility for Chapter 13.); Wisconsin v. Weller (In re Weller), 189 B.R. 467 (Bankr. E.D. Wis. Dec. 11, 1995) (Ihlenfeldt) (Debtor is ineligible because of state court judgment for $278,928.60 for unfair rental practices in violation of Wisconsin statutes. Judgment debt is noncontingent and liquidated notwithstanding that it was entered during a prior Chapter 13 case because debtor did not appeal state court determination that entry of judgment was not in violation of the automatic stay. Conversion of prior Chapter 13 case and entry of Chapter 7 discharge does not help debtor’s eligibility because judgment for $278,928.60 for violations of unfair rental practices statutes was nondischargeable under § 523(a)(7).). See also In re Ekeke, 198 B.R. 315 (Bankr. E.D. Mo. June 14, 1996) (Schermer) (Debtors’ contention that tax debts were discharged in a prior Chapter 7 case makes the claims disputed but not contingent.).

 

12  In re Redburn, 193 B.R. 249, 259–61 (Bankr. W.D. Mich. Feb. 29, 1996) (Gregg). See § 23.1  Eligibility of a Serial Filer: “Chapter 20” and Beyond.

 

13  In re Weiss, 251 B.R. 453 (Bankr. E.D. Pa. Aug. 9, 2000) (Scholl) (Portion of tax claim declared nondischargeable in prior Chapter 7 case is noncontingent and is counted toward Chapter 13 eligibility notwithstanding that the debtor has appealed that portion of the court’s judgment.); In re Slomnicki, 250 B.R. 531, 532 & n.2 (Bankr. W.D. Pa. July 19, 2000) (Fitzgerald) (State court judgments declared nondischargeable in prior Chapter 7 case preclude eligibility for Chapter 13 notwithstanding that the debtor has appealed the nondischargeability determination. “Debtor’s obligation to the Movants has been fixed by judgments that were appealed through the state court system and are now final. Thus, the obligation is liquidated and noncontingent.” In a footnote, “Debtor relies upon the pendency of the appeal from the January 5, 2000, order . . . which found that the debt was not discharged in Chapter 7, as creating a dispute or contingency sufficient to exclude the judgments from the eligibility criteria of § 109(e). Such is not the law.”).

 

14  In re Weiss, 251 B.R. 453 (Bankr. E.D. Pa. Aug. 9, 2000) (Scholl).

 

15  In re Weiss, 251 B.R. at 465–66 (“There is, of course, a contingency that the IRS will prevail in the appeal of Weiss I which will now go forward and establish a nondischargeable debt to it in excess of $269,250 . . . . District Court reversal would be an ‘extrinsic event’ which would trigger the Debtor’s liability for additional tax debt. Hence, the debtor’s potential nondischargeable obligation for the 1986 and 1987 tax year delinquencies is contingent, and cannot be considered.”).