Opinion
No. 00-81593.
December 29, 2000.
OPINION
This matter is before the Court on confirmation of the Chapter 13 plan proposed by Robert Y.
Martinson and Vera M. Martinson (DEBTORS) and the objection filed by a creditor, Edward C.
Moehle (MOEHLE). The Court conducted an evidentiary hearing and took the matter under advisement.
The DEBTORS reside at 442 Cass Street, East Peoria, Illinois. They occupy the property pursuant to an Agreement for Warranty Deed dated September 15, 1990 (AGREEMENT). The sellers under the AGREEMENT are identified as William H. Rawlings and Dorothy M. Rawlings (RAWLINGS). The buyer is Vera M. Martinson (VERA). Robert Y. Martinson is not a party to the AGREEMENT. The RAWLINGS conveyed and quit claimed their interest in the property to MOEHLE by Quit Claim Deed dated October 30, 1998.
The Chapter 13 plan filed by the DEBTORS on May 17, 2000 provides for the debt evidenced by the AGREEMENT, as follows:
William and Dorothy Rawlings to be paid $5,000.00 at (9%) nine percent interest secured by the property located at 442 Cass Street, East Peoria, Illinois.
MOEHLE filed an objection to the plan alleging that the balance due on the AGREEMENT as of May 17, 2000 was $18,563.98, that his claim is secured only by a security interest in real property that is the DEBTORS' principal residence, and that the plan's proposal to fix the amount of the secured claim at $5,000 and reduce the interest rate from the contract rate of 10% to 9% constitutes an impermissible modification under § 1322(b)(2) of the Bankruptcy Code, 11 U.S.C. § 1322(b)(2). MOEHLE filed a brief in support of his position and a motion to compel the DEBTORS to respond to his brief by a certain date. The DEBTORS chose not to file a responsive brief and MOEHLE'S motion to compel should be denied.
At the evidentiary hearing, the DEBTORS agreed that MOEHLE'S claim was a claim secured only by a security interest in real property that is the DEBTORS' principal residence so that the claim may not be modified under § 1322(b)(2) of the Bankruptcy Code. The DEBTORS agreed that the contract rate of interest would have to be paid on the full remaining balance of the debt evidenced by the AGREEMENT. Both sides agreed that the only disputed issue is the proper calculation of the current balance due on the AGREEMENT. The DEBTORS challenge MOEHLE'S calculation of the balance for three reasons. First, the DEBTORS claim that MOEHLE'S calculation improperly debits amounts paid for real estate taxes. Second, the DEBTORS contend that MOEHLE is bound by the treatment of his secured claim in two previous Chapter 13 cases. Third, the DEBTORS argue that MOEHLE is bound by alleged written admissions made by the RAWLINGS to the effect that the payment arrearage on the AGREEMENT, at the time of the writings, was smaller than now claimed by MOEHLE.
MOEHLE'S calculation of the balance is attached as Exhibits "A" and "B" to his brief and purports to show all debits and credits from August 15, 1990 through September 11, 2000 (the "MOEHLE calculation"). At the beginning of the evidentiary hearing, the DEBTORS stipulated and agreed that the payments shown on the MOEHLE calculation correctly reflect all payments made with the possible exception of a single omitted monthly payment of $225. The sole witness who testified at the hearing, VERA, stated her belief that a single $225 payment by the Salvation Army in Pekin, Illinois, was omitted from MOEHLE'S payment schedules. She was unable to recall when the payment was made and no documentary evidence identifying the payment was offered. VERA also testified that she believed the real estate taxes were included within the monthly payment amount of $225 and that it was the sellers' responsibility to pay these amounts when due.
She stated that the only real estate tax payment that she had ever directly paid was in May, 1997 when the real estate tax bill was mistakenly sent to her, rather than the sellers. MOEHLE contends that under the AGREEMENT, the sellers are to pay the real estate taxes but are permitted to recover the amounts paid from the buyers by adding the amounts to the balance due. VERA also testified that she was unaware of any drainage bill and had no knowledge of the $17.45 debit shown on MOEHLE'S calculation for "1 year E.P. drainage."
