In Re: Michael J. Krueger, Debtor-appellant, 192 F.3d 733 (7th Cir. 1999)

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. § 158(d). For the following reasons, we affirm the judgment of the district court.

* BACKGROUND

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. § 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.

II

DISCUSSION

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. § 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.

The key to whether the Bank must release the mortgage is found in the addendum. Mr. Krueger does not dispute that both requirements--that the loan balance be below $26,000 and that all payments be timely made--must be satisfied before the Bank is required to release its second mortgage. He also does not dispute that he made one payment 14 days late. Rather, Mr. Krueger contends that the Bank waived his default, which was de minimis, and should be estopped from requiring strict compliance with the addendum.

Mr. Krueger asserts that the Bank's acceptance of his late payment, together with its assurances that there was no problem with the loan, waived his default. By its actions, he claims, the Bank waived that condition of the addendum. It was therefore reasonable for Mr. Krueger to expect that, once the trigger amount (a balance under $26,000) was reached, the mortgage would be released.

We cannot accept Mr. Krueger's contention. First, we note Mr. Krueger's admission that his December 1993 payment was late. He also acknowledged that, just as the bankruptcy court had construed it, the addendum that he himself sought to incorporate into the loan agreement required both timely payments and a balance of less than $26,000. See Maywood Proviso State Bank v. York State Bank & Trust Co., 625 N.E.2d 83, 88 (Ill. App. Ct. 1993) ("A court cannot revise a contract and give a litigant a better bargain than he himself made."). It is clear that Mr. Krueger failed to satisfy one of the two specific contractual conditions in the addendum. Each of the two requirements was a condition precedent to the Bank's obligation to release the mortgage. See MXL Indus., Inc. v. Mulder, 623 N.E.2d 369, 374 (Ill. App. Ct. 1993) ("Illinois courts define a condition precedent as one . . . which is to be performed by one party to an existing contract before the other party is obligated to perform."). In Illinois, courts generally demand strict compliance with the requirement that a condition precedent be satisfied. See id.

Under Illinois law, nevertheless, a contracting party may waive provisions beneficial to it or waive strict compliance by conduct or actions "indicating that strict compliance with a particular provision will not be required." Barker v. Leonard, 635 N.E.2d 846, 848 (Ill. App. Ct. 1994); see also City of Chicago v. Chicago Title & Trust Co., 563 N.E.2d 65, 70 (Ill. App. Ct. 1990) (noting that a party accepting late payments may waive its right to timely payments unless it gives a definite and written notice of the intention to require strict compliance) (citing Allabastro v. Wheaton Nat'l Bank, 77 Ill.App.3d 395 N.E.2d 1212, 1217 (Ill. App. Ct. 1979)). Whether a Bank's continued acceptance of past due payments, without a demand for more prompt payment, constitutes waiver of a contractual provision is a question of fact. See Smith v. Sturgeon, 342 N.E.2d 420, 421 (Ill. App. Ct. 1976).

In Ryder v. Bank of Hickory Hills, 585 N.E.2d 46 (Ill. 1991), a case considering whether a bank waived its rights to accelerate the plaintiffs' loans because of the bank's cooperative conduct with the plaintiffs, the Supreme Court of Illinois set forth the state's law of waiver:

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. . . .

Since the plaintiffs are claiming waiver, they had the burden of proving at trial that the Bank knew of its acceleration rights, and those facts which evidenced an intention by the Bank to waive such rights. Implied waiver of a legal right must be proved by a clear, unequivocal, and decisive act of the party who is alleged to have committed waiver. "An implied waiver may arise where a person against whom the waiver is asserted has pursued such a course of conduct as to sufficiently evidence an intention to waive a right or where his conduct is inconsistent with any other intention than to waive it." Whether the Bank waived its acceleration rights is a question of fact and " [i]t is axiomatic that this court will not disturb a trial court's finding unless that finding is contrary to the manifest weight of the evidence."

Id. at 49 (internal citations omitted).

