§ 138.7 — Miscellaneous Claims Issues

Revised: June 10, 2004

[1]

Usury1 and even RICO2 laws have been used by clever Chapter 13 lawyers to disallow or subordinate creditors’ claims. That the amount of a creditor’s claim is difficult to calculate may render the claim unliquidated for eligibility purposes3 but does not disallow the claim for other purposes in the Chapter 13 case. Similarly, claims against the debtor as a personal guarantor, though contingent, may be estimated for Chapter 13 purposes and allowed.4

[2]

Res judicata can bar relitigation of a debtor’s defenses to a claim when the claim was fully litigated prior to bankruptcy.5 On the other hand, if the debtor was successful in litigation prior to bankruptcy, the state court judgment can provide a defense to allowance of the claim in a subsequent Chapter 13 case.6

[3]

The enforcement of arbitration clauses in consumer credit contracts is a hot issue that has spilled into Chapter 13 claims litigation. Typically, the issue arises when the debtor objects to a claim and the creditor responds by invoking a contract clause that requires arbitration of disputes. The resulting collision of two strong policies—one favoring the enforcement of contract arbitration clauses and the other supporting the exclusive jurisdiction of the bankruptcy court to resolve claims disputes—has more often than not been resolved in favor of the debtor in Chapter 13 cases.7

[4]

Many reported and unreported decisions reveal the great variety of claims issues and defenses that are litigated in Chapter 13 cases.8


 

1  See Corcoran v. TranSouth Fin. Corp. (In re Corcoran), 268 B.R. 882 (Bankr. M.D. Fla. 2001) (Finance charge in debtors’ used-car contract did not exceed Florida statutory maximum of $17 per $100 per year.); Jones v. First Fidelity Acceptance Corp. (In re Jones), 231 B.R. 66 (Bankr. E.D. Ark. 1999) (Adversary proceeding alleging that car loan was usurious under Arkansas law is defeated by choice of law provision in contract that required application of Texas law.); Dent v. Associates Equity Servs. Co. (In re Dent), 130 B.R. 623 (Bankr. S.D. Ga. 1991) (Nonrebatable “loan fee,” when added to other interest charges, rendered loan transaction usurious under Georgia law.); Boyajian v. Dufusco (In re Giorgio), 62 B.R. 853 (Bankr. D.R.I. 1986) (In addition to disallowing and subordinating creditor’s claim, court found claim usurious, found that claim holder violated the Rhode Island RICO Act and awarded the debtors treble damages.).

 

2  Boyajian v. Dufusco (In re Giorgio), 62 B.R. 853 (Bankr. D.R.I. 1986).

 

3  See § 16.1 [ What Is a Liquidated Debt? ] § 16.1  What Is a Liquidated Debt?.

 

4  In re Fox, 64 B.R. 148 (Bankr. N.D. Ohio 1986). See also National Loan Investors v. LaPointe (In re LaPointe), 253 B.R. 496 (B.A.P. 1st Cir. 2000) (Debtor as guarantor of mortgage has standing to challenge reasonableness of foreclosure sale; bankruptcy court finding that mortgage holder failed to give adequate notice and failed to reasonably advertise the foreclosure sale was supported by the record. Proper remedy was not disallowance of deficiency claim, but debtor was entitled to offset against the deficiency the damages sustained from the failure to properly conduct the foreclosure sale.).

 