Admitted into evidence as Exhibit "3" are copies of two letters that VERA testified she obtained from DOROTHY M. RAWLINGS for the purpose of obtaining assistance with her house payments from the Salvation Army in Pekin. Both letters are preprinted form documents that purport to be demand letters for past due house payments. One letter is undated and states that "You are behind on your rent for the month(s) of May April at the rate of $225.00 per month for a total of $450.00 past due." The second letter is dated May 14, 1997 and shows an amount due of $225.00.
The DEBTORS claim that these letters support a finding that the DEBTORS were only two months behind on their house payments in or around May, 1997 and that MOEHLE is therefore not entitled to all of the interest that he is claiming based upon a more serious default. MOEHLE responds that the letters were used for the DEBTORS' benefit in obtaining aid from the Salvation Army and were not intended to constitute a complete statement of the existing arrearage.
At the hearing, the DEBTORS argued that the doctrines of waiver and/or estoppel preclude MOEHLE from receiving the interest that he is claiming. The DEBTORS claim that these doctrines are applicable based upon the treatment of this same secured claim in the DEBTORS' prior bankruptcy cases. The DEBTORS filed a previous Chapter 13 case on November 14, 1994 and filed a plan proposing to pay current house payments to the RAWLINGS outside the plan and to pay through the plan an arrearage of $2,500 with interest at 9%. The plan was confirmed on December 20, 1994. The case was subsequently dismissed without discharge on April 3, 1996 on the DEBTORS' motion.
Exhibit "1" admitted into evidence at the hearing is the Chapter 13 Trustee's Final Report and Account for the 1994 bankruptcy case showing a total amount paid to the RAWLINGS through the plan of $923.14.
The DEBTORS then filed a second Chapter 13 case on June 9, 1997, Case No. 97-82209. In their Chapter 13 plan, they proposed to pay the RAWLINGS' claim, as a fully secured claim, in the amount of $2,546.36 with interest at 8%. The RAWLINGS filed an objection, which they later amended, objecting to the plan on the basis that the amount of the secured claim was understated. The amended objection alleged that the amount due on the AGREEMENT as of June 15, 1997 was $14,720.40. In support of this allegation the RAWLINGS attached as Exhibit "B" to the amended objection a payment record purporting to show all payments received, interest accrued, taxes and insurance paid and a periodic calculation of the balance due from August 15, 1990 through June 15, 1997. A copy of this same document is attached to MOEHLE'S objection to plan filed in the pending case and is part of the MOEHLE calculation.
The RAWLINGS filed a proof of claim on July 21, 1997 for a secured claim in the amount of $14,720.40. MOEHLE filed an amended proof of claim on April 7, 1999, in his own name as assignee of the RAWLINGS' interest in the AGREEMENT for the same amount. On August 14, 1997, the Court confirmed the Chapter 13 plan filed by the DEBTORS. On the Trustee's motion, the case was subsequently dismissed without discharge by order entered January 25, 2000. Exhibit "2" admitted into evidence at the hearing is a copy of the Trustee's Final Report and Account for the 1997 Chapter 13 case stating that the RAWLINGS received payments through the plan of $589.38 and that MOEHLE received payments of $786.26.
The Court will first address the effect of confirmation in the 1997 case of a plan that set the amount of the RAWLINGS' claim at $2,546.36, an amount far less than that now claimed by MOEHLE. The provisions of a confirmed plan are binding on the debtor and each creditor. 11 U.S.C. § 1327(a). Confirmed plans are accorded a res judicata effect that prevents bankruptcy courts from reconsidering matters that were disposed of by the confirmed plan. In re Puckett, 193 B.R. 842, 845 (Brktcy. N.D. Ill. 1996).
Where a Chapter 13 case is dismissed, the confirmed plan no longer has a res judicata effect.
Elliott v. ITT Corp., 150 B.R. 36, 40 (Bkrtcy. N.D. Ill. 1992). However, if formal proceedings occurred to actually litigate an issue prior to dismissal, the judicial determination of the issue may bind the parties in a later proceeding. In re Shaffer, 48 B.R. 952 (Bkrtcy. N.D. Ohio 1985); In re Pearson, 214 B.R. 156, 160 (Bkrtcy. N.D. Ohio 1997) (when a claim has been adjudicated pursuant to an objection, it is binding on the parties even after dismissal.)
