Patrick B Field and Lisa D Field

MEMORANDUM OF DECISION - 1
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF IDAHO
IN RE 	)
)
PATRICK B. FIELD and LISA 	) 	Case No. 04-00028-TLM
FIELD, d/b/a Pat Field Farms, 	)
)
Debtors. 	) 	MEMORANDUM OF DECISION
)
________________________________ 	)
INTRODUCTION
Patrick and Lisa Field (“Debtors”) filed the instant case as a chapter 11 on
January 6, 2004. Debtors proposed several chapter 11 plans, but, prior to
confirming a plan, Debtors converted their case from chapter 11 to chapter 12 in
December, 2004. See Doc. No. 153.
On June 7, 2005, Debtors proposed their Second Amended Chapter 12 Plan
(the “Plan”). See Doc. No. 224; see also Ex. 15. Two creditors objected to the
Plan, Les Bois Leasing, Inc. (“Les Bois”) and U.S. Bank. See Doc. Nos. 228, 229.
In addition, the chapter 12 trustee, Forrest Hymas (“Trustee”), recommended
confirmation of the Plan but only if its terms were altered by an amendment or in a
confirmation order to address several concerns. See Doc. No. 233.
A confirmation hearing was held on August 10, 2005, and the matter was
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1 Debtors also own a residence located on two acres in Grandview, Owyhee County,
Idaho. In the Plan, Debtors deal with that parcel of land and the creditor secured therein separate
and apart from the Farm.
MEMORANDUM OF DECISION - 2
taken under advisement. After careful consideration, the Court concludes
Debtors’ Plan cannot be confirmed. The following constitutes the Court’s
findings of fact and conclusions of law. Fed. R. Bankr. P. 9014, 7052.
BACKGROUND AND FACTS
A. Creditors secured in real property
Debtors have a farming operation in Owyhee County. Among Debtors’
scheduled assets is a co-ownership interest in 436.85 acres of real estate in
Owyhee County, Idaho (the “Farm”). 1 See Doc. Nos. 14, 31, 64 (schedules and
amended schedules). Three creditors are secured in the Farm: U.S. Bank, Les
Bois and Owyhee County.
1. 	U.S. Bank
U.S. Bank filed a secured proof of claim for $651,645.39. See Claim No. 4.
Debtors’ Plan proposes to pay U.S. Bank semi-annually, amortizing the debt over
twenty five years. See Ex. 15 at 4-5. The Plan assigns a 7% interest rate to the
repayment and proposes a $29,500.00 payment each January and July, beginning
in July, 2005 and concluding with a balloon payment in January, 2015. In effect,
this proposal lowers the interest rate from the contract rate, amortizes the debt over
a period longer then that contemplated by the contract, and extends the deadline
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2 Debtors’ analysis of the Trustee’s objection led them to conclude altering the January
payment to March was equally sound.
3 While U.S. Bank’s primary objection to confirmation and its legal arguments centered
around the last minute modification and interest rate, it also objected to the extended amortization
of its loan past the original twenty years and to other aspects of the Plan’s treatment of its claim.
MEMORANDUM OF DECISION - 3
for the balloon payment by three years.
The Trustee’s recommendations voiced concerns regarding the proposed
timing of the payments to U.S. Bank. The Trustee’s analysis indicates Debtors
will not have positive cash flow in July, and he recommended moving U.S. Bank’s
July payments to October of each year. Recognizing the validity of the Trustee’s
cash flow concerns, Debtors made an oral motion at the confirmation hearing to
modify (among other things addressed below) the dates of payment to U.S. Bank
to March and October, with the first payment to be made in October, 2005. 2
U.S. Bank had objected to confirmation based on the 7% interest rate
proposed by Debtors, arguing that contract rate of interest, 8.75%, should be found
to be the appropriate market rate. Once – and only after – U.S. Bank raised this
issue, Debtors abandoned the 7% interest proposed in the Plan and urged a 4.5%
interest rate as the appropriate market rate. Debtors’ oral motion for modification
of the Plan included the proposed reduction in interest to U.S. Bank from 7% to
4.5%, and, predictably, U.S. Bank objected. 3
2. Les Bois
On February 2, 2004, Les Bois filed a proof of claim asserting a
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4 Several years ago, Debtors filed a petition for chapter 12 bankruptcy relief. See Case
No. 02-04013-TLM. During that case, Debtors stipulated to entry of a judgment declaring a
$456,000.00 debt to Les Boise nondischargeable under § 523(a)(2) and § 523(a)(4). See Adv.
