In Re: Krueger
| Decision Date | 24 September 1999 |
| Docket Number | No. 99-1221,99-1221 |
| Citation | 192 F.3d 733 |
| Parties | (7th Cir. 1999) IN RE: MICHAEL J. KRUEGER, Debtor-Appellant |
| Court | U.S. Court of Appeals — Seventh Circuit |
Appeal from the United States District Court for the Central District of Illinois. No. 98 C 4102--Michael M. Mihm, Judge. [Copyrighted Material Omitted] Before EASTERBROOK, RIPPLE and EVANS, Circuit Judges.
When Michael J. Krueger filed bankruptcy under Chapter 13 of the Bankruptcy Code, his plan proposed that First National Bank ("the Bank") release its second mortgage on Mr. Krueger's residence. The Bank objected to confirmation of the plan. The bankruptcy court sustained the Bank's objection and, on appeal, the district court affirmed the bankruptcy court's holding that the Bank was not required to release the mortgage. We have jurisdiction over this appeal pursuant to 28 U.S.C. sec. 158(d). For the following reasons, we affirm the judgment of the district court.
The following facts in this case are not in dispute. In April 1993, Michael J. Krueger borrowed $35,000 from the Bank to finance the purchase of a saloon in Moline, Illinois, called "Gamblers." The Bank secured the loan with the bar's equipment, Mr. Krueger's automobile, and a second mortgage on his residence in Rock Island, Illinois.
The loan documents, which Mr. Krueger and his attorney reviewed, include a mortgage, a note and an addendum, all executed on April 17, 1993. The note requires that Mr. Krueger pay 59 installments of $560.00, to be paid on or before the 15th of each month, beginning June 15, 1993. It provides that Mr. Krueger is in default if he fails to pay, when due, any amount required by the note's terms, and that notice of non-payment is waived. The note also contains an acceleration clause: If Mr. Krueger is in default for failure to pay an installment when due, the Bank may, at its option, declare the balance of the loan due. Paragraph 11 of the mortgage contains a nonwaiver clause:
Extension of the time for payment . . . shall not operate to release the liability of the [debtor Mr. Krueger]. . . . Any forbearance by [the Bank] in exercising any right or remedy shall not be a waiver of or preclude the exercise of any right or remedy.
The source of the controversy in this case is the addendum appended to the note. Mr. Krueger suggested adding this provision, and the Bank agreed. It provided for an early release of the mortgage interest on Mr. Krueger's home:
It is agreed by [the Bank] and Michael J. Krueger that the mortgage interest in [his] personal residence . . . will be released by [the Bank] upon the following performance:
(1) The balance of the loan that this mortgage interest secures is paid below $26,000.
(2) All payments are paid on or before the due date and all terms and agreements of the loan contract are met as documented in the contract and security agreement.
In December 1993, Mr. Krueger was 14 days late on one $560.00 payment. The Bank accepted, without comment, the late payment. In September 1995, the balance he owed to the Bank dropped below $26,000. Mr. Krueger testified at a hearing that he asked a Bank employee, Theresa, twice about the release of the Bank's mortgage interest; in January 1996, Theresa first said that she would check on it and, in June 1996, after the second inquiry, that she was surprised he had received no notification and that she would bring it to the attention of the Bank officers. By March 1997, when the balance on the note had dropped below $18,500, Mr. Krueger again spoke with Theresa, who said she did not have any answers for him and referred him to Judy at the Bank's downtown location. However, Mr. Krueger testified, neither Judy nor anyone else contacted him. Mr. Krueger continued making payments until April 1997, when a windstorm blew the roof off his saloon and he closed the business.
In September 1997, Mr. Krueger filed his bankruptcy case under Chapter 13 of the Bankruptcy Code. His plan stated that he intended to return to the Bank the assets of Gamblers, on which the Bank had a valid security interest, in full satisfaction of the debt owed. The plan also proposed that the Bank release its second mortgage on Mr. Krueger's residence, pursuant to the terms of the addendum. The Bank objected to confirmation of the plan, contending that it violated 11 U.S.C. sec. 1325(a): The plan was not filed in good faith, was not feasible, and improperly required the Bank to release its mortgage when it was not legally required to do so. Following a hearing, the bankruptcy court sustained the Bank's objection and held that the Bank was not required to release the mortgage.
