§ 102.9     Land Sales Contracts and Contracts to Make a Deed
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 102.9, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Land sales contracts and contracts to make a deed are troublesome in Chapter 13 cases. Counsel’s first task is to determine whether the deal is a true executory contract that can only be assumed or rejected consistent with § 3651 or whether the contract is a financing device that can be treated like any other real estate-secured claim. There are a significant number of reported Chapter 13 decisions in which bankruptcy courts have found that land sales contracts or contracts to make a deed are financing devices that can be managed as secured claims.2

[2]

The principal consequence of determining that a land sales contract or contract to make a deed is a security device is that the debtor can cure default and maintain payments under § 1322(b)(5)3 or, if the claim is not protected from modification by § 1322(b)(2),4 cram down the claim under § 1325(a)(5):5 pay the present value of the land through the plan and treat any deficiency as an unsecured claim. Even if the claim is protected from modification by § 1322(b)(2), the advantage of treatment as a security interest is that the debtor will have a reasonable time to cure any default under § 1322(b)(5)6 rather than being required to cure promptly by § 365.7

[3]

Determining that the contract is a disguised security interest will not always help the debtor. If the contract is secured only by real property that is the debtor’s principal residence, once recharacterized as a security device, the contract will be protected from modification by § 1322(b)(2).8 A contract protected from modification by § 1322(b)(2) must be performed consistent with its terms. For example, in a case decided before the enactment of § 1322(c)(2),9 a land sales contract protected from modification by § 1322(b)(2) that required a balloon payment could only be provided for through the plan by paying the balloon in full when due, according to the contract.10

[4]

Even if the land sales contract is not protected from modification by § 1322(b)(2), the power to modify may not be of much use to the debtor.11 For example, if the amount due under the contract is great and the value of the real property supports a large secured claim, § 1325(a)(5) requires the debtor to pay the full amount of the secured claim during the life of the plan.12 The debtor’s only alternative for keeping the property may be curing default and maintaining payments under § 1322(b)(5).13

[5]

If the contract is a true conditional sale of land, the debtor must comply with § 365, and there are important limits on what the debtor can do with the agreement through the plan.14 If the debtor is the vendor under a conditional land sales contract and if the vendee does not consent to rejection, § 365(i) applies, and the debtor is prohibited from dispossessing the vendee through the plan.15 A contract to make a deed is not assumable when the vendor gave appropriate notices of cancellation under state law before the filing of the Chapter 13 case and the debtor failed to cure within the time periods permitted under state law as extended by § 108(b).16 When the debtor came into Chapter 13 by conversion and a real estate installment sales contract was lost during the Chapter 7 case by failure of the debtor to assume within the time permitted by § 365, conversion to Chapter 13 does not revive the power to assume.17 If the land sales contract is an executory contract and the debtor is the purchaser, the seller has the usual right under § 365(d)(2) to move the court to require the debtor to assume or reject within a specified time.18


 

1  See §§ 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts, 173.1 [ Debtor Must Cure Defaults and Assure Future Performance ] § 102.2  Debtor Must Cure Defaults and Assure Future Performance and 175.1 [ Fake Leases and Rental Agreements ] § 102.8  Fake Leases and Rental Agreements.

 

