Cite as: 189 B.R. 732
re Scott F. Zersen and Mary K. Zersen, Debtors
Bankruptcy Case No. 95-50786-13
United States Bankruptcy Court
W.D. Wisconsin, Eau Claire Division
September 29, 1995
Terrence J. Byrne, Byrne, Goyke, Olsen & Tillisch,
S.C., Wausau, WI, for debtors.
William F. Greenhalgh, Greenhalgh & Hoffman, S.C., Baraboo, WI, for Baraboo Nat. Bank.
Thomas S. Utschig, United States Bankruptcy Judge.
MEMORANDUM OPINION, FINDINGS OF FACT,
AND CONCLUSIONS OF LAW
The matter presently before the Court is the confirmation of the debtors' chapter 13
plan. The Baraboo National Bank has objected to confirmation for two reasons. First, the
bank contends that the debtors have undervalued their homestead, upon which it claims
assorted liens. Second, the bank objects to the plan provision which directs that the bank
must apply plan payments to an obligation cosigned by Robert and Darlene Hill, who are
Mrs. Zersen's parents, before applying payments to any other claims. The bank contends
that it should be free to pursue the Hills upon the cosigned obligation, and that all
payments made by the debtors under the plan should be applied instead to a business note
executed by the debtors alone.
The Court held an extended hearing on this matter on August 16, 1995. The debtors were
represented by Terrence J. Byrne, while the bank was represented by William F. Greenhalgh.
Each side presented appraisal testimony concerning the value of the debtors' homestead.
There was also testimony concerning the various loans made by the bank to the debtors and
the collateral which was intended to secure those obligations. At the close of argument,
the Court took the matter under advisement in order to more fully address the issues
pertaining to the debtors' right to direct the application of plan payments and the
ability of the bank to pursue its claims against the Hills. Before addressing these
issues, however, the Court will first set forth the factual background of this case, and
then resolve the valuation issue which was also presented at the hearing.
A. Factual Background
For a number of years, the debtors lived in Baraboo, Wisconsin. Scott Zersen was
self-employed and operated a carpentry business. In the course of his business operations,
he obtained a series of loans from the Baraboo National Bank. Ultimately, in December of
1993 these obligations were consolidated into one business note in the principal amount of
$131,727.87. Prior to the execution of the business note, the debtors decided to move from
Baraboo, in part due to their belief that it was no longer a safe place to raise their
children. As they had vacationed in the area around Boulder Junction, Wisconsin, on
several occasions and liked it, they decided to move there. They located a house that they
liked for $58,500 and attempted to locate financing as well. The sellers were apparently
willing to finance the bulk of the purchase price through a land contract, but the debtors
needed a $20,000.00 down payment. Despite the rather modest size of the necessary loan,
their requests for financing at a bank in Boulder Junction were denied for unspecified
At this point, the debtors approached Gene Higgins, their loan officer at the Baraboo
National Bank, and asked for help. According to the debtors,(1)
Mr. Higgins told them that he would help them get the loan for the down payment, no matter
how it needed to be structured. Scott Zersen testified that at this time Mr. Higgins
mentioned that they might need a cosignor for the loan. Mr. Zersen subsequently discussed
the matter with his wife, who then asked her parents if they would be willing to cosign a
loan. The Hills agreed to do so.
Mr. Zersen testified that after his wife obtained the Hills' promise to cosign the
loan, he went back to the bank and obtained the bank's approval. According to Mr. Zersen,
the arrangement with the bank was that as soon as the loan documents were completed their
account would be credited with the loan amount, but in the meantime they had access to the
funds so as to proceed with the closing. Prior to the closing on October 15, 1993, Mr.
Zersen wrote a check to the bank and obtained an $18,500.00 cashier's check. This check,
together with $1,500.00 Mrs. Zersen withdrew from her pension fund, constituted the down
payment on the house. It is uncontroverted that by accepting the $18,500.00 check and
providing Mr. Zersen with the cashier's check, the bank permitted the Zersens' account to
become overdrawn in that amount. It is also uncontroverted that the loan documents were
not executed until October 28, 1993, and the loan proceeds were deposited into the
Zersens' account on October 29, 1993.
