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Lump sum payment to secured creditor in Chapter 13
And, of course, an opposing view:
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
Sent: Sunday, May 30, 2010 3:19 PM
Subject: Re: Lump sum payment to secured creditor in Chapter 13
With all due respect, if the statement quoted below is true, then Professor
Scarberry isn't trying very hard. Cases prohibiting balloon payments
post-BAPCPA are legion. There are only two appellate level cases that I
know of, one of which I litigated, In re Hamilton, 401 BR 539 (1st Cir. BAP
2009) (which had about 7 companion cases, but Hamilton is the one that got
published). I had argued that because 1325(a)(5)(B)(iii) begins with the
word "if", then a plan that does not provide for periodic payments to a
creditor should be acceptable. This argument was based on the reality that
in most districts (SFAIK) the plans state with specificity how much a
secured creditor is supposed to be paid - e.g., "From the monthly payment to
the trustee, the trustee shall pay $999.99 to Subprime Lender." That has
never been the case in Massachusetts, or the First Circuit so far as I know;
plans only state the total amount to be paid to the creditor, not the amount
of the monthly "periodic payment". In other words, if (the magic word) the
plan has no language such as that quoted above, then the plan should not be
contrary to 132(a)(5)(B)(iii). The BAP was not impressed, however, and
called this "elevating form over substance", essentially. IMHO, the BAP
missed the basic point: periodic payments are not an absolute requirement
because the word "if" affords the debtor the right to decide what goes in a
plan. Prior to confirmation, only a debtor can propose a plan, and the
judge's task is not to dictate what goes in the plan, but only to determine
a "case or controversy" as to whether the plan conforms to 1325. In re
Muessel, 292 BR 712 (1st Cir. BAP 2003). Because Hamilton was an appeal by
leave of an order denying confirmation, the First Circuit declined
jurisdiction, being unimpressed, apparently, with the concurrence in In re
Zahn, 367 BR 654 (8th Cir. BAP 2007).
This brings me to the other appellate level case on this issue, which, alas,
I did not litigate. In re Flynn, 402 BR 437 (1st Cir. BAP 2009). In
Hamilton, the creditor objected to confirmation. In Flynn, however, the
nobody objected to confirmation, not even the creditor. The bankruptcy
court, acting sua sponte*, issued an opinion denying confirmation because
the balloon payment was not permitted by 1325(a)(5)(B)(iii). On appeal,
the BAP found that the bankruptcy court probably erred because by not
objecting to confirmation, the creditor could be deemed to have accepted the
plan, 1325(a)(5)(A). The BAP vacated the order denying confirmation and
remanded to the bankruptcy court for a determination of whether notice of
the plan provisions was sufficient to comport with due process (see, e.g.,
Espinosa).
*I once overheard a bankruptcy judge (who shall remain nameless) say that
"sua sponte" is latin for "I am making a mistake."
Thus unless the creditor assents (either passively or actively) to
confirmation of a plan with a balloon payment, confirmation will be denied.
I wish there were some way to get this before a circuit court, but unless
one of them pays attention to the Zahn concurrence, it ain't gonna happen.
The entire Zahn history makes for amusing reading; in essence, the debtor
wound up having to object to confirmation of her own plan and then appeal
the confirmation order! Absurd, IMHO. The vast majority of debtors don't
have the ability to propose an alternate plan that would be feasible.
David Baker
Boston
On May 30, 2010, at 1:53 AM, Scarberry, Mark wrote:
In preparing an article for the Pepperdine Law Review's symposium on the
mortgage crisis, I did not find any case authority on this question of
whether BAPCPA's requirement of equal payments precludes such lump sum or
balloon payments plans. What I could find on such plans is described in a
long footnote that is copied at the end of this message.
Message
And, of course, an opposing
view:
David A.
Tilem
Certified Bankruptcy
Specialist*
The post was migrated from Yahoo.
Response to an earlier interesting post about balloon payments in C13 plans.
Mark Scarberry is the bankruptcy professor at Pepperdine and a frequent
contributor of scholarly articles
Peter Lively has already commented on this - others may want to join in.
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
Sent: Saturday, May 29, 2010 10:53 PM
Subject: Re: Lump sum payment to secured creditor in Chapter 13
Dennis Wheeler asks a very good question. Textually perhaps the best
argument is the "periodic payments" are in equal amounts, and that the lump
sum or balloon payment at the end is not a periodic but rather a final
payment. That would seem, however, to leave a hole in the provision large
enough to drive a truck through.