Case No. 03-6004-TLM at Doc. No. 16 (judgment). Debtors’ chapter 12 case was dismissed on
September 11, 2003, and Debtors filed this case as a chapter 11 on January 6, 2004. Debtors’
counsel in the present case is not the same attorney as involved in the prior attempted
reorganization or adversary settlement.
5 The Court’s prior Decision, Doc. No. 215, provides greater discussion of the nature of
Debtors’ interest in the Farm and the nature of the secured claims.
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$456,000.00 unsecured debt based on a stipulated adversary judgment entered in
connection with Debtors’ prior chapter 12 proceeding.4 On December 20, 2004,
Les Bois filed an amended proof of claim, claiming $375,000.00 of the
$456,000.00 debt was secured by a judgment lien on Debtors’ Farm and the
$81,000.00 balance was unsecured. See Claim No. 19. Debtors objected to Les
Bois’ asserted secured claim, and, on April 28, 2005, the Court determined that
Les Bois held a $176,406.52 claim secured by Debtors’ interest in the Farm. See
Doc. No. 215. 5
Debtors’ Plan provides for payment on Les Bois’ $176,406.52 secured
claim over a twenty five year period. Ex. 15 at 6. Debtors propose to pay
$5,000.00 annually for the first five years and $7,570.33 annually for the
remaining twenty years. The Plan does not propose to pay any interest on Les
Bois’ secured claim, instead stating “Les Bois is not an oversecured creditor.” At
the end of the twenty five years, Debtors propose to pay all remaining amounts
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6 In addition to no clear indication of payment of interest during the 25 year period, there
is nothing to indicate any accrual of interest payable at the end of that period.
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due Les Bois in full. 6
In addition, Debtors’ Plan seeks to impose a post-petition injunction against
creditors, including creditors holding nondischargeable judgments such as Les
Bois, to prohibit any attempted collection until January 1, 2012. Ex. 15 at 17.
Debtors’ attorney clarified at hearing that the injunction was intended to prohibit
any enforcement or collection, but not intended to preclude Les Bois from
“renewing” its judgment against Debtors. In addition, Mr. Field acknowledged
that some sort of refinancing or other solution would need to be formulated prior
to January, 2012 to satisfy Les Bois’ claim. Otherwise, Les Bois’ ability to
enforce its judgment post-injunction would render Debtors unable to continue
farming.
Les Bois objected to confirmation on several grounds. First, Les Bois
argued that Debtors’ proposed injunction improperly treated its lien rights and was
in effect an attempt to discharge a nondischargeable debt. Second, Les Bois
objected to the absence of interest on its secured claim. Third, Les Bois objected
to confirmation of Debtors’ Plan for lack of good faith. Fourth, Les Bois argued
the Plan’s treatment of Howard Field’s claim as a creditor secured in equipment is
improper, and this claim should be disallowed, or at the least, subordinated.
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Finally, during oral argument, Les Bois made several feasibility arguments.
3. 	Owyhee County
The Owyhee County treasurer filed a proof of claim for $15,618.62. See
Claim No. 22. The Plan proposes to pay the pre-petition taxes owed to Owyhee
County on the Farm over a period of ten years with interest at 12%. See Ex. 15 at
6. Debtors’ annual payments to Owyhee County will be $2,100.60. Owyhee
County has not objected to Plan confirmation.