The DEBTORS' 1997 case was dismissed. Unless the amount of the claim was "actually litigated," the dismissal means that the statement of the amount of the RAWLINGS' secured claim in the 1997 plan is not binding on MOEHLE. Although the RAWLINGS objected to confirmation, they failed to appear at the confirmation hearing and the plan was confirmed over their objection based on their non-appearance. The court was not required to and did not make a factual determination of the amount of the claim on the basis of evidence. Further, the DEBTORS never objected to the proofs of claim filed by the RAWLINGS and MOEHLE so that no claims litigation occurred. Under these circumstances, the Court finds that the issue of the amount of the disputed claim was not actually litigated in the 1997 case and because the case was dismissed, the amount of the claim set forth in the plan has no binding effect upon MOEHLE.
Since the 1997 case was dismissed, this Court need not resolve the conflict between the secured claim amount of $2,546.36 set forth in the plan and the amount of $14,720.40 set forth in the RAWLINGS' proof of claim. The issue as to which of those amounts controls over the other is left for another day.
The Court will next address the impact of the prior Chapter 13 cases and the DEBTORS' arguments of waiver and estoppel. Waiver is defined as the intentional relinquishment of a known right. Waiver may be made by an express agreement or it may be implied from the conduct of the party who is alleged to have waived a right. An implied waiver of a right must be proved by a clear, unequivocal, and decisive act of the party who is alleged to have committed waiver. In re Krueger, 192 F.3d 733 (7th Cir. 1999). The DEBTORS have not alleged the existence of an express agreement by the RAWLINGS or MOEHLE waiving interest. In order to establish an implied waiver, the DEBTORS have the burden of proving that the RAWLINGS or MOEHLE have pursued such a course of conduct as to sufficiently evidence an intention to waive a right to interest under the AGREEMENT or where such conduct is inconsistent with any other intention than to waive it. See Ryder v. Bank of Hickory Hills, 146 Ill.2d 98, 165 Ill. Dec. 650, 585 N.E.2d 46 (1992).
Although the DEBTORS did not specifically identify the type of estoppel relied upon, they did allege that the doctrine is applicable based on what occurred in the DEBTORS' prior bankruptcy cases.
It appears to the Court, therefore, that the DEBTORS are seeking application of the doctrine of judicial estoppel. This doctrine is intended to prevent litigants from playing fast and loose with the courts.
The doctrine prevents a party who has prevailed on one ground in a court proceeding from taking a contrary position on the same issue in an effort to prevail in a subsequent proceeding. The Seventh Circuit has identified certain prerequisites to application of the doctrine: (1) the later position must be clearly inconsistent with the earlier position; (2) the facts at issue should be the same in both cases; and (3) the party to be estopped must have convinced the first court to adopt its position. Ogden Martin Systems of Indianapolis, Inc. v. Whiting Corp., 179 F.3d 523 (7th Cir. 1999).
Although their claim was provided for in the DEBTORS' 1994 Chapter 13 case, the RAWLINGS did not appear in the case or take any position with respect to the treatment of their claim.
At most, they merely acquiesced in the DEBTORS' proposed treatment of their claim as a fully secured creditor impaired only to the extent that the arrearage was to be paid over time, through the plan. In the 1997 case, the RAWLINGS, and then MOEHLE as their assignee, filed objections to the plan and proofs of claim stating that the amount of their secured claim was $14,720.40 as of June 15, 1997. The plan was confirmed over the objection for the reason that no one appeared on behalf of the RAWLINGS at the confirmation hearing. Nothing in the file indicates that the RAWLINGS ever withdrew the objection or otherwise took a position contrary to the one reflected in the objection and in the proofs of claim. Likewise, in the present case, MOEHLE filed a proof of claim and objection to plan alleging a balance due of $18,563.98 relying, in part, upon the same calculation filed in the 1997 case stating that the balance due as of June 15, 1997 was $14,720.40.
