In re: Robert Cooper Brown, III and Laura Ann Brown

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: March 27, 2017
• Docket: NV-16-1099-KuLJu
• Status: Unpublished

Opinion

FILED MAR 27 2017 1 NOT FOR PUBLICATION SUSAN M. SPRAUL, CLERK U.S. BKCY. APP. PANEL 2 OF THE NINTH CIRCUIT

3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. NV-16-1099-KuLJu ) 6 ROBERT COOPER BROWN, III and ) Bk. No. 3:15-bk-51542 LAURA ANN BROWN, ) 7 ) Debtors. ) 8 _______________________________) ) 9 ROBERT COOPER BROWN, III; ) LAURA ANN BROWN, ) 10 ) Appellants, ) 11 ) v. ) AMENDED MEMORANDUM* 12 ) DAVID BEAVER; CATHERINE BEAVER,) 13 ) Appellees. ) 14 _______________________________) 15 Argued and Submitted on February 24, 2017 at Las Vegas, Nevada 16 Filed – March 27, 2017 17 Appeal from the United States Bankruptcy Court 18 for the District of Nevada 19 Honorable Gregg W. Zive, Bankruptcy Judge, Presiding 20 Appearances: Christopher Burke argued for Appellants; Amy N. Tirre argued for Appellees. 21 22 Before: KURTZ, LAFFERTY and JURY, Bankruptcy Judges. 23 24 25 26 * This disposition is not appropriate for publication. 27 Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. 28 See 9th Cir. BAP Rule 8024-1. 1 INTRODUCTION 2 Robert and Laura Brown appeal from an order dismissing their 3 chapter 131 bankruptcy case with respect to Robert only.2 The 4 bankruptcy court held that, at the time the chapter 13 petition 5 was filed, Robert’s debt to David and Catherine Beaver was 6 noncontingent and liquidated in an amount that exceeded 7 § 109(e)’s eligibility limit for unsecured debt. 8 On appeal, the Browns argue that a settlement agreement the 9 parties entered into during the Browns’ prior chapter 7 case 10 liquidated Robert’s debt in the amount of $171,000 and provided 11 for an increase of that debt to $500,000 only upon the occurrence 12 of an extrinsic event (Robert’s uncured default in making 13 settlement payments). Because this supposed triggering event did 14 not occur before the Browns commenced their chapter 13 case, 15 Robert contends only the lesser amount of $171,000 (less 16 settlement payments made) should have been counted against the 17 § 109(e) unsecured debt eligibility limit. 18 We disagree with the Browns’ interpretation of the 19 settlement. Under the only reasonable interpretation of the 20 settlement, the Beavers held a noncontingent claim against Robert 21 liquidated in the amount of $500,000 (less settlement payments 22 made) – an amount that exceeded the § 109(e) unsecured debt 23 24 1 Unless specified otherwise, all chapter and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and 25 all "Rule" references are to the Federal Rules of Bankruptcy 26 Procedure, Rules 1001-9037. All "Civil Rule" references are to the Federal Rules of Civil Procedure. 27 2 For ease of reference, we refer to Robert by his first 28 name. No disrespect is intended.