2  See Kane v. Inhabitants of Harpswell (In re Kane), 248 B.R. 216, 224 (B.A.P. 1st Cir. 2000) (“[T]he installment land sales contract is not an executory contract because under the terms of the particular transaction and in accordance with Maine law, the Contract was essentially a sale of real estate pursuant to which the Debtors became the equitable owners.”), aff’d, 254 F.3d 325 (1st Cir. 2001); In re Belmonte, 240 B.R. 843 (Bankr. E.D. Pa. 1999) (Debtor’s contract to purchase land from his mother was a security device, not an executory contract; prepetition state court judgment that debtor had no legal or equitable interest in the real property was binding, and seller was entitled to relief from the stay.), aff’d in part and rev’d in part, Nos. CIV. A. 99-CV-6495, 99-18111SR, 2001 WL 177183 (E.D. Pa. Jan. 19, 2001) (State court “verdict” that debtor had no interest in real property under an installment land sales contract between the debtor and his mother was not final for preclusion purposes under Pennsylvania law because the debtor’s motion for post trial relief was pending at the Chapter 13 petition. However, bankruptcy court’s decision to grant mother relief from the stay was appropriate.); In re Robinson, No. 03-18339, 2003 WL 22996982 (Bankr. E.D. Pa. Dec. 12, 2003) (unpublished) (Although debtor was vendee pursuant to an installment contract for sale of real estate, because Secretary of Veterans Affairs treated the contract as if it were a mortgage, debtor can cure default under § 1322(c)(1) notwithstanding that the Secretary obtained a writ of possession before the petition.); In re Brown, 249 B.R. 193, 195–96 (Bankr. N.D. Ill. 2000) (“[U]nder the Illinois Mortgage Foreclosure Law, if the buyer under a long-term real estate installment contract has paid a substantial portion of the amount due, the contract is treated as a mortgage . . . . [W]here the mortgage foreclosure procedure is not required, the seller must comply with the provisions of the Forcible Entry and Detainer Act . . . in order to effect a forfeiture of the buyer’s interests.” Seller is not entitled to relief from the stay and the debtor can cure default under § 1322(c)(1) when Chapter 13 petition was filed before any stay was ordered by the state court in a FEDA proceeding.); In re Verdi, 244 B.R. 494 (Bankr. M.D. Ga. 2000) (Installment land sales contract under Georgia law is most like a “bond for title”; because the seller did not foreclose by legal proceedings before the petition, the debtor’s interest became property of the Chapter 13 estate notwithstanding prepetition default in payments.); In re Groff, 223 B.R. 697 (Bankr. S.D. Ill. 1998) (Applying Illinois law, installment contract for the sale of land was a security device, and debtors became equitable owners; judgment lien impaired debtors’ interest and could be avoided under § 522(f).); In re Vinson, 202 B.R. 972 (Bankr. S.D. Ill. 1996) (Applying In re Streets & Beard Farm Partnership, 882 F.2d 233 (7th Cir. 1989), installment contract for the sale of commercial real estate was a financing arrangement, not an executory contract; thus, the debtor could treat it through the plan as a secured transaction.); In re Molitor, 133 B.R. 1020 (Bankr. D.N.D. 1991) (Under North Dakota law, mortgages and contracts for deed are treated the same.); In re Hayes, 101 B.R. 569 (Bankr. E.D. Ark. 1989); In re Cooper, 98 B.R. 294 (Bankr. W.D. Mich. 1989) (Under Michigan law, land sales contract is treated like a mortgage.); In re Capodanno, 83 B.R. 285 (Bankr. E.D. Pa. 1988) (Real estate installment sales contract can be characterized as a security device rather than an executory contract if the debtor unequivocally and timely chooses. Vendor is not entitled to relief from the stay if the debtor continues to make the monthly payments and otherwise adequately protects the vendor by paying taxes, insurance, and so forth.); In re Sennhenn, 80 B.R. 89 (Bankr. N.D. Ohio), aff’d, 80 B.R. 93 (N.D. Ohio 1987) (Land installment contract is not an executory contract subject to § 365 but is a security device. Because contract calls for balloon payment, debtors cannot treat the contract under § 1322(b)(5) except to pay balloon in full.); In re Johnson, 75 B.R. 927 (Bankr. N.D. Ohio 1987) (Land installment contract was financing device not subject to § 365. However, Chapter 13 plan cannot modify rights of vendor under § 1322(b)(2).); In re Leazier, 55 B.R. 870 (Bankr. N.D. Ind. 1985) (Land sales contract is not executory in nature but is merely a financing device when the purchaser has made substantial payment and has not abandoned the property and the seller has no substantial performance obligation remaining. Chapter 13 debtor may treat the contract as a security device.); Thorpe v. Jones, 54 B.R. 697 (Bankr. E.D. Ark. 1985) (Adopting the analysis in In re Booth, 19 B.R. 53 (Bankr. D. Utah 1982), court finds that the contract for sale of real estate is a security device similar to a mortgage; thus, debtors may treat the contract as a long-term debt, may cure the default and maintain regular monthly payments during the life of the plan, and need not comply with § 365.); In re Flores, 32 B.R. 455 (Bankr. S.D. Tex. 1983) (Debtor need not assume contract for deed as an executory contract under § 1322(b)(7) but can treat the contract as a lien and provide adequate protection where debtor is vendee in possession and there is equity in the property. Plan could alter vendor’s rights under the contract if the plan complies with the requirements of § 1325(a)(4) and (5).).

