                United States Bankruptcy Appellate Panel
                                 FOR THE EIGHTH CIRCUIT


                                      Nos. 00-6089/6104 NI


In re:                                            *
                                                  *
John C. Wagner and                                *
Debra K Wagner,                                   *
                                                  *
         Debtors.                                 *
                                                  *
Chelsea State Bank,                               *           Appeals from the United States
                                                  *           Bankruptcy Court for the
         Appellant,                               *           Northern District of Iowa
                                                  *
                v.                                *
                                                  *
John C. Wagner and                                *
Debra K. Wagner,                                  *
                                                  *
         Appellees.                               *



                                    Submitted: January 23, 2001
                                       Filed: March 13, 2001 (Corrected March 30, 2001)


Before KRESSEL, SCHERMER and SCOTT, Bankruptcy Judges

SCHERMER, Bankruptcy Judge

         Chelsea Savings Bank, (the “Bank”) appeals the bankruptcy court1 orders finding that two
mortgages held by the Bank were unenforceable for failure to comply with Iowa law and that John C.
Wagner’s and Debra K. Wagner’s (the “Debtors”) Fourth Amended Chapter 13 Plan with Technical


         1
          The Honorable Paul J. Kilburg, Chief Judge, United States Bankruptcy Court for the Northern
District of Iowa.
Amendments (the “Plan”) was feasible pursuant to 11 U.S.C. § 1325(a)(6). We have jurisdiction over this
appeal from the final orders of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth
below, we affirm.

                                               ISSUE

       The issues on appeal are whether the Bank’s mortgages are enforceable against the Debtors’
homestead when the Bank failed to insert in the mortgages a homestead waiver as required pursuant to
Iowa Code § 561.22 and whether the bankruptcy court erred by finding that the Debtors’ Plan was
feasible pursuant to 11 U.S.C. § 1325 (a)(6), because the Plan proposed a balloon payment. We
conclude that the Bank’s mortgages are unenforceable as a matter of law because the Bank did not comply
with Iowa Code § 561.22. The bankruptcy court’s finding that the Plan met the requirements of section
1325(a)(6) was not clearly erroneous because it was supported by evidence that John Wagner’s father
would help the Debtors with the balloon payment.

                                          BACKGROUND


Iowa Code § 561.22

        John C. Wagner and Debra K. Wagner live on less than six acres of land outside of Chelsea, Iowa
(the “Land”). The Debtors bought one acre of the Land approximately twelve years ago and the rest six
or seven years later.

       When the Debtors bought the Land, they borrowed $60,000 from the Bank and gave the Bank
a mortgage secured in part by one acre of the Land. The Debtors then refinanced with Farmer’s Savings
Bank of Garwin, Iowa (“Garwin Bank”). The first mortgage was paid in full.

       The Debtors defaulted on the Garwin Bank loan. Within a year after the default, the Bank gave
the Debtors an $82,000 loan that was secured in part by a mortgage on the Debtors’ Land (“Mortgage
Two”). The Debtors used part of the proceeds of Mortgage Two to refinance the debt owed to Garwin
Bank. The Debtors represented that they were currently farming on the Land and would raise livestock
on the Land.



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       The Bank then made a $38,000 loan secured in part by a second mortgage on the Debtors’ Land
(“Mortgage Three”) one year after taking Mortgage Two. At the time the Bank took Mortgage Three, the
Debtors did not have any livestock on the Land but the Debtors represented to the Bank that they would
buy a number of cows.

       The Bank gave the Debtors an additional loan (the “Loan”) that was secured by a lien on some of
the Debtors’ machinery and equipment (the “Machinery and Equipment”). The Debtors then sold the
Machinery and Equipment from the Land in a farm sale auction (the “Auction”). They used the Loan
proceeds to pay back part of Mortgage Three and, through a third-party, to repurchase the Machinery and
Equipment.

        It is undisputed that Mortgages Two and Three and their accompanying promissory notes did not
contain the font and language required by Iowa Code § 561.22. The Debtors admitted that they were
aware that Mortgages Two and Three were secured by their homestead property at the time that the
Debtors signed Mortgages Two and Three.

       Ten years after purchasing the first acre of the Land, the Debtors filed for chapter 13 bankruptcy
relief. At filing, The Debtors still owed the Bank funds secured by Mortgages Two and Three. The
Debtors claimed that Mortgages Two and Three were unenforceable because they lacked the type of
homestead waiver required by Iowa Code § 561.22 and filed an adversary complaint to determine the
enforceability of Mortgages Two and Three against the Land. In response, the Bank asserted that
Mortgages Two and Three were enforceable because Iowa Code § 561.22 had been satisfied or did not
apply.

