Butko v. Ciccozzi (In re Butko)
| Decision Date | 09 April 2018 |
| Docket Number | Case No. 16-23695-GLT |
| Parties | In re: RICHARD P. BUTKO and LORRAINE E. BUTKO, Debtors. RICHARD P. BUTKO and LORRAINE E. BUTKO, Movants, v. RONALD A. CICCOZZI, JOAN L. CICCOZZI, and RONDA J. WINNECOUR, chapter 13 trustee, Respondents. |
| Court | U.S. District Court — Western District of Pennsylvania |
Related to Dkt. No. 170
Richard and Lorraine Butko ("Debtors") occupy a residential property owned by Ronald Ciccozzi and located at 120 Heather Dr. in Monaca, Pennsylvania ("Property").1 After battling for years over their respective rights to the Property, the parties' acrimonious dispute landed here when the Butkos commenced their bankruptcy case. The Court hoped to dispel the tension through mediation, but despite their successful negotiation of a Court-approved settlement, the parties now return with renewed vigor to contest the notice and default provisions within the settlement agreement. In this highly contentious matter for which the legal fees may now exceed the amount in controversy, the Court must determine whether Ciccozzi is entitled to stay relief.
The current dispute and the animosity it generates date back many years. It appears the Debtors initially agreed to purchase the Property from Ciccozzi and his late wife, Joan Ciccozzi,2 through an installment land contract executed in July 2009. For reasons which are not entirely clear, the parties then entered into a Lease with Option to Purchase ("Lease") on December 1, 2014 that terminated the 2009 agreement and released and waived any related rights.3 The Lease provided for monthly rental payments of $1,675 and gave the Debtors the right to purchase the Property for $43,632 plus costs upon thirty days' notice to the Ciccozzis. In turn, the Ciccozzis agreed to credit $1,212 from each rental payment received against the purchase price.4
After defaulting on their September 2016 payment obligation, the Debtors petitioned for relief under chapter 13 of title 11 of the U.S. Code on October 1, 2016.5 The Ciccozzis filed a motion for relief from stay that prompted the Court to determine whether the Lease was a true lease or disguised financing agreement in the form of an installment land contract.6 On December 22, 2016, the Court issued its Memorandum Order finding the Lease to be a true lease agreement but denying stay relief because the Debtors commenced their bankruptcy case before the Lease cure period expired.7 The Debtors appealed the decision,8 but Judge Fischerof the U.S. District Court for the Western District of Pennsylvania held that the Memorandum Order was an unappealable interlocutory order.9 The Debtors then filed an amended Chapter 13 Plan dated February 24, 2017 to assume the Lease under 11 U.S.C. § 365 and ostensibly exercise the purchase option during the plan term.10
Ciccozzi filed objections to the chapter 13 plan disputing, among other things, the Debtors' right to assume the purchase option and arguing that they could only assume the Lease as month-to-month tenants.11 To facilitate a final resolution of these disputes and alleviate the considerable bitterness existing between the parties, the Court referred the matter to mediation before the Honorable Judith K. Fitzgerald, a former chief judge of this Court.12
As a result of the mediation, the Debtors and Ciccozzi consensually entered into a settlement agreement ("Settlement Agreement"), which provides that the Debtors will pay Ciccozzi $1,675 on the fifth of each month for thirty-six months.13 It also requires Ciccozzi to deliver the deed to the Property into escrow, with the understanding that it will be released to the Debtors upon completion of their required payments.14 Finally, it provides the Debtors with a ten-day cure period in the event of a payment default.15 After that date, Ciccozzi has no obligation to notify the Debtors of any nonpayment.16
The Settlement Agreement was presented to the Court for approval under Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 9019.17 During the hearing, the Court expressed concern with the onerous default provisions specifying that "all rights that [the Debtors] may have in the Property shall finally and permanently terminate" in the event a default is not timely cured.18 The Settlement Agreement also provides that in the event of an uncured default, the Court shall grant Ciccozzi stay relief upon the filing of an affidavit of default.19 Acknowledging that they were fully aware of the repercussions of a default, the Debtors committed themselves to proceeding with the settlement:
It is admitted that the forfeiture procedure is dangerous. The [Debtors] have been fully informed of this risk and have been advised to attend the hearing on this motion. They agree to accept this risk due to their inability to fund the option payment and extensive additional litigation costs absent settlement and to remove any risk of loss of the [Property] by an adverse ruling on appeal.20