2 1 eligibility limit. 2 Therefore, we AFFIRM. 3 FACTS 4 The dispute between Robert and the Beavers began over 5 fifteen years ago when, according to the Beavers, Robert failed 6 to build them a house as contracted and allegedly used the 7 construction funds for his own purposes. In 2004, the parties 8 reached a settlement in the ensuing state court litigation 9 pursuant to which “Brown promised to complete construction of 10 the Beavers’ home within two years, at no further cost to 11 Beavers.” Third Amended Complaint (Feb. 23, 2011) at ¶ 46; see 12 also Answer to Third Amended Complaint (Feb. 13, 2012) at ¶ 1 13 (admitting ¶ 46 of the complaint).3 14 Several years later, the parties reached a further impasse, 15 so the Beavers returned to the state court with an amended 16 complaint alleging a new cause of action for breach of the 17 settlement agreement. In 2010, the state court entered an order 18 granting the Beavers partial summary adjudication, which did not 19 determine Robert’s liability but did determine that the damages 20 arising from Robert’s failure to build the Beavers’ home per the 21 settlement agreement amounted to $626,568.66, “plus other sums to 22 be determined at trial.” Third Amended Complaint (Feb. 23, 2011) 23 at ¶ 51; see also Answer to Third Amended Complaint (Feb. 13, 24 3 These early facts are drawn from allegations that Robert 25 admitted in the Beavers’ nondischargeability adversary proceeding 26 (Adv. No. 11-05002) against Robert in the Browns’ first bankruptcy case, District of Nevada Bankruptcy Case No. 10-54665. 27 The same facts are recited in the Stipulation for Entry of Nondischargeable Judgment executed by the parties and approved by 28 court order in 2012.

3 1 2012) at ¶ 1 (admitting ¶ 51 of the complaint). 2 In November 2010, on the same day the state court trial was 3 scheduled to commence, the Browns commenced their chapter 7 4 bankruptcy case. The Beavers removed the state court lawsuit to 5 the bankruptcy court and, with leave of court, filed their third 6 amended complaint, which effectively converted that lawsuit into 7 a nondischargeability action on multiple grounds. 8 Nearly two years later, in 2012, the parties reached a new 9 settlement. This second settlement provided for Robert to make 10 15 years of payments in the aggregate sum of $171,000. The 11 second settlement further provided that, if Robert defaulted on 12 the payments or on his other obligations and did not cure the 13 default within ten days of receipt of written notice of the 14 default, the Beavers could cause to be entered and enforced a 15 $500,000 stipulated nondischargeable judgment. 16 If Robert had timely made all of the required settlement 17 payments, the Beavers would have been required under the second 18 settlement to file a “Satisfaction of Nondischargeable Judgment” 19 and were prohibited from entering the $500,000 stipulated 20 nondischargeable judgment. But Robert defaulted on the required 21 settlement payments, and the Beavers sent Robert the requisite 22 notice of default. 23 Before the cure period ran, the Browns filed their 24 chapter 13 bankruptcy petition in late 2015. Shortly thereafter, 25 in January 2016, the Beavers filed a motion seeking relief from 26 the automatic stay to permit entry of the $500,000 27 nondischargeable judgment against Robert and seeking the 28 dismissal of the case based on the debtors’ chapter 13

4 1 ineligibility under § 109(e).4 2 Pursuant to the second settlement agreement, the Beavers 3 asserted that Robert owed them $500,000 (less $9,000 in 4 settlement payments made), so Robert’s unsecured debt exceeded 5 the $383,175 unsecured debt eligibility limit. In response, 6 Robert argued that, at the time he and his wife filed their 7 chapter 13 petition, he only owed $171,000 (less settlement 8 payments made). 9 The bankruptcy court disagreed with Robert. As a 10 preliminary matter, the court noted that it had presided over the 11 settlement conference between the parties in the Brown’s prior 12 chapter 7 case, that it also had presided over the hearing on the 13 motion seeking approval of the second settlement, that it had 14 signed the order approving the second settlement agreement and 15 that it had reviewed the transcript from the settlement 16 conference, at which time it had stated on the record, on behalf 17 of the parties, the principal settlement terms. 18 According to the court, the settlement provided for fifteen 19 years of graduated payments totaling $171,000, “[b]ut the amount 20 of the debt was clearly $500,000, which would be reduced to 21 [$171,000] only if the $171,000 was actually paid.” Hr’g Tr. 22 (March 17, 2016) at 5:5-7. Alternately stated, the court 23 determined that, under the settlement agreement, “[t]here was a 24 $500,000 non-dischargeable obligation that could be reduced to 25 26 4 Whereas the Beavers initially sought dismissal against both 27 debtors, the bankruptcy court denied without prejudice the motion to dismiss as against Robert’s wife Laura. That ruling is not at 28 issue in this appeal.