In preparing an article for the Pepperdine Law Review's symposium on the
mortgage crisis, I did not find any case authority on this question of
whether BAPCPA's requirement of equal payments precludes such lump sum or
balloon payments plans. What I could find on such plans is described in a
long footnote that is copied at the end of this message.
Given the small amount of amortization that would occur over 5 years on a 30
year amortization schedule, and given the current very unstable market for
residential real property, I'd have to disagree that the lender in this case
is adequately protected. It also seems to me that in such a case the court
should not find that the final payment is sufficiently likely to be made
that the plan should be confirmable.
If values continue to drop, the debtors will not be able to refinance or
sell for a sufficient amount to make the lump sum (balloon) payment (unless
the court has undervalued the property). The debtors then could dismiss
their case or convert to chapter 7, leaving the lender to foreclose on a
property that is worth less than it was worth when the chapter 13 was filed.
I realize that courts (at least prior to BAPCPA) usually took the position
that the making of regular payments on a secured debt would provide whatever
adequate protection might be needed during the plan period. That does not
strike me as a serious provision of adequate protection, especially in a
declining market.
I would be interested to hear from other list members how often they are
managing to confirm such plans with lump sum (balloon) payoffs on
undersecured mortgages secured by real property other than the debtor's
principal residence.
Mark Scarberry
Pepperdine
P.S. Here is the footnote:
Mark S. Scarberry, A Critique of Congressional Proposals to Permit
Modification of Home Mortgages in Chapter 13 Bankruptcy, 37 Pepp. L. Rev.
635, 666-67 n. 131 (2010) (available at http://ssrn.com/author48574):
131. A plan that called for a large balloon payment, based on a contemplated
sale or refinancing
of the home during the Chapter 13 plan, could possibly satisfy the
requirement of 1325(a)(5)(B)
that the amount of the allowed secured claim be paid off with interest
during the Chapter 13 plan
without providing such a head start. See Richard N. Gottlieb,
Up, Up and Away: Considering
(1997). But Chapter 13
plans calling for large balloon payments to be made near their end by way of
refinancing or sale of
the home will seldom be confirmable in this context. See, e.g.,
In re Strober, 136 B.R. 614, 623
(Bankr. E.D.N.Y. 1992) (noting that it was most dubious whether
a plan calling for a balloon
payment could meet the feasibility requirement of 1325(a)(6)). To confirm
a plan, the court must
find that the debtor will be able to make all payments under the plan and
to comply with the plan.
ow
the Chapter 13 feasibility
requirement applies to balloon payments. Some ask whether there is
that [the debtor] actually could make the balloon payment. In
re Hendricks, 250 B.R. 415, 421
(Bankr. M.D. Fla. 2000) (following In re Crotty, 11 B.R. 507, 511 (Bankr.
N.D. Tex. 1981)); accord
In re Tornheim, 239 B.R. 677, 683 n.5 (Bankr. E.D.N.Y. 1999). Other courts
require that the debtor
he
proposed plan. In re
Harrison, 203 B.R. 253 (Bankr. E.D. Va. 1996); see In re Schenk,
67 B.R. 137, 140 (Bankr. D.
Mont. 1986). The First Circuit Bankruptcy Appellate Panel
seemingly endorsed both of those
approaches. See First Natl Bank of Boston v. Fantasia (In re
Fantasia), 211 B.R. 420, 42324
(B.A.P. 1st Cir. 1997) (listing factors courts have considered and citing
approvingly both Crotty and
Schenk). Another approach is to say that certainty is not
required, but the plan must have a
reasonable likelihood of success. See, e.g., In re Gillis, 333 B.R. 1
(Bankr. D. Mass. 2005).
The key seems to be whether the debtor has sufficient
equity in the home, or will have
sufficient equity in the home due to principal amortization under the plan,
to make it likely that the
debtor can refinance. Without question, plans may contain balloon payments
in situations where it
is shown that the mortgage debt will be significantly reduced and result in
sufficient equity build up,
thereby indicating a significant likelihood that the debtor could obtain
refinancing of the property.
In re Tornheim, 239 B.R. at 683 n.5. The court in Gillis found that there
was a reasonable likelihood
of success where the balloon payment would require the debtors to refinance
their $780,000 home,
in which they had at least $180,000 of equity, by taking out a
new first mortgage for less than
$640,000, with a back-up plan of a sale for a net of at least $640,000 after
real estate commissions.