B. Other secured creditors
1. 	Howard Field
Mr. Field’s brother, Howard Field, acquired a secured interest in Debtors’
equipment, crops and accounts receivable by purchasing the claim of Washington
Mutual Bank. He filed a $185,017.59 secured proof of claim. See Claim No. 15.
The Plan proposes to amortize this debt over 25 years and defer payment to
Howard Field until 2009, at which point Debtors would begin making $8,000.00
annual payments at 6% interest, with a balloon payment in December, 2018. See
Ex. 15 at 6-7.
Howard Field has agreed to this treatment. See § 1225(a)(5)(A). While he
acknowledges his collateral (Debtors’ equipment) will depreciate over the initial
four years during which he would not be receiving payment, he nonetheless
supports Debtors’ attempt to reorganize.
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7 Les Bois’ arguments are flawed on several levels. First, no objection has been filed by
Les Bois to the proof of claim, No. 15, filed by Howard Field. See Fed. R. Bankr. P. 3007. That
claim is therefore allowed. See § 502(a), (b). Second, the theory of equitable subordination was
not properly advanced. See Fed. R. Bankr. P. 7001(8) (requiring an adversary proceeding to
subordinate a claim under § 510). Third, Les Bois’ arguments that the assignee of a claim may
assert or enforce such claim only to the extent of the consideration paid for the claim, were not
persuasively advanced or adequately supported. Thus, these contentions of Les Bois will not be
considered further in this Decision.
MEMORANDUM OF DECISION - 7
Even though this treatment of Howard Field’s secured claim assists
Debtors’ efforts to reorganize, Les Bois objects. It argues, among other things,
that Howard Field’s claim should be disallowed altogether, or be equitably
subordinated, or be allowed only in the amount Howard Field actually paid for the
assignment of Washington Mutual’s claim.7
2. 	Deere & Company
Deere & Company filed two proofs of claim, one for $3,265.64 and the
other for $25,699.30, both secured by Debtors’ equipment. See Claim Nos. 1, 2.
The Plan provides for annual payments on these claims at 6% interest from 2005
to 2008. See Ex. 15 at 7. The Plan contemplates an initial payment 30 days after
confirmation and then again in December, 2005. Deere & Company did not object
to confirmation of the Plan.
DISCUSSION AND DISPOSITION
A. 	Debtors’ motion to modify the Plan
Debtors’ proposed preconfirmation modification of the Plan attempts to
alter the dates of payment to U.S. Bank and to reduce the interest rate paid on U.S.
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MEMORANDUM OF DECISION - 8
Bank’s secured claim.
1. 	Notice
Section 1223 allows a debtor to modify a plan “at any time before
confirmation, but [the debtor] may not modify the plan so that the plan as
modified fails to meet the requirements of section 1222.” Section 1223 goes on to
state that “[a]fter the debtor files a modification under this section, the plan as
modified becomes the plan.” Section 1223(b) (emphasis added).
Here, Debtors never “filed” a modification. Instead, they made an oral
motion to modify at the conclusion of the confirmation hearing. Debtors
apparently rely on Fed. R. Bankr. P. 9013 which indicates a motion must be made
in writing “unless made during a hearing.” They ignore, however, Fed. R. Bankr.
P. 2002(a)(5) which requires twenty days notice of the time fixed to accept or
reject a proposed modification of a plan. But the flaw in the request is not solely a
matter of the Rules. There is also a question of fundamental due process.
Debtors argue that oral modifications of plans are regularly made at chapter
12 and 13 confirmation hearings and incorporated in the confirmation order. That
is undeniably true. But these are consensual resolutions of disputes, or
modifications that resolve a trustee’s concerns but do not adversely effect
creditors. Debtors may not orally suggest modifications at the hearing that
adversely effect creditors without providing such creditors a reasonable
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MEMORANDUM OF DECISION - 9
opportunity to respond. For this reason and in light of Rule 2002(a)(5), the
proposed modification was improper. The Court concludes U.S. Bank’s objection
to the oral motion should be sustained.
