OPINION AND ORDER REVERSING the Bankruptcy Court's Decision that Debtor is Eligible for Chapter 13 Relief, VACATING the Bankruptcy Court's Order Confirming Plan and REMANDING for Further Proceedings Signed by District Judge Robert H. Cleland. (LWag)
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF MICHIGAN
ROBERT L. SCHWARTZ,
Case Nos. 11-13160, 11-13161
Bankruptcy Case No. 10-71142
ROBERT L. SCHWARTZ,
OPINION AND ORDER
IN CASE NO. 11-13161:
DISMISSING APPEAL FOR LACK OF JURISDICTION
IN CASE NO. 11-13160:
REVERSING THE BANKRUPTCY COURT’S DECISION THAT DEBTOR IS ELIGIBLE
FOR CHAPTER 13 RELIEF, VACATING THE BANKRUPTCY COURT’S “ORDER
CONFIRMING PLAN,” AND REMANDING FOR FURTHER PROCEEDINGS
Appellee Robert Schwartz and Appellant Pamela Liggett are former spouses who
have been embroiled in highly acrimonious1 legal disputes at least since Schwartz filed
for divorce more than twelve years ago. In this manifestation of their protracted conflict,
Liggett seeks to prevent Schwartz from entering Chapter 13 bankruptcy. After Schwartz
filed for bankruptcy in October 2010, Liggett alone among his creditors lodged a
Schwartz’s brief, for example, casts Liggett’s appeal in this case as constituting
little more than a “part and parcel of . . . her continued efforts to cause the Appellee
emotional and financial grief.” (Appellee Br. 3.)
plethora of objections in the bankruptcy court. She also entered a claim against him
that exceeded $500,000 at its high-water mark. Despite Liggett’s efforts, the bankruptcy
court eventually confirmed Schwartz’s reorganization plan and reduced Liggett’s claim
to just over $60,000. Liggett now seeks review of these decisions.
While the court shares the bankruptcy court’s seeming bewilderment at Liggett’s
all-out effort to thwart Schwartz’s bankruptcy petition, the court nevertheless finds merit
in one of Liggett’s numerous arguments: in determining Schwartz’s eligibility for Chapter
13 relief, the bankruptcy court should have included Schwartz’s second mortgage in the
calculation of his unsecured debt. When this amount is accounted for, Schwartz’s
unsecured debts exceed the statutory limit set forth in 11 U.S.C. § 109(e). Accordingly,
the court must reverse the bankruptcy court’s confirmation of Schwartz’s reorganization
Litigation between Schwartz and Liggett dates to 1999, when Schwartz filed for
divorce in the Oakland County Circuit Court. On November 20, 2000, the circuit court
entered a judgment of divorce dividing the couple’s assets and liabilities. Schwartz and
Liggett appear still to be sorting out their various obligations under the divorce
judgment. They had been in arbitration over these lingering issues for more than a year
when, on October 8, 2010, Schwartz filed for bankruptcy under Chapter 13 of the
By statute, an individual may become a debtor under Chapter 13 only if he has
noncontingent, liquidated, unsecured debts of less than $360,475 and noncontingent,
liquidated, secured debts of less than $1,081,400. 11 U.S.C. § 109(e). In his petition,
Schwartz scheduled unsecured debts of $359,059—just below the cut-off—and secured
debts of $447,835. Included in the total of Schwartz’s secured debts was the entire
obligation owing on two mortgages secured by his personal residence. Even though
Schwartz reported that both mortgages were undersecured, with the second mortgage
wholly unsecured in the amount of $137,707, he did not factor any of the mortgage debt
into the calculation of his unsecured debt.
Liggett entered the bankruptcy proceedings on December 27, 2010, when she
filed an objection to the confirmation of Schwartz’s Chapter 13 plan and submitted a
proof of claim for $82,859.24. Regarding the former, Liggett argued, among other
things, that the debts reflected in her proof of claim put Schwartz over the limit for
unsecured debts under § 109(e). Schwartz objected to Liggett’s proof of claim, though
he acknowledged that he did owe Liggett a one-half share of an IRA pursuant to the
judgment of divorce. The bankruptcy court, opting to first decide whether Schwartz was
eligible for Chapter 13 relief, solicited briefing on the issue. Ultimately, the bankruptcy
court issued a written opinion holding that Schwartz had met the requirements of
§ 109(e). Finding that Schwartz had filed his petition in good faith, the bankruptcy court
concluded that his omission of Liggett’s legitimate claims was honest error given the
parties’ long-running dispute over their respective obligations after the divorce.