       The bankruptcy court entered an order holding that Mortgages Two and Three were unenforceable
against the Debtors’ homestead because they did not comply with the Iowa Code § 561.22 requirements.
Two months after entering its order, the bankruptcy court amended its order in part, but reaffirmed its
conclusion that Mortgages Two and Three were unenforceable against the Debtors’ exempt homestead.

11 U.S.C. § 1325(a)(6)

       In addition to Mortgages Two and Three, the Bank has a claim of $24,500 secured by the
Debtors’ cattle. In the Plan, the Debtors propose to amortize the debt on the cattle at 8.5% over seven

                                                  -3-
years, with a balloon payment at the end of the Plan’s three-year term. 2 The bankruptcy court estimated
that the amount due for the balloon payment will be $20,000. Under the Plan, the Bank will retain its lien
on the cattle until its allowed secured claim is paid in full.

        At trial, John Wagner testified that his father (the “Father”) would assist the Debtors in making the
balloon payment. The Debtors did not contractually bind the Father to assist in the balloon payments. No
evidence was presented to support or refute John Wagner’s claim that the Father would assist with the
financing of the Plan.

        The Bank argued that the arrangement was inadequate to protect its security interest because the
value of the collateral would depreciate faster than the Debtors would pay off the loan. The bankruptcy
court found that the Bank’s security interest was protected and that the Debtors had met their burden of
proving that they would be able to make all payments under the Plan and to comply with the Plan.

                                       STANDARD OF REVIEW

        This Court reviews de novo the bankruptcy court’s legal conclusions, and reviews for clear error
its findings of fact. Fed. R. Bankr. P. 8013. Schroeder v. Rouse (In re Redding), 247 B.R. 474, 477
(B.A.P. 8th Cir. 2000); Martin v. Cox (In re Martin), 140 F.3d 806, 807 (8th Cir. 1998); Gourley v.
Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir. 1997). Whether a homestead waiver is enforceable
although it was not written in compliance with Iowa law is a legal question. A federal court is bound by
decisions of the highest state court when deciding a question of substantive law. Bass v. General Motors
Corp., 150 F.3d 842, 847 (8th Cir. 1998). The Bankruptcy Appellate Panel reviews the bankruptcy
court’s determinations of state law de novo. In re Simmonds, 240 B.R. 897 ( B.A.P. 8th Cir. 1999). A
finding that a chapter 13 plan is feasible pursuant to section 1325(a)(6) is reviewed for clear error.




        2
         The Debtors filed four Chapter 13 plans before they filed a motion to avoid the Bank’s liens.
The Bank objected to the Debtors’ plans. The Debtors filed an additional plan on the same date that
they objected to the liens. The Bank objected. The bankruptcy court then confirmed the Plan over the
Bank’s objection.

                                                    -4-
                                             DISCUSSION

Iowa Code § 561.22

         The Bank contends that the bankruptcy court improperly held that Mortgages Two and Three
were unenforceable against the Debtors’ exempt homestead. Iowa Code § 561.22 sets forth specific
requirements for an enforceable homestead waiver on agricultural land. The statute states:

        If a homestead exemption waiver is contained in a written contract affecting agricultural land as
        defined in section 9H.1, or dwellings, buildings, or other appurtenances located on the land, the
        contract must contain a statement in substantially the following form, in boldface type of a minimum
        size of ten points, and be signed and dated by the person waiving the exemption at the time of the
        execution of the contract: “I understand that homestead property is in many cases protected
        from claims of creditors and exempt from judicial sale; and that by signing this contract,
        I voluntarily give up my right to this protection for this property with respect to the claims
        based upon this contract.”

        Iowa law encourages a broad interpretation of the homestead exemption favoring debtors.
Gustafson v. Fogleman, 551 N.W.2d 312, 314 (Iowa 1996). Courts must respect the express language
of an exemption statute. In re Hahn, 5 B.R. 242, 244 (Bankr. S.D. Iowa 1980). The purpose of enacting
section 561.22 was to ensure that the homestead exemption rights are clearly presented to debtors. See
In re Morris, No. L88-00597C, slip op. at 4 (Bankr. N.D. Iowa Jan. 19, 1989).

