Clifford James Sappah and Debra Lynn Sappah

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
CLIFFORD JAMES SAPPAH
DEBRA LYNN SAPPAH
DEBTORS
CASE NO.
11-03129-8-SWH
ORDER
The matter before the court is the motion filed by the chapter 13 trustee to dismiss this case
because the debtors are ineligible to be chapter 13 debtors pursuant to 11 U.S.C. § 109(e). A hearing
took place in Raleigh, North Carolina, on September 19, 2012.
BACKGROUND
Clifford James Sappah and Debra Lynn Sappah filed a petition for relief under chapter 13
of the Bankruptcy Code on April 21, 2011. On May 4, 2011, the debtors filed their Schedule F,
indicating a total of $1,346,007.25 in unsecured nonpriority claims,1 the largest of which was
scheduled as a contingent, unliquidated claim held by First National Insurance Company of America
(“First National”) in the amount of $1,320,056.00. First National served as a surety in connection
1 The debtors’ schedule E indicated $0 in unsecured priority claims.
SO ORDERED.
SIGNED this 11 day of December, 2012.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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with various bonds on construction projects of Sappah Brothers, Inc., a contracting company of
which the male debtor is an officer. In this regard, First National obtained an indemnity agreement
for any related bonds, which was executed by Sappah Brothers, Inc., Sappah Brothers Building,
LLC, CAR Builders, Inc., and each debtor as individual indemnitors. 2 Also scheduled were claims
in favor of Branch Banking and Trust Company in the amounts of $5,086.00 and $312.74, as well
as a claim in an unknown amount for liability related to a foreclosure.
Creditors filed claims for unsecured nonpriority debts in the total amount of $1,944,617.04,
including a claim for $1,079,001.21 filed by First National, as well as claims filed by BB&T for
$560,573.56 (“Claim No. 8-1") and $284,139.14 (“Claim No. 7-2"). An unsecured priority claim
was filed by the Internal Revenue Service in the amount of $131,567.55 (as most recently amended),
bringing the total amount of claims for unsecured debts to $2,076,184.59. The debtors filed an
objection to the initial claim filed by the IRS, but later withdrew the objection.3 No other objections
to claims have been filed.
DISCUSSION
The chapter 13 trustee filed a motion to dismiss the debtors’ case, contending that they are
not eligible to be debtors under chapter 13 because their unsecured debt exceeds the limit set forth
in 11 U.S.C. § 109(e). Section 109(e) provides, in relevant part, that
2 The male debtor is also a principal of Sappah Brothers Building, LLC and CAR Builders,
Inc.
3 The IRS claim was initially filed on July 21, 2011, in the amount of $189,106.88, based on
a combination of civil penalties and income tax. According to the debtors, the civil penalties arose
from tax assessments against Sappah Brothers Inc., an entity of which the male debtor is a principal.
The debtors objected to the inclusion of the income tax, and the IRS amended the proof of claim to
omit the income tax, reducing the claim amount to $176,846.88 on October 13, 2011. The proof of
claim was subsequently amended on December 22, 2011 and February 16, 2012, in the final amount
of $131,567.55.
2
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[o]nly an individual with regular income that owes, on the date of the
filing of the petition, noncontingent, liquidated, unsecured debts of
less than $360,475 . . . may be a debtor under chapter 13 of this title.
11 U.S.C. § 109(e). Thus, chapter 13 eligibility is determined as of the date the petition is filed. Id.,
see, e.g., In re Bernick, 440 B.R. 449 (Bankr. E.D. Va. 2010).
As to whether a debt is noncontingent, courts generally hold that “a debt is noncontingent
if all of the events necessary to give rise to liability for it take place prior to the filing of the
petition.” See, e.g., In re Knowles, Case No. 05-06402-8-ATS (Bankr. E.D.N.C. Oct. 31, 2005).
