Bradley T. Smith

1Because the Debtor’s bankruptcy case was filed before the effective date of the Bankruptcy
Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), generally effective October
17, 2005, all references to the Bankruptcy Code in this opinion are to the pre-BAPCPA version.
(11 U.S.C. §§ 101–1330 (2000)). See Bankruptcy Abuse Prevention and Consumer Protection Act
of 2005, Pub. L. No. 109-8, § 1501(b)(1), 119 Stat. 23, 216 (stating that, unless otherwise provided,
the amendments do not apply to cases commenced under title 11 before the effective date of
BAPCPA).
UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
EASTERN DIVISION AT COLUMBUS
In re: 	:
: 	Case No. 05-74493
Bradley T. Smith, 	: 	Chapter 13
: 	Judge Hoffman
Debtor. 	:
MEMORANDUM OPINION ON MOTION
TO DISMISS OR CONVERT CHAPTER 13 CASE
Section 109(e) of the Bankruptcy Code provides that only a debtor who “owes, on the date
of the filing of the [bankruptcy] petition, noncontingent, liquidated, unsecured debts of less than
$307,675” is eligible for Chapter 13 relief. 11 U.S.C. § 109(e). 1 On October 14, 2005 (“Petition
Date”), Bradley T. Smith (“Smith” or “Debtor”) filed his Chapter 13 petition. On the Petition Date,
Smith was a defendant in a pending civil enforcement action brought by the United States Securities
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: February 12, 2007
____________________________________________________________
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2See SEC v. Smith, Case No. C2-CV-04-739 (S.D. Ohio filed Aug. 11, 2004).
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and Exchange Commission (“SEC”) in the United States District Court for the Southern District of
Ohio (“District Court”). In the District Court action,2 the SEC alleged that Smith had violated the
anti-fraud provisions of federal securities laws and sought, in addition to other forms of relief,
recovery from the Debtor of more than $2 million. Less than two months after the Petition Date,
the District Court entered judgment against Smith in the amount of $2,095,517.93, plus prejudgment
interest in the amount of $198,679.79, for a total of $2,294,197.72. The District Court also imposed
a civil penalty against Smith in the amount of $120,000.
Arguing that Smith is ineligible to be a Chapter 13 debtor because his noncontingent,
liquidated, unsecured debts on the Petition Date exceeded the $307,675 limitation imposed by
§ 109(e), the SEC seeks dismissal or conversion of this case. The SEC also asserts that Smith acted
in bad faith by failing to list the amount of its claim in his schedules. Smith maintains that he is
eligible for Chapter 13 relief, asserting that, as of the Petition Date, the SEC’s claim remained both
contingent and unliquidated. Smith also argues that, because the amount of the SEC’s claim was
not readily ascertainable on the Petition Date, he did not act in bad faith by listing its amount as
“unknown.”
Although the terms “noncontingent” and “unliquidated” are not defined in the Bankruptcy
Code, case law from the Sixth Circuit and elsewhere establishes that a debt is noncontingent if all
events giving rise to liability occurred prior to the filing of a debtor’s bankruptcy petition. A debt
is deemed liquidated if, on the date of filing, its amount is readily determinable by simple
mathematical calculation; it is deemed unliquidated if a determination of the debt amount depends
upon the future exercise of discretion by a court or finder of fact. As explained below, because the
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District Court made a prepetition liability determination against Smith—by entering summary
judgment in favor of the SEC on its securities fraud claims—his debt to the SEC was noncontingent
on the Petition Date. However, as of the Petition Date, the District Court had deferred a ruling on
the remedies to be imposed against Smith and his co-defendants—and had scheduled a four-day trial
on the issue of remedies. Because resolution of the remedies issues would have required the District
Court’s exercise of judgment and discretion—rather than a mathematical calculation—the amount
of the SEC’s claim was not readily determinable and, thus, it remained unliquidated on the Petition
Date. Excluding the SEC’s unliquidated claim, Smith’s liquidated, unsecured debts did not exceed
the debt limitation imposed by § 109(e) on the Petition Date. The Debtor is accordingly eligible for
Chapter 13 relief.
I. Jurisdiction
The Court has jurisdiction to hear and determine this contested matter pursuant to 28 U.S.C.
§§ 157 and 1334 and the general order of reference entered in this district. 	This is a core
proceeding. 28 U.S.C. § 157(b)(2).
II. Procedural Background
A. 	The Chapter 13 Case
Smith filed his schedules, his Statement of Financial Affairs, and a proposed Chapter 13 plan
(“Plan”) (Doc. 10) on the Petition Date. 	On his Schedule F (Creditors Holding Unsecured
Nonpriority Claims), Smith listed the SEC as a general, unsecured creditor. The amount of the
SEC’s claim, which was scheduled as contingent and unliquidated, was listed as “unknown.” The
remaining debts listed on Schedule F, none of which were scheduled as contingent, unliquidated or
disputed, totaled $258,184.13.
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On December 20, 2005, Frank M. Pees, the standing Chapter 13 Trustee, filed an objection
to confirmation of the Plan (Doc. 16), asserting that (1) the Plan did not comply with 11 U.S.C.
§ 1325(a)(1) because the Debtor had failed to file a complete list of creditors, Statement of Financial
Affairs, and schedules as required by 11 U.S.C. § 521, (2) the Plan failed to meet the “best-interest-
of-creditors test,” which is set forth in § 1325(a)(4) of the Code, because the return to creditors
under the Plan was less than they would receive in a Chapter 7 liquidation, and (3) the Plan was not
feasible, thus violating 11 U.S.C. § 1325(a)(6). 	Because the Plan was not in a posture for
confirmation prior to the scheduled January 10, 2006 hearing date, an order resetting the
confirmation hearing for February 14, 2006 at 2:00 p.m. was entered by the Court (Doc. 18). Smith
then filed an amended Chapter 13 plan on February 13, 2006 (“Amended Plan”) (Doc. 21).
On February 13, 2006—approximately four months after the Petition Date—the SEC filed
its motion to dismiss or convert the Debtor’s case (“Dismissal Motion”) (Doc. 23 and Doc. 24). The
SEC also filed a motion requesting that the Court establish an expedited briefing schedule and set
an expedited hearing on the Dismissal Motion (Doc. 25). The Court denied that request by order
entered on February 23, 2006 (Doc. 28) and set the Dismissal Motion for hearing on March 21,
2006—the same date that the Court was scheduled to consider confirmation of the Amended Plan.
Smith filed his response to the Dismissal Motion (“Response”) on March 6, 2006 (Doc. 32), and the
SEC filed a reply brief on March 17, 2006 (“SEC Reply Br.”) (Doc. 33).
On March 3, 2006, the Trustee filed an objection to confirmation of the Amended Plan (Doc.
31). In his objection, the Trustee—in addition to opposing confirmation of the Amended Plan on
other grounds—joined the SEC in challenging Smith’s eligibility for Chapter 13 relief. 	The
Trustee’s eligibility argument was presumably based on the SEC’s filing of a proof of claim on
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February 9, 2006 (Claim No. 3), in the amount of $2,414,197.72. The filing of the SEC’s proof of
claim also created another bar to confirmation—if the SEC’s claim were allowed in its full amount,
Smith would be unable to complete payments under the Amended Plan within the 60-month period
prescribed by 11 U.S.C. § 1322(d).
The Debtor filed a second amended plan (“Second Amended Plan”) on March 21, 2006
(Doc. 34). The Second Amended Plan calls for graduated payments over a 57-month period and
provides for payment of a 1.5% dividend to holders of general, unsecured claims. The hearing on
confirmation of the Second Amended Plan was continued until May 16, 2006 by agreement of the
Debtor and the Trustee. The hearing on the Dismissal Motion also was continued to that date. Yet
another objection to the Second Amended Plan was filed by the Trustee on April 7, 2006 (Doc. 40).
The Trustee’s objection to the Second Amended Plan again raised the issue of Smith’s eligibility
for Chapter 13 relief under § 109(e), noted that the length of the Second Amended Plan exceeded
§ 1322(d)’s 60-month time limitation, and asserted that the Second Amended Plan was not feasible.
The Court conducted a hearing on the Dismissal Motion on May 16, 2006. Following oral
arguments, counsel for the Debtor sought leave to file a supplemental brief on the issue of Smith’s
eligibility for Chapter 13 relief. The Debtor filed his Brief in Support of His Oral Argument and in
Opposition to the SEC’s Reply Memorandum on June 15, 2006 (“Debtor’s Final Br.”) (Doc. 49).
On July 21, 2006, the SEC filed its Brief in Response to Debtor’s Post Oral-Argument Brief
Concerning the SEC’s Motion to Dismiss or Convert Debtor’s Bankruptcy Petition (“SEC’s Final
Br.”) (Doc. 58). The confirmation hearing was continued pending the Court’s determination of
whether Smith is eligible to be a Chapter 13 debtor.
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B. 	The SEC Civil Enforcement Action
The SEC commenced its civil enforcement action in District Court on August 11, 2004,
seeking relief from Smith and certain entities under his control—Continental Midwest Financial Inc.
