Opinion
19-20178
03-25-2022
IN RE: JAMES NOWACKI, Debtor.
MEMORANDUM OF DECISION AND ORDER DENYING CONFIRMATION OF CHAPTER 13 PLAN
HON. JAMES R. AHLER JUDGE
This matter is before the Court on an objection to confirmation of the debtor's, James Nowacki ("Debtor"), second amended chapter 13 plan (the "Amended Plan") by creditor, Lake County Treasurer ("Treasurer"). (Dkt. No. 337; Dkt. No. 349). Debtor filed for relief under Chapter 13 of the United States Bankruptcy Code on January 28, 2019. Debtor possesses a fee simple interest in approximately 350 parcels of real estate located in Lake County, Indiana. Most of these parcels are "distressed properties" that are vacant and are not income producing.
Shortly after Debtor filed his petition for relief, the Treasurer filed a Proof of Claim (the "Claim") as to the parcels and contends that it is owed a total of $1,761,715.16 for ad valorem property taxes, along with penalties and fees arising therefrom. Additionally, on December 12, 2021, the Treasurer filed its Motion for Allowance and Payment of Administrative Expense Claim (the "Expense Claim"). (Dkt. No. 357). Notice of the Expense Claim was sent to interested parties and objections were to be filed by January 3, 2022. (Dkt. No. 358). On January 31, 2022, after the objection period had run, the Court issued an order approving the Expense Claim in the sum of $146,374.50. (Dkt. No. 368).
The Treasurer filed Proof of Claim #4-1 on April 15, 2019 and filed an Amended Proof of Claim #4-2 on November 13, 2019. The amount of the claim was the same in both filings.
Pursuant to the terms of the Amended Plan, Debtor proposes to make $500.00 monthly payments to the Chapter 13 Trustee over the life of the plan. All additional amounts required to fund the Amended Plan will be acquired through the sale of Debtor's various parcels of real estate. In the Amended Plan, Debtor categorized the real estate parcels into 14 groups with varying proposed timeframes for the sale of each group. On January 26, 2022, the Court held a final hearing on confirmation of the Amended Plan and the Treasurer's related objection (the "Final Hearing").
The Court has jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(b)(1), and Northern District of Indiana Local Rule 200-1(a)(1) and (2). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L). For the reasons stated below, the Treasurer's objection is sustained, and confirmation of the Amended Plan is denied.
FINDINGS OF FACT
1. On January 28, 2019, Debtor commenced a bankruptcy case in this Court by filing a voluntary petition for relief pursuant to chapter 13 of the United States Code ("Bankruptcy Code").
2. At the time this Court issued this Memorandum of Decision and Order, Debtor has approximately 23 months remaining in this Chapter 13 case.
3. Debtor is the owner of approximately 350 parcels of real estate, which he describes as "distressed properties." The majority, if not all of the parcels, were purchased from a Lake County Commissioner's Sale after these parcels failed to sell at prior tax sales.
4. Debtor filed the Amended Plan on October 25, 2021.
5. Pursuant to Part 2.1 of the Amended Plan, Debtor proposes to pay the Chapter 13 Trustee $500.00 per month for the duration of the Amended Plan. Debtor is current on all plan payments to the Chapter 13 Trustee.
6. Part 2.5 of the Amended Plan states that the total amount Debtor will pay through the Amended Plan is $1,865,000.00.
7. In Part 8 of the Amended Plan, Debtor combined the parcels of real estate into 14 specific groups (the "Real Estate Groups"). Debtor's Amended Plan proposes to sell all of the parcels within the Real Estate Groups.
8. In Part 8 of the Amended Plan, Debtor sets forth estimated timeframes, ranging from 6 months to 24 months, during which he anticipates selling the parcels within the Real Estate Groups. However, no definite dates of sale are indicated. At the Final Hearing, Debtor testified that he developed these timeframes based upon his experience. Debtor also testified at the Final Hearing to the current sale status of each of the Real Estate Groups and provided the information that he relied upon in setting the applicable timeframes for sale.
