In re Olsen
Decision Date | 22 July 2019 |
Docket Number | Case No. 18-14255-13 |
Citation | 604 B.R. 790 |
Parties | IN RE: Chad T. OLSEN, Debtor. |
Court | U.S. Bankruptcy Court — Western District of Wisconsin |
Michael J. Rynes, Madison, WI, for Debtor.
Chad Olsen ("Debtor") filed a chapter 13 petition in December 2018. On January 9, 2019, the Debtor proposed a Plan. On February 13, State Bank of Cross Plains ("State Bank") objected to confirmation.
The Debtor filed an amended Plan on May 29. State Bank's objection remains.
The facts here are unique. The Debtor has no unsecured debt. There is no priority debt. He has only four secured creditors. He is and has always been current on payments to each secured creditor—with one exception. The only debt in default is a balloon payment owed to State Bank. The property securing this debt has substantial equity. But for certain conduct by State Bank, the Debtor would have remained current and would not have filed a petition. This is not a case of excess spending, lost employment, sudden medical bills, financial mismanagement, or the like. This is the case of a solvent Debtor undone by the unfair, deceptive conduct of his bank.
In August 2014, Overtime Trucking, LLC, and State Bank entered into a Business Loan Agreement and Promissory Note. The Debtor guaranteed the Loan Agreement by signing that Agreement and executing an Unlimited Continuing Payment Guaranty. The Debtor also granted two mortgages to State Bank to secure the loan. A parcel containing both the Debtor's business and primary residence was the subject of the mortgages. Overtime Trucking pledged all of its assets to secure the loan through a Commercial Security Agreement.
Before maturity of the Note, Debtor contacted an officer at State Bank seeking to renew it. State Bank told him paperwork for renewal would have to be prepared and signed. Just before the close of business on February 3, 2018, the Debtor and State Bank executed another Promissory Note (the "Renewal Note"). The Renewal Note had the same monthly payment amount as the original Note. But instead of a renewal for a like term, it had a balloon payment at the end of three months unlike the longer term in the original Note.1 State Bank does not dispute these facts.
The Renewal Note matured on May 3, 2018. Overtime Trucking defaulted by failing to pay the required balloon payment of about $204,000.00 and, as a guarantor, the Debtor defaulted by failing to pay the balloon. The Debtor was surprised to learn the Note matured after just three months. While he did not read the Renewal Note, he believed it had the same terms as the original Note.
In November 2018, State Bank obtained a judgment of foreclosure in the amount of $214,267.09. The month after, before a foreclosure sale occurred, the Debtor filed a bankruptcy. As of the petition date, the Debtor owed State Bank around $215,613.51. The parties stipulated the real property has a fair market value of at least $465,000.00. The Debtor has at least $100,000.00 of equity in the real property and is current on all taxes.2
The Plan proposes, on account of State Bank's claim, monthly payments of $1,785.00 at 4.88% interest until all administrative expenses are paid in full and then pro rata monthly payments of not less than $1,785.00 also at 4.88% interest. The Debtor proposes to refinance the remaining balance before the end of the Plan to pay State Bank in full through a balloon payment.
State Bank objects to confirmation. According to State Bank, the Plan "fails to comply with the Bankruptcy Code's Chapter 13 ‘cram-down’ provisions." State Bank asserts its entire claim is arrearage because the Note matured prepetition. And the Plan purports to modify State Bank's treatment in contravention of sections 1322(b)(2) and 1325(a)(5) by proposing to extend the term of the loan for sixty months, forcing State Bank to accept monthly payments followed by a balloon payment.
State Bank's second argument is that the Plan is not feasible. The Bank contends a plan involving the need to refinance debt in five years is too speculative. The balloon payment should therefore be disallowed. The Debtor lacks the necessary income to make the equal monthly Plan payments of $3,593.56 State Bank says must be made in the absence of a balloon. Even if the balloon payment is allowed, State Bank says the Debtor still lacks the income necessary to make the Plan payments of $2,500.00 per month.
A chapter 13 plan must meet the requirements of section 1325(a) to be confirmed. The debtor has the burden of proving compliance with these requirements by a preponderance of the evidence. The requirements are:
State Bank is the only party objecting to confirmation. The Bank raises two issues. It asserts the Plan is not feasible, even if the balloon payment is allowed. It also argues the balloon payment violates section 1325(a)(5)(B)(iii)(I). The Court takes each issue in turn.
Section 1325(a)(6) is known as the feasibility requirement for confirmation.
Marshall v. Blake , 885 F.3d 1065, 1083 (7th Cir. 2018) (citations omitted), overruled on other grounds by In re Wade , 926 F.3d 447 (7th Cir. 2019).
Chapter 13 plans are often funded from future income. Income projections "must be based on concrete evidence of financial progress and must not be speculative, conjectural or unrealistic." In re Cherry , 84 B.R. 134, 139 (Bankr. N.D. Ill. 1988). A debtor who is self-employed must show a positive earnings history, current income, and the likely stability of that income in the future. In re Soppick , 516 B.R. 733, 749 (Bankr. E.D. Pa. 2014).
The Debtor proposes paying State Bank's claim through equal monthly payments in the same amounts as were paid under the Note and Renewal Note before the balloon. A refinance and balloon payment would occur at or before the sixtieth month. While there is no per se bar on a provision to fund certain plan payments through a refinance, In re Primes , 518 B.R. 466, 481 (Bankr. N.D. Ill. 2014) (citing Branigan v. Bateman (In re Bateman) , 515 F.3d 272, 279 (4th Cir. 2008) ), most cases hold that where the consummation of a plan "hinges entirely upon the happening of a speculative, contingent event, scheduled to occur some three to five years from the date of confirmation, such a plan does not meet the feasibility requirement of § 1325(a)(6)." In re Isaac , No. 05-B-13874, 2005 WL 3939839, at *2 (Bankr. N.D. Ill. Nov. 16, 2005).
Other courts view balloon payments with less skepticism. These courts hold that for a balloon payment to be feasible, First Nat'l Bank v. Fantasia (In re Fantasia) , 211 B.R. 420, 423 (1st Cir. BAP 1997) (citations omitted). Courts often consider the balloon payment under the totality of the circumstances, analyzing factors such as:
Id. (citing In re Brunson , 87 B.R. 304, 312 (Bankr. D.N.J. 1988), rev'd on other grounds , First Nat'l Fidelity Corp. v. Perry , 945 F.2d 61 (3d Cir. 1991) ); see also Chelsea State Bank v. Wagner (In re Wagner) , 259 B.R. 694 (8th Cir. BAP 2001) (applying similar factors); Soppick , 516 B.R. 733 (...
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