Nothing in any of the three Chapter 13 bankruptcy cases indicates that the RAWLINGS, or MOEHLE as their assignee, ever asserted a position contrary to the one now asserted by MOEHLE, that the secured claim should be paid in full with interest at the contract rate, with the secured claim amount calculated according to MOEHLE'S calculation. As such, the first element of the judicial estoppel doctrine is not met and MOEHLE is not estopped from claiming all of the interest permitted by the AGREEMENT. Nor is there any proof that the RAWLINGS or MOEHLE engaged in a course of conduct that could be interpreted to constitute an implied waiver of interest. Therefore, the Court rejects the DEBTORS' contention that prior conduct in the 1994 or 1997 case bars all or part of MOEHLE'S claim based upon either of the alternative doctrines of waiver or estoppel.
The DEBTORS also claim that the past due rent letters admitted as Exhibit "3" at the hearing support a claim of waiver or estoppel. However, there was no evidence presented to support the conclusion that the one or two-month arrearage stated in the letters was intended by the RAWLINGS to constitute a statement of the entire arrearage amount. VERA'S own testimony indicated that the purpose of the letters was merely to establish the existence of a house payment arrearage in order to support a request for assistance from the Salvation Army. Accordingly, this Court rejects the DEBTORS' contention that the past due rent letters support application of the doctrine of waiver or estoppel against MOEHLE.
As indicated earlier, the DEBTORS agreed that MOEHLE'S calculation correctly reflects all payments made with the possible exception of a single $225 payment. VERA'S testimony with regard to this alleged payment was equivocal at best and was not corroborated by any documentary evidence.
This Court finds that the DEBTORS failed to prove that an additional $225 payment was paid.
Accordingly, MOEHLE'S calculation is hereby found to accurately reflect all payments made by or on behalf of the DEBTORS from August 15, 1990 through September 11, 2000.
The next issue is whether the inclusion of debits for real estate taxes in MOEHLE'S calculation is in accordance with the provisions of the AGREEMENT. The AGREEMENT for Warranty Deed is a printed form. The AGREEMENT was completed by typing on the form the terms and provisions specific to the transaction between the RAWLINGS and VERA. In material part, the AGREEMENT provides that VERA was to pay the contract price as follows:
[T]he balance of THIRTEEN THOUSAND, FIVE HUNDRED and no/100 ($13,500.00) payable at the rate of TWO HUNDRED TWENTY-FIVE DOLLARS ($225.00) or more per month payable on the 15th day of each month commencing September 15, 1990 with interest at the rate of ten per cent (10%) per annum on the unpaid balance, with real estate taxes and insurance included in said monthly installment and paid by First Parties (Rawlings) as they come due.
This language was typewritten on the form AGREEMENT.
The AGREEMENT further provides as follows:
2. Second Party (Vera Martinson) agrees to pay all taxes, assessments, or impositions that may be legally levied or imposed upon said real estate, or which may become due, subsequent to the year 90.
This provision is part of the printed form except for the number "90" which is typewritten.
MOEHLE'S calculation includes debits for real estate taxes paid in the years 1991 through 1998 totaling $4,643.12. MOEHLE claims that the terms of the AGREEMENT render VERA liable for the real estate taxes so that the debits for taxes paid included in MOEHLE'S calculation are proper.
The DEBTORS claim that the AGREEMENT clearly states that the taxes are included within the $225 monthly payment amount so that the debits for taxes in MOEHLE'S calculation are improper.
Under the Illinois "four corners" rule of contract interpretation, the threshold inquiry is whether the contract is ambiguous. Bourke v. Dun Bradstreet, Corp., 159 F.3d 1032 (7th Cir. 1998). Under Illinois law, a contract is not rendered ambiguous simply because the parties do not agree on the meaning of its terms. Id. Under Illinois law, a contract is ambiguous only if it is reasonably and fairly susceptible to more than one construction. Brooklyn Bagle Boys, Inc. v. Earthgrains Refrigerated Dough Products, Inc., 212 F.3d 373 (7th Cir. 2000). If a contract is susceptible to only one reasonable interpretation, it is unambiguous and the court should determine its meaning as a matter of law.