Following the state supreme court's guidance in Ryder, therefore, we consider whether Mr. Krueger met his burden of demonstrating that the Bank's course of conduct constituted sufficient evidence of an intent to waive its rights under the addendum. After reviewing the record in this case, we conclude that the bankruptcy court, which conducted a hearing on the issue, was correct in holding that the Bank did not waive its right to timely payments. Mr. Krueger's argument is based on his three sporadic conversations with Theresa, a loan officer, concerning release of his mortgage once he had paid below $26,000. At one point, Theresa said she would bring it to the attention of the Bank officers, but nothing happened. Mr. Krueger admits that these were his only contacts with the Bank concerning release of his mortgage. When asked why he did not pursue the release more actively, Mr. Krueger testified:

Again, the business wasn't going well but the business was surviving. My intentions were to make all my payments on time. Quite honestly, in my mind I didn't realize I had to push the issue. I thought I had a contract that I thought they had to abide by it. I didn't realize I had to push the issue.

Bankr. R.6 at 55. Mr. Krueger also testified that he received a letter from the Bank's attorney, on July 14, 1997, that he was in default of his loan. However, he stated, "I had no idea that that had any relevance--I mean, any relation to the--to my residence." Id. at 56. He first learned that the Bank would not release the mortgage after he filed bankruptcy, he testified, at the first meeting of creditors. Id. at 55-56.

Mr. Krueger's testimony demonstrates only that a Bank employee accepted his payments and knew that the balance of his loan was below $26,000. No evidence was offered to indicate that the employee accepted the payments knowing the circumstances surrounding the Bank's loan agreement, with its addendum, and that she accepted the payments with the intention of waiving the Bank's right not to release the second mortgage. See Ryder, 585 N.E.2d at 50 (noting that there was no evidence that the bank employee accepted plaintiffs' payments knowing the bank's right to accelerate and intending to waive that right; holding that plaintiffs' waiver claim thus was not supported by the evidence). Indeed, the record contains no evidence of any action by the Bank that was inconsistent with requiring the debtor to make all of his payments on time as a precondition for the release.

The note and the addendum require timely payment. In addition, the mortgage's nonwaiver clause at paragraph 11 expressly provides that the Bank has waived nothing by declining to exercise a right or remedy it may have.³  In light of paragraph 11's explicit statement that an extension of time for payment "shall not operate to release the liability of" the debtor, the Bank's acceptance of one late payment cannot be construed as a waiver of the timely payments requirement. We hold that the bankruptcy court did not err in determining, as a finding of fact, that no waiver occurred. As a result, we conclude that the Bank was not required, under the terms of the addendum, to release its mortgage.

Mr. Krueger insists that he relied on the assurances made by a Bank loan officer that there was no problem with his loan. For that reason, he claims, the Bank is now estopped from requiring strict compliance with the loan addendum. Mr. Krueger claims that the Bank should have told him that he had forfeited his right to an early release by paying 14 days late. Because the Bank did not notify him, he claims he was misled into passively continuing his payments rather than choosing to sue the Bank or to refinance his loan elsewhere.

Under Illinois law, " [t]he test used to evaluate an estoppel claim is whether, considering all the circumstances of the specific case, conscience and honest dealing require that a party be estopped." Hubble v. O'Connor, 684 N.E.2d 816, 823 (Ill. App. Ct. 1997). In Hubble, the state appellate court set forth the elements a plaintiff is required to show in order to make out an estoppel claim:

(1) voluntary words or conduct by the estopped party amounting to a misrepresentation or concealment of material facts; (2) actual or implied knowledge of the estopped party that the representations were not true; (3) lack of knowledge of the true facts by the innocent party both at time made or at time acted upon; (4) intent, or a reasonable expectation, on the part of the estopped party that the innocent party would act on the misrepresentations; (5) a reasonable, good-faith, detrimental change of position by the innocent party based on the misrepresentations; and (6) prejudice to the innocent party.

