In re Fantasia, BAP No. MW 96-072.

• Court: U.S. Bankruptcy Appellate Panel, First Circuit
• Writing for the Court: PER CURIAM
• Citation: In re Fantasia, 211 B.R. 420 (B.A.P. 1st Cir. 1997)
• Decision Date: 26 August 1997
• Docket Number: BAP No. MW 96-072.
• Parties: In re Myrna FANTASIA and Louis Fantasia, Debtors. The FIRST NATIONAL BANK OF BOSTON, Appellant, v. Myrna FANTASIA and Louis Fantasia, Appellees.

211 B.R. 420 (1997)

In re Myrna FANTASIA and Louis Fantasia, Debtors The FIRST NATIONAL BANK OF BOSTON, Appellant, v. Myrna FANTASIA and Louis Fantasia, Appellees.

BAP No. MW 96-072.

United States Bankruptcy Appellate Panel of the First Circuit.

August 26, 1997.

Kevin J. Simard, with whom Timothy M. Mitchelson and Riemer & Braunstein, Boston, MA were on brief for appellant.

Stephan M. Rodolakis, with whom Mark S. Foss and Peters, Barnhill, Massid & Rodolakis, Worcester, MA were on brief for appellees.

Before GOODMAN, LAMOUTTE and VAUGHN, Bankruptcy Judges.

PER CURIAM.

The debtors filed a Chapter 13 plan and a creditor objected. A non-evidentiary hearing was held and the bankruptcy court amended and confirmed the plan. The creditor alleges that the evidence was insufficient to support a finding that the plan was feasible. After reviewing the pertinent case law and the facts of this case, we find that the bankruptcy court abused its discretion by confirming the debtors' Chapter 13 plan.

I. FACTS AND PROCEDURAL HISTORY

On April 24, 1992, the debtors, Louis and Myrna Fantasia, obtained a loan in the amount of $614,000.00. The promissory note was secured by a mortgage in favor of The First National Bank of Boston (FNB), as successor of Mechanics Bank, on two properties, the debtors' residence located in Worcester, Massachusetts, and a commercial building located in Milbury, Massachusetts. The bank also obtained additional security in the form an assignment of rents from the Milbury property. Under the terms of the promissory note, the loan matured on April 24, 1995.

The debtors defaulted on the loan and the parties executed a restructure agreement wherein the parties agreed to an outstanding principal of $587,058.18, an annual interest rate of 9.5%, and a monthly payment of $5,682.20 with a maturity date of April 24, 1997. Thereafter, the debtors defaulted and FNB commenced foreclosure proceedings.

The debtors filed a Chapter 13 petition on August 27, 1996. The debtors' Chapter 13 plan estimated FNB's secured claim at $575,000.00 and provided for direct monthly payments to FNB of $5,662.26 based on a 15-year amortization schedule with 8.5% interest rate and "a balloon payment of the balance remaining at the end of a 60-month Plan." The plan was funded by rental income from the commercial property and the debtors' future earned income. It was undisputed that the property lacked equity at the time of the bankruptcy filing.

FNB objected to confirmation of the debtors' plan on the grounds that the debtors failed to treat FNB's secured claim in accordance with 11 U.S.C. §§ 1322(c) and 1325(a)(5) and that the plan did not meet the feasibility requirement of 11 U.S.C. § 1325(a)(6). The bankruptcy court held a non-evidentiary hearing to consider confirmation on November 19, 1996 wherein counsel for the debtors responded to the various objections. After some discussion, the bankruptcy court found that the commercial property would increase in value¹ and confirmed the plan submitted by the debtors with the following amendment: "the interest rate shall be 9 1/2% — regular mortgage amortization — equal payments of principal and interest."

On appeal, FNB reiterates its objections to the plan arguing that no rational basis exists for the bankruptcy court's ruling. In addition, FNB asserts that prior to confirmation the bankruptcy court failed to consider whether a shortfall would result from its modification of the interest rate which would affect the debtors' ability to comply with the terms of the plan.

II. DISCUSSION

A. TIMING OF BALLOON PAYMENT

FNB asserts that the bankruptcy court erred as a matter of law by confirming a plan in violation of 11 U.S.C. §§ 1322(c) and 1325(a)(5) which require that a modified secured claim be paid in full during the life of the plan. FNB objects to the phrase "a balloon payment of the balance remaining at the end of a 60-month Plan." According to FNB, that phrase is ambiguous and the bankruptcy court erred by not addressing at confirmation the timing of the payment of FNB's claim under the plan. We find no error in the bankruptcy court's actions. Given the language of the debtors' plan and the law regarding payment of modified secured claims during the life of a plan, we find that the provision in question is not ambiguous. Pursuant to the plan, the debtors are to make the balloon payment during the life of the plan by paying the balance due on the sixtieth month.