Moriarty v. Svec, 164 F.3d 323 (7th Cir. 1998). If the terms of a contract are unambiguous, the contract should be enforced as written and its unambiguous terms will control the rights of the parties.
Bourke v. Dun Bradstreet, Corp., 159 F.3d 1032 (7th Cir. 1998).
Although the AGREEMENT could have been drafted to deal with this issue in a more explicit manner, the AGREEMENT is susceptible to only one reasonable interpretation, that being the one proposed by MOEHLE. Paragraph 2 of the AGREEMENT clearly places liability for the taxes upon VERA. The AGREEMENT'S payment provision provides that VERA'S $225 monthly payment includes a portion for taxes and that the sellers are to pay the taxes as they come due. The AGREEMENT does not specifically state that as the taxes are paid by the contract sellers, they are to be added to the balance due. However, this accounting function is necessarily implied by the express terms of the AGREEMENT.
It is important to note that the MOEHLE calculation shows that each payment made by the DEBTORS was credited in full, first to interest, then to principal. No portion was credited to taxes even though the AGREEMENT provides that real estate taxes are "included in (each) monthly installment." Pursuant to the terms of the AGREEMENT, each monthly installment is apportioned among three categories of liability: principal, interest and taxes. Based upon the accounting mechanics used in the MOEHLE calculation, once the accrued interest was paid, the DEBTORS received credit against principal, not only for that portion of each payment properly apportioned to principal, but also for that portion of the payment representing the apportionment for real estate taxes.
Since the AGREEMENT does not provide for a portion of each monthly payment to be escrowed for taxes, permitting the sellers to add paid taxes back into the balance is the only way to give effect to the unambiguous contract term placing liability for real estate taxes upon VERA. If the sellers are not permitted to add the taxes to the balance, the sellers effectively become liable for the taxes and the purchase price balance is reduced substantially below the $13,500 amount stated in the AGREEMENT, since payments against principal are being over-credited.
The Court finds that the AGREEMENT unambiguously places financial liability for the real estate taxes upon VERA which, by necessary implication, permits MOEHLE to debit the real estate tax payments back against the principal balance as the taxes are paid. Even if the AGREEMENT was ambiguous in this respect so that parol evidence is admissible, the only evidence presented on the issue was VERA'S testimony that she believed the taxes and insurance were included within the monthly payment amount and that she had only directly paid one real estate tax bill that had been sent to her by mistake. This testimony does not evidence an intent by the parties to the AGREEMENT that the sellers were to be liable for the real estate taxes. Accordingly, MOEHLE'S calculation correctly includes debits for amounts paid by the contract sellers for real estate taxes.
MOEHLE'S calculation adds interest to the principal balance. Rather than calculating simple interest at 10% on the unpaid principal balance, MOEHLE'S calculation compounds interest on a monthly basis. Compound interest exists when accrued interest is added to the principal sum, and the whole is treated as a new principal for the calculation of the interest for the next period. Reaver v.
Rubloff-Sterling, L.P., 303 Ill. App.3d 578, 582, 708 N.E.2d 559, 562, 236 Ill. Dec. 973, 976 (3rd Dist. 1999). Compound interest is disfavored under Illinois law. Harrington v. Kay, 136 Ill. App.3d 561, 483 N.E.2d 560, 91 Ill. Dec. 214 (1985). Contracting parties may specifically agree to compound interest in the absence of a statutory bar, but unless expressly permitted, interest will be computed so as to avoid the payment of compound interest. Id.
The AGREEMENT provides for the payment of interest at the rate of ten percent (10%) per annum on the unpaid balance. Under Illinois law, "per annum" merely denotes the frequency at which the applicable rate of interest is to be applied and does not permit a compounded method of computation. Helland v. Helland, 214 Ill. App.3d 275, 277, 573 N.E.2d 357, 359, 157 Ill. Dec. 939, 941 (2d. Dist. 1991). This Court finds that the AGREEMENT does not contain an express provision permitting the compounding of interest. Therefore, MOEHLE'S calculation is improper to the extent that it compounds interest.
