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]
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