In re Gillis, 333 B.R. at 510. The court found that even in the event of a
downturn in the market,
the debtors were reasonably likely to be able to obtain the new mortgage or
sell the home for the
required amount. Id. at 910. Note, of course, that if a
Chapter 13 debtor strips down a home
mortgage, the debtor will begin the plan not with $180,000 in
equity, but with zero equity, as in
Strober. Principal amortization during a three-to-five year plan
will likely be small, and thus the
debtor would need to refinance with nearly a one hundred percent
loan-to-value ratio, assuming
there is no change in the value of the home. A court should have difficulty
concluding five years in
advance that a debtor is reasonably likely to be able to refinance the home
at such a level, or that
there is credible and definite evidence that the debtor will be able to do
so, or that it is reasonably
certain the debtor will be able to do so, whichever of the formulations may
be applied. Relevant
case law provides no support for balloon payments in circumstances such as
those presented here,
i.e., plans requiring the payment of a large sum at the end with no source
of funding for the payment
in sight. In re Felberman, 196 B.R. 678, 688 (Bankr. S.D.N.Y. 1995). One
court did find such a
plan to be feasible with regard to a stripped down mortgage where a bank
president testified that his
bank would provide the refinancing when the balloon payment came due, if
his banks underwriting
standards were met; the court considered that commitment to be
urt
in Groff was impressed
by the debtors family lifestyle, resiliency and sheer determination, id.
at 709, and concluded that
while
at the same time protecting the
Bank's interest, they should be given that opportunity. Id. No
other case found has used the
the
Bankruptcy Code preclude
use of balloon payments. See 1325(a)(5)(B)(iii)(I) (requiring that if
periodic payments are made
on a secured claim, such payments shall be in equal monthly amounts).
For other reported cases in which a Chapter 13 plan
calling for a balloon payment was
confirmed, see Magnolia Mortgage, LLC v. Arnett (In re Arnett), 278 B.R. 239
(S.D. Ala. 2002); In
re Nation, 352 B.R. at 656. Neither Arnett nor Nation dealt
explicitly with whether it was
permissible to use a balloon payment to satisfy 1325(a)(5)(B).
The opinion in Nation dealt with discharge issues under a plan
that had been confirmed and
that called for a balloon payment of approximately $30,000 to pay
off a first mortgage on the
debtors home, which was worth well over $100,000. The plan as modified
called for sale of the
home to generate the cash for the balloon payment, and it is hardly
surprising that the bankruptcy
courtin an unpublished orderfound that it would be feasible to
sell a home worth well over
$100,000 for at least $30,000; as it turned out, the home was sold for
$160,000.
The only issue before the district court in Arnett was how to
interpret 1322(c)(2). See In re
Arnett, 278 B.R. at 240. The terms of the undersecured second mortgage on
the debtors principal
residence required that it be paid off by a balloon payment on December 1,
2005. Id. at 241. The
debtor filed a Chapter 13 case in 2001, and the last payment under the
debtors plan would be made
after December 1, 2005. Id. at 240. Thus, the district court correctly
held that under 1322(c)(2)
the short-term mortgage exception to the other than clause, see
infra note 150the mortgage
could be stripped down so long as the full amount of the stripped down
secured claim was paid off
with interest during the term of the debtors plan. See In re Arnett, 278
B.R. at 242. The confirmed
plan stripped down the second mortgage to the value of the second mortgage
holders collateralthe
value of the home minus the amount of the first mortgageprovided for
monthly payments at the
contractual rate of interest, and provided for a balloon payment to be made
on December 1, 2005 to
pay off the remaining principal owed on the stripped down secured claim.
Id. It is not clear to the
author that the plan should have been confirmed, given the uncertainty in
whether the debtor would
be able to make the balloon payment. But note that the original mortgage
payment schedule called
for a balloon payment on the same date as the date set under the plan, and
the amount of the balloon
payment under the original terms of the mortgage would have been
larger that the stripped down
amount of the balloon payment to be made under the plan. Thus, it does not
seem that the risk of
nonpayment of the balloon payment was increased by the plan over the risk
that would have existed
in any event; perhaps the reduced amount of the balloon payment under the
plan, and the ability of
the debtor under the plan to reduce payments on other debts, made
it more likely that the debtor
would be able to make the balloon payment.
[end of overlong footnote]
_____
The post was migrated from Yahoo.
