In re Curtis

Citations: 500 B.R. 122; 2013 Bankr. LEXIS 3908; 2013 WL 5310472Docket: No. 13-40997-JJR

Court: United States Bankruptcy Court, N.D. Alabama; September 19, 2013; Us Bankruptcy; United States Bankruptcy Court

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Angie Curtis (the "Debtor") proposed a Chapter 13 bankruptcy plan aimed at addressing her arrears under an Agreement for Deed with AR Seven, LLC (the "Creditor"), which involves her homestead. The plan intends to cure these arrears and maintain ongoing payments. The Creditor objected, asserting that the Debtor's rights under the Agreement were terminated before the bankruptcy filing. The Standing Chapter 13 Trustee supports the Debtor, arguing that the Agreement should be treated as a secured claim rather than an executory contract.

To resolve the Creditor’s objection, the Court must determine whether the Agreement for Deed falls under executory contracts, which must be assumed or rejected, or if it qualifies as a secured transaction, allowing for default cures and ongoing payments. The Agreement, executed on October 15, 2011, outlines a purchase price of $32,000.00, financed over twenty years at an interest rate of 10.0208%. It does not contain typical lease language but instead resembles a promissory note and mortgage. 

The Debtor retains possession and responsibility for taxes and insurance, while the Agreement allows for the delivery of a deed upon full payment. In the event of default, the Creditor may convert the Debtor’s interest into a month-to-month tenancy, potentially leading to eviction. The terms include secured transaction language, but lack standard mortgage provisions like power of sale or defeasance clauses. The Court's decision will hinge on the classification of the Agreement for Deed in relation to the bankruptcy plan.

The Agreement for Deed resembles a traditional mortgage, characterized by its secured, purchase-money financing arrangement for the Debtor’s homestead, despite lacking some elements of a full mortgage. The Debtor has occupied the property since the Agreement’s initiation and remains in possession despite defaulting on $4,500 in prepetition payments. The Creditor filed for unlawful detainer and sent termination notices before the bankruptcy case commenced, claiming these actions negated the Debtor's interest in the homestead under state law, thus preventing her from including it in her bankruptcy estate.

The Debtor's bankruptcy Plan aims to treat the Agreement for Deed as a secured transaction, allowing her to cure the default over time while continuing payments. The Creditor objects, arguing the Agreement is merely an executory contract with no remaining interest for the Debtor to protect. The analysis of the legal framework is complex, with differing interpretations among cases regarding state law, contract language, and party relationships. Notably, the Eleventh Circuit's decision in Sipes v. Atlantic Gulf Communities Corp. supports the notion that the Debtor may treat the Agreement for Deed as a secured transaction, emphasizing the critical role of the debtor's position in determining the treatment of installment sales contracts in bankruptcy.

The circuit court applied the "functional approach" to assess executoriness, referencing In re Booth, which allows a debtor-vendee to categorize certain contracts as secured claims eligible for cure and reinstatement, rather than requiring assumption or rejection as executory contracts. The Eleventh Circuit's General Development opinion acknowledges that state law governs property rights in bankruptcy unless overridden by federal interests, which are relevant in cases involving executory contracts such as collective bargaining and real property sales when the debtor is the seller. The distinction between a debtor as a seller versus a buyer is crucial, as non-debtor vendees may receive more favorable treatment under Sections 365(i) and 365(j) compared to debtor-vendees, who may benefit from other provisions of the Bankruptcy Code. The court emphasized that the implications of applying Section 365, in terms of benefits to the estate and creditor protection, are more important than the contractual form. While the Eleventh Circuit has not definitively adopted the "functional approach" over the "Countryman approach," it appears to favor the former, as seen in In re Martin Brothers Toolmakers, where leases and installment sales contracts may function as secured financing transactions. The determination of whether an agreement is a lease or a security agreement hinges on which characterization best serves the estate's interests. Section 365 allows the bankruptcy trustee to affirm or reject leases and executory contracts, based on whether rejection can achieve intended objectives. The Eleventh Circuit's endorsement of the functional approach will guide this court in deciding if the Agreement for Deed is an executory contract or a secured transaction, impacting whether it must be assumed or rejected under Code § 1322(b)(7) or if prepetition defaults can be cured while ongoing payments are made under Code § 1322(b)(5).

