It is common for Chapter 11 debtors to have significant tax claims.  Under the Bankruptcy Code, tax claimants have priority status and must be paid in full, with interest, within sixty months of the petition date rather than the effective date of a plan.

In  In re Jerath Hospitality, LLC, 484 B.R. 245, 2012 Bankr. LEXIS 5798 (Bankr. S.D. Ga. Dec. 18, 2012) (Barrett) the Debtor proposed a Chapter 11 Plan that amortized the priority claim of the Georgia Department of Labor over 48 monthly installments, with a lump sum payment due prior to the 60th month after the petition date.  The issue before the Court was whether the Bankruptcy Code allowed balloon payments or whether a debtor must make regular, uniform payments.

Section 1129(a)(9)(C) of the Bankruptcy Code provides the following:

 (9) Except to the extent that the holder of a particular claim has agreed to a different treatment of such claim, the plan provides that—

(C) with respect to a claim of a kind specified in section 507 (a)(8) of this title, the holder of such claim will receive on account of such claim regular installment payments in cash

(i) of a total value, as of the effective date of the plan, equal to the allowed amount of such claim;
(ii) over a period ending not later than 5 years after the date of the order for relief under section 301, 302, or 303; and
(iii) in a manner not less favorable than the most favored nonpriority unsecured claim provided for by the plan (other than cash payments made to a class of creditors under section 1122 (b))…

 11 U.S.C. §1129(a)(9)(C) (emphasis added). 

As detailed in In re F.G. Metals, Inc., 390 B.R. 467 (Bankr. M.D. Fla. 2008), the phrase "regular installment payments in cash" was added as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") to replace "deferred cash payments over a period not exceeding six years after the date of assessment of such claim, of a value, as the effective date of the plan equal to the allowed amount of such claim." 

The District Court in the F.G. Metals case affirmed the Bankruptcy Court’s holding that balloon payments were not prohibited.

A plain reading of the statute indicates that ‘regular’ is not the same as ‘equal.’ ‘Regular installment payments’ means payment made on a recurrent basis over a period of time. Monthly payments are regular payments. There is nothing in the plain reading of the statute that would indicate that monthly payments, followed by a balloon payment, is not an appropriate payment method under the Code. If Congress wanted to say ‘equal payments,’ it could have done so. If Congress had wanted to say ‘no balloon payments,’ it could have done so.

In re F.G. Metals, 2008 U.S. Dist. LEXIS 111451,  *2 (M.D. Fla. Sept. 4, 2008).

Judge Barrett similarly found that had Congress wanted to provide for equal monthly installments in the BAPCPA it knew how to do so, as evidenced by the amended 11 U.S.C. §1325(a)(5)(B)(iii)(I). Further, legislative history revealed that Congress actually considered amending §1129(a)(9) to expressly prohibit balloon payments to tax claimants, but the proposed amendments were not adopted.

For the reasons set forth above, Judge Barrett held that balloon payments for tax claimants in Chapter 11 plans were not prohibited by the Code.

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here