The term “liquidated” in the context of § 109(e) has received somewhat varied interpretations among
courts; the most common interpretation is that a debt is liquidated if the amount of the debt is easily
ascertainable using a simple mathematical calculation. In re Guzman, Case No. 10-10169-8-JRL
(Bankr. E.D.N.C. May 31, 2011). 	Some courts hold that the standard is whether a significant
evidentiary hearing would be necessary to determine the amount of the debt. Id.
The trustee contends, and the debtors concede, that the debtors’ unsecured debt is
noncontingent. 	In addition, the trustee contends that the debt is liquidated, because claims are
considered valid as filed unless successfully contested, and the debtors have not maintained
objections to any of the claims filed.4 If so, the approximate unsecured claim total of $2 million
causes the debtors to run afoul of the unsecured debt limit contained within § 109(e). The debtors,
on the other hand, contend that the majority of their unsecured debts are unliquidated, and to the
extent any of their unsecured debt is liquidated, it totals less than the $360,475 ceiling of § 109(e).
At the hearing, the debtors focused on the following four debts, which account for $2,055,281.46
4 See Fed. R. Bankr. P. 3001(f), which provides that “[a] proof of claim executed and filed
in accordance with these rules shall constitute prima facie evidence of the validity and amount of
the claim.”
3
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of the unsecured claim total, leaving roughly $20,000 in other unsecured debts which the debtors
do not dispute should be included in the § 109(e) unsecured debt calculation:
A. 	Claim No. 8-1 of BB&T
BB&T filed Claim No. 8-1, in the amount of $560,573.56, which is identified as a deficiency
balance arising from a debt of Pine Glen Developers, LLC. The debtors assert that this claim was
unliquidated on the petition date, because it is the result of a foreclosure that was not finalized until
after the petition date. Also, as to this particular claim, the debtors contend that the proof of claim
does not contain a guaranty agreement and therefore does not establish that either of the debtors are
liable for this debt.5
Upon a review of the documents attached to the proof of claim, it appears that this claim is
based on a promissory note between BB&T and Pine Glen Developers, LLC, which was executed
on October 1, 2007 by Clifford Sappah, Richard Sappah, and James W. Post, as managing members
of Pine Glen Developers. Also attached to the proof of claim is a deed of trust executed in 2010 by
the same parties as well as William J. Post, all in their member/manager capacity of the company.
What is not attached to the proof of claim, however, is any sort of guaranty agreement or other
document signed by either of the debtors in an individual capacity. Without such, the proof of claim
does not constitute prima facie evidence that BB&T is in fact a creditor of the debtors individually
on this debt, for purposes of the § 109(e) analysis. This claim amount therefore will not be included
in the § 109(e) unsecured debt calculation.
5 For this reason, counsel for the debtors stated at the hearing that this claim is particularly
ripe for an objection. However, no such objection has been filed.
4
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B. 	Claim No. 7-2 of BB&T
On May 9, 2011, BB&T filed a claim for $905,411.47 (“Claim No. 7-1"), based on a
promissory note executed on behalf of CAR Builders, Inc. by Clifford Sappah as Vice President and
Richard Sappah as President of the corporation. 	Clifford Sappah and Richard Sappah further
executed a deed of trust on behalf of the corporation, pledging certain real property as collateral for
the loan. 	Copies of the note and deed of trust are attached to the proof of claim, along with a
guaranty agreement, which is signed solely by the male debtor in his individual capacity. Other
supporting documentation indicates that the $905,411.47 claim amount reflects the balance as of the
petition date. Over one year later, on June 15, 2012, BB&T filed Claim No. 7-2 in the amount
of $284,139.14, reflecting a principal reduction of $620,000.00, which resulted in a “deficiency
balance” of $284,139.14. The debtors assert that this claim was not liquidated on the petition date,
because at that point a foreclosure had not yet been finalized.
