Court: United States Bankruptcy Court, D. South Carolina; March 24, 2017; Us Bankruptcy; United States Bankruptcy Court
The Court addressed the Objection to Claim by Gary Allen Washington, the Debtor, against the City of Columbia, after the City filed a response and a hearing was held. Jurisdiction is established under 28 U.S.C. 1334, categorizing the matter as core under 28 U.S.C. 157(b)(2)(B).
Key findings include:
1. Carolina Procurement Institute, Inc. executed a $200,000 promissory note to the City on December 22, 2004, secured by a mortgage on specific real property, which was not recorded, and no evidence indicated that the Debtor signed the mortgage personally.
2. The Debtor and Michele A. Washington provided an absolute guaranty for the note, secured by their personal property.
3. In a Chapter 11 case filed on November 2, 2009, the City submitted a secured proof of claim for $197,925.60 based on the guaranty, which went unchallenged by the Debtor or his wife. This case was dismissed on September 24, 2010.
4. A second Chapter 11 petition was filed on February 3, 2011, where the City filed a general unsecured claim of $190,199.05, which also went unobjected to.
5. The Court confirmed the second bankruptcy plan on December 22, 2011, allowing for monthly payments of $1,000 over 60 months to satisfy general unsecured claims, with an estimated dividend of 15 cents on the dollar.
6. The case was closed on July 17, 2012, post-confirmation; however, the plan remains active.
7. Under 11 U.S.C. 1141(d)(5), the Debtor and his wife will not receive a discharge until all payments are completed, and they have not yet requested a discharge in the Second Bankruptcy Case.
The Court's order reflects these findings and the ongoing obligations of the Debtor and Mrs. Washington under the confirmed plan.
In 2013, First Citizens Bank issued an IRS 1099-C form for Carolina Procurement, reporting a discharged debt of $157,911.29 due to 'Bankruptcy.' Debtor and Mrs. Washington sought to reopen their Chapter 11 case on December 2, 2013, to modify their confirmed plan because of reduced income, but the court denied their motion on December 19, 2013, citing insufficient change in circumstances. The City Council discussed the loan with Carolina Procurement on February 26, 2014, indicating potential future write-offs of amounts owed. On October 3, 2014, Debtor filed a third Chapter 11 petition, and the City filed a proof of claim for $182,276.53 on January 22, 2015, which was not contested by Debtor or Mrs. Washington. The court denied confirmation of the Chapter 11 plan on December 29, 2015, due to failure to meet the requirements and dismissed the case on January 4, 2016.
Debtor filed for Chapter 13 on May 30, 2016, but the Trustee objected to confirmation, alleging bad faith and unreasonable delay. On July 21, 2016, the City filed a proof of claim for the same $182,276.53. A consent order was established on September 23, 2016, stipulating any future case dismissal would be with prejudice for one year. On September 24, 2016, Debtor objected to the City's claim, asserting the underlying debt was canceled and uncollectable under South Carolina's statute of limitations, while reserving the right to challenge its validity in separate litigation. The City responded on October 12, 2016, claiming the debt was not discharged and was secured by a mortgage, subject to a longer statute of limitations. An Order Confirming the Chapter 13 Plan was entered on January 18, 2017, with no objections from the City, outlining that general unsecured claims would be paid pro rata, without full payment to any claimants.
A hearing was conducted regarding the Objection to Claim, during which evidence and testimonies were presented from the Debtor and Paul Featheringill, the City’s Commercial Loan Officer. The Debtor argues for disallowance of the City’s proof of claim, claiming the debt was canceled and, alternatively, that it is stale under South Carolina’s three-year statute of limitations. The City counters that the debt remains collectible under a twenty-year statute of limitations. The legal framework requires the debtor to initially present evidence to overcome the presumption of validity for a timely filed claim; if successful, the burden shifts to the creditor to prove the claim's validity by a preponderance of the evidence.