Preserving the chapter 13 Consumer-Debtor’s residence is crucial for the estate and the success of the Debtor’s plan. The Court reviewed the bankruptcy court's ruling in In re Parker, which indicated that a debtor's rights under an agreement could be forfeited under Alabama law if the creditor terminated the agreement prepetition. However, the Court emphasizes that the analysis should also consider the implications of applying Code § 365, particularly regarding the estate's welfare and the creditor's interests if their claim is treated as secured. Treating the Agreement for Deed as an executory contract would necessitate that the Debtor cure $4,500 in arrears promptly or risk losing her home. Although the Debtor may manage to cure the arrears over the plan's duration, she lacks the immediate means to cure the default at the Plan's confirmation.

Allowing the Agreement for Deed to be treated as a secured claim enables the Debtor to address the arrears over time while continuing regular payments, aligning with Congress's intent for distressed homeowners under Code § 1322(b)(5). In the Booth case, a real estate broker debtor sought to classify a contract for deed as a secured transaction, despite the sellers' objections. The court permitted this classification, adopting a functional approach that prioritizes the benefits of reorganization rather than strictly adhering to contract forms. This approach provides debtors flexibility while requiring adequate protection for vendors. The Court concluded that the application of § 365 should mainly serve to assist the Debtor and the estate, rarely disadvantaging a consumer-debtor's right to housing. The case reflects a broader judicial trend favoring debtors' rights in similar circumstances, as seen in In re Fox. Ultimately, the Court leans towards allowing the Debtor to treat the installment land sale contract as a security device rather than as an executory contract, emphasizing the protective intent behind § 365 for consumer debtors.

The court in Fox analyzed conflicting case law regarding the classification of land sale installment contracts, noting that such contracts are deemed executory under certain state laws but that this designation does not dictate their treatment under federal bankruptcy law. It emphasized that state legislatures cannot define the status of these contracts in a manner that contradicts the bankruptcy code due to the Supremacy Clause. The court underscored the importance of preserving homes within the context of Chapter 13 bankruptcy, indicating reluctance to enforce forfeiture provisions that would remove a debtor from their home while they remain in possession and no final judgment for possession exists.

The commencement of a Chapter 13 case prior to a mortgage foreclosure halts the sale, granting debtors the opportunity to rectify defaults through a repayment plan. The court argued for a functional approach that would benefit the debtor while also safeguarding the creditor’s interests. By classifying the contract for deed as a lien, rather than an executory contract, the estate's value is increased, facilitating the debtor's rehabilitation and ensuring that creditors, including lienholders, receive adequate protection.

Under the debtor’s proposed plan, the creditor retains the economic benefits of their agreement, although modified to allow for arrears to be addressed over the plan's duration. The creditor retains the right to seek relief from the stay for causes such as inadequate protection. The court highlighted that while the vendor's right to payment may be temporarily suspended, their security interest in the property remains protected, balancing the rights of vendors, creditors, and the estate. If the debtor successfully executes the plan, the creditor will be restored to their pre-bankruptcy position, receiving all owed payments, while failure to do so allows the creditor to pursue state court remedies for possession.

The Creditor's Objections to Confirmation (Docs. 33, 56) are overruled, and the Creditor's Motion to Determine that No Leasehold Existed (Doc. 34) is denied. The references to the "Code" and "Bankruptcy code" pertain to 11 U.S.C. § 101, et seq. The notarized Agreement for Deed has not been recorded. The Eleventh Circuit's decision in Thompkins v. Lil’ Joe Records emphasizes that the bankruptcy court's approval of the rejection of the 1989 Agreement aligns with a "functional approach" to "executoriness," as supported by General Development, 84 F.3d 1364. The Creditor argues that under Alabama law, the Agreement for Deed should be classified as an executory contract and thus terminated, citing In re Dunn and Taunton v. Reding. However, the distinctions in these cases, particularly between the roles of vendor and vendee, are critical. The Eleventh Circuit's precedent suggests that the treatment of such contracts affects the bankruptcy estate differently based on whether the debtor is the vendor or vendee. The court in Booth raises the issue of whether prepetition forfeiture could terminate the vendee's interest before filing, but it also questions if state law provisions for cure and repayment could override this forfeiture. The Court concludes that the Debtor's possessory interest qualifies for cure and repayment under a chapter 13 plan, preventing the forfeiture of the Debtor's homestead and its adverse effects on the estate. The Court notes that its ruling might differ if the property were vacant or if a final judgment for possession had been issued prior to the petition filing.