B. 	Treatment of secured creditors
Even if modified, a plan must comply with the requirements of § 1222.
Though debtors may alter the rights of holders of secured claims, see § 1222(b)(2),
the treatment of secured creditors must meet the requirements of § 1225(a)(5).
Absent a creditor’s acceptance of plan treatment (§ 1225(a)(5)(A)) or surrender of
its collateral (§ 1225(a)(5)(C)), a debtor’s plan must provide that the creditor
retain its lien securing the claim, and that “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 [be] not less than the allowed amount of such claim.”
Section 1225(a)(5)(B)(ii) (emphasis added). The question of the appropriate
interest rate needed to provide such value to U.S. Bank was hotly contested.
1. 	The “effective date of the plan”
Debtors argue that the date of the filing of their petition is the effective date
of the Plan. Their proposed modification of the interest rate to U.S. Bank of 4.5%
reflected their interpretation of the appropriate interest rate, under Till v. SCS
Credit Corp., 541 U.S. 465 (2004), as of the date their petition was filed. There
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8 Even though the modification has been found improper, supra, the issue of the effective
date remains as U.S. Bank objected to the Plan’s original 7% rate as well as the modified 4.5%
rate.
9 “[C]ourts and commentators have generally treated the question of how the cram down
interest rate should be determined as a question that is answered the same in Chapter 11, 12 and
(continued...)
MEMORANDUM OF DECISION - 10
are several problems with Debtors’ argument. 8
First, Debtors have never amended or modified their Plan provision that
expressly defines the effective date of the plan as “the date on which the order
confirming the plan is non-appealable.” Ex. 15 at 10. Thus, their arguments are in
contravention of their own Plan.
Second, even had Debtors attempted to modify the Plan’s definition of
effective date, they provided little authority that the effective date should be the
petition date. Debtors cite In re Cashu, 321 B.R. 716, 720 (Bankr. E.D. Cal.
2005), for the proposition that the effective date of the plan should be the date the
petition was filed. However, Cashu was based on a definition of effective date
found in the Eastern District of California’s form chapter 13 plan. The model
chapter 13 plan in the District of Idaho has no such definition, and this District has
no model chapter 12 plan.
The Code does not define “the effective date of the plan.” However,
treatise authority and case law support the idea that the effective date should be no
earlier than the date of the confirmation hearing.
In the context of determining the present value issue in chapter 11 cases,9 a
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9(...continued)
13 cases” as the operative Code provisions in each chapter contain the same phrase: “value, as of
the effective date of the plan.” In re Yett, 306 B.R. 287, 291 (9th Cir. BAP 2004). Thus,
Collier’s analysis of chapter 11 and chapter 13 cramdown provisions is equally applicable to
chapter 12.
MEMORANDUM OF DECISION - 11
leading authority notes that:
Most often, the effective date of the plan will be tied to the absence of
any 	successful 	appeals 	from 	the 	order 	of 	confirmation, 	or 	the
satisfaction of conditions contained in the plan. In the absence of any
contrary indications, and since the chapter 11 discharge is effective
upon confirmation absent contrary indications in the plan, the date the
confirmation order is entered should be the effective date.
7 Collier on Bankruptcy ¶ 1129.06[1][e], 1129-171 (Alan N. Resnick & Henry J.
Sommer, eds. rev. 15th ed. 2004) (footnote omitted). In the context of the chapter
13 cram down provision, § 1325(a)(5)(B), Collier notes that:
The effective date of the plan will ordinarily be provided for by
the plan, and may be the date as of which the order confirming the
chapter 13 plan becomes final. 	However, the Court will normally
determine present value as of the date of the hearing on confirmation
held under section 1324, because, as a practical matter, confirmation
will almost always follow within a brief time after the issues raised
under section 1325(a)(5)(B)(ii) are resolved.
