United States Court of Appeals,
Eleventh Circuit.
No. 95-2614.
UNITED STATES of America, Plaintiff-Appellant,
v.
Thomas B. VERDUNN, Defendant-Appellee.
July 31, 1996.
Appeal from the United States District Court for the Middle
District of Florida. (No. 94-2001-CIV-T-17C), Elizabeth A.
Kovachevich, Chief Judge.
Before KRAVITCH and CARNES, Circuit Judges, and HILL, Senior
Circuit Judge.
HILL, Senior Circuit Judge:
In this case we decide whether a debtor's federal income tax
liabilities and penalties, asserted by the Commissioner of the
Internal Revenue Service (Commissioner) in a statutory notice of
deficiency and the subject of dispute in a Tax Court petition filed
by the debtor, are liquidated unsecured debts for Bankruptcy Code
Chapter 13 eligibility purposes. The bankruptcy court concluded
they were not. The district court affirmed. We disagree and
reverse.
I. FACTUAL AND PROCEDURAL BACKGROUND
The Commissioner issued a deficiency notice1 to Thomas B.
1
Once a taxpayer's return is chosen for examination, a
series of events occur, culminating in the issuance of a
statutory notice of deficiency. Treas.Reg. § 601.106(d)(2)(ii).
The notice sets forth the Commissioner's adjustments to the
taxpayer's return and the bases for calculating the deficiencies
and penalties. See I.R.C. § 6211(a). It also informs the
taxpayer that, before making any payment, he or she may contest
the Commissioner's determination by petitioning the United States
Tax Court for a redetermination. See I.R.C. §§ 6212(a), 6213(a).
Verdunn claiming income tax deficiencies, interest, and penalties
for 1982-1986. Verdunn filed a petition in the Tax Court declaring
that these claims were erroneous. One month prior to the date set
for the Tax Court trial, Verdunn filed a voluntary petition for
relief under Chapter 13 with the bankruptcy court.2 Commissioner
filed a proof of claim in the bankruptcy proceeding, claiming
$297,000 in total unsecured debts. On the ground that Verdunn's
unsecured debts exceeded the $100,000 Chapter 13 eligibility
limits,3 the Commissioner objected to confirmation of the proposed
Chapter 13 plan and moved to dismiss the bankruptcy petition. The
bankruptcy court found that, inasmuch as Verdunn disputed his tax
liabilities, and, inasmuch as his underpayment of taxes was alleged
to be entirely due to fraud (with the Commissioner bearing the
burden of proof), the tax debts were unliquidated. It denied the
Commissioner's motion to dismiss and confirmed Verdunn's Chapter 13
plan. The bankruptcy court lifted the automatic stay to allow the
Tax Court litigation to proceed.4
2
In accordance with the automatic stay provisions, the Tax
Court suspended the proceedings before it. 11 U.S.C. §
362(a)(8).
3
For purposes of this appeal, the debt limit is $100,000.
11 U.S.C. § 109(e) (1988). For cases filed after October 22,
1994, the debt limit is $250,000. See 11 U.S.C. § 109(e), as
amended by § 108(a) of the Bankruptcy Reform Act of 1994, Pub.L.
No. 103-394, 108 Stat. 4106.
4
Shortly thereafter, the Tax Court issued a memorandum
opinion, sustaining the Commissioner's determination of tax
deficiencies in full, finding that each of Verdunn's returns for
1982-1985 were fraudulent, and that nearly three-quarters of the
underpayment amounts for those years were attributable to fraud.
The Tax Court also sustained the Commissioner's determination of
substantial underpayment (1982-1985), delinquency (1986), and
negligence penalties (1986). Verdunn v. Commissioner, 69 T.C.M.
(CCH) 2142, 1995 WL 118772 (1995).
The Commissioner appealed the bankruptcy court's order to the
district court.5 The district court affirmed the bankruptcy court.
This appeal followed.6
II. STANDARD OF REVIEW
The proper construction of the bankruptcy code by a
bankruptcy court or a district court is a matter of law. The
interpretations are subject to de novo review. In re Haas, 48 F.3d
1153, 1155 (11th Cir.1995), citing In re Colortex Industries, Inc.,
19 F.3d 1371, 1374 (11th Cir.1994) and In re Taylor, 3 F.3d 1512,
1514 (11th Cir.1993).
III. DISCUSSION
A. The Bankruptcy Statute—Section 109(e)
For purposes of this appeal, the eligibility requirements of
Chapter 13 provide that: "Only an individual with regular income
that owes, on the date of the filing of the petition,
noncontingent,7 liquidated, unsecured debts of less than $100,000
... may be a debtor under chapter 13 of this title." 11 U.S.C. §
109(e) (1988) (emphasis added).8
5
Fed.R.Bankr.P. 8002(a) & (b); 28 U.S.C. § 158(a).
6
See 28 U.S.C. §§ 158(d), 1291.
7
Verdunn concedes that his tax liability is noncontingent.
See In re Knight, 55 F.3d 231, 236 (7th Cir.1995) (a debt is
noncontingent if all events giving rise to a debtor's liability
occurred prior to the filing of the bankruptcy petition); see
also In re Loya, 123 B.R. 338, 340 (9th Cir. BAP 1991).