Despite acknowledging that the bank allowed the debtors' account to become overdrawn in
the amount of $18,500.00 and deposited the loan proceeds directly into the debtors'
account to rectify that overdraft, the bank would have the Court accept a rather different
view of the loan transaction. Mr. Jicinsky, on behalf of the bank, testified that the loan
was actually made to the Hills, who in turn lent the money to the Zersens for whatever
purpose they desired. According to Mr. Jicinsky, the bank would not have loaned the money
to the Zersens given the precarious status of their outstanding loans with the bank. Mr.
Jicinsky seemed to suggest that the Zersens' names were simply added to the loan paperwork
as co-borrowers as an afterthought, or at the Hills' request.
In this regard, it is true that the Hills' names appear first on the $18,500.00
mortgage note dated October 28, 1993, and that Mrs. Zersen's name is not even typed on the
document, although she did sign it. The bank also submitted several other documents which
tend to support its contention. On the loan information and record sheet prepared by the
bank regarding the loan, Robert and Darlene Hill are listed as the borrowers, while Scott
and Mary Zersen are described as the co-borrowers. The purpose for the loan is specified
as a "personal loan for daughter." Similarly, there is a declaration of purpose
relating to the loan which reflects that Robert and Darlene Hill applied for an $18,500.00
loan, labelled a "personal loan for daughter." The declaration also specifies
that the primary collateral for the loan is "personal income" and the secondary
collateral is an assignment of land contract, but it is not clear whose income or what
assignment of land contract is involved.
Beyond these internal bank documents, however, the bank produced nothing signed by the
Hills which expressly indicates that they were the primary borrowers. Neither the Hills
nor the Zersens were required to fill out a credit application. The Hills apparently never
received the loan proceeds they allegedly borrowed from the bank. There is also no
evidence that they directed the bank to deliver those proceeds to the Zersens. In this
regard, the debtors submitted a credit voucher from the bank indicating that their account
had been credited with $18,500.00 in "loan proceeds," which they argue supports
their theory that the loan was to them. Further, the debtors have apparently made all the
payments on the loan. After examining the documents, the Court agrees that, when taken as
a whole, they tend to support the theory that Mr. Higgins fulfilled his promise to get the
Zersens the loan, and simply structured the paperwork to make it work. This interpretation
of the facts is further bolstered by Mr. Jicinsky's testimony that, although he was the
Hills' loan officer at the time, he had no involvement whatsoever in the preparation of
what the bank now claims was a loan to his customers.
In any event, the story continues. On December 28, 1993, Mr. Zersen appeared at the
bank and executed both the $131,727.87 business note and an assignment of land contract.
He testified that he signed the business note in a conference room with a number of bank
officers, while the assignment was executed in Mr. Higgins' office with Higgins alone. He
contends that he was told the assignment was to secure the $18,500.00 loan, and that it
had nothing to do with the business note. The bank has pointed to a notation at the bottom
of the business note, under the provision "for lender clerical use only," which
might refer to the assignment. Based upon this notation, the bank would have the Court
discount Mr. Zersen's testimony. However, it appears unlikely that Mr. Zersen would
manufacture a story about signing the documents in two different offices with two
different transactions in mind. Further, the bank has offered nothing but circumstantial
evidence to rebut his testimony -- in essence, the bank wants the court to disregard his
testimony because it would not make sense for the bank to act the way Mr. Zersen says it
acted. Unfortunately, the bank has offered no concrete evidence that it really didn't act
that way, and Mr. Zersen's testimony is at least credible evidence of what he believed at
the time the loan documents were executed.
After the Zersens moved to Boulder Junction, they decided to purchase the three
unimproved lots adjoining their home. They bought these lots on land contract in May of
1994 for a total purchase price of $6,500.00. In the meantime, the bank contacted them
about executing a note to replace the October 28, 1993 mortgage note. Apparently, the
Hills had made a large payment to the bank on some of their outstanding loans, and the
bank accidentally applied a portion of this payment to the $18,500.00 loan. When the error
was discovered, the parties decided that the best way to rectify the situation would be to
simply execute a new promissory note. On June 14, 1994, a new mortgage note was executed.
Thereafter, on October 14, 1994, the Zersens executed an assignment of land contract
assigning their interest in the May 1994 land contract to the bank for collateral as well.
In the fall of 1994, the debtors defaulted on the business note; this case was filed in
the spring of 1995.
There remain significant questions and inconsistencies in the tales told by both sides.
