Simultaneous 'Chapter 20' filings barred

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A debtor may not file a simultaneous “Chapter 20” petition — a Chapter 13 plan filed while a Chapter 7 petition is still pending — the Seventh Circuit held on Dec. 9.

Mark A. Sidebottom, owned a construction company called Sidebottom Builders, Inc. (SBI). David and Jamie Broyles contracted with SBI to build a home, but SBI ceased performance before completion.

The estimated cost of the project was $968,862, and the Broyleses had already made payments of $678,205, when SBI ceased work. They had to pay another contractor $700,919 to complete the project.

The Broyleses sued SBI and Sidebottom, alleging fraud and conversion, whereupon both filed for bankruptcy under Chapter 7. The Broyleses then filed an adversary action against Sidebottom, arguing that their claims were nondischargeable. A general discharge was granted to Sidebottom on his other debts, which were negligible, but the bankruptcy court scheduled a hearing on the adversary complaint.

Less than two weeks prior to the adversary proceeding, Sidebottom filed for Chapter 13, proposing to pay the Broyleses 36 monthly payments of $100 each, for a total of $3,600. He listed the amount of the claim as “unknown” and “unliquidated.” In response, the bankruptcy court stayed the scheduled adversary proceeding in the Chapter 7 case.

The Broyleses moved to dismiss the Chapter 13 petition, arguing that it was not filed in good faith, and that Sidebottom’s debts exceed the limit imposed by 11 U.S.C. 109(e). They also alleged that their debts were liquidated, and thus, not covered by the sec. 109(e) cap.

The bankruptcy court dismissed the petition, holding that the claims constituted a liquidated, noncontingent debt greater than the statutory cap for eligibility under Chapter 13. The district court affirmed, and Sidebottom appealed. The Seventh Circuit affirmed in a decision by Judge Diane P. Wood, but on other grounds.

The court held that a simultaneous “Chapter 20” filing — a Chapter 13 proceeding filed while a Chapter 7 proceeding involving the same debts is still pending — must be dismissed, irrespective of the filer’s good faith.

The court noted that this is the majority approach, the leading case being In re Turner, 207 B.R. 373 (2d Cir. B.A.P. 1997). However, a minority of courts permit simultaneous filings, but assess the propriety of the Chapter 13 case in light of the good faith standard generally applicable to Chapter 13 plans.

The court held that the majority approach was the better reasoned, concluding, “it seems to us that a debt like the Broyleses’ claim against Sidebottom that is expressly excluded from a general discharge under Chapter 7 falls within the rule articulated by the Turner panel. As [the U.S. Supreme Court in Freshman v. Atkins, 269 U.S. 121 (1925)] might have put it, the effort to litigate the same matter simultaneously in the Chapter 13 proceeding should have been rejected on the grounds of ‘same matter pending.’ This is not a case in which the Chapter 7 proceeding was finished except for some minor technicalities at the end, like the filing of a trustee’s final report. Allowing Sidebottom to proceed with the Chapter 13 case significantly affects the Chapter 7 trustee’s ability to administer the estate, because it will change how much each creditor gets paid if the Broyleses’ claims are resolved through the Chapter 13 process.”

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The court continued, however, concluding that, even if the minority rule applied, the case would likely have to be dismissed for bad faith.

The court noted a number of factors: the petition was filed less than two weeks before the adversary proceeding; the debt allegedly arose from fraud; the plan proposed to pay only $3,600 on a half million dollars in debt; and the made an offer of settlement that threatened to file a Chapter 13 petition if the offer was rejected.

The court concluded, “None of this sounds like a proper use of the bankruptcy procedures to us.”

Finally, the court turned to the issue on which the lower courts decided the issue — whether the debt was liquidated and exceeded the permissible amount. The court found that the disputed amount was more than half a million dollars, and thus, well in excess of the sec. 109(e) limit, but questioned whether it was “liquidated.”

Because it was unnecessary to decide the issue, however, the court did not discuss it, other than to call the issue “problematic.”

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David Ziemer can be reached by email.