In response to this ruling, Liggett filed a motion for reconsideration, amended her
proof of claim to reflect a debt of $535,973.05, and initiated an adversary proceeding
against Schwartz to obtain a non-dischargeable judgment in this amount. After denying
the motion for reconsideration, the bankruptcy court held a confirmation hearing on
June 30, 2011. There, the bankruptcy court largely sustained Schwartz’s objections to
Liggett’s original proof of claim, but it did allow the portion of the claim attributable to the
IRA in an amount to be determined through the adversary proceeding. Liggett,
represented by new counsel, also took the opportunity to reiterate many of her
objections to Schwartz’s confirmation under Chapter 13. Over the bankruptcy court’s
insistence that the § 109(e) question had already been resolved, Liggett’s counsel
pointed out, apparently for the first time, the discrepancy in Schwartz’s reporting of his
unsecured second mortgage as secured debt. The bankruptcy court nevertheless
confirmed Schwartz’s reorganization plan, both at the hearing and in a written order
entered on July 8, 2011. The court also issued a written order on July 18, 2011,
allowing Liggett’s original proof of claim in the amount of $38,061.37, based on a June
2000 account statement of the IRA submitted by Liggett. Liggett appealed both orders
to this court, which now considers the matter on the parties’ consolidating briefing of the
In the meantime, proceedings continued in the bankruptcy court. On July 13,
2011, Schwartz filed an objection to Liggett’s amended proof of claim. Two days later,
he filed a motion to dismiss the adversary proceeding. After a hearing on September
13, 2011, the court granted the motion to dismiss. The bankruptcy court then took up
Liggett’s amended proof of claim, ordering the parties to provide additional briefing and
documentation on the value of Liggett’s share of the IRA. In a January 30, 2012,
opinion that superceded the July 18, 2011, order on Liggett’s original proof of claim, the
Although oral argument was not heard on this matter, the court determines it to
be unnecessary. See E.D. Mich. LR 7.1(f)(2).
bankruptcy court determined that Liggett had an unsecured claim against Schwartz in
the amount of $60,485.10.3
II. JURISDICTION AND STANDARD OF REVIEW
Although the parties agree that the court has jurisdiction over the two instant
appeals as “appeals of right” under 28 U.S.C. § 158(a)(1), see Fed. R. Bankr. P.
8001(a), the court has an independent obligation to ensure that it does, in fact, have
subject-matter jurisdiction, see Campanella v. Commerce Exch. Bank, 137 F.3d 885,
890 (6th Cir. 1998) (“[I]t is beyond question that federal courts have a continuing
obligation to inquire into the basis of subject-matter jurisdiction to satisfy themselves
that jurisdiction to entertain an action exists.”). 28 U.S.C. § 158(a)(1) vests the district
courts with jurisdiction over appeals from “final judgments, orders, and decrees” of the
bankruptcy court. In the bankruptcy context, “this finality requirement is considered ‘in a
more pragmatic and less technical way.’” Lindsey v. O’Brien, Tanksi, Tanzer & Young
Health Care Providers of Conn. (In re Dow Corning Corp.), 86 F.3d 482, 488 (6th Cir.
1996) (quoting Cottrell v. Schilling (In re Cottrell), 876 F.2d 540, 541-42 (6th Cir. 1989)).
Any order “‘finally dispos[ing] of discrete disputes within the larger case’” may be
appealed immediately. Id. (quoting In re Saco Local Dev. Corp., 711 F.2d 441, 444 (1st
This flexible standard is enough to confer jurisdiction over Liggett’s appeal of the
July 8, 2011, order confirming Schwartz’s Chapter 13 plan. However, the same cannot
Liggett also appealed the bankruptcy court’s order dismissing the adversary
proceeding and order determining the amount of her claim. These appeals are currently
pending as case numbers 11-14834 and 12-11055, but they are not presently before
be said of the appeal of the July 18, 2011, order on Liggett’s original proof fo claim.
Orders determining a debtor’s objection to a proof of claim are final when they “leave
nothing more for the bankruptcy court to do” with respect to that issue. In re Ford, 194
B.R. 583, 587 (S.D. Ohio 1995) (internal quotation marks omitted); see also Morton v.
Morton (In re Morton), 298 B.R. 301, 303 (B.A.P. 6th Cir. 2003). The July 18, 2011,
order clearly did not settle the amount to which Schwartz was indebted to Liggett.