8 Collier, ¶ 1325.06[3][b][i], 1325-31 (footnote omitted). In addition, Collier
notes that “the effective date itself might be unknown until the plan is actually
confirmed, because, although the effective date of the plan is usually the date the
order of confirmation becomes final, the plan may provide a later effective date.”
Id. at ¶ 1325.05[2][a], 1325-17.
Case law is in accord. Recently, in In re Prussia Associates, 322 B.R. 572,
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MEMORANDUM OF DECISION - 12
590-91 (Bankr. E.D. Pa. 2005), the court “quickly register[ed] its disagreement
with the Debtor’s contention that the relevant prime rate of interest is that which
existed on the date its reorganization plan was filed.” The court noted that the
Code required interest to be provided as of the effective date of the plan and such
date was the date the confirmation order was entered.
In re Novak, 252 B.R. 487, 491 (Bankr. D.N.D. 2000), discussed the timing
of chapter 12's best interest of creditors valuation under § 1225(a)(4), which is
also determined “as of the effective date of the plan.” It dismissed an argument
that valuation should be made as of the date the petition was filed. See also In re
Case, 115 B.R. 666, 671 (9th Cir. BAP 1990) (determining that the appropriate
rate of interest under § 1225(a)(5)(B)(ii) was the fair market rate at the time of
confirmation); In re Bremer, 104 B.R. 999, 1006 (Bankr. W.D. Mo. 1989)
(quoting In re Perdue, 95 B.R. 475 (Bankr. W.D. Ky. 1988), for the proposition
that the “‘effective date of the plan’ can logically refer only to the date of
confirmation and not the date of the filing of the bankruptcy petition”).
In In re Musil, 99 B.R. 448, 450 (Bankr. D. Kan. 1988), the court observed
that “‘[e]ffective’ in common parlance means ‘ready for service or action; to
effect.’ ‘Effect’ in turn means ‘a quality or state of being operative.’ Webster’s
New Collegiate Dictionary (1975).” The Musil court concluded that “a debtor
may not define the effective date as the date of the filing of the petition, and . . .
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10 As the court in Cashu observed, there is no universal, national “prime rate” and each
bank has its own prime rate to reflect market demands and the interests of that institution. 321
B.R. at 720 n.4. Since both Debtors and U.S. Bank asked the Court to take judicial notice of the
bank prime loan rate as reported at www.federalreserve.gov/releases, it agreed to do so in this
case. However, U.S. Bank’s relevancy objection to Debtors’ reliance on the bank prime loan rate
on the date the petition was filed is well taken and will be sustained given the resolution of the
“effective date” issue.
MEMORANDUM OF DECISION - 13
the effective date can be no earlier than the date the first confirmable plan is
heard.” 99 B.R. at 451.
Finally, this Court in In re McIntyre, 95 I.B.C.R. 202, 206 (Bankr. D. Idaho
1995), concluded that, in the absence of an express provision fixing the effective
date, the effective date of the confirmed plan was the date of the confirmation
hearing.
Debtors’ attempted modification of the interest rate paid on U.S. Bank’s
secured claim to 4.5% was expressly based on the “prime rate” on the date the
petition was filed in January, 2004, which was markedly lower than the prime rate
at the time of the confirmation hearing in August, 2005. 10 So, even absent the
procedural problems with the attempted modification, Debtors’ approach to the
question of the “effective date of the plan” is unsupported and their modification
could not be allowed.
C. 	The Plan as proposed
The Court asked Debtors’ counsel if Debtors would wish to proceed to seek
confirmation of the Plan in the event their motion to modify was denied. The
Court received no clear answer. The Court thus continues its analysis of the Plan
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11 The trustee’s recommendations are given great weight. See McIntyre, 95 I.B.C.R. at
206.
MEMORANDUM OF DECISION - 14
and the various creditors’ objections to confirmation.