The requirement of adequate protection is set forth in the next subsection and makes a specific reference to personal property. 1325(a)(5)(B)(iii)(II). Separately specifying equal payments under 1325(a)(5)(B)(iii)(I) without reference to which type of property arguably suggests that this section wasspecifically targeted to defeat the balloon payment approach in real property matters. Bummer!
Law Office of Peter M. Lively * Personal Financial Law Center I
11268 Washington Blvd, Suite 203, Culver City, CA 90230-4647
Telephone: (310)391-2400 * (800)307-3328 * Fax: (310)391-2462
A-Bankruptcy-Attorney.com
Personal Financial Law Center II - Costa Mesa, CA
THIS MESSAGE IS INTENDED ONLY FOR THE USE OF THE INDIVIDUAL OR ENTITY TO WHICH IT IS ADDRESSED, AND MAY CONTAIN INFORMATION THAT IS PRIVILEGED, CONFIDENTIAL AND EXEMPT FROM DISCLOSURE UNDER APPLICABLE LAW. IF THE READER OF THIS MESSAGE IS NOT THE INTENDED RECIPIENT, OR THE EMPLOYEE OR AGENT RESPONSIBLE FOR DELIVERING THE MESSAGE TO THE INTENDED RECIPIENT, YOU ARE HEREBY NOTIFIED THAT ANY DISSEMINATION, DISTRIBUTION OR COPYING OF THIS COMMUNICATION IS STRICTLY PROHIBITED. IF YOU HAVE RECEIVED THIS COMMUNICATION IN ERROR, PLEASE NOTIFY US IMMEDIATELY BY E-MAIL OR BY TELEPHONE. THANK YOU.
________________________________
To: cdcbaa@yahoogroups.com
Sent: Fri, May 28, 2010 4:20:51 PM
Subject: [cdcbaa] FW: Lump sum payment to secured creditor in Chapter 13
Here's an interesting idea.
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale , CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal Specialization.
ication
Sent: Friday, May 28, 2010 1:55 PM
Subject: Lump sum payment to secured creditor in Chapter 13
I have filed a chapter 13 in which debtors are seeking to retain a second home whose value is less than the first mortgage. The plan proposes to strip off the second DT (this has been completed), and strip down the first DT through valuation of the collateral, and claim bifurcation (this has been completed). The remaining secured claim of the first mortgage holder is to be paid in full through equal monthly payments for 60 months and a lump sum payment with the 60th payment. The periodic payments are each the same and based upon 30 year amortization of the secured claim at 4.75% interest. The lump sum payment, which will be made from the sale or refinance of the property, is the remaining balance on the secured claim after the 60 monthly payments of principal and interest. The creditor now has objected to the confirmation of the plan based on 11 USC 1325(a)(5)(B) (iii)(I) which provides that property to be distributed to pay secured claims must
be in equal amounts. Their argument is that the plan does not pay in equal amounts because of the lump sum payment at the end.
It appears that the code section cited was included in BAPCPA mainly to provide secured creditors with adequate protection. Arguably, the plan does adequately protect the creditor because they are being paid interest on their secured claim, together with principal to protect against decreases in the value of the collateral. Has anyone recently briefed this issue, or have within easy reach cases which support the use of a lumpsum payment in these circumstances depsite 11 USC 1325(a)(5)(B) (iii)(I)?
Law Offices of Dennis R. Wheeler
2358 Market Street, 2nd Floor
San Francisco, CA 94114
415-865-0212 (Office)
415-789-4284 (Fax)
dennis@dwheelerlaw. com(Email)
dwheelerlaw. com(Website)
We are a federally designated Debt Relief Agency under the United States Bankruptcy Laws. We assist people with finding solutions to their debt problems, including, where appropriate, assisting with the filing of petitions for relief under the Bankruptcy Code.
Email is covered by the Electronics Privacy Act, 18 U.S.C. Sections 2510-2521, and is legally privileged. This email may contain confidential and privileged material for the sole use of the intended recipient(s) to which it is addressed and may contain information which is privileged, confidential and exempt from disclosure under law. If the reader of this message is not the intended recipient, you are hereby notified that any dissemination, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please telephone us immediately and please delete this communication. Thank you for your cooperation.
