Floyd Sims and Cynthia Sims

1The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§ 1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. § 157(b)(2)(A); and these are
findings of fact and conclusions of law as required by Rule 7052
F.R.B.P. 	This chapter 13 case was filed prior to the effective
date of most of the provisions of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 (“BAPCPA”), Pub. L. No. 109-
08, 119 Stat. 23, and therefore the changes enacted by that
legislation are not applicable to this case.
2That section provided as of the date of the filing of the
petition as follows:
Only an individual with regular income that owes, on
the date of the filing of the petition, noncontingent,
liquidated, unsecured debts of less than $307,675 and
noncontingent, liquidated, secured debts of less than
$922,975, or an individual with regular income and such
individual's spouse, except a stockbroker or a
commodity broker, that owe, on the date of the filing
of the petition, noncontingent, liquidated, unsecured
debts that aggregate less than $307,675 and
noncontingent, liquidated, secured debts of less than
$922,975 may be a debtor under chapter 13 of this
title.
Section 104 provides for the figures to be adjusted every three
years to reflect changes in the Consumer Price Index for all
Urban Consumers, beginning April 1, 1998. 	The most recent change
was on April 1, 2007. 	The new limits are $336,900 for unsecured
debts and $1,010,650 for secured debts. 	See Judicial Conference
(continued...)
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
Floyd Sims and
Cynthia Sims,
Debtors. 	No. 13 - 05-20101 - SR
MEMORANDUM OPINION ON ELIGIBILITY
This matter 1 came before the Court for trial on the merits
of Lee County State Bank’s (“LCSB”) motion to dismiss the
bankruptcy on the grounds that Debtors’ debt exceeds the limits
of 11 U.S.C. § 109(e) 2 . 	The Court finds that the Debtors’ debts
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2(...continued)
of the United States, Revision of Certain Dollar Amounts in the
Bankruptcy Code Prescribed Under Section 104(b) of the Code, 72
Fed. Reg. 7082 (Feb. 14, 2007).
3The record is unclear if the Cones were partial owners of
FSPC, but that fact is not relevant for the purposes of this
case.
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exceed the limitations imposed by § 109(e) and that this case
must be dismissed.
FINDINGS OF FACT
Floyd Sims and Cynthia Sims (“Debtors”) own stock in Floyd
Sims Pipeline Construction, Inc. (“FSPC”). 	Between 1995 and 1998
FSPC executed and delivered to LCSB several promissory notes and
a “Business Manager Agreement.” 	The Debtors and Martha Cone and
Tom Cone (“Cones”) 3 guaranteed payment of all of FSPC’s debts to
LCSB. 	FSPC defaulted on its obligations and LCSB filed suit
against FSPC, the Debtors and the Cones in the Fifth Judicial
District Court, Lea County (“Lea County Case”), on July 1, 1999
seeking judgment against the Defendants jointly and severally in
the amount of $440,007 plus interest and attorneys fees. 	Exhibit
37.
Debtors filed a joint Chapter 7 proceeding in the District
of New Mexico on July 14, 1999, case 7-99-14093-MR. 	LCSB filed
an adversary proceeding against the Debtors under Sections
523(a)(2) and (6). 	After trial the Court dismissed the adversary
proceeding as to the Section 523(a)(6) claims. 	In a Memorandum
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Opinion and accompanying judgment entered on September 6, 2001,
the Court found against the Debtors on the Section 523(a)(2)
claims and awarded LCSB judgment in the amount of $329,732 plus
attorney’s fees in the amount of $55,063. 	Adversary 99-1199-M
docs 95 and 96. 	Neither the Memorandum Opinion or the Judgment
state that interest will accrue. 	LCSB obtained a transcript of
judgment on April 11, 2002, which for its “Rate of Interest”
states “None awarded.”
On September 18, 2001, the Debtors filed a joint Chapter 13
proceeding in the District of New Mexico, case 13-01-16327-MR.
LCSB filed a motion to dismiss on Section 109(e) grounds. 	The
Court conducted a trial on the motion to dismiss on March 27,
2002, and dismissed the case because the Debtors’ debts exceeded
the limit allowed by Section 109(e).
Meanwhile, the Lea County Case was continuing. 	Martha Cone
had filed her own bankruptcy, so the remaining defendant was Tom
Cone. 	On November 14, 2000, the state court entered Findings of
Fact and Conclusions of Law (Exhibit 36), and on November 30,
2000 entered judgment against Tom Cone in the amount of $360,424,
bearing interest at 8.75% from November 14, 2000 (Exhibit F). 	On
July 3, 2003, the state court entered a further award against Tom
Cone for attorney’s fees in the amount of $15,268, plus taxes of
$916, plus costs of $770 and taxes thereon of $36, for an
additional total award of $16,990.