The fact that the debtor executed both the business note and the first assignment on the
same day is bothersome, as is the execution of the second land contract assignment. The
reason for its execution was never satisfactorily explained, except to the extent that the
bank suggested that it was obtained to further bolster its poor collateral position in
connection with the business note. However, the business note itself is troublesome. Other
than boilerplate language providing that it "is secured by all existing and future
security agreements and mortgages," there is nothing in it which would indicate the
bank intended to take collateral for the note.(2)
Further, the absence of any reference in the land contract assignments to the obligations
they purportedly secure is baffling, especially since the promissory notes do not
coherently express an intention to take specific collateral. The Court will discuss the
ramifications of the inconsistencies in the competing stories in part C of this opinion,
concerning confirmation of the debtors' plan.
B. Valuation of the Debtors' Homestead
The parties disagree on the value of the debtors' homestead. The property consists of
five lots located in a subdivision in Boulder Junction, Wisconsin. Three of the lots are
unimproved, while the remaining lots contain the debtors' house. Each side has submitted
an independent, third party appraisal. The debtors' appraiser states that the property is
worth $74,000.00, while the bank's appraiser contends that it is worth $85,000.00. It is
the Court's responsibility to determine the value of the property both for confirmation
and to determine the amount of the bank's secured claim.
11 U.S.C. § 506(a) provides for valuation of secured claims, and states in pertinent
[a]n allowed claim of a creditor secured by a lien on property in
which the estate has an interest, or that is subject to setoff under section 553 of this
title, is a secured claim to the extent of the value of such creditor's interest in the
estate's interest in such property, or to the extent of the amount subject to setoff, as
the case may be, and is an unsecured claim to the extent that the value of such creditor's
interest or the amount so subject to setoff is less than the amount of such allowed claim.
Such value shall be determined in light of the purpose of the valuation and of the
proposed disposition or use of such property, and in conjunction with any hearing on such
disposition or use or on a plan affecting such creditor's interest.
The phrase "value of such creditor's interest" in this
subsection means "the value of the collateral." United Savings Ass'n of Texas
v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed.
2d 740 (1988). There is no clear cut formula or benchmark for valuing a creditor's
collateral, and valuation depends upon the facts and evidence presented in each particular
case. In re Owens, 120 B.R. 487 (Bankr. E.D. Ark. 1990). "Value" is not a
narrow term which can be rigidly applied under the same standard in all cases for all
purposes; rather, the courts are called upon to determine "value" on a
case-by-case basis, in the process considering the purpose of valuation and the proposed
disposition or use of the subject property. In re Penick, 170 B.R. 914 (Bankr. W.D.
Mich. 1994). The code's expansive approach to valuation allows the court latitude to look
at a variety of methods for valuing the property. Id. at 917.
There are three generally recognized appraisal techniques available to determine the
fair market value of real property. First, there is the market or sales comparison
approach, which is based upon evidence of comparable sales. Second, there is the cost or
land development approach, in which actual costs of construction are reduced for
depreciation. Third, there is the capitalization of income approach, which capitalizes the
net future income that the property is capable of producing. See In re Melgar
Enterprises, Inc., 151 B.R. 34 (Bankr. E.D.N.Y. 1993). In this case, both appraisers
have utilized the market comparison approach, and the Court agrees that this method is the
most appropriate for this property.
The testimony of each appraiser was quite helpful to the Court in determining why they
came to their respective conclusions. Each appraisal utilizes the value of the land itself
in determining overall value. In this regard, the bank's appraiser valued the five lots at
approximately $5,500.00 each while the debtors' appraiser valued them at only $4,000 each,
for a total difference of approximately $7,500.00. The disparity is based largely upon the
fact that the bank's appraiser placed considerable weight upon the recent sale of several
interior lots in the same subdivision as the subject property, while the debtors'
appraiser made adjustments to those lot sales because he believed they were more desirable
than the debtors' property. The lots used as comparables are larger than the debtors' lots
and are located on the interior of the subdivision, while the debtors' property is on the
town road on the exterior of the subdivision. The bank's appraiser believed that market
demand justified his failure to make any adjustments to the comparable sales, but the
debtors' appraiser submitted that even in a seller's market lot size and location were
still a factor.(3)
Another discrepancy involved the type of heating system in the house, and it appears
that the bank's appraiser was mistaken about the presence of a gas forced air system. The
actual system, an electric forced air system, adds considerably less value to the house,
resulting in a difference of approximately $1,000.00 between the two appraisals. The
parties also disagreed about the general condition and value of the type of home
constructed on the debtors' property. The house is a manufactured or "pre-fab"
house approximately 25 years old. The bank's appraiser testified that in his opinion the
house was worth as much as a traditional "stick-built" home, while the debtors'
appraiser contended that a manufactured home of this vintage was generally of lesser
value. This difference of opinion accounted for the remaining disparity in value.