The Debtor claims the debt was canceled based on the issuance of a Form 1099-C and City Council meeting minutes. Under South Carolina law, specifically S.C. Code Ann. 36-3-604, a debt can be discharged by intentional acts or agreements not to sue. The Debtor submitted a Form 1099-C indicating $157,911.29 of the debt was discharged. However, South Carolina courts have not clarified whether this form alone suffices to prove debt cancellation. Courts, including the Fourth Circuit, generally hold that a Form 1099-C does not constitute sufficient evidence of debt cancellation. The consensus indicates that such forms do not discharge debtors from liability, although some courts have ruled otherwise based on principles of justice and equity.
The majority of courts interpret the Internal Revenue Code to require the issuance of IRS Form 1099-C regardless of whether a debt has been discharged. This form serves solely as a reporting document and does not imply that a creditor has relinquished the right to collect the debt. Under South Carolina law, an IRS Form 1099-C is not considered prima facie evidence of debt cancellation; instead, the entire record must be examined to determine if a debt has indeed been canceled. In this case, the Form 1099-C was issued due to the Debtor’s Confirmed Chapter 11 Plan, specifically indicating that it was related to bankruptcy. The amount reported on the form corresponds to approximately 85% of the debt not covered by the bankruptcy plan's terms.
Testimony confirmed that the form was issued to meet IRS compliance and did not signal the City’s intent to cease collection efforts. Additionally, City Council Meeting minutes referenced discussions about "writing off" the loan, with City Attorney Mr. Kenneth E. Gaines noting delinquency in payments. However, these minutes do not indicate any formal agreement by the City to stop pursuing the debt or renounce its rights against the Debtor. Instead, they suggest a consideration of further collection actions, as indicated by Ms. Tina Herbert’s comments about the potential dismissal of the bankruptcy order to pursue the Debtor. Under the South Carolina Commercial Code, cancellation of a debt requires either a voluntary act to discharge the obligation or a signed agreement not to sue, neither of which was established in the meeting minutes.
The City pursued collection efforts by filing proofs of claim in both the Third Bankruptcy Case and the current Chapter 13 Case. Testimony from Mr. Featheringill indicates that the City maintained the debt as active and collectible, despite City Council Meeting minutes suggesting the debt was 'written off.' This 'write off' reflects an internal accounting policy rather than a cancellation of the debtor’s obligations, as supported by case law stating that a charged off loan does not equate to debt forgiveness. No evidence was presented to show that the Guaranty or related loan documents had been delivered to the Debtor as a discharge of the debt or were intentionally destroyed. Consequently, the Court concluded that the Debtor’s obligations under the Guaranty were not canceled or discharged.
Regarding the statute of limitations, the Debtor argued that the City’s proof of claim should be disallowed due to the three-year limit for breach of contract claims. However, the City countered that its claim falls under the twenty-year statute of limitations for actions on a bond or contract secured by a mortgage. Although the Note was secured by a Mortgage, the Guaranty was not, as it is only secured by specific personal property of the Debtor and Mrs. Washington. The Guaranty does not appear to be secured by a mortgage under South Carolina law, which also clarifies that an instrument can be considered sealed without a physical seal if intent is demonstrated in the document.
Under South Carolina law, the criteria for a sealed instrument are interpreted narrowly. Simply including standard attestation language, such as "IN WITNESS WHEREOF," does not suffice to demonstrate the parties' intent to create a sealed instrument. Additional indicators, such as the phrases "SIGNED SEALED AND DELIVERED IN THE PRESENCE OF" or the notation "L.S." next to signatures, are necessary. In the case at hand, the Guaranty contains only standard attestation language and lacks any additional indicators of intent to seal, leading to the conclusion that it was not executed under seal. Consequently, the twenty-year statute of limitations does not apply; instead, the three-year statute of limitations governs.
The Debtor argues that the loan became delinquent in June 2010, initiating the limitations period, which would have expired before this case was filed. However, this argument does not account for the tolling of the statute of limitations due to the Debtor's multiple bankruptcy filings. Under South Carolina law, the statute of limitations is tolled when an injunction or statutory prohibition delays the initiation of a lawsuit. The automatic stay provided by 11 U.S.C. § 362(a) during each bankruptcy case prevented the City from pursuing action against the Debtor for the loan default, thus tolling the limitations period for the claim. This principle is supported by case law indicating that such statutory prohibitions extend the limitations period for the duration of the stay.