When the bankruptcy court entered that order, the original proof of claim had already
been amended by Liggett’s second proof of claim, an adversary proceeding regarding
the claim was pending, and the bankruptcy court had stated at the June 30, 2011,
confirmation hearing that Liggett’s claim would be determined in the course of these
other proceedings. The January 30, 2012, opinion and January 31, 2012, order that
finally settled the amount of Liggett’s claim confirmed that they superceded the July 18,
2011, order. Under these circumstances, the July 18, 2011, order is not a final
judgment, order or decree under § 158(a)(1), and the court will dismiss Liggett’s appeal
from that order.4
As for the remaining appeal from the plan confirmation, the court reviews the
bankruptcy court’s conclusions of law de novo and its findings of fact for clear error.
Because the January 2012 opinion and order explicitly superceded the July 18,
2011, order, it could also be said that the appeal from the earlier order is moot and not
reviewable. Under Article III of the Constitution, “[a] federal court has no authority to
render a decision upon moot questions or to declare rules of law that cannot affect the
matter at issue.” Cleveland Branch, NAACP v. City of Parma, Ohio, 263 F.3d 513, 530
(6th Cir. 2001) (citing Church of Scientology v. United States, 506 U.S. 9, 12 (1992)). A
case becomes moot when, as here, “the issues presented are no longer ‘live’ or the
parties lack a legally cognizable interest in the outcome.” Powell v. McCormack, 395
U.S. 486, 496 (1969).
B-Line, LLC v. Wingerter (In re Wingerter), 594 F.3d 931, 935-36 (citing Behlke v. Eisen
(In re Behlke), 358 F.3d 429, 433 (6th Cir. 2004)).
Liggett advances a number of alleged errors in the bankruptcy court’s
confirmation of Schwartz’s Chapter 13 plan, arguing that the plan does not comply with
a number of provisions in the Bankruptcy Code, see 11 U.S.C. § 1325(a)(1), it was not
proposed in good faith, see id. § 1325(a)(3), and Schwartz would not be able to fully
fund it, see id. § 1325(a)(6). The court’s consideration begins—and ends—with
Liggett’s contention that Schwartz does not qualify for Chapter 13 relief due to his
unsecured second mortgage. If Liggett is correct that the $137,707 owed on the second
mortgage must be factored into Schwartz’s unsecured debt, Schwartz clearly had
unsecured debts of much more than the $360,475 statutory limit set forth in § 109(e).
As an initial matter, Schwartz argues that Liggett should be foreclosed from
raising this contention because she did not argue it in the bankruptcy court. See Hood
v. Tenn. Student Assistance Corp. (In re Hood), 319 F.3d 755, 760 (6th Cir. 2003).
Schwartz has a point. Liggett did not bring up Schwartz’s undersecured second
mortgage in her written objection to plan confirmation or the subsequent briefs she
submitted on Schwartz’s § 109(e) eligibility. It was not until the June 30, 2011,
confirmation hearing that her counsel voiced this particular objection and, even then, it
was initially to assert that the proposed plan impermissibly discriminated among
Schwartz’s unsecured creditors. See 11 U.S.C. § 1322(b)(1). Nevertheless, the issue
was raised in the bankruptcy court. (See Hr’g Tr. 24, June 30, 2011, Bankr. Dkt. # 118
(“[DEFENSE COUNSEL]: If [the second mortgage is] a wholly unsecured claim in the
amount of $137,000, that exceeds the dollar limitations of Chapter 13 . . . .”).) And,
more importantly, the bankruptcy court ruled on it. (See id. at 23-24.) In the court’s
view, Liggett has effectively preserved her claim for appeal.
Turning to the merits, the court’s discussion begins with Comprehensive
Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751 (6th Cir. 1985), in which the
Sixth Circuit set forth the standards that should guide a court’s inquiry into whether a
debtor qualifies for Chapter 13 relief under § 109(e). To determine this question, “a
court should rely primarily upon the debtor’s schedules[,] checking only to see if the
schedules were made in good faith on the theory that section 109(e) considers debts as
they exist at the time of filing, not after a hearing.” Id. at 756. The court should not hold
a hearing on the merits of a claim in order to compute a debtor’s Chapter 13 eligibility,
as “the fact that evidence must be taken to determine the amount of the claim indicates
that until then, the claim was unliquidated.” Id. The inquiry is analogous to the court’s
determination of the amount-in-controversy in diversity jurisdiction cases. The amounts
claimed in good faith by the relevant party will control “unless it appears to a legal
certainty that the claim is for less than the jurisdictional amount.” Id. at 757 (citing St.
Paul Indem. Co. v. Red Cab Co., 303 U.S. 283, 288-90 (1938)). Eligibility is determined
at the time of filing, and “[s]ubsequent events do not divest the court of jurisdiction.” Id.
(citing Worthams v. Atlanta Life Ins. Co., 533 F.2d 994, 997 (6th Cir. 1976)).
