604 B.R. 790
Bankr. W.D. Wis.2019Background
- Debtor Chad Olsen guaranteed a commercial loan to State Bank, secured by a parcel containing his primary residence and his business; the loan was current until State Bank had him sign a Renewal Note in Feb 2018 that matured in three months with a large balloon payment.
- Debtor believed the Renewal Note continued the original loan on the same terms and continued making the same monthly payments; he did not read the Renewal Note and was not told it had a three‑month balloon term.
- Overtime Trucking (the borrower) and Olsen (as guarantor) defaulted when the balloon (~$204,000) came due; State Bank obtained a foreclosure judgment prepetition and Debtor filed Chapter 13.
- As of filing Debtor had substantial equity in the property (≈$100,000+), no unsecured or priority debt, and was current on all other secured creditors except State Bank.
- Debtor’s Chapter 13 plan proposed monthly payments equal to prior monthly payments (with interest) and a refinance/balloon payment by month 60; State Bank objected (feasibility and that §1325(a)(5)(B)(iii)(I) forbids balloon payments and §§1322/1325 cannot be used to unwind a matured mortgage on a principal residence).
Issues
| Issue | Plaintiff's Argument (State Bank) | Defendant's Argument (Olsen) | Held |
|---|---|---|---|
| Feasibility of plan (§1325(a)(6)) | Plan speculative because it depends on refinancing and Debtor’s self‑employment income is volatile; cannot make required payments without eliminating balloon | Debtor showed steady net income, historical timely payments, future jobs, and sufficient monthly surplus to fund payments; equity cushion supports refinance chance | Confirmed: plan is feasible; Debtor proved reasonable likelihood to make payments and refinance by totality of circumstances |
| Applicability of §1322(b)(2) anti‑modification | §1322(b)(2) protects claims secured only by debtor’s principal residence, so Debtor cannot modify mortgage secured by homestead | Loan was commercial in purpose and also secured by business property; collateral not solely the residence so anti‑modification exception does not apply | Held in favor of Debtor: §1322(b)(2) does not bar modification because the loan is not secured only by the principal residence |
| Whether §1325(a)(5)(B)(iii)(I) prohibits balloon payments (equal monthly payments rule) | “Periodic payments” includes the entire payment stream (monthly payments plus balloon) so payments must be equal monthly amounts; balloon impermissible | Minority view: balloon is not a periodic payment; equal‑monthly requirement applies to recurring installments only; plus bank’s misconduct and over‑secured position mitigate creditor risk | Adopted minority approach on these facts: balloon payment allowed; even if majority rule applied, equitable doctrines would permit adjusted schedule (e.g., 42 equal months + balloon) |
| Equitable estoppel / reformation as defenses/remedies | Bank asserts its contractual rights under the Renewal Note and foreclosure judgment | Debtor says Bank misled him about renewal, induced reasonable reliance, and failed to disclose the 3‑month balloon; alternatively, the Note should be reformed to reflect the parties’ intent | Court estopped State Bank from objecting (clear, convincing evidence of inducement and detriment) and authorized reformation/remedy: modify treatment to reflect longer term (at least 42 months before balloon) and confirmed plan |
Key Cases Cited
- Marshall v. Blake, 885 F.3d 1065 (7th Cir.) (feasibility standard for Chapter 13 plans)
- Wade v. [In re Wade?], 926 F.3d 447 (7th Cir.) (overruling on other grounds; cited for appellate context)
- Scarborough v. Chase Manhattan Mortg. Corp., 461 F.3d 406 (3d Cir.) (§1322(b)(2) protects only claims secured solely by principal residence)
- Glenn v. [In re Glenn?], 760 F.2d 1428 (6th Cir.) (discussion of Congress’s intent limiting §1322(b)(2) protection to purely residential mortgages)