(“Continental”); Scioto National Inc. (“Scioto”); Bancshareholders of America, Inc. (“BSA”); and
Bancshare Investors Brokerage, Inc. (“BSIB”) (collectively, “Corporate Defendants”). 	In the
District Court action, the SEC alleged violations of federal securities laws in connection with the
private offerings of Scioto and Continental stock. Specifically, the SEC alleged violations of § 17(a)
of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77q(a); § 10(b) of the Securities and
Exchange Act (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b(5) thereunder, 17 C.F.R. §
240.10b-5; § 20(a) of the Exchange Act, 15 U.S.C. § 78t(a); and § 20(e) of the Exchange Act, 15
U.S.C. § 78t(e). According to the SEC’s complaint, the Continental and Scioto stock offerings—and
the fraudulent conduct by Smith that gave rise to the alleged violations of federal securities
law—occurred sometime between early 2002 and July 2004. 	The SEC’s complaint requested
injunctive and equitable relief, including the disgorgement of ill-gotten gains generated from the two
offerings in an amount exceeding $2 million. Smith and the other defendants filed a joint answer
on September 10, 2004 (Dist. Ct. Doc. 16).
The District Court entered a Notice of Final Pretrial and Trial on December 13, 2004
(“Pretrial Notice”) (Dist. Ct. Doc. 41). The Pretrial Notice scheduled a final pretrial on October 5,
2005 and a trial on December 5, 2005. The Pretrial Notice also required the parties to submit a joint
final pretrial order for the District Court’s consideration.
The SEC filed a motion for summary judgment on May 13, 2005 (Dist. Ct. Doc. 48), and a
response was filed by Smith and the other defendants on June 13, 2005 (Dist. Ct. Doc. 64). During
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the intervening time period—on June 3, 2005—the SEC filed a second amended complaint (Dist.
Ct. Doc. 58). The defendants filed an answer to the second amended complaint on September 22,
2005 (Dist. Ct. Doc. 79). On September 27, 2005—less than three weeks before Smith filed his
bankruptcy petition—the District Court entered an order granting in part, and denying in part, the
SEC’s motion for summary judgment (“Summary Judgment Order”) (Dist. Ct. Doc. 81).
The SEC bases its challenge to the Debtor’s eligibility for Chapter 13 relief on certain filings
by the parties and rulings made by the court in the District Court action. Specifically, the SEC
focuses on the Summary Judgment Order, the proposed and final joint pretrial orders filed by the
parties after the Summary Judgment Order was entered, and the stipulation and final judgment entry
that terminated the District Court litigation.
1. 	The Summary Judgment Order
The Summary Judgment Order recites that Smith operated several businesses through which
investors purchased small, community bank stocks. 	Two of these companies—Continental and
Scioto—conducted private offerings of their common stock, and in connection with each offering,
Smith prepared private offering memoranda. See Summary Judgment Order at 2–3. Continental
conducted its offering between July 2002 and September 2004. According to the Continental private
offering memorandum (“Continental POM”), the offering was to raise up to $2.27 million for
investment in small Midwestern banks. The Continental POM represented that 80% of the offering
proceeds would be invested in small-bank stocks. 	The Continental offering ultimately raised
$1,272,665 from 49 investors. Id. The District Court found that only 9% of the Continental offering
proceeds actually were used to purchase small-bank stocks. Id. at 4. Smith used the remaining
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proceeds to fund personal obligations, including payment of credit card charges for men’s clothing,
nutritional supplements and a dating/escort service, as well as expenses of his other businesses. Id.
Beginning in January 2004, Scioto conducted its private offering. Id. The Scioto private
offering memorandum (“Scioto POM”) stated that the offering would raise up to $1,008,000.
According to the Scioto POM, Scioto was to use 70% of the proceeds raised from the offering for
investment in small-bank stocks. Id. at 5. The Scioto offering actually raised $822,852 from 29
investors. 	Smith used only 21% of the offering proceeds for investment purposes. 	He spent
$503,208 of Scioto investor funds on the expenses of his other businesses and $86,092 for his
personal use, including $41,499 for his salary. Id.
The District Court granted summary judgment in favor of the SEC on three of its claims.
Judgment was granted in favor of the SEC on its § 17(a)(1), § 10b, and Rule 10b-5 claims based on
the District Court’s finding that the “Defendants recklessly made material misstatements or
omissions about how the investors’ funds would be used in connection with the purchase or sale of
securities.” Id. at 15. Having concluded that Smith and his co-defendants acted recklessly, the
District Court found also that they “necessarily acted negligently[]” and, thus, granted summary
judgment on the SEC’s § 17(a)(2) and (a)(3) claims. Id. at 17. And based on its determination that
Smith was “liable as a control person [of both Continental and Scioto],” id. at 19, the District Court
granted summary judgment in favor of the SEC on its claim under § 20(a) of the Exchange Act. Id.
at 20. Finally, concluding that genuine issues of material fact existed, the District Court denied the
motion for summary judgment on the SEC’s claim against Smith for aiding and abetting Continental
and Scioto’s violation of § 20(e) of the Exchange Act and Rule 10b-5. Id.
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The District Court reserved a ruling on the remedies to be imposed against Smith,
Continental and Scioto, stating that:
[t]he Court will not rule on the SEC’s requested remedies at
this time, but will instead conduct a hearing on the requested
remedies at a future date after the trial concludes. To facilitate that
hearing, the final pre-trial conference scheduled for October 5, 2005
at noon in chambers will also be a status conference. 	At that
conference, the Court will discuss trial issues and will establish a
briefing schedule on the issue of relief and remedies. 	The
preliminary injunction will remain in full force and effect until after
the trial is completed and the Court has issued its ruling on the
requested relief and remedies.
Id. at 21.
2. 	The Proposed Pretrial Order
On September 30, 2005—several days after the Summary Judgment Order was entered—the
parties jointly submitted a proposed pretrial order (“Proposed Pretrial Order”) to the District Court
(Dist. Ct. Doc. 83). In the Proposed Pretrial Order, the parties summarized the factual background
of the case, listed the elements of each claim asserted in the complaint, and detailed the findings
made by the District Court in the Summary Judgment Order. See Proposed Pretrial Order at 5–9.
In the section of the Proposed Pretrial Order entitled “Plaintiff SEC’s claims,” the SEC set forth the
various remedies it asked the District Court to impose against Smith, Continental, Scioto and the
“Relief Defendants”—BSA and BSIB. See id. at 9–14. The Proposed Pretrial Order states that
“[f]or the charged violations, the SEC seeks permanent injunctions against Smith, Continental and
Scioto, disgorgement of all ill-gotten gains from all Defendants and Relief Defendants (plus
prejudgment interest thereon), and civil penalties against Smith.” Id. at 9. As to the remedy of
disgorgement, the Proposed Pretrial Order states:
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! 	“The SEC also seeks orders requiring disgorgement of the entire amount of
profits that were illicitly received by all Defendants and Relief Defendants.”
Id. at 10.
! 	“‘Although the SEC bears the ultimate burden of persuasion that its
disgorgement 	figure 	reasonably 	approximates 	the 	amount 	of 	unjust
enrichment,’ a defendant may come forward with evidence that the
disgorgement figure was not a reasonable approximation.” Id. (quoting SEC
v. First City Fin. Corp., Ltd., 890 F.2d 1215, 1231 (D.C. Cir. 1989)).
! 	“The SEC seeks an order requiring primary liability Defendants Continental
and Scioto to disgorge the full amount raised by each through the Continental
and Scioto offerings, plus prejudgment interest. . . . The SEC seeks an order
finding Smith jointly and severally liable as a control person for the entire
amounts of disgorgements, plus prejudgment interest, awarded against
Continental and Scioto.” Id. at 11.
! 	“In the event that the Court does not find that Smith was a control person, the
SEC would seek disgorgement against Smith of all amounts that he received
or that were spent for his benefit from the proceeds of the Continental and
Scioto Offerings.” Id.
Smith, Continental and Scioto briefly summarized their position with respect to remedies in
the section of the Proposed Pretrial Order entitled “Defendants’ claims.” 	They stated that the
investors involved in the offerings were “experienced, sophisticated investors.” Id. at 14. Smith and
Continental also asserted “that the [offering] proceeds were to be used for Continental’s operations
and to develop the business as set forth in the business plan, and that the portfolio of bank stocks
was to be purchased later after the exercise of warrants.” Id. at 15. According to Smith and Scioto,
the information conveyed orally and through written materials to the investors was “that the business
of Scioto was to engage in financial planning, that Scioto was to be an affiliated company of
Continental that would later be consolidated with Continental, that investors were informed that
Scioto would use the proceeds to sustain its operations, and that investors were never told that the
purpose of Scioto was to invest in bank stocks.” Id.
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In the Proposed Pretrial Order, the parties agreed that there were no remaining contested
issues of fact or law as to the SEC claims under § 17(a) of the Securities Act and § 10(b) of the
Exchange Act against Smith, Continental and Scioto, or with respect to the SEC’s claim that Smith
was liable as a control person under § 20(a) of the Exchange Act. With respect to the SEC’s claim
against Smith under § 20(e) of the Exchange Act for aiding and abetting Continental and Scioto’s
violations of the Act, the parties agreed that only two contested issues of fact remained to be tried.