B. FEASIBILITY

The crux of this appeal turns on whether the plan, as confirmed, is feasible. As FNB raised valid objections based on feasibility, the debtors had an obligation to respond with evidence to rebut these objections. Their failure to respond with evidence left the court with insufficient evidence to support confirmation. Accordingly, the bankruptcy court abused its discretion in confirming the debtors' Chapter 13 plan.

The standards for confirmation of a Chapter 13 plan are found in 11 U.S.C. § 1325(a); subsection (6) addresses feasibility.² Feasibility is a factual determination and the bankruptcy court's decision will not be disturbed absent a firm conviction that clear error has been committed. Fed. R. Bankr.P. 8013; 2 Keith M. Lundin, Chapter 13 Bankruptcy § 5.56 (2d ed.1994); see 8 Lawrence P. King et al., Collier on Bankruptcy, ¶ 1325-07 (15th ed.1997) ("by far the most important criterion for the confirmation of a chapter 13 plan in terms of promoting the success of chapter 13 proceedings is subsection 1325(a)(6)'s requirement that the court determine whether the chapter 13 debtor will be able to make all payments under the plan and comply with all other provisions . . . ").

Confirmation of a Chapter 13 plan requires more than a ministerial review; rather, bankruptcy judges should exercise their judicial discretion and assess the evidence to ensure that it meets the guidelines established by section 1325. Fidelity & Casualty Co. of N.Y. v. Warren (In re Warren), 89 B.R. 87 (9th Cir.BAP 1988). To satisfy feasibility, a debtor's plan must have a reasonable likelihood of success, i.e., that it is likely that the debtor will have the necessary resources to make all payments as directed by the plan. 11 U.S.C. § 1325(a)(6); In re Brunson, 87 B.R. 304, 312 (Bankr.D.N.J. 1988). The debtor carries the initial burden of showing that the plan is feasible. In re Felberman, 196 B.R. 678, 685 (Bankr. S.D.N.Y.1995); In re Endicott, 157 B.R. 255, 263 (W.D.Va.1993). Before confirmation, the bankruptcy court should be satisfied that the debtor has the present as well as the future financial capacity to comply with the terms of the plan. In re Crotty, 11 B.R. 507, 511 (Bankr.N.D.Tex.1981) (a definite declaration as to the source and amount of funds necessary to enable debtors to make payments under the plan is required).

1. BALLOON PAYMENT

The inclusion of a balloon payment is not dispositive of a plan's feasibility. Confirmation of such a plan is suspect, however, unless some proof is offered to show that the funds will be available at the time the balloon payment is due. In re Gregory, 143 B.R. 424, 426 (Bankr.E.D.Tex.1992) (propriety of balloon payment should be considered under the totality of the circumstances); 2 Keith M. Lundin, Chapter 13 Bankruptcy § 5.56 (2d ed.1994); see also 5 William L. Norton, Jr. et al., Bankruptcy Law and Practice § 122:9 (2d ed.1994) (feasibility of a plan with a balloon payment scheme depends on the debtor demonstrating that the funds will be available at the time the payment is due).

To avoid potential abuse, debtors must show by definite and credible evidence that they will have the financial ability to make the balloon payment. Crotty, 11 B.R. at 511. While it is impossible to predict with absolute certainty, mere speculation as to the source of funds is not sufficient to satisfy feasibility. In re Harris, 199 B.R. 434, 436-37 (Bankr.D.N.H.1996). In some cases, bankruptcy courts have relied upon the following factors, or a combination thereof, when considering confirmation of a plan which contains a balloon payment:

1) the equity in the property at the time of filing;

2) the future earning capacity of the debtor;

3) the future disposable income of the debtor;

4) whether the plan provides for the payment of interest to the secured creditor over the life of the plan;

5) whether the plan provides for payment of recurring charges against the property, including insurance, local property taxes and utility charges; and

6) whether the plan provides for substantial payments to the secured creditor which will significantly reduce the debt and enhance the prospects for refinancing at the end of the plan.

Brunson, 87 B.R. at 312.

In the case under consideration, it is undisputed that no equity existed in the property at the time of the bankruptcy filing. Furthermore, the debtors indicated their intent to fund the balloon payment by refinancing the commercial property located in Milbury. Also undisputable but not conceded by the debtors, is the fact that, although debtors' counsel referenced the expressed intent of a lending institution to refinance the property, no documents and/or testimony were admitted supporting these assertions. The record indicates that evidence on this point was neither presented at the hearing nor filed with the plan.

The debtors have failed to meet their burden by showing that they would have funds available to make the balloon payment. Endicott, 157 B.R. at 263 (where the secured property lacks equity and the balloon payment is not funded through future income, failure to present evidence as to the likelihood of refinancing makes the plan infeasible); In re Schenk, 67 B.R. 137, 140 (Bankr. D.Mont.1986) (debtor must show with reasonable certainty that he will be able to make the proposed lump sum payment at the end of the plan prior to confirmation of the plan).

2. INCOME

FNB also argues that the plan is not feasible because the debtors' projected...