5 1 $171,000 so long as the debtor, Mr. Brown, complied with the 2 [payment] terms of the second settlement . . . .” Hr’g Tr. 3 (March 17, 2016) at 16:2-4. In so determining, the court further 4 concluded that the debt was neither contingent nor unliquidated 5 at the time of the Browns’ chapter 13 bankruptcy filing. 6 The bankruptcy court entered its order dismissing Robert 7 from the chapter 13 case on March 30, 2016, and the Browns timely 8 appealed. 9 JURISDICTION 10 The bankruptcy court had jurisdiction pursuant to 28 U.S.C. 11 §§ 1334 and 157(b)(2)(A), and we have jurisdiction under 12 28 U.S.C. § 158. 13 ISSUE 14 Did the bankruptcy court commit reversible error when it 15 held that, at the time of the Browns’ chapter 13 petition filing, 16 Robert was obligated to the Beavers for a liquidated and non- 17 contingent debt in excess of the chapter 13 unsecured debt 18 eligibility limit? 19 STANDARDS OF REVIEW 20 The meaning of the statutory terms “liquidated” and 21 “noncontingent” is a question of law we review de novo. Nicholes 22 v. Johnny Appleseed (In re Nicholes), 184 B.R. 82, 86 (9th Cir. 23 BAP 1995). Whether a particular debt fits within the statutory 24 terms for debt eligibility purposes similarly is a question of 25 law reviewed de novo. Id.; see also Guastella v. Hampton 26 (In re Guastella), 341 B.R. 908, 915 (9th Cir. BAP 2006) 27 (“Whether a debt is liquidated involves an interpretation of the 28 Bankruptcy Code and is reviewed de novo.”).

6 1 Both parties urge that the contingency and liquidation 2 issues turn on the correct interpretation of the settlement 3 agreement. For interpretation purposes, settlement agreements 4 are treated like contracts and generally are reviewed de novo. 5 See Commercial Paper Holders v. Hine (In re Beverly Hills 6 Bancorp), 752 F.2d 1334, 1338 (9th Cir. 1984); Pekarsky v. 7 Ariyoshi, 695 F.2d 352, 354 & n.1 (9th Cir. 1982); Kittitas 8 Reclamation Dist. v. Sunnyside Valley Irrigation Dist., 626 F.2d 9 95, 98 (9th Cir. 1980); see also NGA # 2 Ltd. Liab. Co. v. Rains, 10 946 P.2d 163, 167 (Nev. 1997) (stating that construction of 11 contractual terms is a question of law). 12 We can affirm the bankruptcy court’s ruling on any ground 13 supported by the record. Wirum v. Warren (In re Warren), 14 568 F.3d 1113, 1116 (9th Cir. 2009). 15 DISCUSSION 16 This appeal for the most part turns on a single issue: 17 whether, at the time of the Browns’ chapter 13 bankruptcy filing, 18 Robert’s debt to the Beavers was noncontingent and liquidated in 19 an amount that exceeded the chapter 13 eligibility limit for 20 unsecured debt. At the time of the Browns’ chapter 13 filing, 21 the applicable version of § 109(e) provided as follows: 22 Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, 23 liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than 24 $1,149,525, or an individual with regular income and such individual's spouse, except a stockbroker or a 25 commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured 26 debts that aggregate less than $383,175 and noncontingent, liquidated, secured debts of less than 27 $1,149,525 may be a debtor under chapter 13 of this title. 28

