In re David B. HOLMDAHL

• Citation: 439 B.R. 876
• Decision Date: 03 November 2010
• Docket Number: No. 10-12245-13.,10-12245-13.
• Parties: In re David B. HOLMDAHL and Teresa M. Holmdahl, Debtors.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin

439 B.R. 876

In re David B. HOLMDAHL and Teresa M. Holmdahl, Debtors.

No. 10-12245-13.

United States Bankruptcy Court,W.D. Wisconsin.

Nov. 3, 2010.

COPYRIGHT MATERIAL OMITTED.

Lawrence J. Kaiser, The Law Office of Kaiser, Ltd., Eau Claire, WI, for Debtors.

Ronald L. Siler, Van Dyk, Williamson & Siler, S.C., New Richmond, WI, for Creditor AnchorBank, fsb.

MEMORANDUM DECISION AND ORDER

THOMAS S. UTSCHIG, Bankruptcy Judge.

This case presents an unusual scenario in which the debtors actually hope to benefit from a failed foreclosure sale. The parties have stipulated to the essential facts. The Holmdahls' home is encumbered by a mortgage in favor of the creditor, AnchorBank. The debtors defaulted on their loan payments and AnchorBank started foreclosure proceedings in October of 2007. A foreclosure judgment was entered in March of 2008. After the expiration of the debtors' redemption period, a sheriff's sale was conducted the following March. The highest bidder at the foreclosure sale was U.S. Bank, N.A., which held a second mortgage on the Holmdahls' home. U.S. Bank's winning bid was $272,500.00, and it paid a 10% down payment of $27,250.00 to the court clerk at the conclusion of the sale.

Subsequently, U.S. Bank notified the state court that it no longer intended to pay the balance of the purchase price, and the sale was not confirmed. As a result, the down payment was forfeited pursuant to Wis. Stat. § 846.17. In August of 2009, the state court entered an order which stated that the forfeited down payment would be forwarded to AnchorBank. The order also provided that:

$27,250.00 will be credited to the balance owed by the Defendants Holmdahl to S & C Bank (Anchor Bank) by virtue of the foreclosure of 07CV649, retroactive to June 10, 2009. Said $27,250.00 will reduce the amount owed on Note No. 788136534 retroactive to June 10, 2009.

The debtors filed bankruptcy in March of 2010. After the debtors filed bankruptcy, AnchorBank filed a proof of claim which reflected a total claim of $256,730.87, including arrearages of $50,861.70. The claim also reflected that the bank was holding the forfeited funds and had not yet applied them to either the principal claim or the arrearages.

[1] [2] [3] [4] As a preliminary matter, it must be acknowledged that the foreclosure process had reached the penultimate moment, if not the final event: the property was sold at a sheriff's sale. There remained only the confirmation of the sale to fully and completely divest the debtors of any right or interest in the property. Instead, the prospective purchaser backed out of the transaction for unspecified reasons, leaving the property unsold at the time the debtors filed bankruptcy. The debtors' plan contemplates that they will make monthly payments on the mortgage and that they will pay the pre-petition arrearage (all of the unpaid monthly payments which arose prior to the bankruptcy) after receiving a credit against that amount for the forfeited funds. Basically, the debtors propose to “de-accelerate” the mortgage debt and reinstate the regular mortgage payments in accordance with the original loan terms. Their effort in this regard is permissible, as a chapter 13 plan can de-accelerate and reinstate a mortgage after entry of a foreclosure judgment. See In re Clark, 738 F.2d 869, 872 (7th Cir.1984) (“De-acceleration, therefore, is not a form of modification banned by [§ 1322](b)(2) but rather is a permissible and necessary concomitant of the power to cure defaults.”). ¹

Under 11 U.S.C. § 1322(c)(1), the debtors are entitled to cure their pre-petition defaults, which they have proposed to do. The bank's objection is to the debtors' proposed treatment of the forfeited funds as not merely reducing the bank's total claim, but the arrearages as well. There is no debate that the forfeited funds must be applied to the debt in some fashion; U.S. Bank's failure to close the sale does not result in an uncredited windfall to the creditor. The only bone of contention is whether the funds should also be used to reduce the amount of arrearages the debtors owe, thus reducing the amount they are required to cure. If the forfeited funds are not applied to the arrearages, the debtors will be required to maintain the current mortgage payments and pay the creditor an additional $50,000.00 during the life of the plan in order to cure the pre-petition defaults. By applying the forfeited funds to the arrearages, the debtors would only need to make their current payments and pay an additional $23,000.00.