Id. at 825. In this case, the Illinois Appellate Court stated that a plaintiff relying on estoppel "must show that he was led to detrimentally rely upon the conduct or statements of the defendant and that such reliance was in good faith." Id. (citation, internal quotation marks omitted). The bankruptcy court found that Mr. Krueger failed to 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." Bankr. R.11 at 6.

The bankruptcy court's finding was not clearly erroneous. Mr. Krueger continued to make his monthly payments, which was not to his detriment. He knew that he had made an untimely payment and that the note and the addendum required all payments to be paid on or before the due date. Yet he did not pursue a remedy with a Bank officer with decisionmaking power. "It is established that ' [a] party claiming the benefit of an estoppel cannot shut his eyes to obvious facts, or neglect to seek information that is easily accessible, and then charge his ignorance to others.'" Hubble, 684 N.E.2d at 825-26 (quoting Vaughn v. Speaker, 533 N.E.2d 885, 893 (Ill. 1988) (Ryan, J., specially concurring), cert. denied, 492 U.S. 907 (1989)). In this case, the record does not establish the elements of estoppel. We hold that the bankruptcy court did not err in concluding that the Bank is not estopped from refusing to release the second mortgage.

Mr. Krueger contends that the bankruptcy court erred in concluding that one 14-day late payment is not a de minimis breach of the loan addendum. He challenges the ruling of the district court, which upheld that determination and also noted that Mr. Krueger did not explain why the payment was late.⁴  Mr. Krueger insists he made all other payments on a timely basis; therefore, he asserts, the evidence supports the conclusion that the one untimely payment was a de minimis rather than a material breach. He urges us to find that the 14-day delay was not material.

In Illinois, the Restatement of Contracts forms the basis for the state's contract law and, in particular, the law defining whether a breach is material or de minimis. For example, the Supreme Court of Illinois, in Eager v. Berke, 142 N.E.2d 36 (Ill. 1957), followed two sections of the Restatement when holding that the defendant was justified in refusing to accept the plaintiff's tender of payment 6 days after it was due. The court relied first on section 397, which establishes that a "breach or non-performance of a promise by one party to a bilateral contract, so material as to justify a refusal of the other party to perform a contractual duty, discharges that duty." Id. at 39. It also relied on section 274 of the Restatement, which provides:

In promises for an agreed exchange, any material failure of performance by one party not justified by the conduct of the other discharges the latter's duty to give the agreed exchange even though his promise is not in terms conditional. An immaterial failure does not operate as such a discharge.

Id. (emphasis added).⁵  Illinois courts also recognize the doctrine of de minimis non curat lex, "which means that courts will not regard trifles." Pacini v. Regopoulos, 665 N.E.2d 493, 497 (Ill. App. Ct. 1996). As that state appellate court explained, courts generally require strict compliance with contractual terms, and the failure to perform any term of a contract is a breach of contract. However, the nonperforming party is liable for damages resulting only from a material breach. Id. (holding that, because a 94.9953% occupancy rate was essentially a 95% occupancy rate, the difference was de minimis and there was no breach).

Parties to a contract may make timely performance a material element of the contract. See Janssen Bros., Inc. v. Northbrook Trust & Savings Bank, 299 N.E.2d 431, 434 (Ill. App. Ct. 1973). In this case, timely payment was one of the two conditions precedent to the addendum. Mr. Krueger's obligation to make timely payments was therefore a material part of the agreed exchange. Notably, there was no routine acceptance of untimely payments by the Bank (as there was in Sahadi, the case on which Mr. Krueger relies).⁶  However, in one payment he was two weeks late. The bankruptcy court determined that a payment 14 days late is a material rather than immaterial, insignificant, de minimis breach. We hold, as did the district court, that Mr. Krueger's failure to meet the condition in the addendum that "all payments" be made "on or before the due date" was a material breach of the addendum and was not de minimis.

Conclusion

For the foregoing reasons, we affirm the judgment of the district court which affirmed the order of the bankruptcy court allowing the Bank's objection to confirmation of Mr. Krueger's Chapter 13 plan.

AFFIRMED