7 1 (Footnote Omitted.) 2 While the terms noncontingent and liquidated are not defined 3 in the statute, the Ninth Circuit Court of Appeals has given them 4 fixed meanings. “A claim is ‘contingent’ when ‘the debtor will 5 be called upon to pay [it] only upon the occurrence or happening 6 of an extrinsic event which will trigger the liability of the 7 debtor to the alleged creditor,’” and “[a] claim is 8 ‘unliquidated’ when it is not ‘subject to ready determination and 9 precision in computation of the amount due.’” Picerne Constr. 10 Corp. v. Castellino Villas, A. K. F. LLC (In re Castellino 11 Villas, A. K. F. LLC), 836 F.3d 1028, 1033 (9th Cir. 2016) 12 (citing Fostvedt v. Dow (In re Fostvedt), 823 F.2d 305, 306 (9th 13 Cir. 1987)). 14 Before we consider whether Robert’s debt falls within the 15 definition of these terms, we first must resolve a threshold 16 issue. Generally speaking, chapter 13 eligibility “should 17 normally be determined by the debtor’s originally filed 18 schedules, checking only to see if the schedules were made in 19 good faith.” Scovis v. Henrichsen (In re Scovis), 249 F.3d 975, 20 982 (9th Cir. 2001). In Scovis, the Court of Appeals reversed a 21 decision of this panel regarding chapter 13 eligibility because 22 we did not adhere to this rule. Id. Nonetheless, the Scovis 23 rule is not absolute. Scovis acknowledged that, when the good 24 faith of the debtors in filing their schedules is challenged, the 25 bankruptcy court can consider evidence beyond the schedules. 26 Id.; see also In re Guastella, 341 B.R. at 918-21 (applying good 27 faith exception and looking beyond schedules to determine that 28 debtor improperly listed debt at $0 for eligibility purposes).

8 1 More importantly, although it enunciated a simple rule, that 2 the schedules govern for purposes of determining eligibility, 3 Scovis also recognized an important exception: the schedules do 4 not govern when it is clear to a legal certainty that a different 5 result should obtain. Scovis, 249 F.3d at 983-84. In Scovis, 6 one of the scheduled claims at issue was secured by a lien 7 potentially avoidable as an impairment of the Scovis’s homestead 8 exemption. Id. Scovis held that it was appropriate to depart 9 from the schedules’ listing of the claim as secured because the 10 effect of the scheduled homestead exemption on the scheduled 11 secured claim was “readily ascertainable” and was subject to “a 12 sufficient degree of certainty.” Id. at 984. 13 In a similar vein, we do not construe Scovis as requiring 14 the bankruptcy court, in reading the schedules for eligibility 15 purposes, to ignore what it knows based on prepetition events 16 that occurred before the same bankruptcy court in a prior 17 bankruptcy case. In the parlance of Scovis, if the undisputed 18 occurrence of events during the prior bankruptcy case: (1) are 19 “readily ascertainable”; (2) are subject to “a sufficient degree 20 of certainty”; and (3) unequivocally establish that the claims as 21 scheduled are wrong, then the bankruptcy court should not be 22 bound to the face of the schedules for purposes of determining 23 the debtors’ chapter 13 eligibility. 24 Our reading of Scovis is bolstered by its observation – 25 distilled from Comprehensive Accounting Corp. v. Pearson 26 (In re Pearson), 773 F.2d 751, 756-57 (6th Cir. 1985) – that the 27 rule for determining § 109(e) eligibility “is similar in nature 28 to the subject matter jurisdiction context for purposes of