The requirement of adequate protection is set forth in the next subsection and makes a specific reference to personal property. 1325(a)(5)(B)(iii)(II). Separately specifying equal payments under 1325(a)(5)(B)(iii)(I) without reference to which type of property arguably suggests that this section was specifically targeted to defeat the balloon payment approach in real property matters. Bummer! Peter M. Lively, JD/MBALaw Office of Peter M. Lively * Personal Financial Law Center I11268 Washington Blvd, Suite 203, Culver City, CA 90230-4647Telephone: (310)391-2400 * (800)307-3328 * Fax: (310)391-2462 A-Bankruptcy-Attorney.comPersonal Financial Law Center II - Costa Mesa, CA
THIS MESSAGE IS INTENDED ONLY FOR THE USE OF THE INDIVIDUAL OR ENTITY TO WHICH IT IS ADDRESSED, AND MAY CONTAIN INFORMATION THAT IS PRIVILEGED, CONFIDENTIAL AND EXEMPT FROM DISCLOSURE UNDER APPLICABLE LAW. IF THE READER OF THIS MESSAGE IS NOT THE INTENDED RECIPIENT, OR THE EMPLOYEE OR AGENT RESPONSIBLE FOR DELIVERING THE MESSAGE TO THE INTENDED RECIPIENT, YOU ARE HEREBY NOTIFIED THAT ANY DISSEMINATION, DISTRIBUTION OR COPYING OF THIS COMMUNICATION IS STRICTLY PROHIBITED. IF YOU HAVE RECEIVED THIS COMMUNICATION IN ERROR, PLEASE NOTIFY US IMMEDIATELY BY E-MAIL OR BY TELEPHONE. THANK YOU.
From: David A. Tilem <DavidTilem@TilemLaw.com>To: cdcbaa@yahoogroups.comSent: Fri, May 28, 2010 4:20:51 PMSubject: [cdcbaa] FW: Lump sum payment to secured creditor in Chapter 13
Here's an interesting idea.
The post was migrated from Yahoo.
Here's an interesting idea.
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
Sent: Friday, May 28, 2010 1:55 PM
Subject: Lump sum payment to secured creditor in Chapter 13
I have filed a chapter 13 in which debtors are seeking to retain a second
home whose value is less than the first mortgage. The plan proposes to
strip off the second DT (this has been completed), and strip down the first
DT through valuation of the collateral, and claim bifurcation (this has been
completed). The remaining secured claim of the first mortgage holder is to
be paid in full through equal monthly payments for 60 months and a lump sum
payment with the 60th payment. The periodic payments are each the same and
based upon 30 year amortization of the secured claim at 4.75% interest. The
lump sum payment, which will be made from the sale or refinance of the
property, is the remaining balance on the secured claim after the 60 monthly
payments of principal and interest. The creditor now has objected to the
confirmation of the plan based on 11 USC 1325(a)(5)(B)(iii)(I) which
provides that property to be distributed to pay secured claims must be in
equal amounts. Their argument is that the plan does not pay in equal
amounts because of the lump sum payment at the end.
It appears that the code section cited was included in BAPCPA mainly to
provide secured creditors with adequate protection. Arguably, the plan does
adequately protect the creditor because they are being paid interest on
their secured claim, together with principal to protect against decreases in
the value of the collateral. Has anyone recently briefed this issue, or
have within easy reach cases which support the use of a lumpsum payment in
these circumstances depsite 11 USC 1325(a)(5)(B)(iii)(I)?
Law Offices of Dennis R. Wheeler
2358 Market Street, 2nd Floor
San Francisco, CA 94114
415-865-0212 (Office)
415-789-4284 (Fax)
dennis@dwheelerlaw.com (Email)
dwheelerlaw.com (Website)
We are a federally designated Debt Relief Agency under the United States
Bankruptcy Laws. We assist people with finding solutions to their debt
problems, including, where appropriate, assisting with the filing of
petitions for relief under the Bankruptcy Code.
Email is covered by the Electronics Privacy Act, 18 U.S.C. Sections
2510-2521, and is legally privileged. This email may contain confidential
and privileged material for the sole use of the intended recipient(s) to
which it is addressed and may contain information which is privileged,
confidential and exempt from disclosure under law. If the reader of this
message is not the intended recipient, you are hereby notified that any
dissemination, distribution or copying of this communication is strictly
prohibited. If you have received this communication in error, please
telephone us immediately and please delete this communication. Thank you for
your cooperation.
Message
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Here's an interesting
idea.
David A.
Tilem
Certified Bankruptcy
Specialist*
The post was migrated from Yahoo.