After a hearing on September 19, 2017, the Court approved the Settlement Agreement subject to certain modifications, including a requirement that Ciccozzi report any default to the Court by filing a notice of default within two days after the applicable cure period expired.21
Less than two months later, Ciccozzi filed a notice indicating that the Debtors had defaulted on their November 2017 payment obligation and requesting enforcement of the forfeiture provisions of the Settlement Agreement.22 The Debtors filed a Motion to Deny Ronald A.Ciccozzi's Request for Relief from Stay ("Debtors' Motion"),23 arguing that the Settlement Agreement is an installment land contract subject to the Loan Interest and Protection Law ("Act 6"), which affords residential mortgagors unwaivable24 rights to statutory notice25 of defaults and a thirty-day cure period.26 Ciccozzi responded, arguing that the Debtors are estopped from taking that position, and that if Act 6 does apply, the Settlement Agreement is void because there was no meeting of the minds and the parties entered into it by virtue of a mutual mistake as to its enforceability.27 The Debtors argue that estoppel and mutual mistake do not apply because the Settlement Agreement's reference to the "applicable cure period" in ¶ 14 should be read as a reference to the thirty-day period afforded by statute rather than the contractual ten-day period. The Debtors also assert that Ciccozzi waived the default by accepting payment.28
Since then, Ciccozzi filed another notice of default ( the Debtors failed to make their December 2017 payment),29 followed by a motion to rescind the Settlement Agreement and vacate the order approving it under Federal Rule of Civil Procedure ("Rule") 60(b)(6) (as incorporated by Bankruptcy Rule 9024).30 The Debtors subsequently filed notices indicating that they cured their December 2017 default and paid their January 2018 obligation,31followed by a response arguing that the facts of this case do not constitute the extraordinary circumstances that would trigger Rule 60(b).32 After the Court conducted a hearing on the motion to vacate on February 14, 2018, Ciccozzi withdrew his motion to rescind the Settlement Agreement.33
The Court afforded the parties additional time to discuss a potential resolution of these issues, but after several hearings on these matters, they remain entrenched in their positions. Accordingly, this matter is now ripe for disposition on the Debtors' Motion.
The Court has subject-matter jurisdiction pursuant to 28 U.S.C. § 1334(b).34 This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(G).35 The Court makes its findings of facts and conclusions of law pursuant to Bankruptcy Rules 7052 and 9014.36
The Court must determine whether the default provisions in the Settlement Agreement are superseded by the notice and cure requirements of Act 6, and if so, whether that nullifies the Settlement Agreement. Settlement agreements "share many characteristics of voluntary contracts and are construed according to traditional precepts of contract construction."37 Any settlement agreement that would be "a contract under relevant nonbankruptcy law . . . will bea contract in bankruptcy '[u]nless some federal interest requires a different result.'"38 Because state law governs questions of contractual validity,39 the Court will apply Pennsylvania law to assess the viability of the Settlement Agreement.40
By its plain terms, the protective provisions of Act 6 apply to residential mortgages.41 The statute defines a "residential mortgage" as:
an obligation to pay a sum of money in an original bona fide principal amount of the base figure or less, evidenced by a security document and secured by a lien upon real property located within this Commonwealth containing two or fewer residential units or on which two or fewer residential units are to be constructed and shall include such an obligation on a residential condominium unit.42
Pennsylvania courts have held that the definition of "residential mortgage" in Act 6 should be broadly construed to include residential installment land contracts because "substance must prevail over form."43
The Settlement Agreement easily satisfies three of the definitional elements of a "residential mortgage" under Act 6, as applied to installment land contracts. The first element, "an obligation to pay a sum of money,"44 is fulfilled because the Settlement Agreement imposesan obligation to pay Ciccozzi $1,675 per month for thirty-six months.45 The second element, requiring that the sum be "in an original bona fide principal amount of the base figure or less,"46 is also met. The "base figure" is an amount established by the Pennsylvania Department of Banking and Securities, and is adjusted annually for inflation. When the Settlement Agreement was executed in 2017,47 the "base figure" was $244,856,48 an amount considerably larger than the $60,300 payable under the Settlement Agreement. The final element is also satisfied...
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