In either event, the debtors should theoretically be “current” on their mortgage when they emerge from chapter 13, having maintained their current payments and cured all prior defaults. ² Under the debtors' proposal, the bank should still have received the benefit of its contractual bargain. They contend that the bank's interpretation would actually put the bank ahead of the game, as the bank will have received more from the combination of forfeited funds, current payments, and cured arrearages than the mortgage's original amortization schedule would have contemplated. The bank, in contrast, argues that because the funds were received as part of the foreclosure sale process, it is entitled to treat the funds as a payment against principal. ³ Under this interpretation, the bank would simply reduce the entire balance by the amount of the “extra” payment and nonetheless be entitled to demand that the full amount of the arrearages be cured within the plan period.

[5] [6] [7] There are a variety of common-law principles associated with payment, although they are of minimal assistance in this case. For example, where a debtor owes a creditor multiple debts, a payment by the debtor should be applied to one or another of the debts as the debtor directs. Moser Paper Co. v. North Shore Publishing Co., 83 Wis.2d 852, 857-58, 266 N.W.2d 411 (Wis.1978). Where the debtor fails to direct application of the payment to a particular debt, the creditor may apply the payment as he chooses, and in the absence of direction by the parties, the court may make the application in accordance with equitable principles. Id. at 858, 266 N.W.2d 411. However, the rule that allows a debtor to allocate payment between two or more debts contemplates that the payments are “voluntary.” Stevens v. United States, 49 F.3d 331, 334 (7th Cir.1995).

As the Seventh Circuit noted, the idea of “voluntariness” is a continuum, or “an issue of more or less: more or less promptness in the payment ... before the full coercive machinery of collection is brought to bear.” Id. Thus, even if it were possible to construe this as a scenario in which the debtors owed the bank on “multiple debts” by segmenting the arrearage claim from the entire balance, ⁴ it would be impossible to find that the debtors are entitled to direct the application of the forfeited funds to the arrearages. They did not make the payment, and it was certainly not a “voluntary” payment on their behalf. But what they may not be able to direct by reference to the common law, they may nonetheless be entitled to achieve if it is what the parties contractually agreed.

[9] [10] [11] [12] [13] [14] Indeed, the resolution of this dispute hinges upon the proper interpretation of the mortgage itself. The mortgage is a contract and must be construed in accordance with its terms. The purpose of contractual construction is to “ascertain the intention of the parties to the contract as expressed by all of the language rather than to put a trick interpretation or twist upon one word.” Langer v. Stegerwald Lumber Co., 259 Wis. 189, 192, 47 N.W.2d 734 (Wis.1951). A reasonable meaning should be given to all provisions of an agreement so as not to render any part of the contract surplusage. Hastreiter v. Karau Bldgs., Inc., 57 Wis.2d 746, 748, 205 N.W.2d 162 (Wis.1973). Contract construction is the art of determining the “sense, real meaning, or proper explanation of obscure or ambiguous terms” in an agreement. Hammel v. Ziegler Financing Corp., 113 Wis.2d 73, 77-78, 334 N.W.2d 913 (Wis.Ct.App.1983) (citing Black's Law Dictionary (5th ed. 1979)). A contract which on its face clearly discloses the parties' intent must be applied as written. In re Rude, 122 B.R. 533, 536 (Bankr.E.D.Wis.1990). The primary goal in contract interpretation is to give effect to the parties' intent, as expressed in the contractual language. Md. Arms Ltd. P'ship v. Connell, 2010 WI 64, 326 Wis.2d 300, 311, 786 N.W.2d 15 (2010).

[15] The parties acknowledge that the $27,250.00 was not a “payment” made directly by the debtors. However, Wis. Stat. § 846.17 dictates what happens when the prospective purchaser at a sheriff's sale does not pay the balance of the purchase price. The statute provides:

In the event of the failure of such purchaser to pay any part of the purchase price remaining to be paid within 10 days after the confirmation of [the sheriff's] sale, the amount so deposited shall be forfeited and paid to the parties who would be entitled to the proceeds of such sale as ordered by the court. [Emphasis added]

Likewise, the August 6, 2009, state court order reflects that a check “made payable” to the bank in the amount of $27,250.00 was to be issued by the court clerk. That amount was to be “credited to the balance” owed by the debtors to the bank. The bank received an amount of money which was to be applied to the note. The debtors argue that the forfeited funds must be characterized as a “payment” and that under Paragraph 2 of the mortgage, “payments or proceeds” shall be applied as follows:

[A]ll payments accepted and applied by Lender shall be applied in the following order of priority: (a) interest due under the Note; (b) principal due under the Note; (c) amounts due under Section 3. Such payments shall be applied to each Periodic Payment in the order in which it became due. Any remaining amounts shall be applied first to late charges,...