8
"The eligibility criteria set forth in respect to this
provision are specific and restrictive, with monetary amounts
established to govern eligibility.... The dollar limits on both
categories of debts, unsecured and secured, apply only to debts
that are noncontingent and liquidated at the crucial petition
filing time." 2 Collier on Bankruptcy, § 109.05 (1989).
B. The Orders Interpreting Section 109(e)
The bankruptcy court found that:
Generally, a determination that there is a tax due is
prima facie evidence of tax liability. I.R.C. § 7481(d);
Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 290-91,
79 L.Ed. 623 (1935). [Verdunn] must prove by [the]
preponderance of the evidence that the tax liabilities and
interest on those liabilities are incorrect. In contrast, the
[Commissioner] must prove by the preponderance of the evidence
[that the] tax fraud liabilities are correct. I.R.C. § 7454.
The taxes as expressed in the [Commissioner's] proof of claim
are all, with the exception [of the tax year] 1986, based on
tax fraud. There is a dispute as to the character and nature
of these claims in which the [Commissioner] will have the
burden of proof. Although [Verdunn] has filed income tax
returns for the years in question, the tax liabilities are not
readily determinable from the documents before the Court and
therefore they are deemed unliquidated.
The district court affirmed the bankruptcy court stating that:
It is an undisputed fact that [Verdunn] vigorously
disputed the penalties which the [Commissioner] sought to levy
against him based upon alleged civil fraud, understatement of
income, negligence and delinquency in filing income tax
returns and had filed a petition for determination with the
United States Tax Court. In this dispute as to the character
and nature of the claims, [the Commissioner] has the burden of
proof. I.R.C. § 7454. Although set for trial, the Tax Court
had not rendered a determination as of the date of the
[bankruptcy] petition regarding [Verdunn's] tax liability.
Therefore, [Verdunn] now argues, and this Court agrees, that
the amount of the tax liability was not readily ascertainable
from the information before the bankruptcy court and were
properly excluded as "not readily determinable" and
"unliquidated" debts when eligibility to proceed under §
109(e) of the Bankruptcy Code was determined.
Both the bankruptcy court and the district court concluded
that the debts were unliquidated under section 109(e) as the
9
amounts: (1) were not readily determinable; (2) were in dispute;
9
The overwhelming body of precedent is contrary to this
conclusion. See In re Knight, 55 F.3d 231, 234 (7th Cir.1995)
("In light of the virtual synonymy of "debt' and "claim,' ... we
conclude that a disputed claim is a debt to be included when
calculating the § 109(e) requirements."); see 1 William I.
Norton, Jr., Bankruptcy Law & Practice § 18:12 (2d ed. 1994) at
18-43 ("Most courts have concluded ... that disputed debts are
and (3) were alleged to be entirely due to fraud, with the
Commissioner bearing the burden of proof as to the fraud
penalties.10 We limit our discussion, infra part IV.C., to the
first conclusion. See also supra notes 9-10 and accompanying text.
C. Liquidated Debt for Purposes of Section 109(e)
Black's Law Dictionary defines a liquidated debt as one where
11
it is certain what is due and how much is due. Black's Law
Dictionary 930 (6th ed. 1990). A liquidated debt is that which has
been made certain as to amount due by agreement of the parties or
by operation of law. Id. Therefore, the concept of a liquidated
debt relates to the amount of liability, not the existence of
liability. See In re McGovern, 122 B.R. 712, 715
included in the calculation of the amount of debt of eligibility
purposes."). The fact that Verdunn contests the Commissioner's
claim does not remove it as a claim under section 109(e) or
render it unliquidated. Knight, 55 F.3d at 235; In re Jordan,
166 B.R. 201, 204 (Bankr.D.Me.1994) ("[T]he vast majority of
courts have held that the existence of a dispute over either the
underlying liability or the amount of a debt does not
automatically render the debt either contingent or
unliquidated."); accord Vaughn v. Central Bank of the South, 36
B.R. 935, 938 (N.D.Ala.), aff'd, 741 F.2d 1383 (11th Cir.1984);
see also Norton, supra, at 18-48 ("If the amount of a claim has
been ascertained or can readily be calculated, it is
liquidated—whether contested or not.").
10
This conclusion is misplaced for two reasons: (1) The
concept of liquidation for purposes of section 109(e) relates
only to the amount of liability not the existence of liability.
See discussion infra part IV.C. The burden of proof issue is
relevant to the existence of Verdunn's liability, not the amount
of liability asserted. Id. (2) Notwithstanding, while the
Commissioner has the burden of proof in Tax Court as to fraud
penalties, Verdunn has the burden of proof as to the amount of
his tax liability (excluding fraud penalties). This sum alone
exceeds $100,000.
11
The terms liquidated debt or unliquidated debt are not
defined in the bankruptcy code. See Norton, supra, § 18:12 at
18-43 (neither the Bankruptcy Code nor its legislative history
defines "contingent" and "liquidated").