Id. at 20. But, insofar as remedies were concerned, the Proposed Pretrial Order recited numerous
contested issues of fact remaining to be adjudicated at trial, including the following:
! 	“d. Whether the Court should impose a civil penalty against Smith and, if so,
in what amount.” Id. at 21.
! 	“e. Whether the Court should order that Smith disgorge his ill-gotten gains
and, if so, in what amount.” Id.
! 	“f. Whether the Court should order that Continental disgorge its ill-gotten
gains and, if so, in what amount.” Id.
! 	“g. Whether the Court should order that Scioto disgorge its ill-gotten gains
and, if so, in what amount.” Id.
! 	“i. Whether the Court should order Defendants and Relief Defendants to pay
prejudgment interest on their disgorgement amounts, and if so, in what
amounts.” Id.
3. 	The Final Pretrial Order
On December 2, 2005—nearly two months after the Petition Date—the District Court
entered an amended version of the Proposed Pretrial Order (“Final Pretrial Order”) (Dist. Ct. Doc.
98). After jointly submitting the Proposed Pretrial Order, the SEC opted not to go forward at trial
with its aiding and abetting claim against Smith. Thus, one notable difference between the Proposed
and Final Pretrial Orders is that the “Current Procedural Posture” section of the Final Pretrial Order
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states that “the only issues remaining for trial are: 1. whether BSA and BSIB should be held liable
as relief defendants; and 2. what remedies should be ordered against Defendants and Relief
Defendants.” Final Pretrial Order at 3. As to the remedies sought by the SEC, the Final Pretrial
Order repeated all of the contested issues of fact that were enumerated in the Proposed Pretrial
Order, but listed two additional remedies issues to be determined by the District Court at trial:
! 	“g. Whether the Court should order that Smith be held jointly and severally
liable for the ill-gotten gains of Continental and Scioto as a ‘control person’
pursuant to 15 U.S.C. § 20(a).” Id. at 21.
! 	“h. Whether, in the case that the Court declines to hold Smith jointly and
severally liable for the disgorgement of the ill-gotten gains of Continental
and Scioto, the Court should order that Smith disgorge his personal ill-gotten
gains and, if so, in what amount.” Id.
In the Final Pretrial Order, the SEC identified a total of 11 witnesses whom it would call at
trial and reserved the right to call 7 others. Smith and the Corporate Defendants identified a total
of 19 witnesses whom they would call at trial. The Final Pretrial Order listed a total of 123 exhibits
that the parties intended to introduce at the trial. The parties estimated that the trial of the remedies
issues would require a total of four days to complete. See id. at 4 (“The estimated length of the trial
is 4 days. The SEC estimates that it will take 2 days for it to put on its case-in-chief. Defendants
estimate that it will take 2 days for them to put on their defense.”).
4. 	The Stipulation and Final Judgment
On December 6, 2005, the SEC, Smith and the Corporate Defendants filed a Stipulation of
the Parties (“Stipulation”) (Dist. Ct. Doc. 100). The parties first noted in the Stipulation that “[t]he
Court scheduled trial to commence on December 5, 2005 to determine what remedies, if any, should
be imposed against each of the defendants based on [the Summary Judgment Order].” Stipulation
at 1. 	The Stipulation goes on to state, however, that the need for the scheduled trial had been
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3In its briefing and at oral argument on the Dismissal Motion, the SEC argues that Smith’s
consent to the Stipulation establishes that he knew that a judgment in favor of the SEC in excess of
$2 million was a foregone conclusion. 	According to the SEC, the Debtor simply delayed the
inevitable by waiting to agree to the Stipulation until after he had filed his bankruptcy petition, thus
preserving his ability to argue that the SEC’s claim remained contingent and unliquidated on the
Petition Date. The Debtor takes issue with the SEC’s characterization of his motives, stating that
he could not afford to pay his attorneys both to appeal the Summary Judgment Order and go forward
with the four-day trial on the remedies issues. Smith points out that the Stipulation would have been
rendered null and void had he and the Corporate Defendants prevailed on appeal. See Stipulation
¶¶ 5–6.
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obviated by the defendants’ agreement to disgorge their ill-gotten gains from the Continental and
Scioto offerings and also to pay prejudgment interest on the disgorgement amount. Id. Under the
Stipulation, Smith agreed that he would be jointly and severally liable with Continental and Scioto
for a disgorgement obligation of $2,095,517.93, plus prejudgment interest in the amount of
$198,679.79, for a total of $2,294,197.72. Id. at 2. Contemporaneously, the District Court entered
its final judgment as to all defendants (“Final Judgment”) (Dist. Ct. Doc. 101). 	In the Final
Judgment, the District Court ordered, among other things, that “Smith’s total joint and several
disgorgement obligation is in the amount of $2,095,517.93, together with prejudgment interest
thereon in the amount of $198,679.97, for a total of $2,294,197.72.” 	Final Judgment at 4. 	In
addition, Smith was ordered to pay a civil penalty in the amount of $120,000. Id. at 6.
The Stipulation preserved the defendants’ right to appeal the Summary Judgment Order, and
the defendants filed their notice of appeal on December 16, 2005. In an unreported, per curiam
decision issued on December 15, 2006, the Sixth Circuit affirmed the Summary Judgment Order.3
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III. Legal Analysis
A. 	Eligibility for Chapter 13 Relief
As stated above, a debtor is eligible for relief under Chapter 13 only if he/she owes
noncontingent, liquidated debts aggregating less than the amounts specified in 11 U.S.C. § 109(e).
Courts are divided on the question of who bears the burden of proof in an eligibility dispute. This
Court has held that the party challenging eligibility has the initial burden of going forward with
evidence that the debtor is not eligible. See In re Pike, 258 B.R. 876, 882 (Bankr. S.D. Ohio 2001)
(addressing § 109(g) eligibility issue). Accord In re Horne, 277 B.R. 320, 322 (Bankr. E.D. Tex.
2002) (“Movant bears the burden of proof to demonstrate to the Court, by a preponderance of the
evidence, that the Debtor does not comply with the § 109 debt limit.”); In re Baird, 228 B.R. 324,
330 (Bankr. M.D. Fla. 1999) (same). But see Nat’l Sch. Bus, Inc. v. Carignan (In re Carignan), 190
B.R. 739, 741 (N.D.N.Y. 1996) (“It is well-settled that the debtor has the burden of proving
entitlement to relief under Chapter 13. . . .”); In re Odette, 347 B.R. 60, 62 (Bankr. E.D. Mich. 2006)
(“Debtors bear the burden of proof to demonstrate chapter 13 eligibility.”).
The Court may dismiss or convert the case to another chapter of the Bankruptcy Code if the
debtor fails to meet § 109(e)’s eligibility requirements. See In re White, 216 B.R. 232, 234 (Bankr.
S.D. Ohio 1997). Here, the SEC argues that on the Petition Date it held a noncontingent, liquidated,
unsecured claim exceeding $2.4 million. The SEC maintains, therefore, that because Smith’s total
unsecured debt at filing far exceeded the $307,675 limitation established by § 109(e), he is not
eligible to be a Chapter 13 debtor.
The starting point in the Court’s § 109(e) eligibility analysis is the Debtor’s bankruptcy
petition and schedules. “[A] court should rely primarily upon the debtor’s schedules checking only
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to see if the schedules were made in good faith on the theory that section 109(e) considers debts as
they exist at the time of filing, not after a hearing.” Comprehensive Accounting Corp. v. Pearson
(In re Pearson), 773 F.2d 751, 756 (6th Cir. 1985); see also In re Hughes, 98 B.R. 784, 788 (Bankr.
S.D. Ohio 1989) (same). Courts are not to consider postpetition events in the eligibility analysis.
See Pearson, 773 F.2d at 756; In re Smith, 325 B.R. 498, 502 (Bankr. D.N.H. 2005) (“Eligibility for
chapter 13 is not based upon postpetition events such as allowed claims, filed claims, or treatment
of claims in a confirmed chapter 13 plan.”). There is, however, an exception to this rule: “When it
appears a debtor did not exercise reasonable diligence or good faith in completing and filing the
schedules, the Court may look to other evidence, including postpetition events to determine
eligibility.” Smith, 325 B.R. at 502.
The schedules—even if filed in good faith—are not dispositive of a debtor’s eligibility for
Chapter 13 relief. Thus, a bankruptcy court is not bound by how the debtor schedules a creditor’s
claim. See In re Stern, 266 B.R. 322, 326 (Bankr. D. Md. 2001) (“A debtor’s designation of debt
as ‘unliquidated’ does not settle the question.”); In re McGovern, 122 B.R. 712, 714 (Bankr. N.D.
Ind. 1989) (“Congress did not intend that debtors would be given exclusive control over the
accessibility to Chapter 13 or be permitted to circumvent its debt ceilings by the artful manipulation
of the information contained in the bankruptcy filings. . . . [J]ust because a creditor has been
scheduled in one fashion or another does not necessarily make it so.”). Nor must a bankruptcy court
accept a creditor’s characterization of its claim. Rather, “the court is required to look beyond the
information given and make an independent determination.” 	Id. 	The Court must therefore
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4The SEC argues that Smith’s failure to schedule its claim as disputed “serv[es] as additional
evidence that the Debtor did not seriously dispute the amount of the SEC’s disgorgement claim .