5  Williams v. International Bhd. of Elec. Workers, Local 520 (In re Williams), 298 F.3d 458 (5th Cir. 2002) (District court judgment for contempt and damages is res judicata in claims litigation during Chapter 13 case.); Abboud v. Abboud (In re Abboud), 237 B.R. 777 (B.A.P. 10th Cir. 1999) (Debtor’s statute of limitations objection to claim is barred by Rooker Feldman doctrine because same statute of limitations defense was decided against the debtor by a state court before bankruptcy. Court distinguishes Peper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 2d 281 (1939).); In re Morley, 292 B.R. 446 (Bankr. D.N.H. 2003) (On debtor’s objection to claim, prebankruptcy settlement agreement was not subject to rescission based on fraud.); Ramirez v. NYCTL 1996-1 Trust (In re Ramirez), 283 B.R. 156 (Bankr. S.D.N.Y. 2002) (Default judgment in prior Chapter 13 case that determined the amount of city’s tax claim is res judicata in claims litigation in subsequent Chapter 13 case.); In re Hanes, 248 B.R. 136 (Bankr. W.D. Mo. 2000) (Failure to appeal state court order confirming support obligation is fatal to debtors’ objection to the resulting claim.); In re Tant, 156 B.R. 1018 (Bankr. W.D. Mo. 1993) (State court determination that judgment was still enforceable, notwithstanding the failure of any party to seek execution or revival before passage of 10 years, is binding on bankruptcy court, and claim based on that judgment is valid.); In re Bowers, 69 B.R. 822 (Bankr. D. Conn.), rev’d sub nom. Bowers v. Connecticut Nat’l Bank, 78 B.R. 388 (D. Conn. 1987) (Doctrine of res judicata bars reconsideration of the validity of the note underlying the creditor’s claim.); Rau v. Bender (In re Gilman), 59 B.R. 234 (Bankr. D. Ariz. 1986) (Chapter 13 trustee has standing to object to claim; however, prepetition judgment against the debtor bars relitigation by trustee.); In re Novak, 37 B.R. 31 (Bankr. D. Conn. 1983) (Debtor who objected to proof of claim is entitled to discovery to determine whether default judgments underlying claim were procured by fraud.); Bloomer v. Bustraan, 32 B.R. 25 (Bankr. W.D. Mich. 1983) (Res judicata defeats objection to claim based on a prebankruptcy state court default judgment in the absence of fraud or collusion.). But see In re Germain, 249 B.R. 47 (Bankr. W.D.N.Y. 2000) (Because the action held to be a malicious prosecution was instituted in the debtor’s name without her knowledge, consent or ratification, the damages claim is not enforceable against the debtor under § 502(b)(1).); Neese v. Hollywood Video, Inc. (In re Neese), 196 B.R. 39, 40 (Bankr. W.D. Va. 1995) (Sustains debtor’s objection to claim for lack of personal liability notwithstanding state court default judgment against the debtor. Default judgment was based upon a contract between two corporations. Debtor was not officer or director of the corporation that contracted for the debt, and there was no evidence of any agreement between the debtor and the creditor. “Debtor’s Objection to Claim is not barred by the doctrine of res judicata. . . . Since the judgment in this case was by default, the issue of Kathryn Neese’s personal liability was never litigated and, thus, is not barred by the doctrine of res judicata.”); In re Fulton, 148 B.R. 838 (Bankr. S.D. Tex. 1992) (Even a final state court judgment that fixes the damages for the debtor’s prepetition breach of a lease is subject to the limitation in § 502(b)(6). The amount of the lessor’s claim, “including attorney’s fees,” is limited to the maximum amount specified in § 502(b)(6)—in this case, one year of rent. The lessor is also entitled to unpaid rent as of the date on which it repossessed the property or accepted surrender from the debtor.).

 

6  See, e.g., Empire Funding Corp. v. Armor (In re Armor), No. 99-1529, 2000 WL 1568201 (4th Cir. Oct. 20, 2000) (Table decision at 232 F.3d 887) (State court judgment that construction of building was defective can be asserted by debtors as a defense to claim of holder of deed of trust; res judicata does not bar objection to claim because the state court did not address the argument that the loan was not enforceable.); Marulanda v. Marrero (In re Marrero), 162 B.R. 20 (S.D. Fla. 1993) (Debtor’s objection to fraud claim is sustained based on collateral estoppel and statute of limitations grounds. State court judgment in debtor’s favor collaterally estops claimant’s fraud claims. State statute of limitations with respect to fraud also bars creditor’s claim.); In re Hendricks, 250 B.R. 415 (Bankr. M.D. Fla. 2000) (Prepetition judgment against the debtor in lawsuit against divorce attorneys for malpractice is preclusive of the claim of those attorneys for unpaid fees that could have been recovered as a counterclaim but were not mentioned in the judgment against the debtor.); In re Gibson, 249 B.R. 645 (Bankr. E.D. Pa. 2000) (Prepetition state court default judgment is binding as to the amount of mortgage lender’s claim, and lender is limited to interest at the state judgment rate through confirmation. Allowed amount of secured claim is reduced to reflect that dragnet clauses in four mortgage loans failed the “relatedness rule.”); In re Gates, 187 B.R. 426 (Bankr. N.D.N.Y. 1995) (Mortgage holder’s claim is disallowed because mortgage was voided by a Pennsylvania default judgment, notwithstanding a prior inconsistent New York judgment in favor of the mortgage holder.).