9. Although it contains estimated timeframes for the sale of the Real Estate Groups, the Amended Plan does not contain default remedies to provide the Treasurer relief if the sales are not closed within the stated timeframes. Pursuant to Part 8 of the Amended Plan, Debtor also seeks to retain the right to abandon or surrender real estate as Debtor sees fit.
10. In Part 8 of the Amended Plan, Debtor contends that the Treasurer's Claim will be paid in full and any subsequent reductions in the tax amounts will be refunded to Debtor. At the Final Hearing, the Treasurer did not present any witnesses or submit any evidence in support of its case. Therefore, for the purpose of this Memorandum of Decision and Order, the Court accepts the amount of $1,761,715.16 as the current approximate total amount of the Treasure's secured tax claim.
Debtor provided testimony at the Final Hearing on the contents of the Amended Plan and was questioned by counsel for the Treasurer on cross-examination.
11. Debtor testified at the Final Hearing that the payment of the Treasurer's prepetition property tax claim and the accrued post-petition property taxes, which are now an allowable administrative expense pursuant to 11 U.S.C. § 503(b)(1)(B), is wholly dependent on the sale of the Real Estate Groups. Debtor testified that his current gross monthly income is $2,425.00 and his income is insufficient to pay the property taxes that he owes. Debtor further testified that no payments have been made to the Treasurer for any of the accrued prepetition or post-petition property taxes. The Court accepts this uncontested evidence.
12. Debtor testified at the Final Hearing that he is still in the process of interviewing realtors to sell several of the Real Estate Groups and only one of the several Real Estate Groups is currently listed for sale.
13. At the conclusion of the Final Hearing, the Chapter 13 Trustee stated that he could not support confirmation of the Amended Plan because it lacks feasibility.
CONCLUSIONS OF LAW AND ORDER
The bankruptcy court shall confirm a Chapter 13 plan if it meets the six requirements of § 1325(a), including the requirement that the debtor "will be able to make all payments under the plan and to comply with the plan." 11 U.S.C. § 1325(a)(6); Matter of Aberegg, 961 F.2d 1307, 1308 (7th Cir. 1992). The provisions of 11 U.S.C. § 1325 are an important procedural safeguard to "ensure that a Chapter 13 plan ... will be properly scrutinized by the bankruptcy court before the plan is confirmed, mitigating the danger of abuse." In re Smith, 286 F.3d 461, 466 (7th Cir. 2002) quoting In re Young, 237 F.3d 1168, 1174 (10th Cir. 2001). Specifically, § 1325(a)(6) requires that the proposed plan be feasible, in that the debtor will be able to make all payments and comply with the plan. In re Olson, 553 B.R. 343, 348 (Bankr. N.D.Ill. 2016). To satisfy the feasibility requirement, a debtor's plan must have a reasonable likelihood of success, i.e., that it is likely that the debtor will have the necessary resources to make all payments as directed by the plan. In re Fantasia, 211 B.R. 420, 423 (B.A.P 1st Cir. 1997). The debtor bears the burden of proving that the proposed plan has a reasonable likelihood of success and is therefore feasible. In re Bassett, 413 B.R. 778, 788 (Bankr. D. Mont. 2009).
Here, Debtor's ability to make payments under the Amended Plan is wholly dependent upon his sale of the Real Estate Groups. Put another way, Debtor's ability to make plan payments is entirely based upon the future proceeds from real estate sales. Some courts have concluded that any plan proposing to pay a secured creditor from future proceeds are too uncertain to confirm. See In re Gavia, 24 B.R. 216, 218 (Bankr. E.D. Cal. 1982), aff'd, 24 B.R. 573 (B.A.P. 9th Cir. 1982); Cf. In re Ziegler, 88 B.R. 67 (E.D. Pa. 1988); In re Reims, 30 B.R. 555 (Bankr. D. N.J. 1983); In re Anderson, 21 B.R. 443 (Bankr. N.D.Ga. 1981) (all denying confirmation where debtors proposed to fund plan payments from the proceeds of pending lawsuits). Other courts, however, have chosen not to categorically deny confirmation of such plans based on 11 U.S.C. § 1322(b)(8). See, e.g., In re Newton, 161 B.R. 207, 217-218 (Bankr. D. Minn. 1993). The foregoing section provides that a plan may "provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor." 11 U.S.C. § 1322(b)(8). This Court agrees that confirmation of "cure by sale" plans should not be denied outright, however, the Court believes that proponents of such plans should be held to "exacting standards" to ensure a reasonable likelihood of payment for the secured party. Newton, 161 B.R. at 217.
