§ 16.2     Effect of Defenses and Counterclaims
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 16.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

As discussed above,1 for eligibility purposes in a Chapter 13 case, only noncontingent, liquidated debts are counted. “Liquidated” is an undefined term that has come to be viewed by many courts as “ease of calculation.”2 “Ease,” of course, is badly subjective.

[2]

To further complicate whether a debt is liquidated, it has been held that the existence of affirmative defenses or counterclaims does not affect the liquidated character of a claim.3 The logic of these opinions is that a claim is liquidated for eligibility purposes even though a final hypothetical judgment might be reduced by counterclaims, offsets or defenses of the debtor. It has also been said that defenses address whether the debtor is liable—not whether the amount of the debt can be easily calculated—thus defenses have no bearing on liquidation for eligibility purposes.4

[3]

These cases are troublesome because characterization of a dispute as an affirmative defense or counterclaim is not always obvious, and defenses or counterclaims are not easily distinguished from other kinds of disputes that do affect whether a debt is liquidated.5 And if “ease of calculation” is the benchmark of a liquidated debt,6 when if ever would defenses or counterclaims cause uneasiness? Debtors do not have a clear rule to follow when scheduling a debt that may be subject to defenses or counterclaims. The opinions seem to say that the debt should be scheduled in the gross amount and not reduced by any estimate of defenses, counterclaims or offsets.7

[4]

This view is not easily squared with some of the tort cases discussed previously.8 For example, in Loya v. Rapp (In re Loya),9 the Bankruptcy Appellate Panel for the Ninth Circuit held that malpractice claims against a professional tax preparer were liquidated for eligibility purposes because many of the victims admitted their claims were barred by a statute of limitations, and claims that are barred by a statute of limitations are “capable of ready determination and computation.”10 It is conventional wisdom that a statute of limitations is a defense that is pleaded in the answer to a complaint or by motion. If defenses or counterclaims do not affect the liquidated character of a claim, was the Loya panel correct to apply a statute of limitations to determine that debts were liquidated?

[5]

It would be appropriate to consider the statute of limitations and other defenses or counterclaims to determine the allowance of claims under 11 U.S.C. § 502(b)(1). However, nowhere does § 109(e) refer to allowed claims; rather, liquidated and noncontingent debts are counted for eligibility purposes without regard to whether they are ultimately allowed.11 The liquidated amount of a debt may be quite different from the amount that would be allowable in bankruptcy. The cases thus seem to hold that defenses and counterclaims are not relevant to whether a debt is liquidated, but certain defenses have been considered to determine that liquidation of claims would require only a simple hearing.

[6]

One “defense”—the defense of discharge in bankruptcy12—may affect the eligibility calculus, but not because it renders a debt unliquidated. As discussed elsewhere,13 discharge in bankruptcy eliminates personal liability and makes the debt unenforceable. If there is no personal liability, there is no debt to be counted toward eligibility in the first instance.14 Arguably, discharge in bankruptcy does not affect the ease or difficulty of calculating the amount of a debt and thus should not change the liquidated or unliquidated character of a debt for purposes of § 109(e).15 However, as discussed above,16 the “defense” of discharge in bankruptcy could render a debt unliquidated in a jurisdiction that considers liability to be a component of the question whether a debt is liquidated.


 

1  See § 14.1  Dollar Amounts, § 15.1  What Is Noncontingent Debt? and § 16.1  What Is a Liquidated Debt?.

 

2  See § 16.1  What Is a Liquidated Debt?.

 

3  In re Newman, 259 B.R. 914, 919 (Bankr. M.D. Fla. Mar. 5, 2001) (Glenn) (Prepetition tax liability was liquidated debt for eligibility purposes notwithstanding that debtor disputed the priority and asserted grounds for waiver of penalties. “[T]he total tax liability including the tax due, interest and penalties is the liquidated amount for purposes of determining Chapter 13 eligibility. The ‘potential for defenses or counterclaims that might reduce the creditors’ actual collection’ does not render a debt ‘unliquidated’ or result in a lower amount for eligibility purposes.”). Accord In re Doyle, 340 B.R. 381 (Bankr. D. Or. Mar. 21, 2006) (Alley) (Civil penalties for violations of state campaign finance laws were liquidated at petition, even though debtor may have defense to claim before Election Commission.); In re Smith, 325 B.R. 498, 504–05 (Bankr. D.N.H. Apr. 15, 2005) (Deasy) (“The relevant determination is the amount of the creditor’s claim rather than the debtor’s ultimate liability after taking into account any defenses or counterclaims.” Claim of Plymouth Village Water & Sewage District for costs resulting from a violation of hazardous waste laws was not unliquidated even though debtors claimed that costs incurred were unreasonable and that the District failed to mitigate damages. “Even if the Debtor has defenses that may decrease the amount of the District’s claim based on reasonableness of expenditures or a failure to mitigate damages, it does not affect the character of the claim.”); In re Fredricksen, 325 B.R. 302 (Bankr. D. Or. Apr. 11, 2005) (withdrawn from publication) (Debtor scheduled $5,300,000 debt to IRS as unliquidated based on innocent spouse defense under 26 U.S.C. § 6015; “fact that debtor has a potential defense to liability does not render the tax debt unliquidated[,]” citing Sylvester v. Dow Jones & Co. (In re Sylvester), 19 B.R. 671, 673 (B.A.P. 9th Cir. Feb. 9, 1982) (Hughes, Katz, Volinn).); In re Hanson, 275 B.R. 593 (Bankr. D. Colo. Apr. 3, 2002) (Brown); In re Kaufman, 93 B.R. 319 (Bankr. S.D.N.Y. Nov. 17, 1988) (Schwartzberg); In re Clark, 91 B.R. 570 (Bankr. D. Colo. Oct. 14, 1988) (Brooks); In re Burgat, 68 B.R. 408 (Bankr. D. Colo. Dec. 30, 1986) (Matheson); Vaughn v. Central Bank of the S., 36 B.R. 935 (N.D. Ala. Feb. 3, 1984) (Acker), aff’d, 741 F.2d 1383 (11th Cir. Aug. 15, 1984) (Table). See also In re Reader, 274 B.R. 893 (Bankr. D. Colo. Mar. 26, 2002) (Brown) (Claim for misappropriation from probate estate is noncontingent notwithstanding that the debtor may raise defenses or counterclaims.).

