In re Olsen

604 B.R. 790

IN RE: Chad T. OLSEN, Debtor.

Case No. 18-14255-13

United States Bankruptcy Court, W.D. Wisconsin.

Signed July 22, 2019

Michael J. Rynes, Madison, WI, for Debtor.

MEMORANDUM DECISION

Hon. Catherine J. Furay, U.S. Bankruptcy Judge

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.

BACKGROUND

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.

DISCUSSION

A. Confirmation Standards

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:

1) The plan must comply with chapter 13 and title 11;

2) All fees and charges assessed by the court under chapter 13 of title 28 must be paid;

3) The plan must be proposed in good faith;

4) The value to be distributed to unsecured creditors must not be less than what they would receive in a chapter 7 liquidation;

5) With respect to each allowed secured claim—

a) the holder of such claim has accepted the plan;

b) the plan provides that—

1. the holder of such claim retains the lien securing such claim until the earlier of the payment of the underlying debt or discharge, and if the case is dismissed or converted, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law;

2. the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; and

3. if the creditor stands to receive periodic payments, such payments must be in equal monthly amounts; or

c) the debtor surrenders the collateral;

6) The debtor must be able to make all payments under the plan and must be able to comply with the plan;

7) The debtor must have filed the petition in good faith;

8) All domestic support obligations that became payable after the petition was filed have been paid; and

9) The debtor must have filed all required Federal, State, and local tax returns.

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.

i. The Plan is feasible.

Section 1325(a)(6) is known as the feasibility requirement for confirmation.

It requires that the debtor "will be able to make all payments under the plan and to comply with the plan." To be feasible,

the plan must have a reasonable likelihood of success as determined by the particular circumstances of the plan and the case. While the feasibility requirement is not rigorous, the plan proponent must, at minimum, demonstrate that the Debtor's income exceeds expenses by an amount sufficient to make the payments proposed by the plan. Because the issue of feasibility is one of fact, the determination by the bankruptcy court will not be disturbed unless the decision is clearly erroneous.

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, "debtors must show by definite and credible evidence that they will have the financial ability to make the balloon payment. While it is impossible to predict with absolute certainty, mere speculation as to the source of funds is not sufficient to satisfy feasibility." 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:

1) equity in the property at the time of filing, if any;

2) the debtor's future earning capacity;

3) the debtor's future disposable income;

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 and local property taxes; 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.

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 (balloon payment should be...