Balloon-PaymentIn In re Cochran, Ch. 13 Case No. 15-52314-aec, 2016 WL 4575557 (Bankr. M.D. Georgia, September 1, 2016), the primary issue was “whether a plan that calls for distributions in the form of monthly payments followed by a balloon payment to a creditor holding a claim secured by the debtor’s real property complies with §1325(a)(5)(B)(iii)(I) of the Bankruptcy Code.”

Debtor pledged his real property for a loan from the Bank of Perry to fund the purchase of equipment for his automobile repair business.  The loan matured in 2012, but the Bank continued to accept payments.  In 2015, the loan was assigned to RREF II PB-GA (“RREF”), which initiated foreclosure, and the Debtor filed a Chapter 13 Petition.  In his Plan, Debtor proposed to continue the previously-established adequate protection payments of $2500 for one year, then pay off the RREF balance ($649,990.09 POC) with a balloon payment.  To make the balloon payment, Debtor would transfer the property to his wife, who would then obtain a loan in her name to make the balloon payment. RREF objected on two grounds: 1) the Plan did not satisfy §1325(a)(5)(B)(iii)(I) because the balloon payment was not equal to the adequate protection payments, and 2) the Plan was not feasible.  The Chapter 13 Trustee did not oppose confirmation. Judge Carter acknowledged that the majority of courts have held that §1325(a)(5)(B)(iii)(I) does prohibit balloon payments as “unequal periodic payments,” although many of the cases are distinguishable on the facts and none are binding authority in the Eleventh Circuit.  However, he disagreed with the conclusion that a balloon payment falls within the “periodic payments” referenced in the statute.

These courts assume that because a balloon payment occurs as part of, or following, a series of regular payments, it too must be “periodic.” The Court disagrees with this conclusion. A balloon payment satisfies the debt in full, and thus by definition cannot be repeated periodically, whether in equal amounts or otherwise. Because “periodic” payments are regularly reoccurring and balloon payments are not, balloon payments are not “property to be distributed … in the form of periodic payments” and, consequently, are outside the scope of § 1325(a)(5)(B)(iii)(I). This conforms with the common and technical understanding of these terms… Black’s references the definition of “balloon note”: “A note requiring small periodic payments but a very large final payment. The periodic payments usually cover only interest, while the final payment (the balloon payment) represents the entire principal.” See Note, id. (emphasis added). These definitions establish that a final, balloon payment is distinct and separate from the preceding “periodic payments.” Accordingly, it is only the periodic payments—and not the balloon payment—that are subject to the “equal monthly amounts” directive of §1325(a)(5)(B)(iii)(I).

The Court also noted the subsection starts with the phrase “if…property to be distributed pursuant to this subsection is in the form of periodic payments…”  The subsection, by its plain language, does not require equal periodic payments. It just requires equal periodic payments if the Plan provides for periodic payments.  The subsection also does not require that “the property distributed under a plan” needs to be of a singular type and made in a singular manner.

The term “periodic payments” could be construed to mean regular, recurring payments that are made to reduce a secured claim during the plan’s term but not to a final one that completely satisfies it. A regular installment payment or payment of interest on the debt is a “periodic” one, whereas a lump sum payment is not. So long as the interim payments provide adequate protection, if required by Code § 1325(a)(5)(B)(iii)(II), this interpretation of “periodic payments” accomplishes the primary objective of the new provisions of Code § 1325(a)(5)(B)(iii) that a secured creditor receive regular payments to reduce its debt and protect it from loss of value in its collateral through depreciation.

Hon. W. Homer Drake, Jr., Hon. Paul W. Bonapfel, & Adam M. Goodman, Chapter 13 Practice & Procedure §5:18 (2016).  The Court, therefore, concluded that balloon payments do not fall within the statutory language of  § 1325(a)(5)(B)(iii)(I) and need not be equal.  The legislative history and intent support this conclusion.

With respect to feasibility, the parties agreed that RREF was oversecured, and would receive adequate protection payments.  The parties also agreed to add a self-executing stay relief provision in the Plan.  The evidence supported the conclusion that RREF was protected, and there was a good chance the Debtor’s wife was willing and able to obtain a loan to “purchase” the property, the Plan was feasible.  Therefore, the Plan was confirmed.

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.