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4The yield on 1-year Treasury constant maturities on
September 7, 2001 was 3.43%. 	See
http://www.federalreserve.gov/releases/h15/data/Weekly_Friday_/
H15_TCMNOM_Y1.txt (last visited March 26, 2007).
5The judgment was for $360,424. 	The $1,382 discrepancy is
not explained by the exhibits, but the amount is immaterial to
the outcome of this case.
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After receiving its judgments, LCSB initiated collection
actions. 	LCSB received a payment on behalf of Debtors from Wells
Fargo Bank on May 2, 2002, then started receiving regular wage
garnishments from the Debtors on October 4, 2002 (Exhibit 23).
LCSB started receiving royalty garnishments on behalf of Tom Cone
on November 20, 2003 (Exhibit 34).
LCSB accounted for the Debtors’ judgment as per Exhibit 23.
It shows an opening balance of $384,795 on September 7, 2001, it
computes interest at 3.43% 4 through the date of each payment,
then subtracts each payment received. 	From September 7, 2001 to
the date of bankruptcy Debtors paid, through garnishments,
$61,110. 	Interest of $54,806 had accrued, and the principal
balance was reduced to $378,491. 	This is the amount claimed due
by LCSB. 	LCSB did not credit any of the Cone garnishments
towards the Debtors’ judgment.
LCSB accounted for the Cone judgment as per Exhibit 34. 	It
shows an opening balance of $361,806 5 as of November 14, 2000, it
computes interest at 8.75% through the date of each payment, then
subtracts each payment as received. On July 3, 2003, $16,989 of
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6The Court finds the actual values of real estate below.
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attorney fees, costs and taxes were added. 	This accounting
differs from the Debtors’ accounting in Exhibit 23 because it
also has a column denoted “Unpaid interest.” 	Unlike the
treatment afforded Debtors’ judgment, LCSB also credited all
payments received on behalf of the Debtors towards the Cone
judgment. 	From November 14, 2000 to the date of bankruptcy, Cone
paid, through garnishments, a total of $58,044. 	However, the
issue in this case is not the Cone balance, but rather whether
any of the Cone garnishments should have been applied to Debtors’
judgment.
On August 9, 2005, the Lea County court allowed Yates
Petroleum Corporation to interplead money owed to Tom Cone.
Exhibit H. 	On February 8, 2006, the state court ordered the
funds disbursed to LCSB. 	Yates thereafter paid $64,222 to LCSB.
Exhibits I and J.
On October 13, 2005, Debtors filed the current Chapter 13
proceeding, case 13-05-20101-SR. 	The Debtors’ Schedule A lists 4
parcels of real estate in Eunice, New Mexico (the “Eunice
properties”) valued at $75,000 and their residence 10 miles south
of Eunice valued at $80,000. 6 	Schedule B shows minimal personal
property, all of which is exempt. 	Schedule D lists LCSB as a
secured creditor by virtue of its transcript of judgment, a tax
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7The state filed a proof of claim for $5,815.
Page -6-
lien to the State of New Mexico of $7,230 7, and a mortgage on the
residence of $16,866. 	Schedule E lists no priority claims.
Schedule F lists 2 credit cards totaling $12,344.
The parties stipulated to the admission of real estate
appraisals without testimony of the experts. 	Debtors’ Exhibit X-
2 values the residence at $127,000, which the Court accepts.
Debtors’ Exhibit X-1 values the Eunice property at $37,400.
LCSB’s Exhibit 14 values the Eunice property at $36,400. 	At
trial LCSB presented evidence that the Eunice property consists
of 4 lots, but 3 are titled in FSPC and 1 (consisting of 2.27
acres) is jointly titled in Floyd Sims and FSPC. 	Debtor’s
appraisal fixes a value of $5,200 per acre, so the jointly held
property is worth approximately $12,000, with Floyd Sims’ one-
half being worth $6,000.
ISSUES
1. 	Was it proper for LCSB to accrue interest on the Debtors’
judgment?