1. 	The Trustee’s recommendations and concerns
The Trustee’s recommendations regarding confirmation 11 were dependant
not just upon resolution of creditors’ objections but also upon specific changes to
Debtors’ Plan. Debtors’ motion to modify included some of those changes, along
with the proposed interest rate change for U.S. Bank. U.S. Bank’s objection to the
attempted modification has been sustained. Thus, the Trustee’s conditions for
approval of the Plan have not been fulfilled. The Court concludes the Trustee’s
concerns are credible, and the current Plan may not be confirmed.
2. 	Interest to secured creditors
a. 	U.S. Bank
As previously noted, if a secured creditor does not accept the proposed
treatment of its claim, the plan must provide that the secured creditor retain its lien
and “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.” See § 1225(a)(5)(B). In other words, a plan
must provide for interest if payments are made over time, so that the value
ultimately received is not less than the amount of the claim. See Yett, 306 B.R. at
293 (noting that providing the value of secured claims as of the effective date of
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12 U.S. Bank also objected to the extended amortization of the loan and balloon payment
date beyond the time frames of the original contract. Section 1222(b) permits Debtors to propose
a plan providing payment on secured claims for a period exceeding the plan’s payment period for
unsecured claims. There is no maximum time prescribed by the Code. Thus, the Court looks to
good faith and market standards in the proposed modification of the creditor’s rights. See Collier,
¶ 1225.03[4][b] at 1225-17 to 1225-19. However, given the other defects in treatment of U.S.
Bank’s claim, and the other impediments to confirmation, the Court need not address these issues.
MEMORANDUM OF DECISION - 15
the plan “‘is typically accomplished by ascribing an interest rate to the allowed
amount of the claim and by requiring payment of the amount of the claim along
with interest at the specified rate.’” (quoting Farm Credit Bank v. Fowler (In re
Fowler), 903 F.2d 694, 696 (9th Cir. 1990)).
Debtors’ Plan proposes 7% interest on payments of U.S. Bank’s secured
claim. However, U.S. Bank argues such a rate is inadequate under Till.12 In Till,
the Supreme Court announced the appropriate method of determining the rate of
interest on cramdown loans in chapter 13. In a plurality opinion, Till adopted a
“formula approach.” 541 U.S. at 478-81. Under the formula approach, the trial
court must begin its analysis with a prime interest rate and make upward
adjustments based on the risk of nonpayment. Till left the appropriate amount of
upward risk adjustment up to the trial court given the facts of the case, but noted
that a typical upward adjustment might be 1% to 3%. Id. at 480. Till places the
burden on the creditor to prove that an upward adjustment to the prime interest
rate is required under the facts of any given case. Id. (stating that “starting from a
concededly low estimate and adjusting upward places the evidentiary burden
squarely on the creditors, who are likely to have readier access to any information
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absent from the debtor’s filing”). The Court listed several relevant factors in
determining an appropriate risk adjustment, such as the circumstances of the
estate, the nature of the security, and the duration and feasibility of the
reorganization plan. Id. at 479.
Here, U.S. Bank argues that its prebankruptcy contract rate of 8.75% is also
the appropriate Till formula rate. U.S. Bank relies on a prime rate, as of the
confirmation hearing of 6.5% and thus effectively urges a risk adjustment of
2.25% under Till.
U.S. Bank argues that Debtors’ past conduct with it (including an extended
period without payment) and Debtors’ treatment of other creditors supports the
suggested adjustment. However, Till instructs that the interest rate determination
must be objective, not subjective. “[A] court choosing a cram down interest rate
need not consider the creditor’s individual circumstances, such as its
prebankruptcy dealings with the debtor or the alternative loans it could make if
permitted to foreclose.” Id. at 476-77. Debtors’ past conduct does not support a
significant risk adjustment.
U.S. Bank is an oversecured creditor; its $635,746.37 claim is secured by a
senior lien on real property valued at $920,000.00. Such a secured position also
militates against U.S. Bank’s suggested 2.25% risk adjustment.