As noted earlier, MOEHLE'S calculation includes a debit in the amount of $17.45 on October 15, 1999 for "1 year E.P. drainage." At the hearing, MOEHLE orally waived his claim that this amount should be included as a debit in calculating the balance due under the AGREEMENT. This debit should be excluded.
MOEHLE'S calculation uses a reduced interest rate of 8% as of June, 1997, since that was the interest rate provided in the DEBTORS' Chapter 13 plan that was confirmed in Case No. 97-82209.
However, the DEBTORS failed to complete the plan, did not receive a discharge, and the case was dismissed. The dismissal of a Chapter 13 case without discharge negates the effects of the case and restores the rights of the parties to their full prepetition extent, unmodified and unaffected by the unsuccessful bankruptcy case. In re Irons, 173 B.R. 910 (Bkrtcy. E. D. Ark. 1994). Any modification of a creditor's right to accrue interest in an unsuccessful Chapter 13 case has no continuing effect once the case has been dismissed without discharge and the creditor is entitled to calculate the accrual of interest at the contract rate the same as if the case had never been filed. Id.
Accordingly, the interest rate reduction from 10% to 8% effected in the DEBTORS' 1997 Chapter 13 case ceased to have any effect when the case was dismissed. MOEHLE is entitled to accrue interest at the contract rate of 10% per annum from August 15, 1990 to the present. In the instant case, the DEBTORS' Chapter 13 plan proposes to reduce the interest rate on MOEHLE'S claim to 9%. At the hearing, however, the DEBTORS agreed that the interest rate could not be modified under § 1322(b)(2).
Based upon this Court's determination of the proper calculation of MOEHLE'S claim, confirmation of the DEBTORS' plan fixing the amount of his claim at $5,000 must be denied. A correct determination of the amount of MOEHLE'S secured claim requires MOEHLE to make a recalculation. In making the recalculation, the beginning balance of $13,500 as of August 15, 1990 is correct. Interest should be calculated on the unpaid balance at the rate of 10% per annum on a simple interest basis, without compounding interest. The dates and amounts of payments to be credited are correctly reflected on MOEHLE'S calculation through September 11, 2000. The balance should be calculated through May 17, 2000, the date this Chapter 13 case was filed. MOEHLE may debit real estate taxes paid by the RAWLINGS or him as of the date paid, to be treated as additions to principal, with interest to accrue thereon at the contract rate. The $17.45 debit for drainage should be deleted from the revised calculation.
MOEHLE should prepare a revised balance calculation in accordance with this Opinion. The revised calculation should be filed within 14 days and served upon the DEBTORS' attorney, the Chapter 13 Trustee and the U.S. Trustee. Those parties shall have 10 days from the date that the revised calculation is served in which to file a written objection to the revised calculation. If an objection is timely filed, a further hearing will be scheduled. If an objection is not filed, a further order will be entered finding that the amount of MOEHLE'S allowed secured claim is as stated in the revised calculation. Upon entry of a final order determining the amount of MOEHLE'S allowed secured claim, the DEBTORS shall have twenty-one (21) days from the date of the order to file an amended plan. If no amended plan is filed by the DEBTORS, their case shall be dismissed.
This Opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
See written Order.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that:
1. MOEHLE'S motion to compel the DEBTORS to respond to his brief by a date certain is DENIED.
2. Confirmation of the Chapter 13 plan filed by the DEBTORS is DENIED.
3. EDWARD C. MOEHLE shall file a revised balance calculation in accordance with this Court's Opinion within fourteen (14) days from the date of that Opinion and shall serve that revised balance calculation upon the DEBTORS' attorney, the Chapter 13 Trustee and the U.S. Trustee. Those parties shall have ten (10) days from the date that the revised calculation is served to file a written objection to the revised calculation.
4. If the DEBTORS timely file an objection, the Bankruptcy Clerk shall set the matter for hearing.
5. If no objection is filed, MOEHLE shall submit an order allowing his secured claim in that amount and the DEBTORS shall have twenty-one (21) days from the date of that Order to file an amended plan. If no amended plan is filed by the DEBTORS, their case shall be DISMISSED.