The issue before the bankruptcy court was whether the Bank was required to release the mortgage it held on Mr. Krueger's residence. At the hearing, Mr. Krueger contended that the plan did not have to be amended to pay the mortgage debt because the mortgage should have been released, pursuant to the terms of the addendum, once the balance of the mortgage debt dropped below $26,000. The Bank countered that it was not legally obligated to release the mortgage unless both conditions of the addendum were met, and one was not: Mr. Krueger had failed to make all the payments on or before their due dates, as required.
The bankruptcy court found that the addendum to the loan agreement was subject to two constructions, depending on whether the two conditions for release of the mortgage were conjunctive or disjunctive.1 Following the rules of contract construction under Illinois law, the court determined that the addendum had meaning only if it was construed to require both conditions to exist before an early release would occur. Under that construction, the Bank would grant an early release if Mr. Krueger made timely payments and the balance dropped below $26,000.
The bankruptcy court then determined that Mr. Krueger simply failed to satisfy the specific contractual condition of timely payments--the condition precedent to early release. The court rejected Mr. Krueger's contention that his single late payment was de minimis; in fact, it found that "[a] fourteen day delay in payment cannot be considered de minimis." It also declined to accept Mr. Krueger's argument that strict compliance with contractual provisions can be waived by the Bank's conduct of accepting late payments. The court specifically found that the Bank was not required to notify the debtor of his default and that the Bank's actions were not inconsistent with requiring the debtor to make timely payments in order to obtain the release. Thus, the court concluded, no waiver occurred. Nor did the debtor establish estoppel: He did not show that he took any action to his detriment based on the Bank's accepting a late payment and remaining silent and not telling the debtor he was in default. Thus, the court held, the Bank was not required to release its mortgage and, therefore, Mr. Krueger's plan was not feasible.
The district court affirmed the holding of the bankruptcy court. It noted that the addendum, a customized rather than boilerplate provision, clearly and unambiguously required that all payments be paid on or before the due date. It concluded that Mr. Krueger failed to satisfy the timely payment requirement of the addendum and therefore could not obtain an early release of the mortgage. It also upheld the bankruptcy court's determination that the late payment was not de minimis.
The district court rejected Mr. Krueger's contention that the Bank's failure to notify him that his late payment would result in the retention of the mortgage constituted a waiver. It stated: "Krueger does not explain how, in light of the express provision of Paragraph 11 [the nonwaiver clause], [the Bank's] mere inaction should constitute a waiver." R.6 at 7. The fact that the Bank accepted the late payment and chose not to accelerate repayment does not render ineffective the contract's express requirement of timely payments, the court found.
The district court also determined that the Bank was not estopped from demanding that the terms of the addendum be honored. Finally, it noted that Mr. Krueger failed to show that he took, or was lulled into, any action to his detriment based on the Bank's acceptance of his late payment.
We review de novo the conclusions of law of the bankruptcy court and the district court; however, we review the bankruptcy court's findings of fact under a clearly erroneous standard. See In re Scott, 172 F.3d 959, 966 (7th Cir. 1999); Matter of Chappell, 984 F.2d 775, 779 (7th Cir. 1993). To determine the nature of a debtor's interest in property, we look to state law; to determine whether that interest counts as property of the debtor's estate, we look to federal bankruptcy law. See Fisher v. Apostolou, 155 F.3d 876, 880 (7th Cir. 1998).
Mr. Krueger filed his bankruptcy case under Chapter 13 of the Bankruptcy Code. His plan qualifies for confirmation under that chapter if it satisfies the requirements set forth in sec. 1325(a) of the Code. His treatment of a secured claim such as the Bank's is governed by subsection (a)(5).2 "Under this provision, a plan's proposed treatment of secured claims can be confirmed if one of three conditions is satisfied: The secured creditor accepts the plan, see 11 U.S.C. sec. 1325(a)(5)(A); the debtor surrenders the property securing the claim to the creditor, see sec. 1325(a)(5)(C); or the debtor invokes the so-called 'cram down' power, see sec. 1325(a)(5)(B)." Associates Commercial Corp. v. Rash, 520 U.S. 953, 956-57 (1997); see also Collier's on Bankruptcy para. 1325.06[1][c] (15th ed. rev. 1999). In this case, Mr. Krueger's plan did not attempt to satisfy any of those alternatives. It proposed, instead, that the Bank release the second mortgage on the debtor's residence.
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