The Court agrees with the debtors' appraiser concerning the comparative value of
manufactured homes, as well as the relative value of this home given its condition. The
Court also agrees that the mistake made by the bank's appraiser regarding the heating
system should be discounted. However, the Court disagrees with the debtors' appraiser
concerning the value of the land itself. While the Court recognizes that in general
interior lots are more valuable than lots on the exterior of subdivisions, in this
particular case $4,000.00 per lot seems low given the apparent demand for lots and the
evidence regarding comparable sales. On the other hand, the failure of the bank's
appraiser to make any adjustment to his comparables for their larger size and more
desirable location precludes the Court from merely accepting his valuation of the lots.
Given the foregoing discussion, the Court accepts the debtors' appraisal of $74,000.00,
but modifies it to provide for an increase of $500.00 in the value of each lot, for a
total increase of $2,500. The value of the debtors' homestead for purposes of determining
the bank's secured claim is therefore set at $76,500.00.
C. Confirmation of the Debtors' Plan
Confirmation of the debtors' plan seemingly hinges upon the debtors' ability to
allocate payments to the cosigned obligation. The battle over this provision in the
debtors' plan has caused the parties to summon the common law regarding allocation of
payments, the "identical source" rule, and the doctrine of marshalling of the
assets. It has also caused the bank to complain that it is being treated inequitably, and
that it is being forced to give the debtors and the Hills an $18,500.00 "gift."
However, the parties have not focused at any length upon what lurks behind the payment
issue, and what likely fuels the bank's attacks on the debtors' plan -- the co-debtor stay
of 11 U.S.C. § 1301. It appears that it is the effect of the co-debtor stay that the bank
is truly hoping to avoid, and the Court must accordingly set the stage for a discussion of
the issues by discussing the effect of § 1301.
Section 1301(a) provides, in pertinent part, that:
Except as provided in subsections (b) and (c) of this section, after
the order for relief under this chapter, a creditor may not act, or commence or continue
any civil action, to collect all or any part of a consumer debt(4)
of the debtor from any individual that is liable on such debt with the debtor, or that
secured such debt, unless --
(1) such individual became liable on or secured such debt in the
ordinary course of such individual's business; or
(2) the case is closed, dismissed, or converted to a case under
chapter 7 or 11 of this title.
An issue raised in the course of this proceeding is the type of "co-debtor"
protected by § 1301. Without ever mentioning § 1301,(5)
the bank seemingly submits that the Hills are not "co-debtors" because the
$18,500.00 loan was made to them, not the debtors. Once the Hills are defined as the
"primary obligors," in the bank's estimation equity requires that they repay the
loan. However, if they are "co-debtors" of the Zersens, the bank's argument
suffers greatly, because under § 1301 co-debtors are protected from collection efforts by
creditors to the extent that the chapter 13 plan provides for full payment of the debt. In
re Pardue, 143 B.R. 434 (Bankr. E.D. Tex. 1992). The only protection afforded the
creditor is that the debtor cannot unilaterally extinguish the co-debtor's liability
without full payment of the debt. Id. at 437. The creditor may therefore have
relief from the stay to proceed against the co-debtor only to the extent that the
plan fails to pay for a portion of the debt. Matter of Bradley, 705 F.2d 1409, 1413
(5th Cir. 1983).(6)
The bank seems to believe that the "primary" or "secondary" nature
of the nondebtor's liability determines which "co-debtors" are protected by §
1301 and entitled to benefit from the provisions of a debtor's chapter 13 plan. However,
while § 1301(c)(1) provides an exception to the stay for situations in which the alleged
co-debtor received the consideration for the creditor's claim, there is no other statutory
basis for a distinction between levels of liability. Indeed, the Court has found only one
case which arguably supports a difference in treatment based upon the "primary"
nature of the nondebtor's liability, and that case appears to have been decided by a
misreading of § 1301.