 

7  See, e.g., Mintze v. American Gen. Fin., Inc. (In re Mintze), 288 B.R. 95 (Bankr. E.D. Pa. 2003) (Arbitration clause in home improvement mortgage is not enforceable because debtor’s adversary proceeding is a core proceeding to determine the validity and priority of the mortgage lien that will affect confirmation of a plan and the rights of all creditors.), aff’d, No. 03-2113, 2003 WL 22701020 (E.D. Pa. Nov. 12, 2003) (Bankruptcy court appropriately refused enforcement of arbitration clause because adversary proceeding to rescind mortgage directly affected the rights of all creditors.); Hicks v. Homeq Servicing Corp. (In re Hicks), 285 B.R. 317, 323 (Bankr. W.D. Okla. 2002) (Lender’s motion to compel arbitration is denied in debtor’s adversary proceeding alleging violations of Oklahoma Consumer Protection Act and Truth-in-Lending Act. Citing Green Tree Financial Corp. Alabama v. Randolph, 531 U.S. 79, 121 S. Ct. 513, 148 L. Ed. 2d 373 (2000), “Debtor’s potential liability for the costs of the arbitration exceeding one day could inhibit her willingness to pursue her claims against Homeq, and calls into question the accessibility of the arbitral forum to resolve Debtor’s claims.”); Larocque v. Citifinancial Mortgage Co. TX (In re Larocque), 283 B.R. 640, 642 (Bankr. D.R.I. 2002) (On debtor’s objection to Citifinancial Mortgage Company’s claim and debtor’s adversary proceeding alleging Truth-in-Lending Act violations, bankruptcy court has discretion whether to enforce arbitration clause in mortgage contract; because “resolution of this dispute will establish whether Citifinancial is a secured or unsecured creditor in the bankruptcy case, thereby affecting how creditors will share in the Debtor’s assets, and in what priority,” adversary proceeding and claim objection are core proceedings that should be retained by the bankruptcy court and not sent for arbitration.).

 