. . .” SEC Final Br. at 4. Section 109(e) does not impose a requirement that a claim be undisputed
in order to be counted in calculating a Chapter 13 debtor’s total unsecured indebtedness. Although
the “three concepts—contingent, liquidated, and disputed—are interrelated[,] [t]hey are not . . .
interdependent.” McGovern, 122 B.R. at 714–15. Here, the fact that the Debtor failed to dispute
the SEC’s claim has little or no bearing on the § 109(e) eligibility issues before the Court—whether
the claim was noncontingent and liquidated as of the Petition Date. See In re Redburn, 193 B.R.
249, 257 (Bankr. W.D. Mich. 1996) (“For purposes of determining eligibility under section 109(e),
it is immaterial whether or not the debt is ‘disputed.’”); McGovern, 122 B.R. at 717 (“[D]isputes,
defenses, and counterclaims concerning a debt are not relevant to the question of eligibility for relief
under Chapter 13.”).
16
independently determine whether the SEC’s claim was noncontingent and liquidated as of the
Petition Date.4
B. 	Was Smith’s Debt to the SEC Noncontingent on the Petition Date?
As previously stated, the Bankruptcy Code does not provide statutory guideposts for
distinguishing contingent from noncontingent debts. While the term “noncontingent debt” is not
statutorily defined, case law uniformly holds that “a debt is contingent if it does not become an
obligation until the occurrence of a future event, but is noncontingent when all of the events giving
rise to liability for the debt occurred prior to the debtor’s filing for bankruptcy.” Mazzeo v. United
States (In re Mazzeo), 131 F.3d 295, 303 (2d Cir. 1997); In re Krupka, 317 B.R. 432, 436 (Bankr.
D. Colo. 2004). Thus, the unsecured debt held by the SEC will be found to be noncontingent only
if the Court concludes that all events giving rise to Smith’s liability to the SEC occurred before he
sought bankruptcy relief. See Redburn, 193 B.R. at 259. See also de Jounghe v. Mender (In re de
Jounghe), 334 B.R. 760, 769 (B.A.P. 1st Cir. 2005) (“[I]f all events giving rise to liability occurred
prior to the filing of the bankruptcy petition, the debt is not contingent.”); McGovern, 122 B.R. at
715–16 (“[C]ontingency involves the nature or origin of liability. . . . The distinction between
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contingent and noncontingent debts turns upon whether or not there is a presently existing duty,
which should be fulfilled, as opposed to a duty which may arise sometime in the future.”).
Smith maintains that his debt to the SEC was contingent as of the Petition Date, pointing out
that, while he had been found liable on the securities fraud claims before he filed his Chapter 13
case, the District Court had not entered a prepetition judgment imposing the remedies sought by the
SEC—disgorgement, a civil penalty and prejudgment interest. 	Because he had not agreed to a
specific disgorgement amount, and because the District Court had yet to enter a monetary judgment
against him (requiring disgorgement of a sum certain, payment of prejudgment interest, and/or
imposition of a civil penalty), Smith asserts that he had no legal duty to pay the SEC on the Petition
Date. The Debtor therefore claims that his debt to the SEC remained contingent at the time he sought
bankruptcy protection. See Response at 3 (“[T]he SEC’s claim was contingent because the District
Court had not yet entered an order fixing and awarding the SEC a right to payment of a monetary
remedy.”).
The SEC responds by pointing out that its claim arose from fraudulent acts by Smith
committed well before the time he filed his Chapter 13 case. See Dismissal Motion at 5. According
to the SEC, application of the accepted test for distinguishing contingent from noncontingent
debts—whether “all of the events giving rise to liability for the debt occurred prior to the debtor’s
filing for bankruptcy[,]” see Mazzeo, 131 F.3d at 303—leads to the inescapable conclusion that its
claim against Smith did not remain contingent on the Petition Date. The Court agrees.
The Debtor’s suggestion that the SEC’s claim necessarily remained contingent until such
time as the District Court imposed a remedy against him is erroneous. As the bankruptcy court
explained in McGovern, “contingency involves the nature or origin of liability. . . . [I]t relates to the
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time or the circumstances under which liability arises [and] . . . does not mean the same as judgment
or remedy, but only a condition of being obligated to answer for a claim.” McGovern, 122 B.R. at
715 (emphasis added) (internal quotation marks omitted). In this case, all of the events giving rise
to Smith’s liability to the SEC—namely, his misconduct in connection with the Continental and
Scioto offerings—occurred well before the Petition Date. More importantly, Smith’s liability to the
SEC on its securities fraud claims had actually been adjudicated by the District Court in the
Summary Judgment Order, which was entered more than two weeks before the Petition Date. As
previously stated, in the Summary Judgment Order the District Court found Smith—along with
Continental and Scioto—liable on the SEC’s claims under § 17(a) of the Securities Act and § 10(b)
of the Exchange Act (and Rule 10b-5) and as a control person under § 20(a) of the Exchange Act.
As McGovern instructs, a bankruptcy court’s contingency analysis must focus not on whether a
judgment or remedy has been imposed, but rather on the “time or circumstances under which
liability arises.” Id. Here, because Smith’s liability to the SEC had been established pre-bankruptcy
by the entry of the Summary Judgment Order, the SEC’s claim was noncontingent on the Petition
Date.
C. 	Was Smith’s Debt to the SEC Liquidated on the Petition Date?
The Court must next determine whether the SEC’s claim was liquidated as of the Petition
Date. As previously noted, the term “liquidated debt”—like the term “noncontingent debt”—is not
defined in the Bankruptcy Code. Addressing a challenge to the debtor’s eligibility for Chapter 13
relief, the Sixth Circuit in Pearson discussed the meaning of the term “liquidated debt” contained
in § 109(e), stating:
The concept of liquidation has been variously expressed. 	The
common thread throughout the cases, however, has been ready
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determination and precision in computation of the amount due. . . .
[A] liquidated debt [is] one that can be determined by mathematical
computation. Some cases have stated the test as whether the amount
due is capable of ascertainment by reference to an agreement or by
simple computation.
773 F.2d at 754 (alterations in original) (internal quotation marks omitted). Since Pearson, courts
applying § 109(e)’s eligibility standard have uniformly held that ready determinability is the
touchstone for distinguishing between liquidated and unliquidated debts. See, e.g., Mazzeo, 131
F.3d at 300 (“‘Liquidated’ denotes the ability to readily and precisely compute the amount
due . . . .”); United States v. Verdunn, 89 F.3d 799, 802–03 (11th Cir. 1996) (holding that tax debt
was liquidated for purposes of § 109(e) because the amounts due the Internal Revenue Service were
“easily ascertainable”); In re Knight, 55 F.3d 231, 235 (7th Cir. 1995) (“If the amount of a claim has
been ascertained or can readily be calculated, it is liquidated . . . .” (internal quotation marks
omitted)); Fostvedt v. Dow (In re Dow), 823 F.2d 305, 306 (9th Cir. 1987) (“[T]he question whether
a debt is liquidated turns on whether it is subject to ready determination and precision in
computation of the amount due.” (internal quotation marks omitted)); de Jounghe, 334 B.R. at 769
(“[C]ourts have generally held that a debt is ‘liquidated’ . . . where the claim is determinable by
reference to an agreement or by simple computation.” (alteration in original)); McGovern, 122 B.R.
at 715 (“A claim is often characterized as liquidated if the amount due can be readily ascertained
either by reference to an agreement or through simple mathematics.”); Hughes, 98 B.R. at 788
(“[C]laims are liquidated if the court is able to make a sufficiently precise determination of the
amount due for the claim.” (internal quotation marks omitted)).
Courts applying the readily-determinable test generally hold that a debt is unliquidated if
judgment, discretion or opinion—as distinguished from mathematical computation—is required to
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determine the amount of the claim. See, e.g., Horne, 277 B.R. at 324 (“The element of ‘discretion’
[is] a distinguishing factor to discern whether a debt is liquidated . . . .”); In re Newman, 259 B.R.
914, 918 (Bankr. M.D. Fla. 2001) (“Mathematical computation is the basis for a liquidated debt,
where opinion, discretion, and exercise of judgment are not relevant for computation of the amount
of the debt.”); In re Vaughn, 276 B.R. 323, 326 (Bankr. D.N.H. 2002) (“[I]f the debt amount is
dependent upon a future exercise of discretion by a court . . . the debt is unliquidated.”). As the
bankruptcy court in McGovern put it, “a claim is unliquidated when the finder of fact must rely upon
its judgment to establish an appropriate amount to compensate for past and future injury. 	It is
liquidated when judgment or discretion is not required.” 122 B.R. at 715 (citation omitted). The
McGovern court added that
[t]he need to use judgment in determining the amount of liability
must be distinguished from the judgment which must necessarily be
used to determine the existence of liability. A court or a jury will
always be required to exercise its judgment in determining the fact of
liability. 	The assessment of damages, however, does not always
require the court or the jury to do so.