The Court should consider several factors when deciding whether a proposed plan, dependent on future sales, passes muster under the feasibility requirement of § 1325(a)(6). These include the: (1) current marketing efforts of a debtor including listing prices and the length of current listing agreements; (2) default remedies in the plan for relief to creditors; (3) past marketing efforts of a debtor; (4) state of the market for the assets; (5) current sale prospects; (6) existence of any equity cushion; and (6) presence of any other circumstances that bear on the likelihood of success that a creditor will be financially whole by the end of the plan. Newton, 161 B.R. at 217-218; Bassett, 413 B.R. at 789; In re Erickson, 176 B.R. 753, 757-758 (Bankr. E.D. Pa. 1995).
Here, Debtor has failed to carry his burden to show that the Amended Plan is feasible under § 1325(a)(6). Debtor has failed to market the Real Estate Groups and testified at the Final Hearing that only one of the many Real Estate Groups is currently listed for sale with a realtor. Debtor also testified that he currently is interviewing realtors for the listing of additional Real Estate Groups but has not hired anyone yet. This is despite the fact Debtor has been in this Chapter 13 case for more than three years. And tellingly, in three years, Debtor has not sold any parcels within the Real Estate Groups. It is highly speculative that Debtor will be able to do in the remaining 23 months what he has thus far been unable to do in three years.
The Amended Plan also contains no built-in remedies to afford creditors relief should the proposed timeframes pass without a sale. To the contrary, the Amended Plan proposes that Debtor will still retain the ability to abandon and surrender properties at his sole discretion. At the Final Hearing, Debtor argued that although there is no specific relief provided to the Treasurer in the Amended Plan, the Treasurer is protected because it can move the Court for relief if the sale timeframes are not met. This, however, is not tantamount to an automatic remedy contained in the plan to meet Debtor's burden to ensure creditors have a reasonable likelihood of being made whole.
Finally, even assuming that there is an equity cushion in these Real Estate Groups, this Court concludes that Debtor's estimated timeframes are unlikely and highly speculative. Debtor testified at the Final Hearing that the sale of most, if not all, of the Real Estate Groups are dependent upon actions of third parties or circumstances completely out of Debtor's control. For instance, Debtor testified at the Final Hearing that the proposed timeframe for the sale of Real Estate Group 11 was based upon proposed Indiana legislation that may or may not pass. The Amended Plan does not provide any specific anticipated sale dates outside of the speculative proposed timeframes. "If a debtor cannot produce anything more than remote speculation as to the terms or dates of a sale. . . the court cannot confirm the plan." Newton, 161 B.R. at 218.
At the Final Hearing, Debtor testified that in his professional opinion, a sale of all the Real Estate Groups could net $3,000,000.00.
The Amended Plan states that Group 11 is comprised of parcels in the "Hard Rock Casino Area" and that there will be "development activity that will create the opportunity to sell these parcels." At the Final Hearing, Debtor testified that the development activity that he expects will create the sale opportunity is a bill that has been introduced in the Indiana legislature that would involve the use of these parcels to build a Lake County Convention Center.
For the foregoing reasons, the Treasurer's objection is sustained, and confirmation of the Amended Plan is DENIED. Moreover, if Debtor intends to file another amended plan, he shall first file a Motion for Leave to File an Amended Plan, which the Court then shall set for hearing. If no such Motion for Leave is filed on or before April 4, 2022, then the Court shall set a hearing to consider the dismissal of this case.
See Krishnan v. J.P. Morgan Chase Bank, N.A., No. 4:16-CV-572, 2017 WL 515519, at *5 (E.D. Tex. Feb. 8, 2017) (bankruptcy court has the ability to dismiss a proceeding for failure to meet the requirements of 11 U.S.C. § 1307, pursuant to 11 U.S.C. § 105).
All of the foregoing is ordered, adjudged, and decreed this 25th day of March 2022 in Hammond, Indiana.