9 1 determining diversity jurisdiction.” Scovis, 249 F.3d at 982. 2 Discussing the test for determining the amount in controversy in 3 the diversity jurisdiction context, the Supreme Court in St. Paul 4 Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288-90 (1938), 5 articulated a test analogous to the Scovis test used in 6 chapter 13 cases. Under the St. Paul Mercury test, as restated 7 in Pearson, “the amount claimed in good faith by the plaintiff 8 controls unless it appears to a legal certainty that the claim is 9 for less than the jurisdictional amount or the amount claimed is 10 merely colorable.” Pearson, 773 F.2d at 757 (emphasis added) 11 (citing St. Paul Mercury, 303 U.S. at 288–90). 12 As more fully explained in St. Paul Mercury: 13 [I]f, from the face of the pleadings, it is apparent, to a legal certainty, that the plaintiff cannot recover 14 the amount claimed or if, from the proofs, the court is satisfied to a like certainty that the plaintiff never 15 was entitled to recover that amount, and that his claim was therefore colorable for the purpose of conferring 16 jurisdiction, the suit will be dismissed. Events occurring subsequent to the institution of suit which 17 reduce the amount recoverable below the statutory limit do not oust jurisdiction. 18 19 303 U.S. at 288–90 (emphasis added).5 20 21 5 Some courts have characterized the legal certainty exception to following the schedules as being subsumed within the 22 good faith inquiry. See, e.g., In re Smith, 419 B.R. 826, 829 23 (Bankr. C.D. Cal. 2009), aff'd in part, 435 B.R. 637 (9th Cir. BAP 2010) (“Bad faith, in this context, exists when it appears to 24 a legal certainty that the claim is not what the debtor reported.”). But we think it is more faithful to Scovis, Pearson 25 and St. Paul Mercury to conceive of the legal certainty exception 26 as a separate and independent inquiry that may affect whether it is appropriate to accept at face value the debtor’s schedules for 27 § 109(e) eligibility purposes. As this panel determined in its decision affirming in part the Smith bankruptcy court’s ruling, 28 (continued...)

10 1 Indeed, when a rule of law would make it “virtually 2 impossible” for the plaintiff to establish the requisite amount 3 in controversy, the legal certainty rule permits the court to 4 depart from the amount of damages alleged in the plaintiff’s 5 complaint. See Pachinger v. MGM Grand Hotel-Las Vegas, Inc., 6 802 F.2d 362, 364 (9th Cir. 1986). And the court “may go beyond 7 the pleadings for the limited purpose of determining the 8 applicability of the rule [of law].” Id. 9 Returning to the undisputed facts in the record before the 10 bankruptcy court here, those facts established that Robert and 11 the Beavers entered into the second settlement agreement which 12 fixed the amount of Robert’s nondischargeable obligation to the 13 Beavers. Thus, figuring the amount and status of Robert’s debt 14 at the time of the Browns’ chapter 13 bankruptcy filing is a 15 relatively straightforward matter of construing the parties’ 16 rights and liabilities under the second settlement agreement. 17 We apply Nevada law in interpreting the second settlement 18 even though the agreement was brokered and approved in a 19 bankruptcy court. See Cannon v. Haw. Corp. (In re Haw. Corp.), 20 796 F.2d 1139, 1143 (9th Cir. 1986); Commercial Paper Holders v. 21 Hine (In re Beverly Hills Bancorp), 649 F.2d 1329, 1332–33 (9th 22 Cir. 1981). Under Nevada law, our contract interpretation 23 efforts must strive to give effect to the parties’ intended 24 meaning as manifested by the contract’s express terms. Galardi 25 26 5 (...continued) 27 the “principle of certainty” may apply even if the debtor’s good faith in filing its schedules has not been challenged. 435 B.R. 28 at 646-47.

11 1 v. Naples Polaris, LLC, 301 P.3d 364, 367-69 (Nev. 2013); 2 Campanelli v. Conservas Altamira, S.A., 477 P.2d 870, 872 (Nev. 3 1970). That meaning typically is derived from the terms the 4 parties chose and in light of the context in which the terms were 5 used. Galardi, 301 P.3d at 367; see also Mohr Park Manor, Inc. 6 v. Mohr, 424 P.2d 101, 105 (Nev. 1967) (“A court should ascertain 7 the intention of the parties from the language employed as 8 applied to the subject matter in view of the surrounding 9 circumstances.”). The ordinary and reasonable meaning of 10 contract terms is preferred. Galardi, 301 P.3d at 368. 11 Here, the patent meaning of the parties’ settlement 12 agreement terms is straightforward. By way of the second 13 settlement, the parties sought to fully and finally resolve the 14 questions regarding Robert’s liability to the Beavers and 15 regarding the nondischargeability of that debt. If Robert timely 16 paid all of the required settlement payments in the aggregate 17 amount of $171,000, his obligations to the Beavers would be 18 treated as fully satisfied. On the other hand, if Robert 19 defaulted on his settlement payments – and did not timely cure 20 the default – the Beavers were entitled to have entered against 21 Robert a judgment for $500,000 in nondischargeable debt (less any 22 settlement payments made). 23 There is only one reasonable interpretation of these 24 settlement agreement terms. By way of the second settlement, the 25 parties agreed that Robert’s debt to the Beavers would be 26 nondischargeable in the amount of $500,000, subject to a 27 condition subsequent: if Robert timely paid the $171,000 in 28 settlement payments, the entire nondischargeable obligation would