The guaranty agreement provides that it is a primary obligation, payable on demand, and that
BB&T is not required to pursue either the note borrower or any collateral before seeking payment
from the male debtor. The agreement further provides that the male debtor shall have no right of
subrogation, reimbursement, or indemnity, nor any right of recourse to security for the note
borrower’s obligations, unless all such obligations are paid in full. 	In addition, the agreement
contains a waiver of any rights or benefits of law that would require BB&T to delay pursuit of the
male debtor until it exhausts remedies against the note borrower. Thus, the guaranty agreement is
a separate debt instrument from the note and deed of trust, creating a separate obligation of the male
debtor, and BB&T is not required to liquidate any collateral or pursue the note borrower before
seeking payment in full from the male debtor. See also, In re Smith, Case No. 11-01951-8-JRL at 2
5
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(Bankr. E.D.N.C. Oct. 25, 2011) (“In North Carolina, a personal guarantor is absolutely liable for
the underlying debt, without regard for the obligation of other guarantors or obligors to pay the same
or related debt.”) (citations omitted). As a result, any foreclosure efforts pending at the time of the
petition do not affect BB&T’s claim against the male debtor individually. As of the petition date,
Claim No. 7-1 indicates an unsecured debt of $905,411.47 as to the male debtor. 	The fact that
BB&T later amended its claim, reducing the amount to $284,139.14 has no bearing on the § 109(e)
analysis, given that the relevant debt amount is the amount owed as of the petition date. As the
uncontroverted initial proof of claim (Claim No. 7-1) establishes that the male debtor owed an
unsecured debt of $905,411.47 on the petition date, the male debtor’s unsecured debt total exceeds
$360,475.00, rendering him ineligible to be a chapter 13 debtor pursuant to § 109(e).
C. 	Claim of the Internal Revenue Service
As to the claim filed by the IRS, the debtors state that this claim arises from civil penalties,
and that the IRS has also filed a claim in the Sappah Brothers, Inc. case for the same or related civil
penalties. The debtors contend that this claim is unliquidated because the IRS is secured by certain
collateral that was unliquidated as of the date of the petition, and because the IRS has amended the
claim three times since the initial claim was filed in July of 2011, which demonstrates the uncertain
nature of the claim amount. In addition, the debtors assert that the claim is subject to reduction in
an unknown amount, given that the male debtor’s brother and sister-in-law, Richard and Joann
Sappah, are debtors in a chapter 7 case and a portion of the proceeds of the sale of their residence
will go to the IRS, thereby reducing the amount owed by the debtors in the instant case.
The initial proof of claim filed on July 21, 2011 includes several taxes assessed for “civil
penalties,” in association with the male debtor’s social security number. Also included are two
6
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amounts attributable to income tax for tax year 2010, one under each debtor’s social security
number. The debtors’ objection to claim stated that the debtors filed income tax returns for the year
in question, and expected a refund. 	As such, the debtors sought a reduction in the claim by
$12,260.00, the amount of income tax assessed, for a claim amount of $176,846.88. On October 13,
2011, the IRS amended the proof of claim to $176,846.88, changing the amount due for income
taxes to $0. Since this reduction involves the debtors’ income tax liability for 2010, incurred pre-
petition, as well as a corresponding tax refund, it affects the amount due on the date of the petition
and is not a post-petition reduction in the amount owed.6
It is unclear from the record whether this debt is an obligation of both debtors, or the male
debtor only. 	The debtors bear the burden of establishing eligibility pursuant to § 109(e). 	In re
Bernick, 440 B.R. 449 (Bankr. E.D. Va. 2010). 	The evidence suggests that both debtors are
obligated, in that the proof of claim does not state otherwise and the debtors have not asserted
otherwise. To the contrary, their objection to claim states that the “debtors” object to the claim and
“the debtors pray that said unsecured priority claim of the Internal Revenue Service be reduced to
$176,846.88.” Obj. to Claim, Doc. No. 24. It therefore appears that both debtors are obligated on
6 The proof of claim was subsequently amended two more times, apparently to reflect
reductions in the civil penalties assessed, beginning with the oldest dated penalties. There is no
indication that these changes were corrective measures; instead the reductions are perhaps the result
of post-petition developments, such as credits for the liquidation of collateral. 	Post-petition
developments may be considered in the § 109(e) analysis, but only to the extent they shed light on
the amount of debt owed on the petition date. In re Hatzenbuehler, 282 B.R. 828 (Bankr. N.D. Tex.