U.S. Bank notes that Debtors are (and have for sometime been) in
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13 As noted above, the Plan defines “effective date” differently, and changes in prime rate
would have an impact. Under the circumstances, it is enough to note that the 7% interest rate in
the Plan is insufficient.
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bankruptcy. Debtors are clearly struggling to put together a reorganization plan
that deals not only with U.S. Bank, but also a number of other claims, most
significantly a $465,000.00 nondischargeable judgment. The existence of such a
large, nondischargeable debt, and the other facts noted in this Decision, puts the
possibility of a successful reorganization in serious doubt. These factors do
support a risk adjustment. However, of the creditors, U.S. Bank is still the most
securely protected.
Fundamentally, U.S. Bank has not provided the Court with many
persuasive reasons for elevating the interest rate too far beyond its suggested bank
prime rate as of August 10, 2005 of 6.5%. The Court concludes upon the totality
of the evidence that a risk factor of 1.5% is appropriate. Using the bank prime
loan rate as of the date of the hearing as an initial guide, the Plan would have
needed to provide an 8.0% interest rate on U.S. Bank’s claim. 13 It does not and,
therefore, it cannot be confirmed. U.S. Bank’s objection is well taken.
b. 	Les Bois
The interest rate adjustment issue involving U.S. Bank’s claim is by no
means the only problem involving cram down of secured creditors. Les Bois
objects to the Plan’s proposed treatment of its $176,406.52 allowed secured claim.
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14 Les Bois also claims the Plan fails to provide for the retention of its lien. The Plan
appears to provide generally that all secured creditors will retain their liens. See Ex. 15 at 6, 16.
Les Bois’ argument that its lien is not retained is based in large part on the injunction language
found within the Plan. Id. at 17. Les Bois argues that such language would preclude it from
renewing its judgment and maintaining its lien in effect. Debtors clarified at hearing that they did
not intend to preclude Les Bois from renewing its judgment, only from executing on it until 2012.
The Court concludes the positioning of the lien retention provision is, at best inartful, as it does
not clearly apply to Les Bois and because Debtors’ “clarification” regarding the injunction was
not in the Plan as proposed. Therefore, the objection based on § 1225(a)(5)(B)(i) is well taken.
MEMORANDUM OF DECISION - 18
Specifically it objects to the Plan’s failure to provide any interest at all on the
deferred payments on that claim.14
Debtors argue they do not need to provide interest on Les Bois’ allowed
secured claim because Les Bois is undersecured. See Doc. No. 237 at 10-11.
Debtors confuse the application of § 506(b) with the requirements of
§ 1225(a)(5)(B). Section 1225(a)(5)(B) makes no distinction between
undersecured and oversecured creditors; it speaks only in terms of allowed secured
claims.
Section 506 distinguishes between undersecured and oversecured creditors,
but only in computation of the allowed secured claim. Under § 506, an
undersecured creditor has an allowed secured claim to the extent of the value of
the collateral while an oversecured creditor is also entitled to interest and
reasonable fees, costs or charges to be included in its claim. See § 506(a), (b).
Collier explains:
If the secured obligation is oversecured, . . . the method of
determining 	the 	allowed 	amount 	of 	the 	claim 	differs 	[from
undersecured claims]. Section 506(b) provides that the amount of a
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MEMORANDUM OF DECISION - 19
secured claim will also include postpetition interest and reasonable
fees, costs, and charges provided for under the agreement under which
the claim arose, but only up to the value of the property securing the
claim. Accordingly, the allowed amount of the secured claim that must
be treated under section 1225(a)(5) must include interest, fees, costs,
and charges arising between the petition date and the effective date of
the plan.
Collier, ¶ 1225.03[2] at 1225-14.