2. 	Was LCSB’s accounting for the judgments done correctly?
3. 	What is LCSB’s secured claim?
4. 	What are the total unsecured claims?
CONCLUSIONS OF LAW
1. 	Interest
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The award of interest in federal court is governed by 28
U.S.C. § 1961, which states in part:
(a) Interest shall be allowed on any money judgment in
a civil case recovered in a district court. Execution
therefor may be levied by the marshal, in any case
where, by the law of the State in which such court is
held, execution may be levied for interest on judgments
recovered in the courts of the State. Such interest
shall be calculated from the date of the entry of the
judgment, at a rate equal to the weekly average 1-year
constant maturity Treasury yield, as published by the
Board of Governors of the Federal Reserve System, for
the calendar week preceding the date of the judgment.
The Director of the Administrative Office of the United
States Courts shall distribute notice of that rate and
any changes in it to all Federal judges.
(Emphasis added.)
First, “[t]he use of the word ‘shall’ indicates the
mandatory nature of such interest ‘on any money judgment in a
civil case.’” 	Peltz v. Worldnet Corp. (In re USN Communications,
Inc.), 280 B.R. 573, 602 (Bankr. D. Del. 2002). 	(Citations
omitted.) 	See also Resyn Corp. v. United States (In re Resyn
Corp.), 945 F.2d 1279, 1284 (3 rd Cir. 1991)(Although order
“suggests” that IRS was not entitled to interest on fraud
penalties, the Third Circuit held that fraud penalties would
accrue interest under 28 U.S.C. § 1961.); United States v.
Michael Schiavone & Sons, Inc., 450 F.2d 875, 876 (1 st Cir.
1971)(“Regardless of whether the judgment itself contains a
specific award of interest, once final judgment has been entered
in a civil suit in a federal court the prevailing party becomes a
judgment creditor and is entitled to post-judgment interest under
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828 U.S.C. § 151 provides:
In each judicial district, the bankruptcy judges in
regular active service shall constitute a unit of the
district court to be known as the bankruptcy court for
that district. Each bankruptcy judge, as a judicial
officer of the district court, may exercise the
authority conferred under this chapter with respect to
any action, suit, or proceeding and may preside alone
and hold a regular or special session of the court,
except as otherwise provided by law or by rule or order
of the district court.
Page -8-
the mandatory terms of 28 U.S.C. § 1961.”)(Citation omitted.);
Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, 10 Fed.
Prac. & Proc. Civ. 3d § 2664 (Section 1961 makes the allowance of
interest mandatory from the date judgment is entered. 	Interest
is mandatory regardless of what was demanded in the complaint.)
Second, the courts uniformly hold that bankruptcy courts are
units of the district court under 28 U.S.C. § 151 8 so 28 U.S.C. §
1961 applies to bankruptcy court judgments. 	See Resyn Corp., 945
F.2d at 1284; Pester Refining Co. V. Ethyl Corp. (In re Pester
Refining Co.), 964 F.2d 842, 849 (8 th Cir. 1992); Ocasek v.
Manville Corp. Asbestos Disease Compensation Fund, 956 F.2d 152,
154 (7 th Cir. 1992); In re Godsey, 134 B.R. 865, 867 (Bankr. M.D.
Tenn. 1991). 	Compare Jones v. Wilson Indus., Inc. (In re Jones),
804 F.2d 1133, 1143-44 (10 th Cir. 1986)(Without discussion of the
issue, the Tenth Circuit remanded a case to bankruptcy court with
instructions to add interest pursuant to 28 U.S.C. § 1961).
Third, Debtors argue that Judge McFeeley intentionally
awarded no interest in the Section 523 adversary proceeding
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9 The Debtors’ principal obligation was only the non-
dischargeable portion of the debt to LCSB; Cone was liable for
the entire FSPC debt to LCSB.
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because the transactions under the Master Business Agreement were
based upon prepaid interest and an award of interest on the
judgment would therefore give a double reward to LCSB. 	This
Court has reviewed the Memorandum Opinion and finds no such
finding or inference. 	However, even if this were true, the clear
language of 28 U.S.C. § 1961 mandates an award of post-judgment
interest.
Therefore, the Court concludes that it was proper for LCSB
to accrue interest on its judgment against the Debtors.
2. 	LCSB’s Accounting
In this case, LCSB has two judgment debtors, the Debtors and
Tom Cone, and each judgment debtor owed two debts to LCSB. 	The
Debtors owed the amount of the nondischargeable debt ($329,732),
which was joint and several liability with Tom Cone, and they
owed a separate debt to LCSB for the fees and costs awarded
against them ($55,610). 	Tom Cone owed the amount of the
nondischargeable debt ($329,732), which was joint and several
liability with the Debtors, and an additional $30,692 for a total
of $360,424 9 , plus the fees and costs against him in the amount
of $16,989. 	Therefore, Cone had a joint liability of $329,732
and a separate liability of $47,681 accruing interest at 8.75%.