2002). 	As the later amendments to the proof of claim appear to be the result of post-petition
developments, these amendments are not relevant to the § 109(e) analysis. See, e.g., In re Lamar,
111 B.R. 327 (D. Nev. 1990) (holding that the § 109(e) calculation is made as of the date of the
petition filing; “subsequent activities do not affect how much was owed on that date”).
7
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this debt and that the second proof of claim was filed to correct errors in the first proof of claim,
such that the amount owed on the petition date was $176,846.88.
As to the debtors’ argument regarding the potential future reduction in the debt amount if
certain collateral is liquidated, the court finds that because the collateral was not liquidated as of the
petition date, its existence and potential future liquidation is not relevant for purposes of § 109(e).
Moreover, the IRS claim is based on civil penalties that apparently arose from assessments against
Sappah Brothers for unpaid federal withholding taxes, Federal Insurance Contributions Act taxes,
and Federal Unemployment Tax Act taxes. Claim No. 6-1, Case. No. 11-08250-8-SWH. Based on
Sappah Brothers’ failure to pay these taxes, the IRS may collect the full amount due from those
responsible for the corporation’s failure to pay the taxes. Chaffee v. IRS (In re Chaffee), 186 B.R.
783, 788 (Bankr. N.D.N.Y. 1995). Importantly, a responsible person’s liability is “separate and
distinct from that imposed on the corporation.” Id. The debtors, therefore, were liable for the full
amount due on these penalty taxes as of the petition date. 	Should the male debtor’s brother’s
residence be liquidated post-petition, the amount ultimately owed by the debtors will be reduced,
but because they were liable for the full debt as it existed on the petition date, the potential
liquidation of collateral of another is not relevant to the § 109(e) analysis. Thus, with the inclusion
of the debt owed to the IRS, the male debtor’s running unsecured debt total is over $1 million, and
the female debtor is within the § 109(e) limit, at least until the final debt at issue is considered
below.
8
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D. 	Claim of First National Insurance Company of America
The debtors assert that the largest claim filed for an unsecured debt, that of First National
in the amount of $1,079,001.21, is unliquidated because it is the subject of a pending district court
lawsuit involving not only the debtors in the present case, but also other individual debtors related
to the male debtor, and several entities that are in bankruptcy and in which the debtors have an
interest. According to the debtors, both factual and legal disputes exist with regard to the claims
raised in the complaint filed by First National,7 resulting in the debtors’ filing of a substantial answer
in the proceeding. As such, the debtors argue that the claim is the subject of a non-frivolous dispute,
and a significant evidentiary hearing would be required to determine the amount of the claim. In
addition, the debtors assert that First National is secured by certain collateral, which was
unliquidated as of the date of the petition. 	The debtors represent that a list of the collateral is
contained within a June 18, 2012 consent order entered in the Sappah Brothers, Inc. case, and that
only recently an item of collateral was sold for approximately $69-70K, but as of the petition date,
the value of the collateral was unknown. For these reasons, the debtors contend that the claim of
First National is unliquidated and should not count toward the § 109(e) unsecured debt calculation.