In Pearson, the court noted but did not rule on the issue now before the court:
how to evaluate a debtor’s designation of a debt as secured or unsecured, particularly
when a secured debt is identified by the debtor as undersecured or, as in this case, fully
unsecured. Id. at 755-56. Section 506 of the Bankruptcy Code speaks to the
classification of claims for the purpose of determining whether a creditor has a secured
debt against the bankruptcy estate:
An allowed claim of a creditor secured by a lien on property in which the
estate has an interest . . . is a secured claim to the extent of the value of such
creditor’s interest in the estate’s interest in such property . . . , and is an
unsecured claim to the extent that the value of such creditor’s interest . . . is
less than the amount of such allowed claim. Such value shall be determined
in light of the purpose of the valuation and of the proposed disposition or use
of such property, and in conjunction with any hearing on such disposition or
use or on a plan affecting such creditor’s interest.
11 U.S.C. § 506(a)(1). Liggett asserts that this framework should apply in the § 109(e)
inquiry, such that a debtor’s estimate of his undersecured debt should be included in the
calculation of his total unsecured debt. Schwartz disagrees. In his view, the amount to
which an undersecured debt is unsecured cannot be determined until the bankruptcy
court holds a valuation hearing, which is a post-petition event that cannot affect a
debtor’s Chapter 13 eligibility. Prior to such a hearing, an undersecured debt may be
counted as a wholly secured debt under § 109(e), since any unsecured portion of the
debt is necessarily unliquidated before the value of the collateral is determined.
While the bankruptcy court agreed with Schwartz, the overwhelming majority of
courts to consider this issue have adopted Liggett’s position that the unsecured portion
of undersecured debt is counted as unsecured for § 109(e) eligibility purposes. This
includes all four courts of appeal to take up the question, as well as a host of bankruptcy
courts. See, e.g., Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 983 (9th Cir.
2001); Brown & Co. Secs. Corp. v. Balbus (In re Balbus), 933 F.2d 246, 247 (4th Cir.
1991); Miller v. United States, 907 F.2d 80, 82 (8th Cir. 1990); In re Day, 747 F.2d 405,
406-07 (7th Cir. 1984); United States v. Dallas, 157 B.R. 912, 913 (S.D. Ala. 1992);
United States v. Edmonston, 99 B.R. 995, 999 (E.D. Cal. 1989); Soderlund v. Cohen (In
re Soderlund), 236 B.R. 271, 274-75 (B.A.P. 9th Cir. 1999); In re Bernick, 440 B.R. 449,
450-51 (Bankr. E.D. Va. 2010); In re Smith, 419 B.R. 826, 831-32 (Bankr. C.D. Cal.
2009); In re Werts, 410 B.R. 677, 684-85 (Bankr. D. Kan. 2009); In re Groh, 405 B.R.
674, 675-76 (Bankr. S.D. Cal. 2009); In re Weiser, 391 B.R. 902, 908 (Bankr. S.D. Fla.
2008); In re Grenchik, 386 B.R. 915, 917-19 (Bankr. S.D. Ga. 2007); In re Buis, 337
B.R. 243, 248 (Bankr. N.D. Fla. 2006); In re Harrold, 257 B.R. 916, 916-17 (Bankr. W.D.
Ark. 2000); In re Prosper, 168 B.R. 274, 278 (Bankr. D. Conn. 1994); In re Mason, 133
B.R. 877, 878-79 (Bankr. N.D. Ohio 1991); In re Rifkin, 124 B.R. 626, 627-29 (Bankr.
E.D.N.Y. 1991); In re Jerome, 112 B.R. 740, 741-42 (Bankr. S.D.N.Y. 1990); In re Bos,
108 B.R. 740, 741-42 (Bankr. D. Mont. 1989); In re McClaskie, 92 B.R. 285, 286-87
(Bankr. S.D. Ohio 1988); In re Clark, 91 B.R. 570, 573 (Bankr. D. Colo. 1988); In re
Martin, 78 B.R. 928, 929-30 (Bankr. S.D. Iowa 1987); In re Potenza, 75 B.R. 17, 19
(Bankr. D. Nev. 1987); In re Bobroff, 32 B.R. 933, 935-36 (Bankr. E.D. Pa. 1983); In re
Ballard, 4 B.R. 271, 274-75 (Bankr. E.D. Va. 1980). But see In re Edmonston, 99 B.R.