 

3  See discussion beginning at § 81.1  Overview: General Rules for Saving Debtor’s Home See, e.g., In re Robinson, No. 03-18339, 2003 WL 22996982 (Bankr. E.D. Pa. Dec. 12, 2003) (unpublished) (Although debtor was vendee pursuant to an installment contract for sale of real estate, because Secretary of Veterans Affairs treated the contract as if it were a mortgage, debtor can cure default under § 1322(c)(1) notwithstanding that the Secretary obtained a writ of possession before the petition.)

 

4  See discussion beginning at § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

5  See discussion beginning at § 74.11  The Power to Modify

 

6  See § 133.1 [ Reasonable Time to Cure Defaults ] § 82.4  Reasonable Time to Cure Defaults.

 

7  See § 173.1 [ Debtor Must Cure Defaults and Assure Future Performance ] § 102.2  Debtor Must Cure Defaults and Assure Future Performance.

 

8  See In re Molitor, 133 B.R. 1020 (Bankr. D.N.D. 1991) (Under North Dakota law, mortgages and contracts for deed are treated the same. Section 1322(b)(2) prohibits modification of a contract for deed.); In re Johnson, 75 B.R. 927 (Bankr. N.D. Ohio 1987) (Land installment contract was financing device not subject to § 365. However, Chapter 13 plan cannot modify rights of vendor under § 1322(b)(2).). See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

9  See § 143.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 ] § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994.

 

10  See In re Sennhenn, 80 B.R. 89 (Bankr. N.D. Ohio), aff’d, 80 B.R. 93 (N.D. Ohio 1987) (Land installment contract is not an executory contract subject to § 365 but is a security device. Because contract calls for balloon payment, debtors cannot treat the contract under § 1322(b)(5) except to pay balloon in full.).

 

11  See also § 128.2 [ Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations ] § 80.14  Providing for and Accounting for an Unprotected Mortgage: Modifying, Curing Default, Maintaining Payments and Combinations.

 

12  See § 113.1 [ Full Payment of Allowed Secured Claim ] § 78.1  Full Payment of Allowed Secured Claim.

 

13  See discussion beginning at § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

14  See, e.g., In re Kingsmore, 295 B.R. 812, 826 (Bankr. D.S.C. 2002) (Applying South Carolina law, installment land contracts were executory because debtor asserts equitable right of redemption; “the proper way for debtors to exercise an equitable right of redemption . . . is to treat it as a property right which has precluded the prepetition cancellation of the executory contract and therefore provides them an opportunity to assume or reject the unterminated executory contract . . . pursuant to § 365. . . . Debtor cannot treat them like mortgages in her Chapter 13 Plan.”).

 

15  In re Walkup, 28 B.R. 225 (Bankr. N.D. Ind. 1983). See also In re Smith, 269 B.R. 629 (Bankr. E.D. Tex. 2001) (Contract for sale of homestead was not executory and could not be rejected under § 1322(b)(7) because state court entered an order of specific performance before the petition.).

 

16  In re Crawley, 53 B.R. 40 (Bankr. D. Minn. 1985). Accord In re Horton, 302 B.R. 198 (Bankr. E.D. Mich. 2003) (Right to redeem property subject to a land sale contract expired two days before petition; debtor cannot assume the contract, and vendor does not need relief from the stay.).

 

17  Veterans Admin. v. Benson (In re Benson), 76 B.R. 381 (Bankr. D. Del. 1987).

 

18  See § 174.4 [ Lessor Can Accelerate Assumption or Rejection ] § 102.7  Lessor Can Accelerate Assumption or Rejection. See, e.g., In re Von Keisler, 166 B.R. 620 (Bankr. N.D. Tex. 1994) (Applying Texas law, contract for deed for the purchase of a homestead is an executory contract, and 11 U.S.C. § 365 applies. It is appropriate, on motion of the vendor, for the bankruptcy court to fix a deadline within which the debtors as vendees must assume or reject the contract.).