The Debtors are not liable for the fees and costs awarded against
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Page -10-
Cone. 	Similarly, Cone is not liable for the fees and costs
awarded against the Debtors.
The first payment on Cone’s separate debt was made on
November 20, 2003, or 3 years and 6 days after entry of the
judgment. 	By that time, $12,585 interest had accrued on the
separate debt. 	So, on November 20, 2003, Cone’s separate debt
was $60,266 with interest continuing to accrue. 	The total amount
of Cone garnishments made between November 20, 2003 and the
bankruptcy were $58,044. 	This demonstrates that Cone’s separate
debt was never paid in full.
In the absence of a controlling statute, we answer
the first question [what is the proper allocation to be
made of a partial payment on a debt when the payor has
two obligations to the payee, one a separate obligation
and the other a joint and several obligation for a
portion of the entire amount] by adopting the generally
accepted common law rules. 	Specifically, when a debtor
who is solely and individually liable for a debt and
concurrently liable, jointly and severally with one or
more co-obligors, for a portion of that debt, makes a
payment insufficient to satisfy the entire debt, under
the general rule, the payment will be applied, as
between the two debts, as follows: (I) if there is a
controlling agreement between the debtor and the
creditor, the payment shall be applied as provided in
the agreement; (ii) if there is no controlling
agreement, but the debtor, at or before the time of
payment, indicates an intent as to how the payment
should be applied, that intent shall be followed; (iii)
if there is no controlling agreement and the debtor has
not adequately designated how the payment should be
applied but the creditor made a definite election,
within a reasonable time after receipt of the payment,
as to how to apply the payment, the creditor's election
will govern; and (iv) if there is no controlling
agreement and neither the debtor nor the creditor has
made a clear, timely designation, the presumption is
that the payment should be credited first to the
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10 A “voluntary payment” is one “made by a debtor of his own
will and choice, as distinguished from one exacted from him by
process of execution or other compulsion.” 	Black’s Law
Dictionary 1129 (6 th ed. 1990).
Page -11-
separate debt, with any remainder being allocated to
the joint and several obligation. See generally 60
Am.Jur.2d, Payment §§ 94-113, 119 (1987); 70 C.J.S.
Payment §§ 36-54 (1987).
Jorgensen v. Aetna Casualty & Surety Co., 769 P.2d 809, 811-812
(Utah 1988). 	See also Wischkaemper v. Massey, 70 S.W.2d 771, 772
(Tex. App. 1934)(“The rule is that where a debtor is alone liable
on one debt and jointly liable upon another, a payment by him or
for him should be applied to his individual debt.)(Citation
omitted.); Richard A. Lord, 28 Williston on Contracts § 72:21
(4 th ed.)(“A sole debt rather than a joint debt of the debtor
will be treated as paid.”)
All payments received by LCSB were involuntary payments 10 .
As a general rule, a creditor may apply involuntary payments as
it sees fit. 	Covey v. Commercial Nat’l Bank of Peoria, 960 F.2d
657, 662 (7 th Cir. 1992); Odell v. United States, 326 F.2d 451,
456 (10 th Cir. 1964); Automotive Finance Corp. v. Barthelmes (In
re Barthelmes), 318 B.R. 364, 368 (Bankr. D. S.C. 2004) (general
rule concerning allocation of payments by debtor is not
applicable when payment is involuntary). 	In this case, we have
no evidence that Tom Cone attempted to direct the payments’
applications; however, even if he did, LCSB had a right to apply
the payments to its benefit. 	See Weinstein v. Park Funding
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Page -12-
Corp., 879 P.2d 462, 465 (Colo. App. 1994)(Equity requires courts
to apply proceeds from involuntary collections in a manner which
provides the creditor the greatest opportunity to recover payment
for the full debt.) And, the best way LCSB could apply the
payments would be entirely to the separate debt, leaving two
sources of payment for the joint debt. 	See also Barthelmes, 318
B.R. at 370 (Debtor with nondischargeable debt from selling
vehicles out of trust does not have clean hands and cannot ask
the Court to use its equity powers under Section 105 to allocate
payments to reduce nondischargeable portion of debt.)
