Against the weight of authority from lower courts, a bankruptcy judge in Macon, Ga., confirmed a chapter 13 plan paying a secured creditor’s claim in full with a balloon payment a year after confirmation.
The issue revolved around Section 1325(a)(5)(B)(iii)(I), which provides that “payments shall be in equal monthly amounts” if distributions are “in the form of periodic payments.”
To secure a $650,000 loan for his car repair business, the debtor had given the lender a lien on his home and surrounding acreage. The lender agreed that the collateral was worth more than the loan.
To pay the lender in full, the plan provided for the debtor to continue making $2,500 monthly adequate protection payments that were roughly equal to the monthly payments before the loan had matured. Within a year of confirmation, the debtor was to transfer the property to his wife, who would refinance the loan with another lender to pay off the remaining balance.
The lender objected to confirmation, citing what Bankruptcy Judge Austin E. Carter called the “overwhelming majority of reported decisions” holding that Section 1325(a)(5)(B)(iii)(I) precludes using a balloon payment that is not in the same amount as periodic payments before payoff.
In his Sept. 1 decision, Judge Carter declined to follow the majority, which includes the First Circuit Bankruptcy Appellate Panel. He said the majority rule “goes against the plain language and purpose of Section 1325(a)(5)(B)(iii)(I).”
Instead, Judge Carter adopted the rationale espoused by the Drake, Bonapfel and Goodman treatise on chapter 13 and by Prof. Lynn M. LoPucki in a 2014 law review article.
Courts that preclude balloon payments based on congressional intent in the 2005 amendments are engaging in “mere educated speculation,” Judge Carter said. There is “no formal legislative history,” he said, other than a mere echo of the statutory language providing no “insight as to the purpose” of the enactment of Section 1325(a)(5)(B)(iii)(I).
Judge Carter pointed to Bankruptcy Judges A. Jay Cristol of Miami and Randall L. Dunn and Elizabeth Perris, both of Portland, Ore., who confirmed chapter 13 plans containing balloon payments.