Id. at 715 n.1.
Decisions rendered by courts applying the foregoing principles arise from a wide range of
fact patterns. At one end of the spectrum lies the classic liquidated debt—a contract claim that can
be calculated from the face of the writing. See, e.g., Fostvedt, 823 F.2d at 306 (finding debt to be
liquidated because “the amount due on the two [promissory] notes could be readily determined at
the time of filing”); Commonwealth Bank v. Pambianco (In re Pambianco), 206 B.R. 351, 352
(Bankr. M.D. Pa. 1996) (holding “that the amount of debt at issue can easily be determined [from
the face of the promissory note signed by the debtors] and is, therefore, liquidated”); In re Pulliam,
90 B.R. 241, 246 (Bankr. N.D. Tex. 1988) (“A guaranty is a type of contract that is inherently
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liquidated when it is used to guarantee a promissory note because the amount owed can be
determined from the promissory note and supporting documents.”). 	The classic unliquidated
debt—a claim based on tort or quantum meruit—lies at the other end of the spectrum. See, e.g., In
re Arcella-Coffman, 318 B.R. 463, 473 (Bankr. N.D. Ind. 2004) (“Because the determination of both
liability and damages ordinarily requires the exercise of judgment by the factfinder, claims based
on tort and on quantum meruit are generally unliquidated, unless they have been resolved by a
judicial decree or otherwise.”); In re Belt, 106 B.R. 553, 558–59 (Bankr. N.D. Ind. 1989) (holding
that creditors’ claim for injuries they sustained as a result of debtor’s drunk driving was an
unliquidated debt and noting that tort claims “are unliquidated until resolved by judgment decree
or otherwise because the claimant’s damages are not fixed”); Pulliam, 90 B.R. at 246 (same).
Not surprisingly, most of the reported § 109(e) eligibility decisions in which courts have
applied the readily-determinable standard to distinguish liquidated from unliquidated claims arise
from fact patterns that fall somewhere in the middle of the range. Tax claims, for example, have
been held to be liquidated debts because their amount is readily determinable. See, e.g., Mazzeo,
131 F.3d at 305 (concluding that debtor’s obligation arising from failure by corporation he
controlled to pay state withholding taxes “can readily be ascertained from statutory provisions and
from the tax returns filed by [the corporation]”); Verdunn, 89 F.3d at 803 (holding that Internal
Revenue Service’s claim was liquidated because amount was calculable using “fixed legal standards
set forth in the tax code” and the “tax liability was evident from . . . the statutory notice of
deficiency”). Debts based on a debtor’s misappropriation of funds comprise a second category of
claims whose amount is readily determinable. See, e.g., McGovern, 122 B.R. at 717 (claim arising
from debtor’s misappropriation held to be liquidated because the court “need only add up the amount
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of money involved in each [wrongful transaction] to determine the amount of the claim[,] . . . which
will require only mathematics not the exercise of judgment”); Krupka, 317 B.R. at 436–38 (Bankr.
D. Colo. 2004) (determining that claim against debtor for misappropriation of investor funds was
liquidated because total amount of misappropriated funds was known and Colorado statute did not
confer on courts the discretion not to award treble damages once a defendant’s theft had been
established). A debt based on the right of subrogation has also been deemed liquidated because the
claim amount is readily determinable. See, e.g., In re Clark, 91 B.R. 570, 574 (Bankr. D. Colo.
1988) (subrogation claim asserted by insurance carrier issuing employee dishonesty policy held to
be liquidated because the amount of the claim, which was based on the amount actually paid under
the insurance policy, was “clear, precise and not subject to bona fide dispute”); In re Furey, 31 B.R.
495, 497 (Bankr. E.D. Pa. 1983) (finding that issuer of bond insuring against fraudulent or dishonest
act by employees held a liquidated claim because the debtor had admitted misappropriating funds
from his employer and subrogee had indisputably paid a sum certain to the debtor’s employer).
Finally, there are statutory claims whose amounts are determined by a mathematical calculation
rather than through the exercise of judgment or discretion by a court or fact finder. See, e.g., Knight,
55 F.3d at 235 (holding that State of Indiana’s claim against the debtor was “easily calculated by
multiplying . . . the number of traffic violations [the debtor failed to report] by [the] $100.00 [per-
violation statutory fee]”); In re Doyle, 340 B.R. 381, 385–86 (Bankr. D. Or. 2006) (portion of claim
attributable to “New Transactions” penalties was readily determinable because Oregon campaign
finance statute provided a specific penalty amount for each unreported campaign contribution or
expenditure); Smith, 325 B.R. at 504–05 (holding that local water and sewer district’s environmental
clean-up claim was liquidated because, under governing New Hampshire statute, claim is “based
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upon actual costs . . . [that] can be readily determined with precision through simple arithmetic
computation”).
Decisions in which courts have applied the readily-determinable test and concluded that the
debt in question is unliquidated generally have involved either tort claims, see, e.g., Belt, 106 B.R.
at 558–59 (holding that drunken driving tort claim against debtor was unliquidated) or statutory
claims that require a court or finder of fact to exercise discretion—rather than simply make a
mechanical calculation—in order to assess damages, see, e.g., Doyle, 340 B.R. at 385 (portion of
claim attributable to “Personal Use” penalties under Oregon campaign finance statute was not
readily calculable because determination of what constituted an impermissible personal expenditure
was based on the totality of the circumstances); Smith, 325 B.R. at 505–06 (amount of claim asserted
by the State of New Hampshire arising from debtors’ improper disposal of hazardous waste was not
readily ascertainable because, under the controlling state statute, a court would be required to
exercise discretion to determine the appropriate penalty); In re Mandarino, 312 B.R. 214, 219
(Bankr. E.D.N.Y. 2002) (“There is no ‘simple computation’ this Court can use to fix the amount of
the claim. . . . [where,] [u]nder 47 U.S.C. § 605, the sanctions range from ‘$10,000 per unit’ to as
little as a total fine of $250 [for each pirated cable television descrambling device purchased by the
debtor].”); Horne, 277 B.R. at 326 (holding that claim against debtor arising under Texas Deceptive
Trade Practices Act was unliquidated because “[i]t [was] clear that th[ere] was no simple
mathematical computation” the district court could employ to fix a damage amount and because “the
evidence of application of judicial discretion is clear from the language of the [court’s] [f]indings”);
Hughes, 98 B.R. at 787–88 (concluding that claims asserted by the State of Ohio under both state
and federal odometer rollback and disclosure laws and the Ohio Consumer Sales Practices Act were
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unliquidated because, as of the filing date, “there was simply no method the court could have
employed to ascertain with precision what amount the state court would later fix and award as
damages”).
In Smith and Horne—like the present case—the debtors’ eligibility for Chapter 13 relief was
challenged based on the filing of large statutory claims asserted by governmental creditors. The
argument was made—by the governmental creditors and the Chapter 13 Trustee in Smith, and by
the trustee only in Horne—that the amount of these claims was readily determinable, and thus they
were liquidated, on the bankruptcy filing date. Although the statutory claims asserted in those cases
were not based on the violation of federal securities laws, the analysis undertaken by the Smith and
Horne courts of the determinability of the governmental creditors’ claims is instructive here.
In Smith, the bankruptcy court was required to determine whether two claims for hazardous
waste cleanup—one asserted by the Plymouth Village Water & Sewage District and the other by the
State of New Hampshire—were liquidated for purposes of § 109(e). Before the debtors filed their
Chapter 13 case, the New Hampshire Department of Environmental Services had issued an
administrative order finding that the debtors had illegally disposed of hazardous waste from their
dry cleaning business and were liable for costs associated with the clean-up. Smith, 325 B.R. at 504.
Although they did not appeal the administrative order and undertook remedial action, the debtors
scheduled the State and District claims as unliquidated, arguing that these claims should not be
included in determining their eligibility for Chapter 13 relief. Id.
For purposes of litigating the eligibility challenge, the parties agreed to limit the District’s
claim amount to $156,562.28—the actual, prepetition clean-up costs incurred by the District. Id.
The debtors argued that the District’s claim was unliquidated because its response to the
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containment and disposal of the hazardous waste was not reasonable and it had failed to mitigate its
damages. Id. at 505. Rejecting the debtors’ contention that the District’s claim was “more like a
tort claim which cannot be readily determined[,]” the Smith court reasoned that “[e]ven if the
[d]ebtors have defenses that may decrease the amount of the District’s claim based on
reasonableness of expenditures or a failure to mitigate damages, it does not affect the character of
the claim.” Id. The court concluded that the District’s claim was liquidated because it was based
on actual clean-up costs incurred and, thus, the claim amount was determinable “with precision
through simple arithmetic computation.” Id.
The Smith court reached a contrary conclusion with respect to the State claim, which was
“based entirely on civil penalties” imposed due to the debtors’ illegal disposal of hazardous waste.
