In Re Michels
ORDER RE: CONFIRMATION AND MOTION TO DISMISS
This matter came before the undersigned on August 26, 2003. Debtor Vincent W. Michels appeared with Attorney Thomas Fiegen. Carol Dunbar appeared as Chapter 12 Trustee. Attorney John Hofmeyer represented Maynard Savings Bank (“MSB”). Assistant U.S. Attorney Lawrence Kudej appeared on behalf of the I.R.S. After hearing evidence and arguments of counsel, the Court took the matter under advisement. The time for filing briefs has passed and this matter is ready for resolution. This is a core proceeding pursuant to
STATEMENT OF THE CASE
Debtor filed a Chapter 13 petition in this Court in April 2001. Debtor’s Chapter 13 petition was amended five times before a final confirmation hearing was held. The Chapter 13 case was dismissed after appeal to the 8th Circuit B.A.P. Debtor filed the present Chapter 12 case less than one month after dismissal of the prior case. Debtor filed an Amended Chapter 12 Plan of Reorganization (“Plan”) on June 30, 2003. It is this Plan which is the subject of this confirmation hearing.
Two matters are before the Court: confirmation of Debtor’s First Amended Plan and MSB’s Motion to Dismiss. Debtor has filed an objection to the claim of Maynard Savings Bank. Valuation of the claim was deferred until after ruling on the Plan Confirmation. The issues presented include:
a) the Plan’s proposed avoidance of MSB’s liens on certain farm equipment;
b) feasability of Debtor’s Plan;
c) the sufficiency of the interest rate to be paid MSB under the Plan; and
d) the overall good faith of the proposed plan.
FINDINGS OF FACT
Debtor owns a 200-acre farm in Buchanan County, Iowa. Between 1996 and 2000, Debtor’s farming operation lost $323,000. Debtor leased the land to relatives for the 2003 growing season, but maintains that he intends to resume farming in 2004. Debt- or’s gross revenue from his farming operations was $48,031 in 2002. The projected revenue under the Plan is $122,188 in 2004, and $132,880 in 2005. Debtor currently earns $1,572 per month from off-farm employment. The Plan projects this income to increase to $1,965 by 2005. Debtor owns commercial real estate in Oelwein, Iowa, which provides rental revenue of $1,550 per month.
Debtor’s total outstanding debts, according to the Plan, are $365,829. The current
The Plan proposes that MSB’s lien on Debtor’s machinery be avoided and the machinery sold to generate proceeds to pay unsecured creditors. Debtor concedes that he needs to use the proceeds from the sale of the machinery to pay unsecured creditors because there is a lack of unencumbered assets in the estate. Debtor asserts MSB will not be harmed by avoidance of the liens because the bank is ov-ersecured. In exchange for having its lien avoided, MSB is given the right to demand receipt of Debtor’s interest in the commercial real estate with the stipulation that Debtor be credited for $100,000 on his outstanding balance. The Plan also allows for MSB to retain its lien on the commercial real estate in the event MSB does not exercise the right to have the property transferred to it. Debtor’s appraiser valued the Oelwein commercial real estate at $88,500 in June, 2003.
The Plan proposes that MSB shall receive semi-annual payments of $2,000 every October and April from October, 2003 through October, 2013. In addition, MSB is to receive $1,232.76 per month, which includes principal and interest payments. Interest is to accrue at 5.75% on the balance. The Plan proposes that on October 15, 2013, the entire balance shall become due and payable to MSB. Under this payment scheme, the balloon payment would be approximately $70,000.
CONCLUSIONS OF LAW
Debtor must establish all six elements essential to confirmation under
REMOVAL OF MSB’S LIENS,
The Plan proposes to avoid the liens held by MSB on Debtor’s farm machinery. For the Plan to be confirmed,
with respect to each secured claim provided for by the plan—
(A) the holder of such claim has accepted the plan;
(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed by the trustee or the debtor under the plan on account of such claim is not less than the allowed amount of such claim; or
(C) the debtor surrenders the property securing such claim to such holder....
Debtor asserts in his brief that
Debtor relies on
In re Hanna,
The Hanna court held that the debtor could sell the livestock, but that the bank would continue to possess a lien on the entire herd of cattle. Id. at 951. The court also found that the plan must adequately protect a secured creditor such as the bank. Id. To protect the bank in this situation the plan would have to ensure that the livestock inventory would be maintained at a minimum level and provide the bank with additional safeguards such as collateral reports, inspections, or monthly interest payments. Id. The Hanna court rejected the plan because it did not adequately protect the bank. Id. at 952. The court would not allow the real estate lien to replace the livestock lien even though the bank was oversecured by a greater margin with the real estate lien. Id. The court stated, “The [real estate] mortgage granted the bank is much less liquid and carries with it different risks than a lien on cattle, for which the bank had bargained. The debtors’ plan denies the bank too much of the benefit of that bargain.” Id.