12 1 be deemed satisfied. The concept of a condition subsequent – a 2 specific subsequent event that can extinguish a prior binding 3 contractual obligation – is recognized under Nevada law. See, 4 e.g., Am. Bank Stationery v. Farmer, 799 P.2d 1100, 1102 (Nev. 5 1990); Prudential Ins. Co. of Am. v. Lamme, 425 P.2d 346, 348 6 (Nev. 1967). 7 The Browns contend on appeal that Robert’s nondischargeable 8 obligation of $500,000 was not subject to a condition subsequent 9 but rather was subject to a condition precedent: an uncured 10 default in settlement payments. We reject this interpretation of 11 the second settlement as unreasonable. The Browns point to the 12 settlement term providing for the entry of a $500,000 13 nondischargeable judgment only upon the occurrence of an uncured 14 default. However, this settlement term on its face deals with 15 enforcement of the debt and not with its creation. 16 More importantly, the Browns’ posited interpretation of the 17 second settlement and their contention that the $500,000 debt was 18 subject to a condition precedent is unreasonable because it would 19 render invalid one of the key terms of the settlement – the term 20 providing for entry of the $500,000 nondischargeable judgment. 21 Under Nevada law, a contractual term providing for a $500,000 22 debt as a consequence for not timely paying a $171,000 obligation 23 typically would constitute an unenforceable penalty. See 24 generally Hubbard Bus. Plaza v. Lincoln Liberty Life Ins. Co., 25 649 F.Supp. 1310, 1316–17 (D. Nev. 1986), aff’d, 844 F.2d 792 26 (Mem. Dec.) (9th Cir. April 4, 1988) (applying Nevada law and 27 holding that a so-called liquidated damages provision constituted 28 an unenforceable penalty when the adverse party demonstrated that

13 1 the agreed liquidated damages were disproportionate with the 2 actual damages suffered by the proponent). 3 Nevada law requires us to prefer a contract interpretation 4 that renders the contract’s terms lawful, valid and enforceable. 5 Mohr, 424 P.2d at 104-05; see also Restatement (Second) of 6 Contracts § 203(a) (1981). By interpreting the timely payment of 7 the $171,000 in settlement payments as a condition subsequent 8 that would extinguish the entire, pre-existing $500,000 9 obligation, we comply with this contract construction 10 requirement. 11 Accordingly, on the date of the Browns’ chapter 13 12 bankruptcy filing, the Beavers held a noncontingent claim 13 liquidated in the amount of $500,000 (less $9,000 in settlement 14 payments made). This claim was not subject to a contingency 15 within the meaning of § 109(e) because the parties to the second 16 settlement did not contemplate that any further act or event was 17 necessary to trigger the liability. In re Fostvedt, 823 F.2d at 18 306-07. By its very nature, the condition subsequent was not 19 necessary to trigger the liability. Thus, the liquidated amount 20 of this noncontingent debt exceeded the § 109(e) eligibility 21 limits for unsecured debt, and the bankruptcy court correctly 22 determined that Robert was ineligible to be a chapter 13 debtor. 23 CONCLUSION 24 For the reasons set forth above, the bankruptcy court’s 25 order dismissing Robert’s chapter 13 bankruptcy case is AFFIRMED. 26 27 28