Alane Becket, Managing Partner
The debtor filed a Chapter 13 bankruptcy owing only $41,000 in unsecured debt, over $30,000
of which was owed to a single creditor. The debtor also owned a commercial property valued
at almost $800,000 with a mortgage of only $275,000. Because the debtor had so much equity
in his real property, under the "best interests of the creditors test" the debtor was required
to repay his unsecured creditors in full.
The best interest of the creditors test is shorthand for 11 U.S.C. § 1325(a)(4) which requires
that a Chapter 13 plan, in order to be confirmed, pay unsecured creditors no less than what they
would have received in a hypothetical Chapter 7 case. Here, since a liquidation of the debtor's
commercial property would have yielded over $500,000 in profit to the debtor, the best interest
of the creditors test mandated full payment to unsecured claims.
Because any money left over after the payment of all unsecured claims would be returned to the
Debtor, it was not surprising when the debtor objected to the creditor's claim, seeking its
disallowance by alleging that the debt was incurred by his corporation and that he was not
personally responsible for the obligations incurred by his corporation. The creditor, represented
by Becket & Lee, filed a Response to the objection. The Response noted, among other things, that
the debtor listed a debt to the creditor on his signed and sworn schedule of unsecured claims.
The debtor did not mark the debt as "disputed". The Response argued that the Debtor did not meet
his burden of proof to overcome the evidentiary value of the proof of claim.
Becket & Lee later supplemented the creditor's Response by filing an affidavit of the creditor
attesting to the history of the account. Specifically, in 2002, the debtor originally opened
the account with another creditor. During the life of the account, it was purchased by the current
creditor. The creditor was able to retrieve the account agreement from the time the account was
active with it and the account agreement from the original creditor. Both agreements clearly held
the company representative responsible for all charges on the account. The creditor was also able
to produce account statements for the account, as well as copies of advance checks written by the
debtor in the amounts of $13,000 and $3,600.
A preliminary hearing was held on the Debtor's objection at which time the court ordered the
creditor to produce "something" evidencing the debtor's assent to being held liable for the
advances on the account. Because a signed application was not available, Becket & Lee, on
behalf of its client, filed a second supplemental brief arguing that proof of a signed agreement
is not the only way to show assent to liability on an account. More specifically, in accordance
with the terms of many credit card agreements, acceptance of the terms of the agreement can be
shown by the cardholder's use of the account.
In addition, the account agreement contained a "choice of law" provision which stated that it
was governed by the laws of Rhode Island. The second account agreement, from the current creditor,
had a choice of law provision which held that the laws of Delaware were applicable to the account.
Becket & Lee showed in its brief that regardless of whether the laws of Rhode Island, Delaware,
or even New Jersey, where the bankruptcy case was pending, were applicable, all three states have
law that provide that acceptance or use of a credit facility by a consumer binds the consumer to
the terms of the agreement.
A total of eight hearings were held on this matter. It appeared that the judge was reluctant to
hold the debtor liable for a debt incurred for business purposes. Becket & Lee provided substantial
supporting documentation and legal authority to show that, regardless of how the account was used,
the terms of the agreement showed the Debtor was liable on the debt.
Immediately prior to the last hearing on the objection, the court asked both parties for a summary
of their arguments. Becket & Lee reiterated its position that, under the law, the debtor was
responsible for the balance due on the account by virtue of the terms of the account agreement.
In the alternative, it was argued that, because the corporation was owned 100 percent by the Debtor,
it would be inequitable to allow the debtor to incur debt in the corporation's name, take for himself
all the profits of the corporation, and then refuse to pay the debts of the corporation from the sale
of the property occupied by the corporation. Under the legal theory of quantum meriut, it was argued,
the Debtor should be responsible for the accounts. Quantum meriut means "as much as he deserves" and
is an equitable doctrine based on the concept that no one who benefits by the labor and materials of
others should be unjustly enriched thereby, and that the law implies a promise to pay a reasonable
amount for labor and materials furnished even absent a specific contract therefore.
After the eighth and final hearing, the court ruled in favor of the creditor. The court did not
elaborate on its decision but cited the Debtor's 100 percent interest in the corporation that obtained
the benefit of the credit as weighing on its decision. The creditor's claim of over $30,000 will be
paid in full.
In re Jeffrey Satkin, Case no. 05-23156 (Bankr. D. N.J. 2005)