 

4  See, e.g., Cannon v. PNC Bank, N.A. (In re Cannon), 521 B.R. 686, 697 (D. Utah Oct. 23, 2014) (Shelby) (Mortgage claims were liquidated for purposes of eligibility under § 109(e) notwithstanding that debtor scheduled them as disputed and claimed offsets and defenses against amounts owed; “a mere ‘dispute regarding liability on a claim is insufficient to render a claim unliquidated.’”); 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.).

 

5  See § 16.1  What Is a Liquidated Debt?.

 

6  See § 16.1  What Is a Liquidated Debt?.

 

7  See, e.g., In re Brown, 302 B.R. 913, 916–17 (Bankr. D. Or. Aug. 13, 2003) (Alley) (100% penalty claim for withholding by corporation without remission is noncontingent and liquidated notwithstanding that the debtor intends to pay some or all of the debt through the related Chapter 11 case for the corporation. “The fact that a third party might relieve the Debtors of liability by paying the tax at some future date does not reduce or limit their liability as of the date of the petition. . . . The amount of the debt in this case is not subject to any serious dispute: The Debtors and Smith Masonry have already acknowledged the amount withheld from the paychecks. Even if they were to dispute this, the amount withheld would be easily ascertained by referring to the corporation’s payroll records. The claim is liquidated.”).

 

8  See § 15.5  Is Tort Liability Contingent? and § 16.1  What Is a Liquidated Debt?.

 

9  123 B.R. 338 (B.A.P. 9th Cir. Feb. 11, 1991) (Ollason, Jones, Perris).

 

10  Loya v. Rapp (In re Loya), 123 B.R. 338 (B.A.P. 9th Cir. Feb. 11, 1991) (Ollason, Jones, Perris). See also In re Conrad, 252 B.R. 559 (Bankr. M.D. Fla. May 26, 2000) (Paskay) (Debtor is not eligible based on California judgment for $6,563,043.69 in an adversary proceeding that determined the nondischargeability of fraud claims in a prior bankruptcy case; California judgment was not barred by five-year Florida statute of limitations because the debtor did not establish a residence in Florida until the year before filing the Chapter 13 case.).

 

11  See § 14.2  Time for Determining Debt. See, e.g., In re Marrama, 345 B.R. 458, 471 (Bankr. D. Mass. July 14, 2006) (Hillman) (Unsecured debts scheduled in Chapter 7 case pending when debtor filed new Chapter 13 case are counted toward eligibility notwithstanding that some of those debts are subject to defenses such as the statute of limitations. “While the Debtor may be able to defend against those claims based upon the statute of limitations . . . a defense to a claim does not reduce the claim at the time a court is considering the claim.”).

 

12  Discharge in bankruptcy is still (inappropriately) identified as a defense in some state rules of civil procedure notwithstanding that it need not be pleaded to be effective under substantive bankruptcy law. See 11 U.S.C. § 524(a). Rule 8(c) of the Federal Rules of Civil Procedure was not amended to delete “discharge in bankruptcy” from the list of affirmative defenses until late in 2010—31 years after the Bankruptcy Code became inconsistent with the Rule.

 

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

 

14  Unless there is also a lien on estate property. See § 85.5  Debts Discharged in Prior Bankruptcy and Nonrecourse Debts.

 

15  See In re Ekeke, 198 B.R. 315 (Bankr. E.D. Mo. June 14, 1996) (Schermer) (Debtors’ assertion that tax claims were discharged in a prior Chapter 7 case does not render the claims unliquidated.). See also In re Redburn, 193 B.R. 249 (Bankr. W.D. Mich. Feb. 29, 1996) (Gregg) (Claims that are the subject of nondischargeability litigation in a simultaneously pending Chapter 7 case are “liquidated” for § 109(e) purposes because a prepetition stipulated judgment against the debtor fixed the claims in amount.). But see In re Weiss, 251 B.R. 453, 466 (Bankr. E.D. Pa. Aug. 9, 2000) (Scholl) (“[I]t was . . . already determined in Weiss I that the Debtor’s liability for tax years 1986 and 1987 was dischargeable. . . . [T]he IRS should be foreclosed from arguing with us that it has a ‘liquidated’ claim for these amounts.”).

 

16  See § 16.1  What Is a Liquidated Debt?.