In In re Kelley, 22 B.R. 150 (Bankr. M.D. Ala. 1982), the court found that the
co-debtor stay did not protect a co-obligor because the debtor had not been the
"primary obligor." The facts in Kelley were remarkably similar to the
present case. The debtor contacted the creditor in hopes of obtaining a loan. He did not
make an application for a loan because his discussions with the creditor indicated his
credit history was unsatisfactory. The debtor then asked his mother to assist him in
obtaining a loan, and the mother agreed. The mother applied for a loan from the creditor
and was treated as the borrower by the creditor. In fact, it was only at her request that
the son's name was added to the loan documents. The loan proceeds were made payable to
both the mother and the son, but the parties all knew the loan was for the son.
The creditor objected to the debtor's plan and sought relief from the provisions of §
1301. Although the debtor proposed to repay the debt under his plan, the court concluded
that the situation had not been contemplated by the drafters of the code, and that the
mother was not a "co-debtor" within the meaning of § 1301. The court stated:
It can only be concluded from the facts that the mother of the debtor
. . . is the principal and primary borrower from [the creditor] and that [the creditor]
did not seek the mother as a guarantor, endorser, or surety but rather loaned her the
money with the knowledge that she intended to give it over to her son. The fact that the
son signed the note and received the consideration does not of itself render the mother a
codebtor protected by the automatic stay provided by Section 1301 of the Code. [cite
omitted]. No new liability was created as to the mother by reason of the filing of the
case and the chilling effect on prospective debtors by reason of their codebtors becoming
liable for their debts is not present in this case.
Id. at 151.
This Court, however, must disagree with Kelley's analysis of § 1301(a), as that
code section protects not only those parties who "secured such debt" (i.e., the
guarantors, endorsers, or sureties the Kelley court mentioned) but also those
parties who are "liable on such debt with the debtor" (i.e., co-obligors).
Section 1301(a) simply makes no distinction between "primary" and
"secondary" liability. The question is liability in general, and if both the
debtor and co-debtor are liable, the co-debtor stay of § 1301 applies. See In
re Lopez Melendez, 145 B.R. 740, 743 (D. Puerto Rico 1992) (section 1301 is designed
to protect debtor from indirect pressure of family and friends who have cosigned
Indeed, the majority of courts have recognized that the only time the co-debtor stay
should be lifted are in situations in which the debtor is actually the co-debtor in the
disputed transaction. In these circumstances, § 1301(c)(1) provides the creditor with
relief from the stay to the extent that the nondebtor party received the consideration for
the creditor's claim. The legislative history reflects that the indirect pressures upon
debtors that Congress sought to avoid simply would not be present when the nondebtor party
actually received the consideration for the claim. See 124 Cong. Rec. H11106
(September 28, 1978); S17423 (October 6, 1978). Even under § 1301(c), however, the
co-debtor stay should be lifted only in those situations where the debtor did not
receive any of the consideration for the loan, as otherwise the indirect pressure
to pay will still exist. Lopez Melendez, 145 B.R. at 743. See also In re
Motes, 166 B.R. 147 (Bank. E.D. Mo. 1994); In re Rhodes, 85 B.R. 64 (Bankr.
N.D. Ill. 1988).
In this case, the Zersens and the Hills are clearly jointly obligated on the loan. The
bank concedes this fact by asserting a claim against the Zersens for the $18,500.00 loan.
The Hills did not receive any of the consideration for the loan; the debtors did. The
money was deposited directly into the debtors' account. Therefore, there is no basis for
finding that the debtors were actually the co-debtors. Even if the Hills were the
"primary obligors," an assertion which is not borne out by the evidence, there
is still no basis for precluding them from benefiting from § 1301 and the debtors' plan.
The co-debtor stay protects those who are "liable on such debt with the debtor,"
see § 1301(a), and as the debtors received the loan proceeds the Hills are
co-debtors within the meaning of that section. Rhodes, 85 B.R. at 65.
The debtors in this case propose full payment of the $18,500.00 cosigned debt.