In this case, LCSB applied Cone’s payments to his separate
debt. 	LCSB had no duty to credit the Debtors with any payments
on behalf of Cone until Cone’s separate debt was paid. 	It never
was. 	LCSB correctly accounted for Debtors’ judgment on Exhibit
23. 	Debtors’ debt to LCSB on October 7, 2005 was $378,491.
3. 	LCSB’s Secured Claim
Debtors argue that the full value of the Eunice properties,
a portion of their homestead, and the funds on deposit from Yates
Petroleum secure LCSB.
Bankruptcy Code Section 506 governs secured claims. 	That
statute provides, in part:
(a)(1) An allowed claim of a creditor secured by a lien
on property in which the estate has an interest, or
that is subject to setoff under section 553 of this
title, is a secured claim to the extent of the value of
such creditor's interest in the estate's interest in
such property, or to the extent of the amount subject
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Page -13-
to setoff, as the case may be, and is an unsecured
claim to the extent that the value of such creditor's
interest or the amount so subject to setoff is less
than the amount of such allowed claim. 	Such value
shall be determined in light of the purpose of the
valuation and of the proposed disposition or use of
such property, and in conjunction with any hearing on
such disposition or use or on a plan affecting such
creditor's interest.
(Emphasis added.)
The first sentence of Section 506(a) states that an
allowed claim is a secured claim to the extent of “the
value of such creditor's interest in the estate's
interest in such property.” 11 U.S.C. § 506(a). 	An
interpretation of this sentence necessitates a two-step
analysis. 	First, a court must determine the “estate's
interest in such property,” before it can then
ascertain the “value of such creditor's interest in the
estate's interest.” 	See id.
In re Maddox, 200 B.R. 546, 551 (D. N.J. 1996). 	If the estate
has no interest in a piece of property, such as collateral
belonging to a third party, then the creditor’s claim is
considered unsecured as to the debtor, although it can be
considered a secured claim of the person owning the collateral.
PSI, Inc. of Missouri v. Aguillard (In re Senior-G & A Operating
Co., Inc.), 957 F.2d 1290, 1301 (5 th Cir. 1992); In re May, 194
B.R. 853, 858 (Bankr. D. S.D. 1996)(“Property that secured a
claim against the debtor that was never a part of the bankruptcy
estate, such as assets of a third party, will not, of course, be
included in the creditor’s secured claim for plan
treatment.”)(Citation omitted.)
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11 Unlike the calculations for the best interests of
creditors test, closing costs and transaction fees are not
deducted when computing Section 522(f) impairment. 	Sheth v.
Affiliated Realty & Management Co. (In re Sheth), 225 B.R. 913,
918-19 (Bankr. N.D. Ill. 1998).
Page -14-
The estate’s interest in the Eunice properties is only
$6,000, so LCSB will be considered secured by that amount in the
Eunice properties. 	Next, the Debtors have claimed a $60,000
homestead in their residence and would be able to avoid LCSB’s
lien to that extent. 	See Section 522(f). 	The amount of LCSB’s
lien on the homestead which is unavoidable is calculated as
follows:
Value of homestead 	$127,000
Less: 	1 st Mortgage 	$16,137
Tax lien 	5,815
Exemption 	60,000
Total deductions 11 	$81,952
Equity available for LCSB lien 	$45,048
Finally, LCSB may have had a lien on the funds on deposit with
the Lea County Court, but such a determination is not necessary.
Floyd Sims had no interest in those funds on deposit, they were
garnishments of Tom Cone’s interests. 	Therefore, the estate’s
interest in the property was zero, and the creditor’s interest in
the estate’s interest was zero. 	LCSB’s total secured claim is
$51,048.
4. 	Total Unsecured Claims
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Page -15-
LCSB has a total claim of $378,491, of which $51,048 is
secured. 	This means that LCSB has an unsecured claim of
$327,443. 	The Debtors have other unsecured claims of $12,344,
for a total of unsecured claims of $339,787.
CONCLUSION
Debtors’ debts exceed the limits of Section 109(e) and the
case will be dismissed by separate order.
Honorable James S. Starzynski
United States Bankruptcy Judge
copies to:
James A Askew
Attorney for LCSB
PO Box 1888
Albuquerque, NM 87103-1888
Shay E Meagle
Attorney for Debtors
PO Box 30707
Albuquerque, NM 87190-0707
Kelley L. Skehen
Chapter 13 Trustee
625 Silver Avenue SW
Suite 350
Albuquerque, NM 87102-3111
United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
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