(Bankr.N.D.Ind.1989); see also C. McCormick, Handbook on the Law
of Damages, § 54 at 213 (1935).12 If the amount of the debt is
dependent, however, upon a future exercise of discretion, not
restricted by specific criteria, the claim is unliquidated. See 1
T. Sedgwick, Measure of Damages, § 300 at 570 (9th ed. 1912).13
Verdunn maintains that his tax liabilities were not
liquidated debts on the petition date because: the notice of
deficiency was insufficient to enable a court to readily ascertain
the amount of his debt to the United States; he vigorously
disputed the fraud penalties asserted by the Commissioner; and
extensive and contested evidentiary hearings before the Tax Court
were necessary in order to determine his tax liability.14
The Commissioner contends that a notice of deficiency is
analogous to a contract, i.e., it furnishes data that, if believed,
make it possible to compute the amount of the claims without
reliance upon opinion or discretion. See McCormick, supra at 213.
He contends that, similar to a contract, the function of a notice
of deficiency is to specify the amount of the tax liability
12
Examples of liquidated claims are claims upon promises to
pay a fixed [or determinable] sum, claims for money paid out, and
claims for goods or services to be paid for at an agreed rate.
McCormick, supra at 213.
13
"For an example, we may take the case of a claims for
damages for personal injury resulting from assault and battery,
or a case of seduction, or libel. Here the elements from which
to ascertain the amount of the demand are wholly at large. The
defendant has no means of knowing in advance of proof what the
precise pecuniary damage had been, still less what should be
allowed for pain and suffering. Even the plaintiff, short of an
assessment of damages by a jury, cannot give him the necessary
information. Down to the time of verdict the claim is entirely
unliquidated." T. Sedgwick, supra at 570.
14
See supra note 9 and accompanying text.
determined by the Commissioner and enable the taxpayer to petition
the Tax Court for a redetermination of a deficiency. See I.R.C. §§
6212(a), 6213(a); Hempel v. U.S., 14 F.3d 572, 578 (11th
Cir.1994); Benzvi v. Commissioner, 787 F.2d 1541, 1542 (11th
Cir.1986). Further, the Commissioner argues that as the amount of
the debt is ascertainable through the application of fixed legal
standards, it is a liquidated debt, i.e., the deficiency
determination is based on criteria established in the Internal
Revenue Code, see I.R.C. § 6211(a), and the bases for calculating
the underpayment and penalties are set forth in the notice. See,
e.g., In re Madison, 168 B.R. 986, 990 (D.Hawai"i 1994) (a
deficiency notice itemizes the amounts of the taxpayer's
liabilities); In re Lamar, 111 B.R. 327 (D.Nev.1990).
In support of this analysis, the Commissioner cites the
Seventh Circuit's recent decision in In re Knight, 55 F.3d 231 (7th
Cir.1995). Knight involved a debtor, the town court judge of
Mooresville, Indiana, who was required, and failed, to report a
total of 915 traffic convictions to the Indiana bureau of motor
vehicles, at a ($100 per incident) civil penalty cost of $91,500.15
The state attorney general issued a demand letter for payment. The
debtor filed for Chapter 13 relief. The bankruptcy court, affirmed
by the district court, dismissed the bankruptcy petition on the
ground that the debtor's outstanding liabilities exceeded the limit
established in section 109(e). The Seventh Circuit agreed.
Rejecting the debtor's argument that the claim was not liquid
15
This sum, together with a second claim, totalled
$108,949.50, and placed the debtor above the $100,000 eligibility
limit.
because he disputed the underlying liability, the court held that
the amount of the claim was readily ascertainable because it was
fixed in the state's demand letter and could be calculated from the
relevant state statute. Id. at 235.
Under a de novo review, our case is indistinguishable from the
Knight case. Like the relevant state statute in Knight,
established Internal Revenue Code criteria were used to calculate
Verdunn's tax debt. Like the demand letter in Knight, the amount
of Verdunn's tax liability was evident from a document, the
statutory notice of deficiency. See e.g., McCormick, supra, at
213; Sedgwick, supra, at 570. Like the $91,500 sum inKnight, the
amount of Verdunn's $297,000 deficiency was easily ascertainable,
i.e., it was computed through the application of fixed legal
standards set forth in the tax code. Id.
We conclude, therefore, like the penalties for failing to
report traffic offenses in Knight, Verdunn's federal income tax
liabilities and penalties, as asserted, were liquidated unsecured
debts to be included in the section 109(e) eligibility calculation.
As the bankruptcy and district courts improperly excluded these
claims from the computation, Verdunn is ineligible for Chapter 13
relief and his petition should be dismissed.
IV. CONCLUSION
For the reasons stated above, we conclude that Verdunn's
federal income tax liabilities and penalties were noncontingent,
liquidated, unsecured debts on the date he filed his bankruptcy
petition, that they exceeded the pertinent statutory limitation at
the time, and made him ineligible for relief under Chapter 13. The
district court order affirming the bankruptcy court is REVERSED and
this case is REMANDED WITH INSTRUCTIONS that it be returned to the
bankruptcy court for dismissal.
REVERSED and REMANDED WITH INSTRUCTIONS.