In re Flaten, Bankruptcy No. 84-05080

• Decision Date: 12 June 1985
• Docket Number: Adv. No. 84-7151.,Bankruptcy No. 84-05080
• Citation: 50 BR 186
• Parties: In re Keith G. FLATEN and Lana K. Flaten, Debtors. Phillip D. ARMSTRONG, Trustee of the Estates of Keith G. Flaten and Lana K. Flaten, Plaintiff, v. Marlene L. HUSTAD and Erik R. Hustad, Defendants.
• Court: U.S. Bankruptcy Court — District of North Dakota

50 B.R. 186 (1985)

In re Keith G. FLATEN and Lana K. Flaten, Debtors.

Phillip D. ARMSTRONG, Trustee of the Estates of Keith G. Flaten and Lana K. Flaten, Plaintiff, v. Marlene L. HUSTAD and Erik R. Hustad, Defendants.

Bankruptcy No. 84-05080, Adv. No. 84-7151.

United States Bankruptcy Court, D. North Dakota.

June 12, 1985.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Phillip D. Armstrong, Minot, N.D., for plaintiff.

Steven C. Lian, Minot, N.D., for defendants.

ORDER

WILLIAM A. HILL, Bankruptcy Judge.

The Trustee commenced the present adversary proceeding by Complaint filed with the Court on November 29, 1984, seeking recovery of estate property pursuant to sections 544 and 547 of the Bankruptcy Code. The Defendants, Marlene and Erik Hustad, filed on December 12, 1984, their Answer denying that the Trustee is entitled to recovery of the property, contending that the Debtor never had an interest in the property which would have passed to the bankruptcy estate upon the filing of the bankruptcy case. The Court permitted the Trustee to file on May 1, 1985, an Amended Complaint. The Defendants responded by filing an Answer to the Amended Complaint on May 10, 1985. Trial in the above-entitled adversary proceeding was held before the undersigned on May 14, 1985, in Minot, North Dakota. The relevant facts established at trial are, as follows:

FINDINGS OF FACT

Marlene and Erik Hustad are owners of property located near Stanley, North Dakota, legally described as:

Commencing at a point 100 feet South and 33 feet West of the Northeast corner of the Northeast Quarter of the Northeast Quarter (NE¼NE¼) of Section 29, Township 156 North, Range 91 West, thence due West 194 feet, thence due South 280 feet, thence due East 194 feet, thence due North 280 feet to the place of beginning, including improvements thereon consisting primarily of a bar and cafe, two cabins and a wash house, together with furnishings and equipment, which property is known as TWO-WAY INN BAR AND CAFE.

The Hustads acquired the property through a contract for deed entered into between themselves and Alfred W. Jewett and Ramona T. Jewett on December 22, 1975. The Hustads in turn entered into an agreement to sell the property to Keith G. Flaten, Lana K. Flaten, Milfred O. Thompson and Claire I. Thompson by written agreement dated February 5, 1980. The agreement specifically provided in part, as follows:

NOW, THEREFORE, IN CONSIDERATION OF THE MUTUAL COVENANTS HEREIN CONTAINED, IT IS HEREBY AGREED BETWEEN THE PARTIES AS FOLLOWS:

1) The Sellers shall sell and the Buyers shall purchase, free from all liabilities and encumbrances, subject to Sellers\' Contract for Deed, the real property and improvements thereon, equipment, fixtures, and furnishings owned by the Sellers and operated as a business known as TWO-WAY INN BAR AND CAFE, Stanley, North Dakota, including the liquor inventory located upon the bar premises at the time of taking possession thereof.

The purchase price set out in the agreement provided in addition to a down payment of $43,500.00 and a payment for the cost of the liquor inventory, the Buyers would be obligated for monthly payments in the sum of $1,349.10 on the 4th day of each month for a period of ten years. The written agreement noted that the property sold and purchased under the contract included all furniture, fixtures, and liquor licenses used as a part of the business operation of the TWO-WAY INN BAR AND CAFE. The Buyers were given under the contract the privilege of replacing personal property which in their opinion became worn or obselete, but the contract also provided the title to those replacements were to vest in the Sellers until the balance of the purchase price was paid in full. Additionally, Hustads were given under the contract a security interest in the furnishings and fixtures on the bar premises, and the Buyers agreed to execute the necessary documents to grant such security interests to the Hustads. Financing statements were filed with the Secretary of State and the Register of Deeds for Mountrail County, North Dakota, which disclosed that the Hustads claimed a security interest in "all equipment, furnishings, and fixtures located in the TWO-WAY BAR AND CAFE located at Stanley, North Dakota, and any proceeds or replacements." The financing statements were properly filed and remained effective at the time Keith and Lana Flaten filed for bankruptcy relief.