The City could have initiated legal action for a June 2010 default by June 8, 2016, but since Debtor filed for Chapter 13 on May 30, 2016, the statute of limitations had not expired. Under S.C. Code Ann. 15-3-100, the limitations period extends less than 30 days, and further extends an additional 30 days after the automatic stay's termination under 11 U.S.C. 108(c)(2), which has not yet occurred. Consequently, the Court overrules Debtor’s objection to the City’s proof of claim, allowing it as filed. The Guaranty secures various assets of the Debtor with the City, but no UCC Statements were provided for the listed security. The City deemed its claim unsecured during the Second Bankruptcy Case, as the Mortgage was not executed or recorded properly. Debtor appealed several orders from the Third Bankruptcy Case, which were affirmed by the U.S. District Court, with no further appeals taken. The filing of a Chapter 13 case following a Chapter 11 case is termed a 'Chapter 24' proceeding, which, while rare, is permissible under the Bankruptcy Code. Debtor did not substantiate claims regarding the amount in the City’s proof of claim during hearings, hence the Court will not consider this argument. The City’s claim is recorded as Claim Number 8 on the claims register.
Debtor raised a new argument at the hearing, claiming that the City's proof of claim lacked necessary supporting documentation, specifically the loan payment history, which would allow the Debtor to ascertain the claim's current amount. The Court noted there is no requirement for such documentation to accompany a proof of claim for unsecured debt and declined to consider this argument since it was not included in the Objection to Claim. The City filed an IRS Form 1099-C citing "discharge of indebtedness under bankruptcy," which was erroneous as the Debtor did not receive a discharge in the Second Bankruptcy Case due to the requirement for individual chapter 11 debtors to complete all payments under their plan. The absence of an alternative identifiable event on the form suggests a misunderstanding by the City regarding the Debtor's discharge status.
The confirmed Chapter 11 Plan included the City's claim among general unsecured creditors, who are entitled to a pro rata share of $1,000 monthly payments over five years, amounting to approximately 15% of their allowed claims. South Carolina case law does not clarify the impact of internal write-offs or charge-offs on debt cancellation, but a definition from a Supreme Court of South Carolina case indicates that charge-offs are merely accounting practices and do not discharge the underlying debt. The statute of limitations for actions based on a guaranty begins upon the debtor’s default, with the Court recognizing a default in June 2010. The Debtor's payments under the Confirmed Chapter 11 Plan, made until October 2013, were not addressed in relation to their effect on the statute of limitations. South Carolina Code Section 15-3-120 stipulates that only a signed writing can constitute evidence for a new or continuing contract to extend the statute of limitations, but partial payments are considered equivalent to a written promise.
The Court found no case law addressing how payments under a Chapter 11 plan affect the revival of a claim's statute of limitations, contrasting this with Chapter 13 cases where courts typically do not allow such revival due to trustee payments being deemed non-voluntary. However, since the Debtor made payments directly to the City after the bankruptcy estate's property had vested back to him, there is an argument that these payments were voluntary and could restart the statute of limitations.
The Court acknowledged its records from the Debtor's three bankruptcy cases. The automatic stay from the first case, pending in June 2010, tolled the statute of limitations until September 24, 2010, extending it to September 24, 2013, due to the dismissal of that case. The second bankruptcy case, filed on February 3, 2011, further tolled the statute for 530 days, extending the limitation to March 8, 2015, after the automatic stay ended on July 17, 2012. The third case, filed on October 3, 2014, tolled the statute for 458 days, extending it to June 8, 2016, upon dismissal on January 4, 2016.
Debtor claimed the amount on the Proof of Claim was erroneous, but since this argument was not included in the Objection to Claim, it was not considered. Testimony from Mr. Featheringill confirmed the City's claim amount of $182,276.53, which the Court found credible. Additionally, in the Second Bankruptcy Case, the Debtor recognized the City’s claim as a general unsecured claim of $190,199.05, which was allowed without objection. The Court stated that the confirmation of the Chapter 11 plan in the Second Bankruptcy Case constitutes a final judgment, preventing any collateral attack on the claim. Under Section 108(c) of the Bankruptcy Code, the statute of limitations not expired before the petition filing does not expire until the later of the normal period’s end or 30 days after the stay's termination.