         We agree with the Debtors’ interpretations of the cases regarding Iowa Code § 561.22.
Iowa Code § 561.22 should be interpreted to mean that a written contract providing for a waiver of
homestead rights in agricultural land should only be effective if the contract contains a written homestead
waiver in compliance with that statute. Iowa courts recognize the importance of strict compliance with
section 561.22. See Morris, No. L88-00597C, slip op. at 4 (noting that Iowa Code § 561.22 requires
that a clause explaining that the debtor waives his homestead rights must be written simply and concisely);
Peoples Bank & Trust Co. v. Lala, 392 N.W.2d 179, 190-91, n.2 (Iowa App. 1986) (stating that Iowa
Code § 561.22 “codifies the concern that we have that mortgages must make mortgagors fully aware of
the legal effects of a note and mortgage on an ordinarily exempt homestead.”).




                                                   -5-
        Moreover, when interpreting a similar statute, the North Dakota Supreme Court held that there
must be strict compliance with a homestead waiver statute. See Red River State Bank v. Reierson, 533
N.W.2d 683, 686 (N.D. 1995).3 Both North Dakota and Iowa law require identical text to appear in a
homestead waiver for agricultural land. N.D.C.C. § 47-18-05.1(1); Iowa Code § 561.22. The North
Dakota homestead exemption statute requires the text to be “conspicuous.” N.D.C.C. § 47-18-05.1(1).
Iowa Code § 561.22 states that a homestead waiver must be written “in boldface type of a minimum size
of ten points.” Although in Red River, the statutory language was not written conspicuously, in this case,
the language required by Iowa Code § 561.22 did not appear at all.

        The Bank also argued that its waiver should be effective because the Debtors mortgaged their
homestead knowingly and voluntarily. When the same argument was raised by the bank in Red River, the
North Dakota Supreme Court responded by stating “[t]hat borrowers know they are mortgaging their
homestead is not the same as knowing they are waiving homestead exemption rights by doing so.” Red
River, 533 N.W.2d at 687.

          According to the Bank, the bankruptcy court erred in finding that the Land qualified as agricultural
land at the time the Bank took Mortgages Two and Three. Iowa Code § 561.22 gives extra protection
to farmers and agricultural land. As mentioned in the statute, for a debtor to qualify for protection under
Iowa Code § 561.22, the homestead waiver must be contained in a “written contract affecting agricultural
land.” Iowa Code § 561.22 specifically refers to Iowa Code § 9H.1 for a definition of agricultural land.
Iowa Code § 9H.1(2) states that “[a]gricultural land’ means land suitable for farming.” Pursuant to Iowa
Code § 9H.1(11), “farming” is defined in part as “the cultivation of land for production of agricultural crops,
. . . grazing or the production of livestock.”

        The bankruptcy court’s finding that the Debtors’ land qualified as “agricultural land” was supported
by the evidence because the land was clearly suitable for farming. It is undisputed that the Debtors had
used the land for agricultural production at some point during the time that they owned it. The Bank
admitted that it was aware that the Land had been used for livestock production and that the Land was set




        3
         The Red River court analogized the homestead exemption waiver to Miranda rights. Red
River, 533 N.W.2d at 688, citing, MINUTES OF THE SENATE JUDICIARY COMMITTEE ON
SENATE BILL 2450, February 10, 1987, at 1 and 2, Fiftieth Legislative Assembly of North Dakota.

                                                     -6-
up to raise livestock. In addition, the Bank stated that the approval of the application for Mortgage Two
was based on generating revenue from livestock production in the future.

        Next, the Bank contends that a homestead exemption waiver is not required to be part of a
mortgage under Iowa Code § 561.22 because a mortgage is not a contract. We agree with the bankruptcy
court’s determinations that the United States Supreme Court and the Iowa Supreme Court treat mortgages
as contracts, Iowa Code § 561.22 applies to mortgages, and that Mortgages Two and Three were treated
as contracts, as well as the statement that because the security agreements incorporated into Mortgages
Two and Three were contracts, Mortgages Two and Three should be treated as contracts. Those
conclusions support our holding that Mortgage Two and Three were contracts.

         The sale of a homestead is allowed under Iowa Code § 561.21 if the sale is conducted to satisfy
debts which are created by written contracts when the contracts stipulate that the homestead should be
liable. The Bank claims that notwithstanding the fact that the Bank did not comply with Iowa Code
§ 561.22, Mortgages Two and Three should be enforceable because they are enforceable under Iowa
Code § 561.21(2) and Mortgage Three should be enforceable because it is in compliance with Iowa Code
§ 561.21(1). Iowa Code § 561.21 states:

        The homestead may be sold to satisfy debts of each of the following classes:
        (1)   Those contracted prior to acquisition, but then only to satisfy a deficiency remaining after
              exhausting the other property of the debtor, liable to execution.
        (2)   Those created by written contract by persons having the power to convey, expressly
              stipulating that it shall be liable, but then only for a deficiency remaining after exhausting all
              other property pledged by the same contract for the payment of the debt.