993, 993-95 (Bankr. E.D. Cal. 1988), abrogated by U.S. v. Edmonston, 99 B.R. at 999;
In re Morton, 43 B.R. 215, 218-20 (Bankr. E.D.N.Y. 1984); In re King, 9 B.R. 376, 37778 (Bankr. D. Or. 1981).5
At least one court adopting the majority position has held that undersecured
debts that are even partially secured by a lien on the debtor’s personal residence are
counted as secured debts, given that the bankruptcy court cannot modify such liens
under 11 U.S.C. § 1322(b)(2). Smith, 419 B.R. at 832; see also Soderlund, 236 B.R. at
275 n.5. While Schwartz’s second mortgage is secured by his personal residence, this
potential exception does not apply here. In scheduling his two mortgages, Schwartz
reported that the first was undersecured and the second was completely unsecured.
Because the lien associated with the second mortgage had no value, the holder of the
With this fairly overwhelming convergence of thinking, the court is not inclined to
disagree. The few bankruptcy courts that have taken a contrary position rely upon a
distinction between the term “claim” used in § 506(a)(1) and the term “debt” used in
§ 109(e). See Morton, 43 B.R. at 220. The majority view, in contrast, “avoids the
elevation of form over substance.” Rifkin, 124 B.R. at 629. If courts cannot account for
the value of the collateral securing a debt, a potential debtor could easily circumvent the
debt limitations of § 109(e) merely by granting his unsecured creditors a security
interest in property with little or no value. Day, 747 F.2d at 407. Bifurcating
undersecured debts allows for a more realistic evaluation of a debtor’s Chapter 13
eligibility, as it provides a closer approximation of how his claims are likely to be treated
under the debtor’s reorganization plan.
Nor does the court’s adoption of the majority position defy Pearson’s mandate
that post-petition events cannot defeat eligibility, as Schwartz argues and the
bankruptcy court held. Just as a court relies on the debtor’s good-faith estimation of his
debts, so too can it rely on his estimation of the value of his secured property. Here, a
valuation hearing is not required to see that Schwartz is ineligible for Chapter 13 relief.
The court need look no further than his schedules. He lists a first mortgage of $250,959
and a second mortgage of $137,707 secured by property valued at $225,000. Adding
the entire, unsecured balance of the second mortgage to Debtor’s scheduled unsecured
debt puts him far beyond the $360,475 limit. If there were a good faith dispute as to the
second mortgage has only an unsecured claim that can be modified notwithstanding
§ 1322(b)(2). Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663, 669 (6th Cir.
2002). Thus, the wholly unsecured second mortgage should be counted as unsecured
debt. See Smith, 419 B.R. at 831-32.
value of a debtor’s secured property or, as in Pearson, the secured status of a debt, see
773 F.2d at 755, there might be a different result. “[A]bsolute certainty” as to the amount
of a debtor’s secured and unsecured debts “is not and cannot be expected.” Id. at 757.
But when a debtor’s unsecured debts, including those arising from undersecured
obligations, exceed the § 109(e) limit on the face of a debtor’s schedules, he should be
deemed ineligible for Chapter 13 relief. See McClaskie, 92 B.R. at 286-87.
Applying these principles in Schwartz’s case has the unfortunate consequence of
nullifying more than a year of the bankruptcy court’s work on this case. Further, in
these days of greatly depreciated property values, the majority approach could have the
effect of disqualifying many would-be debtors from filing under Chapter 13. These
considerations, however, cannot change the relevant provisions of the bankruptcy code,
which require reversal of the bankruptcy court’s decision that Schwartz is eligible for
Chapter 13 relief. The court will vacate the bankruptcy court’s order confirming
Schwartz’s reorganization plan and remand this case to the bankruptcy court.
For the reasons discussed above, IT IS ORDERED that, in Case Number 1113161, the appeal of the bankruptcy court’s “Order Granting Debtor’s Objection to Claim
of Pamela Liggett (Claim #14)” [Bankr. Dkt. # 97] is DISMISSED.
IT IS FURTHER ORDERED that, in Case Number 11-13160, the bankruptcy
court’s decision that Debtor Robert Schwartz is eligible for relief under Chapter 13 of the
Bankruptcy Code is REVERSED, the bankruptcy court’s “Order Confirming Plan”
[Bankr. Dkt. # 87] is VACATED, and this case is REMANDED to the bankruptcy court
for further proceedings consistent with this opinion.
s/Robert H. Cleland
ROBERT H. CLELAND
UNITED STATES DISTRICT JUDGE
Dated: March 26, 2012
I hereby certify that a copy of the foregoing document was mailed to counsel of record
on this date, March 26, 2012, by electronic and/or ordinary mail.
Case Manager and Deputy Clerk
S:\Cleland\JUDGE'S DESK\C2 ORDERS\11-13160.11-13161.SCWARTZ.BankruptcyAppeal.set.2.wpd
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?