Normally, the bank would be obligated to accept the plan payments and forebear from taking
any action against the co-debtors as a result of § 1301(a). Bradley, 705 F.2d at
1413. However, the bank argues that it should be absolved from the impact of § 1301(a)
because of the business note upon which the debtors alone are liable. The bank argues that
the Hills should pay the $18,500.00 debt and the plan payments should be allocated to the
business note instead. To find in the bank's favor, the court would have to decide (i)
that the debtors cannot direct the application of plan payments to benefit the Hills and
(ii) that the business note is in fact secured by the debtors' home.
As to whether the debtors may allocate plan payments to the cosigned debt, the debtors
and the bank have both cited state law in support of their arguments. The debtors contend
that the "identical source" rule permits them to allocate payments. The bank
argues that the doctrine of "marshalling of the assets" prohibits allocation of
payments to the debt. Presupposing for the moment that the bank were secured as to the
business note, however, neither party is correct. This case is simply dictated by the
common law rule of payment, which is that
[w]here 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. [cites
omitted]. Where the debtor fails to direct the application of the payment to a particular
debt, the creditor may apply the payment as he chooses. [cites omitted]. If neither the
creditor nor the debtor applies the payment, then the court makes the application in
accordance with equitable principles.
Moser Paper Co. v. North Shore Pub. Co., 83 Wis. 2d 852, 857-58,
266 N.W.2d 411, 414-15 (1978); see also Lyman Lumber of Wisconsin, Inc. v.
Thompson, 138 Wis. 2d 124, 127, 405 N.W.2d 708, 710 (Wis. Ct. App. 1987).
The "identical source" rule cited by the debtors is an exception to Moser
Paper's general rule. Under this exception, where payment is made to a creditor who
knows that the payment is derived from a particular source or fund, the creditor must
apply it to the exoneration of the debt related to that source or fund, at least where the
rights of third parties are concerned. Moser Paper, 83 Wis. 2d at 858, 266 N.W.2d
411. The debtors have cited this exception in support of their position, arguing that the
"equity" in their home is somehow the source of repayment, and that this equity
was the result of the loan. Under the identical property rule, however, both the loan and
the payment must truly be derived from the same source, and the debtor's
"equity" is not a payment source. An example of the application of this rule
would be if the debtors, having used the loan proceeds to buy their house, then sold the
house and paid the bank the proceeds. In that case, the bank would be required to apply
the payment to the home loan, because the rights of third parties (i.e., the Hills) would
be implicated. See Sorge Ice Cream & Dairy Co. v. Wahlgren, 28 Wis. 2d
220, 137 N.W.2d 118 (1965) (where loan was used to purchase equipment guaranteed by
debtor's sister, creditor was required to apply funds derived from sale of equipment to
satisfy the equipment loan). In this case, the payments to the bank are not derived from
the property; rather, the payments come from the debtors' paycheck, a completely unrelated
The doctrine of marshalling of the assets also does not apply. The doctrine of
marshalling of the assets is an equitable doctrine, and has been described under Wisconsin
law as follows:
Where a creditor has a lien on or interest in two funds or properties
in the hands of the same debtor, and another creditor has a lien on one of these funds or
properties, equity at the request of the latter creditor will compel the creditor with two
funds to satisfy his debt out of that fund to which the other creditor cannot resort.
Moser Paper, 85 Wis. 2d at 860, 266 N.W.2D 411. In this case, it
is quickly apparent that the necessary predicates for application of the doctrine are
simply not present. Marshalling requires not only two creditors but also two distinct
funds. The bank's attempt to characterize the Hills as creditors is weak at best, as is
its attempt to characterize itself as two creditors in one corporate body. The Hills do
not have a secured claim against the debtors; at present they have no claim at all.
Additionally, there is no fund to which they have recourse that the bank does not, nor
does the bank have a claim to collateral that the Hills do not. The law requires two distinct
creditors, and the bank stands alone, albeit with two independent claims. Even if the bank
were to be treated as two creditors, however, under Moser Paper it would still be
without a remedy. The dispute, if any, between the bank's two claims merely involves
whether one claim should proceed against the co-debtor instead of debtor. Moser Paper
clearly states that the presence of a surety (or co-debtor) is insufficient to invoke the
doctrine. Id. at 862, 266 N.W.2d 411.