Id. The civil penalties were assessed under a New Hampshire statute that punished illegal disposal
of hazardous waste by requiring a civil forfeiture of up to $50,000 a day for each day of a continuing
violation. Id. The State arrived at the amount of the civil penalty set forth in its proof of claim by
using the facts and findings contained in a Department of Environmental Services administrative
order and applying an “EPA Penalty Matrix.” Id. The debtors asserted that the State’s use of the
penalty matrix demonstrated that the determination of its claim amount was a discretionary function.
Id. at 506. That, along with the “subjective valuations regarding the degree of harm . . . resulting
from the [d]ebtors’ actions[,]” established that the amount of the State’s claim was not readily
determinable and, hence, the claim was unliquidated. Id. The court agreed with the debtors that the
State’s “determination of the penalty in the context of the penalty matrix . . . [required] an exercise
in discretion . . . [and, its claim therefore was] not subject to ready determination and precision in
computation of the amount due[,]” explaining:
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5Because the case filed by the State of Texas against Blast Fax and the debtor constituted an
action to enforce the State’s police or regulatory powers, it was not stayed by the filing of the
debtor’s Chapter 13 petition. Horne, 277 B.R. at 322 n.1 (citing 11 U.S.C. § 362(b)(4)).
26
Proper use of the penalty matrix necessarily requires discretionary
judgments regarding the seriousness and nature of the Debtors’
actions to reach a final penalty amount. 	Thus, unlike a simple
contract action, the Court could not independently determine the
amount of the penalty obtained by the State simply by looking at the
facts and applying them to the matrix. Simply because the amount of
the penalty is estimated in good faith does not change the fact the
actual amount of the penalty is dependent upon the exercise of
discretion. Although the amount of the penalty is limited by the New
Hampshire statute, there is a range of possible outcomes dependent
on a discretionary determination of the seriousness of the violations
then applied to the penalty matrix.
Id. The Smith court therefore held that the State’s claim should not be counted in determining the
debtors’ eligibility for Chapter 13 relief. Id. at 507.
In Horne, the Chapter 13 Trustee challenged the debtor’s eligibility for Chapter 13 relief.
Asserting that the State of Texas held a liquidated, unsecured claim in the amount of $485,375, the
Trustee sought dismissal of the debtor’s Chapter 13 case on the ground that the total of his
noncontingent, liquidated, unsecured debts exceeded the limitation imposed by § 109(e). Horne,
277 B.R. at 321. The claim in question arose from a postpetition, federal district court judgment
obtained by the Texas Attorney General against American Blast Fax, Inc., and its 50%
shareholders—one of whom was the debtor, Robert Horne.5 Id. Prior to the debtor’s Chapter 13
filing, the district court had granted the State’s motion for partial summary judgment, holding “that
the corporate defendant had violated the Texas Consumer Practices Act [(“TCPA”)] by sending
unsolicited intrastate fax advertisements and that the corporation had violated the Texas Deceptive
Trade Practices Act by misleading Texas consumers about the legality of its business.” Id. at 325.
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The issues remaining for trial “were the amount of damages and the scope of injunctive relief, if any,
for [the corporation’s] violations and whether the individual defendants could be held personally
liable for these violations.” Id. at 323. The district court found the debtor personally liable for Blast
Fax’s violations of the TCPA and concluded that the statutory violations occurring during a five-
week period in 2001 had been knowing and willful. 	Id. 	Concluding that the debtor, his co-
shareholder and the corporation had violated the TCPA 937,500 times a month over a five-month
period, the district court “calculated the damages at $459,375 based on a formula it devised.” Id.
“According to the Standing Chapter 13 Trustee, the [district court’s] ability to calculate the
damages based upon a specific formula rendered the debt liquidated.” Id. The debtor maintained
that his debt to the State was unliquidated when he commenced his Chapter 13 case, arguing that
the district court “need[ed] to use independent judgment . . . [and] discretion” to fix the amount of
damages to be awarded to the State. Id. at 324.
The Horne court began its analysis by explaining that “‘if judgment, discretion, or opinion,
as distinguished from calculation or computation is required to determine the amount of the claim,
it is unliquidated.’” Id. at 325 (quoting McGovern, 122 B.R. at 717–18). The court then described
the methodology employed by the district court to arrive at a damage amount:
Although the Trustee argues that the District Court in our case used
a simple formula to calculate the damages, a complete reading of the
District Court’s reasons for judgment makes it clear that this was no
simple matter . . . . [Although it had granted the State’s motion for
partial summary judgment,] . . . [t]he District Court had specifically
reserved for trial the question of the amount of damages and the
scope of injunctive relief . . . . [A] reading of the reasons for
judgment makes it clear that this was no simple application of a
mathematical formula. The Court had to determine the number of
unsolicited faxes mailed; the percentage of those actually received
and had to determine the degree of willfulness on the part of the
individual defendants to determine the penalties applicable to them.
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The Court then looked at the question of damages based on the
application of the Texas Statute and determined that under one
construction of the Statute, which provided for a $500.00 award for
each violation, the penalty would be “inequitable and unreasonable.”
The Court then made a determination based on its analysis of the cost
to the recipient of each unwanted fax page that an appropriate award
in this case would be seven cents per violation. The Court also had to
assess the question of willful and knowing violation of the Statute
and found that for a portion of the time, the Defendant’s conduct was
willful and knowing and therefore, the damages for that period of
time was trebled. The Court additionally made an award to the state
of attorney fees based on its determination of the reasonable amount
of the fees.
Id. at 325–26. The court added that “the evidence of application of judicial discretion is clear from
the language of the [district court’s] [f]indings.” Id. at 326. Because “[s]imple mathematics alone
did not supply the value of the State’s claim[,]” the court concluded that “the [State’s] claim was not
liquidated or certain on the date of the filing of the petition, nor did it become so until the District
Court’s final judgment was rendered.” Id.
As noted above, neither Smith nor Horne involved governmental claims arising from a
debtor’s violation of federal securities laws. 	Although not cited by the parties, the Court’s
independent research has revealed only one decision in which a bankruptcy court has been
confronted with the issue of whether a securities fraud claim, which had not been reduced to
judgment on the date of the debtor’s bankruptcy filing, constitutes a liquidated claim for purposes
of § 109(e)—an unreported, three-page order issued by Judge Hale in In re Svoboda, Case No. 04-
82284, (Bankr. N.D. Tex. November 28, 2005) (Tex. Bankr. Ct. Doc. 87). 	There, the debtor,
Richard A. Svoboda, had engaged in illegal insider trading and—prior to his bankruptcy filing—had
pleaded guilty to 10 counts of securities fraud and seven counts of tender-offer fraud. Upon his
release from prison, Svoboda filed a Chapter 13 petition. At the time the debtor sought bankruptcy
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6As in Horne, the government’s action in Svoboda was not stayed by the debtor’s Chapter
13 filing because it was a proceeding by a governmental unit to enforce its police or regulatory
powers. See 11 U.S.C. § 362(b)(4).
29
protection, an SEC civil enforcement action was pending against him in the United States District
Court for the Southern District of New York. 	The SEC had commenced the civil enforcement
action—in which it alleged multiple violations of federal securities laws and sought disgorgement,
prejudgment interest and penalties—some four years earlier. More than a year after the debtor filed
his Chapter 13 case, the district court entered summary judgment against him, finding that Svoboda
had committed violations of § 10b-5 of the Exchange Act and Rule 10b-5 thereunder, § 14(e) of the
Exchange Act and Rule 14e-3 thereunder, and § 17(a) of the Securities Act. See SEC v. Svoboda,
409 F. Supp. 2d 331, 339–49 (S.D.N.Y. 2006). The district court ordered the debtor to disgorge
more than $2 million and imposed prejudgment interest and civil penalties. Id. at 349. 6
More than eight months before the district court entered its judgment, the SEC moved to
dismiss Svoboda’s Chapter 13 petition, arguing—as it has here—that because its claim was
liquidated on the bankruptcy filing date, the debtor’s total liquidated debts exceeded the limitation
imposed by § 109(e). About one month before the judgment was entered against the debtor by the
district court in the civil enforcement action, the bankruptcy court denied the SEC’s request for
dismissal, concluding that Svoboda’s debt to the SEC remained unliquidated on the date he had filed
his Chapter 13 petition. The bankruptcy court stated:
[I]f one can simply calculate the damages and ascertain them with
certainty in a simple fashion, a debt is a liquidated debt, but if one
needs to use independent judgment, then the debt is unliquidated.
The decisions in this area indicate that if judgment, discretion,
or opinion is required to determine the amount of the claim, it is
unliquidated. See Horn[e], 277 B.R. at 718. The Court finds that the
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7The SEC appealed the bankruptcy court’s decision denying its motion to dismiss, but later
reached an agreement with the debtor to compromise its claim and dismissed the appeal. 	See
Svoboda, Case No. 04-82284, Joint Motion to Compromise, filed April 25, 2006 (Tex. Bankr. Ct.
Doc. 125).
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claim of the SEC has not been liquidated and is still subject to the
discretion of the district court in the SEC’s civil suit against the
Debtor. The claim should therefore not be included in the § 109(e)
analysis.