An exhibit to the proof of claim indicates that First National’s claim amount reflects the total
amounts paid out by First National on payment and performance bonds as of the petition date, as
well as loss adjustment expenses and amounts attributable to pending claims. The exhibit further
includes credits for reimbursement payments received. Although the debtors assert that both the
pending status of the district court litigation and the extent to which the complaint is disputed render
the amount of the debt unliquidated, the court is not persuaded. The fact that a claim is in dispute
7 The claim, however, was not scheduled as “disputed.”
9
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does not exclude it from the § 109(e) analysis, if it is found to be noncontingent and liquidated. In
re Claypool, 142 B.R. 753, 755 (Bankr. E.D. Va. 1990); see, e.g., In re Mitrano, 2008 Bankr. LEXIS
4177 (Bankr. E.D. Va. 2008) (holding that even vigorous dispute as to liability on a debt does not
exclude the debt from the § 109(e) analysis on the basis of the dispute alone). “To hold otherwise
would allow debtors to bootstrap themselves into chapter 13 eligibility simply by disputing liability
on the requisite amount of their claims.” Claypool, 142 B.R. at 755. Similarly, the existence of a
pending lawsuit does not automatically exclude a debt from the § 109(e) calculation. Numerous
types of debts are the subject of non-frivolous litigation and discovery, but the mere fact that a
debtor disputes the debt does not mean the debt does not count in determining eligibility under §
109(e), as the statute does not exclude disputed debts – only contingent and unliquidated debts are
excluded. Although some causes of action, such as those based in tort and quantum meruit, are
generally considered unliquidated until judgment is rendered or the damages are otherwise fixed,
contract debts tend to be liquidated even though disputed, because the amount owed can be
determined from the contract and supporting documents. See, In re Pulliam, 90 B.R. 241 (Bankr.
N.D. Tex. 1988).
In determining whether the amount owed is easily ascertainable, such that the debt is
liquidated, it is enough that a minimum claim amount can easily be determined. In re Knowles, Case
No. 05-06402-8-ATS (Bankr. E.D.N.C. Oct. 31, 2005). 	In the present case, many claims and
counterclaims have been raised in the district court action, but the proof of claim establishes that
First National made multiple bond payments in connection with Sappah Brothers projects, and now
claims those amounts are owed by the debtors pursuant to the indemnity agreement executed by each
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debtor. The bond payments and related expenses alone total $1,040,961.71,8 far in excess of the
$360,475 unsecured debt limit of § 109(e). These bond payments establish at least a minimum
claim, regardless of additional pending claims in the district court lawsuit.
As to the debtors’ arguments regarding unliquidated collateral, the indemnity agreement
provides that First National may enforce the agreement directly against the debtors without first
proceeding against the contractor, and the debtors waived all rights of indemnity, subrogation, and
contribution against Sappah Brothers until all obligations are satisfied in full. The agreement does
not contain any requirement that First National liquidate collateral before seeking payment in full
from the debtors. As a result, the existence of unliquidated collateral on the petition date does not
affect the § 109(e) analysis. Additionally, it makes no difference whether collateral exists or not,
because in signing the indemnity agreement, the debtors agreed to be jointly and severally liable
with Sappah Brothers Inc., Sappah Brothers Building, LLC, and CAR Builders, Inc. for the
repayment of any amounts paid by First National as a surety on Sappah Brothers’ contracts. See
Crain & Denbo, Inc. v. Harris & Harris Constr. Co., 252 N.C. 836, 839-40 (N.C. 1960) (“‘In the case
of a joint and several obligation, under both the common law and the modern practice statutes, the
plaintiff at his option or election may sue each obligor separately or all of them jointly.’”) (citation
omitted). As a result, although some future liquidation of collateral owned by Sappah Brothers may
reduce amount of the debt owed, until that happens, First National may pursue the debtors for the
full amount due, and the amount due as of the petition date is the only amount relevant to the
§ 109(e) determination.
8 This number does not include $38,039.50 in “pending” claims, but does reflect credits for
any amounts paid to First National by Sappah Brothers or others.
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Based on the foregoing, both debtors exceeded the unsecured debt limit as of the petition
date. The debtors are therefore ineligible to be debtors under chapter 13 pursuant to § 109(e). The
motion to dismiss is ALLOWED. The debtors may convert their case to chapter 7 within 10 days
of the date of this order. If no notice of conversion is filed, the case will be dismissed without
further hearing.
SO ORDERED.
END OF DOCUMENT
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