In sum, the issue of the debtors' right to direct application of payments under the
plan is controlled by the general rule that the creditor must do as the debtor directs. Moser
Paper, 83 Wis. 2d at 857-58, 266 N.W.2d 411. If a debtor may direct which debts are
paid at common law, there does not appear to be any reason for holding that the bankruptcy
code somehow interferes with this right. To the contrary, a similar holding was validated
by the Supreme Court in the case of United States v. Energy Resources Co., 495 U.S.
545, 110 S. Ct. 2139, 109 L. Ed. 2d 580 (1990). In Energy Resources, the debtor
sought to allocate payments to the I.R.S. so that the first taxes eliminated would be the
"trust fund" taxes, while the general taxes would be paid later. The I.R.S.
objected, arguing that the debtor should pay the general taxes first because the I.R.S.
had recourse against others for the trust fund taxes. Since the debtor might default after
paying the trust fund taxes and leave no one to pay the remaining taxes, the I.R.S. argued
that the debtor's proposed allocation was improper. The Supreme Court rejected the
argument, finding that the bankruptcy court had the authority to order the I.R.S. to apply
the payments to the trust fund taxes if the bankruptcy court found that the allocation was
necessary to the success of the reorganization plan. The Supreme Court stated:
The Bankruptcy Code does not explicitly authorize the bankruptcy
courts to approve reorganization plans designating tax payments as either trust fund or
nontrust fund. The Code, however, grants the bankruptcy courts residual authority to
approve reorganization plans including "any . . . appropriate provision not
inconsistent with the applicable provisions of this title." 11 U.S.C. § 1123(b)(5); see
also § 1129. The Code also states that bankruptcy courts may "issue any order,
process, or judgment that is necessary or appropriate to carry out the provisions" of
the Code. § 105(a). These statutory directives are consistent with the traditional
understanding that bankruptcy courts, as courts of equity, have broad authority to modify
495 U.S. at 549, 110 S. Ct. at 2142,109 L.Ed.2d at 586.
11 U.S.C. § 1322(b)(10) is identical to § 1123(b)(5), and provides that the court may
approve any provision in a chapter 13 plan which is not inconsistent with the other
provisions of the bankruptcy code. Clearly, there is nothing about the debtors' intent to
allocate payments to the cosigned debt which is inconsistent with the code. Instead, it is
contemplated by § 1301 and it is authorized by state law. Further, a similar directive
was approved in Energy Resources. There is simply no reason to deny the debtors the
right to allocate payments as they see fit within the parameters of the code and
applicable state law if the allocation is necessary to effectuate the debtors'
Regardless, even if the debtors were not entitled to allocate payments, the bank is not
entitled to the relief it seeks. As the Court has indicated previously, the loan documents
in this case are in disarray, completely lacking any clear indication of what the parties
intended. To call the documents ambiguous may be generous, given the absence of any
language which evidences that the assignments secure either the business note or the
$18,500.00 note. Nonetheless, it is this Court's burden to interpret the loan documents,
and given the patent ambiguities in the documents, the Court must resort to various
time-honored rules of contract construction to do so. See Capital Investments,
Inc. v. Whitehall Packing Co., Inc., 91 Wis. 2d 178, 280 N.W.2d 254 (1979) (after a
contract is found to be ambiguous, the court may determine parties' intent by extrinsic
evidence and canons of construction).
Generally speaking, the best indicator of the parties' intent is the language of the
contract itself. Matter of Alexander's Estate, 75 Wis. 2d 168, 248 N.W.2d 475
(1977). In construing a written contract, the entire instrument must be considered as a
whole in order to give each of its provisions the meaning intended by the parties. Ketay
v. Gorenstein, 261 Wis. 332, 53 N.W.2d 6 (1952). In determining the parties' intent,
it is appropriate to consider factors happening before and after the signing of the
agreement. H. & R. Truck Leasing Corp. v. Allen, 26 Wis. 2d 158, 131 N.W.2d 912
(1965). The omission of words may be considered in construing a contract. Farley v.
Salow, 67 Wis. 2d 393, 227 N.W.2d 76 (1975). A fundamental rule of contract
construction is that in construing a contract's ambiguity the court's primary guideline
should be to construe that ambiguity most strongly against the party drafting the
document. Capital Investments, supra, 91 Wis. 2d at 190, 280 N.W.2d 254; see
also Goebel v. First Federal Savings and Loan Ass'n of Racine, 83 Wis. 2d 668,
266 N.W.2d 352 (1978).
With these rules of construction in mind, the Court now turns to the loan documents.