Svoboda, Case No. 04-82284 (Tex. Bankr. Ct. Doc. 87) at 2–3.7 Although the Svoboda court did
not provide an extensive explanation of its rationale, it apparently concluded that the remedies issues
facing the district court in the civil enforcement action—whether to order disgorgement and, if so,
in what amount, whether to impose prejudgment interest, and whether to impose civil penalties—all
required the exercise of judgment and discretion.
Applying the principles discussed above to the undisputed facts of this case, the Court
concludes that the amount of the SEC’s claim against Smith was not readily determinable and, thus,
the debt remained unliquidated, on the Petition Date. While Smith’s liability to the SEC had been
established on the Petition Date—by way of the Summary Judgment Order—the Final Pretrial Order
makes clear that there were a number of remedies issues remaining to heard by the District Court
at trial. Among others, these included: (1) whether Continental should be required to disgorge its
ill-gotten gains and, if so, in what amount; (2) whether Scioto should be required to disgorge its ill-
gotten gains and, if so, in what amount; (3) whether Smith should be held jointly and severally liable
for the ill-gotten gains of Continental and Scioto as a control person pursuant to 15 U.S.C. § 20(a);
(4) whether, in the event that Smith was not found jointly and severally liable for disgorgement of
the ill-gotten gains of Continental and Scioto, he should be required to disgorge his personal ill-
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8Disgorgement is an equitable remedy imposed to “‘depriv[e] a wrongdoer of his unjust
enrichment and . . . deter[] others from violating the securities laws.’” SEC v. Thorn, 2002 WL
31412439 at *3 (S.D. Ohio Sept. 30, 2002) (quoting SEC v. First City Fin. Corp., Ltd., 890 F.2d
1215, 1230 (D.C. Cir. 1989)). As the Sixth Circuit has noted, “[t]he purpose of disgorgement is to
force a defendant to give up the amount by which he was unjustly enriched rather than to
compensate the victims of fraud.” 	SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985) (internal
quotation marks omitted). Courts are unable to determine with exact precision the amount of gain
a defendant may receive from his fraud. 	Thus, “‘disgorgement need only be a reasonable
approximation of profits causally connected to the violation.’” Thorn, 2002 WL 31412439 at *3
(quoting SEC v. Inorganic Recycling Corp., 2002 WL 1968341 at *2 (S.D.N.Y. Aug. 23, 2002)).
The SEC must demonstrate that “the disgorgement sought approximates the amount of unjust
enrichment.” Id. The burden then shifts to the defendant to prove that “the amount is not accurate
. . . [and] that the amount received is less than the full amount sought.” Id. (citation omitted). See
also SEC v. Mohn, 2005 WL 2179340 at *3 (E.D. Mich. 2005) (“Although the SEC bears the
ultimate burden of persuasion that its disgorgement figure reasonably approximates the amount of
unjust enrichment, a defendant may come forward with evidence that the disgorgement figure was
not a reasonable approximation.” (internal quotation marks omitted)). In this district, “[f]inancial
hardship does not preclude the imposition of an order of disgorgement.” Thorn, 2002 WL 31412439
at *3.
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gotten gains and, if so, in what amount; (5) whether a civil penalty should be imposed against Smith
and, if so, in what amount; and (6) whether Smith and the other defendants would be required to pay
prejudgment interest on amounts ordered disgorged, and, if so, at what rate. See Final Pretrial Order
at 20–21. As explained below, resolution of each of these remedies issues required the District
Court to exercise judgment and discretion rather than simply make an arithmetic calculation.
As the Final Pretrial Order recites, the threshold remedies issue for the District Court was
whether to order the corporate defendants controlled by Smith—Continental and Scioto—to
disgorge their ill-gotten gains and, if so, in what amount.8 See id. at 20. Because Smith had been
found to be a control person in the Summary Judgment Order, the District Court had the option of
holding him jointly and severally liable for the ill-gotten gains of Continental and Scioto or,
alternatively, requiring disgorgement of his personal ill-gotten gains only. See id. at 21; SEC v. First
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Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1996) (“[W]here a firm has received gains through
its unlawful conduct, where its owner and chief executive officer has collaborated in that conduct
and has profited from the violations, and where the trial court has, within the proper bounds of
discretion, determined that an order of disgorgement of those gains is appropriate, it is within the
discretion of the court to determine that the owner-officer too should be subject, on a joint and
several basis, to the disgorgement order.”).
Case law makes clear that a district court has broad discretion to use its equitable powers to
craft an appropriate disgorgement remedy. See SEC v. Namer, 2006 WL 1541378 at *1 (2d Cir.
June 1, 2006) (“A district court enjoys broad discretion in fashioning a disgorgement remedy.”);
SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998) (“The district court has broad equity
powers to order the disgorgement of ‘ill-gotten gains’ obtained through the violation of the securities
laws.”); First Jersey, 101 F.3d at 1474–75 (“The district court has broad discretion not only in
determining whether or not to order disgorgement but also in calculating the amount to be
disgorged.”); SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996) (“The decision to order disgorgement
of ill-gotten gains, and the calculation of those gains, lie within the discretion of the trial court,
which ‘must be given wide latitude in these matters.’” (quoting SEC v. Patel, 61 F.3d 137, 140 (2d
Cir. 1995))). 	Such discretion includes “not only . . . determining whether or not to order
disgorgement but also . . . calculating the amount to be disgorged.” Svoboda, 409 F. Supp. 2d at 344
(internal quotation marks omitted). See also SEC v. Sunbelt Dev. Corp., 2006 WL 519769 at *3
(W.D. La. Mar. 2, 2006) (district court has “broad discretion” to determine if disgorgement should
be ordered and, if so, in what amount). And, as one reported decision notes, “[d]istrict courts enjoy
so much latitude in these matters that a decision not to order disgorgement will not be disturbed by
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an appellate court unless it is established that the district court abused its discretion.” 	SEC v.
Merchant Capital, LLC, 400 F. Supp. 2d 1336, 1373 (N.D. Ga. 2005).
The SEC argues that—particularly in fraudulent offering cases—courts rarely exercise their
discretion to order disgorgement in an amount less than that requested by the SEC. That may well
be true. Many courts have opted not to reduce an SEC request for disgorgement of ill-gotten gains.
See, e.g., Svoboda, 409 F. Supp. 2d at 345 (declining to reduce disgorgement amount sought by the
SEC because defendants failed “to demonstrate that they received less than the full amount sought
to be disgorged”); Lorin, 76 F.3d at 462 (upholding district court’s order requiring disgorgement of
all profits and rejecting appellant’s argument for limiting disgorgement to profits from sales to other
parties); Sunbelt Dev. Corp., 2006 WL 519769 at *3 (ordering disgorgement in amount requested
by SEC based on finding that SEC had met its burden of reasonable approximation and debtor failed
to demonstrate inability to pay). But, despite the SEC’s suggestion to the contrary (see SEC Final
Br. at 11), it is simply not true that courts have “uniformly” declined to exercise their discretion in
a manner that results in reduction of an SEC disgorgement request. See, e.g., SEC v. Johnson, 2006
WL 2053379 at *1 (S.D.N.Y. July 24, 2006) (ordering disgorgement and imposing civil penalties
in amounts less than that requested by the SEC and finding “the SEC’s proposals to be too severe
and [the defendant’s] proposals too mild”); SEC v. Pardue, 367 F. Supp. 2d 773, 778 (E.D. Pa.
2005) (although SEC requested disgorgement of approximately $140,000 and imposition of a civil
penalty in the same amount, district court ordered disgorgement of $25,000 and imposed a $25,000
civil penalty based on the fact that “the Internal Revenue Service and the stock market declines since
2000 ha[d] deprived [the defendant] of the benefits of the [illegal insider] transaction”).
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If the remedies phase of the trial had gone forward, the District Court also would have had
to determine whether to award prejudgment interest on any disgorgement amount. This too would
have required the exercise of discretion, not simply a mathematical computation. See First Jersey,
101 F.3d at 1476 (“The decision whether to grant prejudgment interest and the rate used if such
interest is granted are matters confided to the district court’s broad discretion, and will not be
overturned on appeal absent an abuse of that discretion.” (internal quotation marks omitted));
Svoboda, 409 F. Supp. 2d at 345 (“A district court has broad discretion to decide whether to assess
prejudgment interest and the rate used in calculating such interest.”); Thorn, 2002 WL 31412439
at *4 (“As to the SEC’s request for prejudgment interest on the amount ordered to be disgorged, the
Court observes that any such award is within the Court’s discretion.”). In determining whether to
award prejudgment interest in an SEC civil enforcement action, courts generally consider: “(i) the
need to fully compensate the wronged party for actual damages suffered, (ii) considerations of
fairness and the relative equities of the award, (iii) the remedial purpose of the statute involved,
and/or (iv) such other general principles as are deemed relevant by the court.” First Jersey, 101 F.3d
at 1476 (internal quotation marks omitted); Thorn, 2002 WL 31412439 at *4 (same). Balancing
these factors would, of necessity, require the exercise of judgment and discretion. Thus, “[s]imple
mathematics alone . . . [would] not supply the value of [this component of the SEC’s] claim.”
Horne, 277 B.R. at 326.