A determination by this Court that Mortgages Two and Three were made in compliance with Iowa Code
§ 561.21 would not help the Bank. Where a homestead qualifies as agricultural land, homestead waivers
must comply with both Iowa Code §§ 561.21 and 561.22. See Morris, No. L88-00597C, slip op. at 4
(stating that although Iowa Code § 561.22 does not give debtors rights additional to those granted under
Iowa Code § 561.21(2), Iowa Code § 561.22 imposes an additional requirement on lenders requiring that
a waiver of homestead rights for agricultural land be written conspicuously and concisely).

        The balance of the Bank’s arguments lack merit.



                                                     -7-
11 U.S.C. § 1325(a)(6)

        According to the Bank, the bankruptcy court erred by confirming the Debtors’ Plan because the
three-year balloon payment in the cattle note renders the Plan unfeasible under 11 U.S.C. § 1325(a)(6).
A Chapter 13 plan must meet the requirements of section 1325(a) to be confirmed. 11 U.S.C. §
1329(b)(1). Plan compliance is discussed in section 1325(a)(6). That section states that “the court shall
confirm a plan if the debtor will be able to make all payments under the plan and to comply with the plan.”
11 U.S.C. § 13325(a)(6).

        A plan is not unfeasible per se because a debtor proposes a lump sum payment. In re Fantasia,
211 B.R. 420, 423 (B.A.P. 1st Cir. 1997). Unless the debtor shows proof that he will be able to pay the
balloon payment at the time it comes due, confirmation of a plan with a balloon payment is suspect. Id.
A definite declaration as to the source and the amount of funds necessary to enable the debtor to make the
plan payments is required. Id.
        Debtors have the burden to prove that their plans are feasible. See In re Olp, 29 B.R. 932, 936
(Bankr. E.D. Wis. 1983). A court must determine whether a chapter 13 debtor will be able to comply with
all provisions of a plan, including making all plan payments. 11 U.S.C. § 1325(a)(6); Collier on Bankrptcy,
1325.07 at 1325-40 (15th ed. 1986).

         To determine feasibility of a plan where a balloon payment on a secured debt is proposed, courts
look to a number of factors. The factors include the future earning capacity and disposable income of the
debtor, whether the plan provides for payment of interest to secured creditors, the debtor’s perseverance
and motivation to execute the plan successfully, the type of employment in which the debtor is engaged or
may become engaged, whether the plan includes a cushion for unexpected expenses, the equity in the
property, whether the plan provides for recurring charges against the property, and whether the plan
provides for payments to the creditor which will significantly reduce the debt and enhance the prospects
for refinancing at the end of the plan. See In re Olson, No. L90-00423W, slip. op. at 7 (Bankr. N.D.
Iowa Oct. 14, 1994) (citations omitted); In re Fantasia, 211 B.R. 420, 423-24 (B.A.P. 1st Cir. 1997);
see also In re St. Cloud, 209 B.R. 801, 810 (Bankr. D. Mass. 1997) (applying a totality of the
circumstances test to determine the feasibility of a balloon payment plan).

        John Wagner testified that the Father would assist the Debtors in making the balloon payment. The
Bank offered no rebuttal testimony. The bankruptcy court found John Wagner’s testimony to be credible

                                                   -8-
enough to protect the Bank’s security interest in the cattle and therefore held that the Debtors had met their
burden under section 1325 (a)(6). Because John Wagner’s testimony was the only evidence presented
on the subject of the Father’s ability and willingness to assist the Debtors with making the balloon payment,
the court’s finding was not clearly erroneous.

                                             CONCLUSION

        The bankruptcy court’s conclusion that Mortgages Two and Three were unenforceable because
the homestead waivers failed to comply with Iowa Code § 561.22 was legally correct. The finding that
the Debtors’ Plan was feasible pursuant to 11 U.S.C. § 1325(a)(6) was not clearly erroneous. For the
foregoing reasons, the judgment of the bankruptcy court is affirmed.



        A true copy.

                Attest:

                          CLERK, U.S. BANKRUPTCY APPELLATE PANEL FOR THE
                          EIGHTH CIRCUIT




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