8  See, e.g., Bevan v. Socal Communications Sites, LLC (In re Bevan), 327 F.3d 994 (9th Cir. 2003) (Foreclosing creditor that bid on debtor’s property and then voluntarily paid junior IRS lien to eliminate IRS’s redemption right is not subrogated to IRS’s claim against the debtor.); Berardi v. IRS (In re Berardi), No. 02-4240, 2003 WL 21796549 (3d Cir. Aug. 5, 2003) (unpublished) (Debtor failed to rebut the IRS’s evidence of unreported income from gambling.); Adams v. Coveney (In re Coveney), 162 F.3d 23 (1st Cir. 1998) (On debtor’s objection to claim, Chapter 13 debtor was not personally liable for withholding and meals taxes incurred by the debtor’s corporation in the course of operating a restaurant.); Pro Fin., Inc. v. Spriggs (In re Spriggs), 219 B.R. 909 (B.A.P. 10th Cir. 1998) (BAP sustains debtor’s objection to mortgage holder’s proof of claim that included fees and expenses for a foreclosure sale conducted in violation of the automatic stay.); Nicholson v. Dubroc (In re Nicholson), No. Civ. A. 99-03552, 2000 WL 159313 (E.D. La. Feb. 10, 2000) (Restructuring agreement between debtor and mortgage holder was unenforceable or lapsed on account of a condition precedent and would not support objection to mortgage holder’s secured claim.); In re Hollida, 212 B.R. 831, 833 (N.D. W. Va. 1997) (District court need not withdraw reference to liquidate embezzlement claim because “claim of debtor’s alleged embezzlements is not a personal injury tort in nature and . . . the claim in question is properly within the jurisdiction of the United States Bankruptcy Court.”); In re Goldberg, 297 B.R. 465 (Bankr. W.D.N.C. 2003) (Student loan claim is disallowed because debtor was victim of fraud by Southern College of Business, which closed one week after debtor signed student loan forms.); In re Gillis, 293 B.R. 134 (Bankr. N.D. Ohio 2002) (Objection to check-cashing-creditor’s claim for liquidated damages of $183 is overruled because under Ohio law, if liquidated damage amount was disallowed, creditor would then be entitled to a larger claim for prepetition interest.); In re Scott, 281 B.R. 404 (Bankr. M.D. Ga. 2002) (Debtor is not entitled to recover attorneys’ fees in litigation over mortgage holder’s refusal to pay premiums for disaster mortgage protection. Debtor failed to prove that mortgagee acted in bad faith or was stubbornly litigious for purposes of Georgia fee-shifting statute.); In re Acker, 275 B.R. 143 (Bankr. D.D.C. 2002) (Agent for claim holder must prove that money is still owed to get unclaimed funds from the Treasury after dismissal of a Chapter 13 case.); In re Williams, 269 B.R. 68 (Bankr. M.D. Fla. 2001) (Because rollover of distribution from 401(k) plan did not occur within 60 days, Chapter 13 debtor was properly taxed on the distribution.); In re Hall, 265 B.R. 435 (Bankr. W.D. Mo. 2001) (Claim based on 1985 note and mortgage to debtor’s mother is not barred by 10-year Missouri statute of limitations because last installment became due within 10 years of petition and mother did not previously accelerate the note.); In re Crosby, 261 B.R. 470 (Bankr. D. Kan. 2001) (Credit union claims are disallowed or subordinated because credit union caused Form 1099-C, cancellation of debt, to be filed with the IRS when debtors defaulted.); In re McGee, 258 B.R. 139 (Bankr. D. Md. 2001) (Judgment against corporation wholly owned by Mr. and Mrs. McGee is an allowable claim in Mr. McGee’s Chapter 13 case because, under Maryland Construction Trust statute, Mr. McGee has personal liability for construction funds not used to pay suppliers.); In re Bean, 252 B.R. 570 (Bankr. M.D. Fla. 2000) (Resolving ambiguity in agreements, debtor was personally liable for motor vehicles sold out of trust by automobile dealership.); Moran v. Household Realty Corp. (In re Moran), 249 B.R. 90 (Bankr. E.D. Pa. 2000) (Credit life insurance was canceled before the petition; debtor is liable for the mortgage, and insurance company is not responsible to pay the mortgage on the death of the debtor’s husband.); In re Verdi, 244 B.R. 314 (Bankr. E.D. Pa. 2000) (Absence of consideration for restrictive covenants in the debtor’s employment contract is fatal to claim for breach.); In re Whitus, 240 B.R. 705 (Bankr. W.D. Tex. 1999) (100% penalty tax assessment against nonfiling spouse is a community claim in the Chapter 13 case, but the claim can be separately classified for no payment because in a Chapter 7 case, applying § 726(c), the community claim would not be payable from the debtor’s postpetition earnings.); In re Artura, 230 B.R. 236 (Bankr. E.D.N.Y. 1999) (That creditor is a corporation dissolved under state law does not defeat the allowance of creditor’s claim.); In re Atkins, 228 B.R. 14 (Bankr. M.D. Fla. 1998) (Sustains debtor’s objection to proof of claim filed by successor in interest to fertilizer business that the debtor sold before the petition. Debts in proof of claim did not survive the sale of the corporation to the claimant.); In re Kindinger, 219 B.R. 214 (Bankr. N.D. Ohio 1998) (On Chapter 13 debtors’ objection to former landlord’s claim, landlord was entitled to four months’ rent and to damages totaling $15,187.69 based on Ohio law and the debtors’ holding over under the lease.).