The District Court also would have been required to exercise discretion in passing upon the
SEC’s request for the imposition of a civil penalty against Smith. As the District Court stated in its
Final Pretrial Order: “Courts have broad discretion in determining the appropriate amount of any
penalty. Pursuant to statute, the amount [of the civil penalty] should be determined in light of the
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‘facts and circumstances’ surrounding the violations.” Final Pretrial Order at 12 (emphasis added)
(quoting 15 U.S.C. § 78u(d)(3)). The SEC sought the imposition of civil penalties under § 20(d) of
the Securities Act (15 U.S.C. § 77t(d)) and § 21(d)(3) of the Exchange Act (15 U.S.C. § 78u(d)(3)).
These remedy provisions “categorize[] penalties into three tiers of increasing severity.” See SEC
v. Lybrand, 281 F. Supp. 2d 726, 730 (S.D.N.Y.), aff’d sub nom. SEC v. Kern, 425 F.3d 143 (2d Cir.
2003). 	Had the trial gone forward, the District Court would have been required to determine
whether to grant the SEC’s request for imposition of a “third-tier” civil penalty. Third-tier penalties
are available if the violation in question “involved ‘fraud, deceit, manipulation or a deliberate or
reckless disregard of a regulatory requirement [and the violation] resulted in substantial losses or
created a significant risk of substantial losses to other persons.’” Id. (quoting 15 U.S.C. §§ 77t(d),
78u(d)(3)); Mohn, 2005 WL 2179340 at *7; Thorn, 2002 WL 31412439 at *4 (quoting 15 U.S.C.
§ 77t(d)(2)(C)(I), (II)). Factors that courts weigh in imposing those penalties include:
(1) the egregiousness of the violations at issue[;] (2) defendants’
scienter[;] (3) the repeated nature of the violations[;] (4) defendants’
failure to admit to their wrongdoing; (5) whether defendants’ conduct
created substantial losses or the risk of substantial losses to other
persons; (6) defendants’ lack of cooperation and honesty with
authorities, if any; and (7) whether the penalty that would otherwise
be appropriate should be reduced due to defendants’ demonstrated
current and future financial condition.
Lybrand, 281 F. Supp. 2d at 730. See also Mohn, 2005 WL 2179340 at *7. Application of this
multi-factor test to the facts and circumstances surrounding Smith’s violations of the securities laws
clearly would have required the exercise of judgment and discretion by the District Court, not simply
a mathematical computation. See Lybrand, 281 F. Supp. 2d at 729 (“District courts have discretion
in determining the appropriate amount of any penalty.”); SEC v. Moran, 944 F. Supp. 286, 296–97
(S.D.N.Y. 1996) (“Considering the discretionary nature of the civil penalty framework, prior
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decisions and consent decrees are of little comparative value for any individual matter. Each case,
of course, has its own particular circumstances which determine the appropriate penalty to be
imposed.”).
To summarize, as the Final Pretrial Order makes clear, in order to fix a damage amount to
award the SEC, the District Court would have been required to decide: (1) whether to order the
corporations controlled by Smith—Continental and Scioto— to disgorge their ill-gotten gains and,
if so, in what amount; (2) whether to hold Smith jointly and severally liable for disgorgement of the
ill-gotten gains of Continental and Scioto as a control person pursuant to 15 U.S.C. § 20(a); (3)
whether, in the event that the District Court declined to hold Smith jointly and severally liable for
the disgorgement of the ill-gotten gains of Continental and Scioto, it should order that Smith
disgorge his personal ill-gotten gains and, if so, in what amount; (4) whether to assess prejudgment
interest on any amounts ordered disgorged and the rate to be used in calculating the interest; and (5)
whether to impose civil penalties against Smith and, if so, in what amount. Each decision point in
this process called for the District Court’s exercise of judgment and discretion, rather than a simple
mathematical calculation.
In support of the contention that the amount of its claim was readily determinable on the
Petition Date, the SEC advances several arguments, none of which is meritorious. First, the SEC
argues that, in the District Court action, Smith had agreed to—or alternatively, did not dispute—the
amount that he would be required to disgorge. See, e.g., SEC Reply Br. at 1–2 (“[T]he Debtor had
already filed a joint proposed final pretrial order concerning remedies in which Debtor did not
dispute the amount of disgorgement that Debtor owed to the SEC . . . . [A]s of the Petition Date the
parties had agreed as to the disgorgement amount that flowed from the court’s fraud finding.”).
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Although the SEC repeats this assertion throughout the briefing—see SEC Reply Br. at 1, 2, 5, 6,
7, 8—it is simply not true. Granted, there was no dispute between the parties as to the total amount
raised in the Continental and Scioto offerings. The Final Pretrial Order states: “For the Continental
[o]ffering, the total amount raised was[] $1,272,655. For the Scioto offering, the total amount raised
was $798,000.” Final Pretrial Order at 10. 	But the Proposed and Final Pretrial Orders make clear
that, as of the Petition Date, Smith and the corporate defendants had not agreed to a disgorgement
amount, and this issue remained in dispute. See Proposed Pretrial Order at 21; Final Pretrial Order
at 20–21. The ultimate agreement between the parties as to a disgorgement amount came nearly two
months after the Petition Date, with the submission of the Stipulation and Final Judgment. See Dist.
Ct. Doc. 100, 101.
The SEC also attempts to establish that its claim was liquidated on the Petition Date by
urging the Court to focus solely on the disgorgement component of its claim. The SEC does not
dispute the fact that, in determining whether to impose a civil penalty against Smith (and, if so, in
what amount) and whether to award prejudgment interest (and, if so, at what rate), the District Court
necessarily would have been required to exercise discretion. But despite the fact that the District
Court would necessarily have been required to exercise judgment and discretion to quantify these
elements of the SEC’s claim, the SEC maintains that its disgorgement claim alone would cause the
Debtor to exceed § 109(e)’s eligibility threshold and, thus, that portion of its claim was in fact
liquidated on the Petition Date. This argument is unavailing. As previously explained, the premise
underlying the SEC’s argument—that the disgorgement component of its claim had been fixed and
was thus readily determinable on the Petition Date—is flawed. While the total amount raised by the
Continental and Scioto offerings indeed “ha[d] been adjudicated down to the penny” as the SEC
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contends, see SEC Final Br. at 10, the amount that the District Court ultimately would order Smith
to disgorge following the trial on remedies was neither known nor readily determinable on the
Petition Date.
Nor is the Court persuaded by the SEC’s contention that “courts use very little discretion in
awarding disgorgement in offering fraud cases.” SEC Final Br. at 2. As discussed above, while it
may be true that federal courts typically do not exercise their discretion to order disgorgement in an
amount less than that requested by the SEC, the fact remains that they retain the discretion to do so
if deemed appropriate in a particular case. See First Jersey, 101 F.3d at 1474–75 (“The district court
has broad discretion not only in determining whether or not to order disgorgement but also in
calculating the amount to be disgorged.” (emphasis added)); Svoboda, 409 F. Supp. 2d at 344
(same); Johnson, 2006 WL 2053379 at *1 (ordering disgorgement and imposing civil penalties in
amounts less than requested by the SEC); Pardue, 367 F. Supp. 2d at 777 (same). In short, contrary
to the SEC’s suggestion, it was simply not a foregone conclusion on the Petition Date that the
District Court would require Smith’s full disgorgement of all proceeds raised from the Continental
and Scioto offerings. Had this been the case, a four-day trial on the remedies issues—in which over
a dozen witnesses were to be called and more than one hundred exhibits admitted—would not have
been necessary. See Pearson, 773 F.2d at 756 (“[T]he fact that evidence must be taken to determine
the amount of the claim indicates that, until then, the claim was unliquidated.”).
As of the Petition Date, then—given the outstanding remedies issues not yet presented to or
decided by the District Court—the amount of Smith’s debt to the SEC was not readily calculable
and thus remained unliquidated. The SEC’s claim accordingly will not be counted in determining
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Smith’s eligibility under § 109(e). 	Smith therefore qualifies for relief under Chapter 13 of the
Bankruptcy Code.
D. 	Bad Faith
Having concluded that the amount of the SEC’s claim was not readily determinable on the
Petition Date, the Court finds that Smith did not act in bad faith by listing the debt as unliquidated
and its amount as “unknown” in the Schedule F that he filed with his petition.
IV. Conclusion
For these reasons, the Court will enter a separate order denying the Dismissal Motion. A
hearing to consider confirmation of the Debtor’s Chapter 13 plan will be held on February 20, 2007
at 2:00 p.m. in Courtroom A.
IT IS SO ORDERED.
Copies to:
Bradley T. Smith, Debtor, 26 Nottingham Road, Columbus, OH 43214
W. Mark Jump, Attorney for Debtor, 2130 Arlington Avenue, Columbus, OH 43221
Steven J. Levine, Attorney for U.S. Securities and Exchange Commission, 175 W. Jackson
Boulevard, Suite 900, Chicago, IL 60604
Frank M. Pees, Chapter 13 Trustee, 130 E. Wilson Bridge Road, Worthington, OH 43085
Office of the U.S. Trustee, 170 N. High Street, Suite 200, Columbus, OH 43215
###
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