Lana Flaten testified at trial that they moved out of the property one month before filing bankruptcy and told the Hustads that they were turning the property back over to them because they could not afford it any more. The Flatens owed the Hustads $76,000.00 under the contract at the time they moved out of the premises. The Flatens never paid anything more under the contract after moving out of the premises. The Flatens completed the required payments of $1,349.10 a month for November and December 1983 but did not make any payment in January 1984. The November payment was made in three installments over a period of time from November 7 to November 20, 1983. The payment was made by cash and various customers' checks which were endorsed over to the Hustads. The December payment was made in a similar fashion.

The last day the TWO-WAY BAR AND CAFE was open for business was on New Years Eve 1983. The Flatens completed moving out from the property by January 9, 1984. The Hustads subsequently obtained an Order of the District Court for Ward County, North Dakota, dated January 25, 1984, allowing Hustads to immediately enter the abandoned premises and operate the business. After obtaining the District Court Order, the Hustads reopened the bar, got the heat back on, replaced broken water pipes, fixed the well and cleaned up damage to the building caused by the broken water pipes. As soon as was possible, the Hustads reopened the bar and cafe for business. Keith and Lana Flaten filed for relief under Chapter 7 of the Bankruptcy Code on February 10, 1984. Phillip D. Armstrong was duly appointed Trustee for the bankruptcy case on February 14, 1984. The Hustads filed a motion for relief from the automatic stay imposed by 11 U.S.C. § 362 on December 12, 1984. The motion was objected to by the Trustee, and after a hearing was held on the motion, the Court entered an Order granting the relief on February 26, 1985, permitting the Hustads to continue a state court action to cancel their contract for deed with the Debtors.

CONCLUSIONS OF LAW

The Trustee asserts interests under sections 544 and 547 of the Bankruptcy Code in real and personal property held by the Hustads. The property includes the furnishings, equipment, fixtures and real property which makes up the TWO-WAY INN BAR AND CAFE. The Hustads contend, on the other hand, that the Trustee has no claim to the property since it was voluntarily returned to them by the Debtors prior to the filing of the bankruptcy case.

I.

The real property interests in this proceeding spring from a contract for the sale and purchase of real estate reflected by the written agreement dated February 5, 1980. Resolution of the Trustee's claim to the real estate can only be made after examining the nature of the vendor and vendee's interests under the contract for deed. The Trustee claims that the Debtors held an interest in the real estate pursuant to the contract for deed at the time they filed for bankruptcy relief since formal cancellation proceedings initiated by the Hustads were not completed at that time. The Hustads argue that cancellation proceedings were not necessary to extinguish the Debtors' interests since the property was voluntarily returned to them by the Debtors.

A bankruptcy estate is created upon the commencement of a bankruptcy case which, in property terms, divests the debtor from his interests in property. See In re Schock, 37 B.R. 399, 400 (Bankr.D.N. D.1984). The debtor's property is transferred under section 541 of the Bankruptcy Code to a bankruptcy estate which is either liquidated to pay creditors or utilized in a reorganization process to rehabilitate the debtor's business. Section 704 of the Bankruptcy Code mandates that the trustee in a Chapter 7 case collect and reduce to money property of the estate and close up the estate as expeditiously as possible and be accountable for all property received and to investigate the financial affairs of the debtor. Whatever interests in property the debtor holds at the time he files for bankruptcy relief is vested in a trustee. The trustee may also recover property interests which the debtor does not hold at the time of the bankruptcy filing but which constitute preferences under section 547 of the Bankruptcy Code.

Enforceability of contracts for the sale and purchase of real property rests on application of general contract law. See Zitzow v. Diederich, 337 N.W.2d 799 (N.D. 1983). Section 9-09-02 of the North Dakota Century Code provides that a party to a contract may rescind the agreement by consent of all of the parties to that contract. If a party fails to comply with the terms of a contract without receiving the mutual agreement of all other parties to rescind the contract, a breach of the contract for deed occurs and a breaching party is entitled to receive notice of that breach under N.D.C.C. § 32-18-01 and is given a period of time to cure the default under N.D.C.C. § 32-18-04. It has been noted that a debtor retains interests in real property even after there has been a breach of an agreement and foreclosure proceedings have been completed. See In re Hulm, 738 F.2d 323, 326 (8th Cir.1984) ("We have no difficulty in concluding that under North Dakota law the debtor had an interest in the property at the time of its sale, and at least until expiration of the redemption period."). The circumstances in the present instance support a finding that a breach of the contract rather than rescission occurred. Although the Debtors notified the Hustads that th...