There is nothing in the business note, other than boilerplate language on the back page,
which indicates that the assignment of land contract was intended as collateral for this
note. The notation at the bottom is clearly not binding upon the debtors, as it was
expressly for "lender clerical use only." On the other hand, the document
executed to reflect the $18,500.00 loan is titled "mortgage note." The debtors
both testified that they believed, and were told by Mr. Higgins, that the assignment was
only intended to secure the $18,500.00 loan. There is really no evidence to the contrary.
As the Court noted in part A of this opinion, it finds that the documents support their
contention that Mr. Higgins simply structured the loan transaction to get the Zersens
their loan. It also appears that they only intended the assignments to secure the
$18,500.00 loan. Due to the numerous ambiguities in the documents the Court is constrained
to construe the ambiguities against the bank and hold that the assignments secure only the
$18,500.00 loan, not the business note. Capital Investments, 91 Wis. 2d at 190, 280
The Court notes that it appears as if the bank, through Mr. Higgins, attempted to
assist these debtors when another bank would not. For that effort it is to be commended.
However, by doing so the bank took a risk, and the fact that it provided the debtors with
financial assistance cannot strip the debtors of their rights under the bankruptcy code.
Given the state of the loan documents, which precludes a finding that the bank is secured
as to the business note, the bank's objections to confirmation are denied, and the
debtors' plan is confirmed.
This decision shall constitute findings of fact and conclusions of law pursuant to
Bankruptcy Rule 7052 and Rule 52 of the Federal Rules of Civil Procedure.
1. Mr. Higgins did not testify at the hearing. Therefore, the
debtors' version of the facts surrounding his involvement in the loan transaction stands
largely uncontroverted. The bank officer present at the hearing, Jeffrey Jicinsky, was the
Hills' loan officer, and testified that he had no involvement in the preparation
of the loans at issue.
2. There was considerable discussion at the hearing regarding the
"box" on the business note which provides "Unless checked here, this note
is NOT secured by a first mortgage or equivalent security interest on a one-to four family
dwelling used as a Maker's principal place of residence." Mr. Jicinsky testified at
trial that the box should have been checked if the bank intended to take a mortgage. In
subsequent correspondence, Mr. Greenhalgh contends that the box was properly not checked
because the bank could not have taken a first mortgage given the prior interest of the
land contract vendors. All of this simply further highlights the numerous inconsistencies
and ambiguities in the bank's loan documents, the effect of which the Court discusses more
fully in part C of this opinion, below.
3. Notably, neither appraiser placed much weight upon the debtors'
purchase price of $6,500.00 for three lots in May of 1994. In fact, their purchase price
was discounted by the debtors' appraiser as a "good deal." This sale also took
place over a year ago, and the more recent sales of lots in the area justify a finding
that this price was in fact quite low for the market.
4. The bank has apparently conceded this is a "consumer
debt", which is defined as one incurred primarily for a personal, household or family
purpose. See 11 U.S.C. § 101(8). Although there has been some question as to
whether an obligation secured by real property is a consumer debt, see In re
Ikeda, 37 B.R. 193 (Bankr. D. Hawaii 1984), the better view is that a loan incurred by
a debtor to purchase a family home is a consumer debt. See Matter of Booth,
858 F.2d 1051, 1054-55 (5th Cir. 1988); In re Johnson, 115 B.R. 159, 162 (Bankr.
E.D. Ill. 1990); In re Gunderson, 76 B.R. 167, 169 (Bankr. D. Ore. 1987). The
decision in In re Nenninger, 32 B.R. 624, 626 (Bankr. W.D. Wis. 1983) has no impact
on this decision, as the property involved in that case was a commercial campground.
5. The bank's attorney did refer to the co-debtor stay in closing
argument, when he indicated that if the bank's objections to confirmation were sustained,
it would seek relief from the stay.
6. Of course, if the debtor defaults under the plan, the co-debtor
remains liable for the deficiency. Bradley, 705 F.2d at 1413.
7. Even if Kelley were correct in its analysis of § 1301(a),
its holding would be inapplicable in this case. There is no evidence that the bank treated
the Hills as the borrowers. Instead, all the evidence points to a joint obligation simply
cosigned by the Hills as an accommodation.