Section 506(b)’s applicability or inapplicability does not vary the
§ 1225(a)(5)(B)(ii) requirement that all allowed secured claims be provided
payments that have a “value, as of the effective date of the plan,” not less than the
allowed amount of the claim. This requires an interest component on the Plan
payments. Simply put, § 506(b) deals with the amount of the allowed secured
claim when a creditor is oversecured. In contrast, § 1225(a)(5)(B)(ii) deals with
the needed interest factor on plan payments to ensure all secured creditors receive
the value of their allowed secured claim as of the effective date of the plan.
Without an interest component to Debtors’ treatment of Les Bois’ allowed
secured claim, Debtors’ Plan violates § 1225(a)(5)(B)(ii) and cannot be confirmed.
3. 	Feasibility
Debtors bear the burden of demonstrating their plan is feasible. See, e.g., In
re Yett, 03.2 I.B.C.R. 122, 125 (Bankr. D. Idaho 2003), In re Stallings, 03.1
I.B.C.R. 77, 83 (Bankr. D. Idaho 2003); McIntyre, 95 I.B.C.R. at 206. “Debtors
must show that they ‘will be able to make all payments under the plan and to
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MEMORANDUM OF DECISION - 20
comply with the plan.’” Stallings, 03.1 I.B.C.R. at 83 (quoting § 1225(a)(6)).
“The debtor is not required to guarantee the ultimate success of his plan, but only
to provide a reasonable assurance that the plan can be effectuated.” Id. (quoting
Millar v. Nauman (In re Nauman), 213 B.R. 355, 358 (9th Cir. BAP 1997)).
Given the Plan’s current negative cash flow as identified by the Trustee,
and the Plan’s failure to provide adequate interest on the allowed secured claim of
U.S. Bank, or any interest on Les Bois’ allowed secured claim, the Plan is clearly
not feasible.
Les Bois also focuses feasability objections on Debtors’ admitted need to
refinance their operations in 2012 in order to make the Plan work when the
proposed injunction terminates. It, and other creditors, also note a feasibility
concern given the balloon payments required under the Plan.
The language of the Code requires Debtors to demonstrate that they will be
able to make the payments under the Plan, but not necessarily that they will be
able to do so without any further negotiations or commitments. Balloon payments
are commonly part of chapter 12 plans. Courts that have considered balloon
payments, and the need to refinance to make those payments, have looked at the
probability of successfully refinancing, particularly by evaluating the existing
equity in the property and projected equity at the time of refinancing. See In re
Showtime Farms, Inc., 267 B.R. 541, 545 (Bankr. E.D. Tex. 2000) (finding plan
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MEMORANDUM OF DECISION - 21
was feasible and discussing limited risk to creditor given ability to foreclose in
event of default and improved land values allowing possible refinance to pay
balloon payment); First Nat’l Bank of Boston v. Fantasia (In re Fantasia), 211
B.R. 420, 423-24 (1st Cir. BAP 1997) (determining debtors failed to demonstrate
feasibility of a plan requiring refinancing because mere assertions that they would
refinance to make balloon payments were insufficient to satisfy their burden); In
re Endicott, 157 B.R. 255, 263 (W.D. Va. 1993) (finding lack of feasibility where
secured property lacked equity, the balloon payment was not funded through
future income, and there was no evidence as to the likelihood of refinancing).
Here, Debtors voiced an intent to refinance to take care of their
nondischargeable debt to Les Bois and also to make the balloon payments called
for under the Plan. Including such a provision is not per se improper. But Debtors
did not provide any evidence or analysis of the likelihood that they could
successfully refinance their property or make those payments.
The Court therefore must conclude that Debtors have failed to prove the
Plan is feasible.
CONCLUSION
Given the several reasons addressed above that prohibit confirmation of the
current Plan, the Court declines to address any further confirmation objections. It
is clear that confirmation must be denied.
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The Court will enter a separate order.
DATED: October 17, 2005
TERRY L. MYERS
CHIEF U. S. BANKRUPTCY JUDGE
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