Debtor’s reliance on
Hanna
is misplaced for several reasons. First,
Hanna
only speaks to the unique situation in which the
The
Hanna
court conceded and did not attempt to change the general rule that a literal interpretation of
Second, the
Hanna
court did not allow the debtor to replace the lender’s lien in the livestock with a second mortgage on debtor’s real estate.
Hanna,
Debtor’s reliance on
Kerwin
is equally misplaced.
Kerwin
stands for the proposition that a debtor may satisfy
Upon careful analysis of the statute, we hold that because the completed transfer of property valued at or above the secured lender’s claim fully satisfied that debt' — regardless of whether the property transferred comprised only part and not all of the collateral — the lien requirement of§ 1225(a)(5)(B) ® must be deemed satisfied. This follows because however much protection a lien is entitled to under§ 1225(a)(5) , it does not continue in existence after the creditor’s oversecured claim is satisfied by the transfer of property to it of equal or greater value. In short, when the claim is satisfied the lien securing it is extinguished too, for nothing remains for it to secure.
Id.
Debtor’s position seems to be that the combination of transferring his interest in the Oelwein commercial real estate to MSB and the future payments to MSB will satisfy
Therefore, in addition to impermissibly attempting to use the plan confirmation process for lien avoidance instead of by motion, Debtor has failed to satisfy the requirements of
PRESENT VALUE,
Even though
Under
Szudera,
In
In re Noe,
The yield on a 20-year treasury bond was 5.48% as of September 2, 2003. Add
FEASIBILITY
Finding Debtor’s Plan to be feasible requires several leaps of faith. Debtor projects a shift from substantial historical farm losses to instant and growing profitability under the Plan without any indication of a change in strategy. This sudden swing is to occur as Debtor liquidates most of his farm equipment, retaining little more than a 31-year-old tractor. The Plan shows Debtor’s expenses remaining flat while his off-farm wages increase by a total of 25%. Debtor projects crop revenue to more than double under the Plan. Debtor has not provided any credible evidence substantiating these overly optimistic projections.
In addition, any “plan that includes a balloon payment to a creditor is suspect of confirmation unless there is proof of circumstances likely to produce a bucket of cash at just the right time to make the payment.” 3 Keith M. Lundin,
Chapter 13 Bankruptcy
§ 198.1 (3d ed.2002);
In re Harris,
As noted above, the Plan provides MSB with interest on its outstanding claim at a rate of 5.75%. Allowing Debtor to pay $1232.76 per month to MSB plus two additional payments per year in the amount of $2000 would result in a balloon payment of approximately $70,000 in 2013. However, using an interest rate of 9.0%, which is more realistic given Debtor’s credit risk, the balloon payment would be approximately $168,500. The monthly payments being offered in the Plan do not even cover the monthly interest expense using a fair
DEBTOR’S LACK OF GOOD FAITH
This Court must conclude that Debtor’s Plan has not been proposed in good faith as required by
The Plan proposes to provide MSB with very little in the way of immediate satisfaction of the debt. Instead, the Plan proposes to stretch out the loan to MSB on a 20-year amortization schedule and then seeks to satisfy the debt in a single balloon payment in 2013. This proposal suggests that Debtor is attempting to delay payment to MSB even more than he already has done, resulting in additional risk exposure for MSB. In addition, the Plan’s proposal to allow MSB to acquire Debtor’s interest in the Oelwein commercial real estate worth $88,500 in exchange for a $100,000 credit on the loan balance owed to MSB lacks both reason and good faith. It is difficult to conceptualize how Debtor could, in good faith, propose that an ov-ersecured creditor such as MSB should accept anything less than complete satisfaction of its claim.
DISMISSAL
Section 1208 of the Bankruptcy Code articulates the circumstances under which a bankruptcy court may dismiss a case. The court “may dismiss a case under this chapter for cause, including— (1) unreasonable delay ... by the debtor that is prejudicial to creditors; ... (5) denial of confirmation of a plan under
The fact that the Plan is not confirmable under
Due to the Plan’s inadequacies,
CONCLUSION
Debtor has no basis in law for avoiding MSB’s liens on the farm machinery as proposed under paragraph 3.02(d) of the Plan. Without MSB’s acceptance of the
MSB has not received a payment from Debtor in over four years. Debtor has been unsuccessfully seeking relief in bankruptcy for the past two and one-half years. The Plan offers MSB, a fully secured creditor, no immediate relief, a below market interest rate on its outstanding claim, and the additional risk that Debtor will be unable to make the balloon payment in ten years. MSB wisely demanded a security interest in many of Debtor’s assets in exchange for extending him credit. Approving the Plan allowing Debtor to deprive MSB of its bargained for security interest in Debtor’s assets would be contrary to the applicable rule of law and would cause further needless delay and undue hardship for MSB.
WHEREFORE, confirmation of Debt- or’s Amended Chapter 12 Plan is DENIED.
FURTHER, the claim valuation issue of MSB is moot.
FURTHER, this case is DISMISSED.