In re Gonzales
| Decision Date | 07 December 2022 |
| Docket Number | 21-11384-j13 |
| Parties | In re: NELSON GONZALES, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Mexico |
The Court held a final, evidentiary hearing on the Motion for Determination that Automatic Stay Does Not Apply or Alternatively for Relief from the Stay and for Determination that Contract was Terminated Pre-Petition and Cannot be Assumed ("Motion" - Doc. 42) filed by Grover C Herring and Frances L. Herring, sellers under a real estate contract with Debtor, Nelson Gonzales, and Anthony Menchaca as buyers (the "REC").[1] The Herrings contend that they terminated the REC before Debtor filed his chapter 13 bankruptcy case. Debtor counters that his confirmed chapter 13 plan, which treats the REC as a secured claim, binds the Herrings to its terms. The evidence admitted at the final hearing is inconclusive. On the one hand, the Herrings presented insufficient evidence of proper pre-petition termination of the REC. On the other hand, the evidence also failed to establish conclusively that the Herrings received proper notice of Debtor's bankruptcy case and the deadline to object to Debtor's chapter 13 plan.
Having considered the evidence and the applicable caselaw, and the applicable burdens of proof, the Court concludes that 1) the Herrings failed to establish that the REC was properly terminated pre-petition; 2) the Herrings are not bound by the terms of Debtor's confirmed chapter 13 plan; and 3) under the circumstances, the Court will not grant the Herrings' request for relief from the automatic stay if Debtor timely provides the Herrings with proof of insurance on the property. The Court will deny the Motion, conditioned upon proof of insurance, and grant Debtor an opportunity to amend his chapter 13 Plan to provide for treatment of the Herrings' claim, which might include alternative treatment of the REC as a secured claim consistent with 11 U.S.C. § 1322 or as an executory contract to be assumed under 11 U.S.C. § 365.
Debtor and Mr. Menchaca are Frances Herring's cousins. On or about December 23, 2020, the Herrings, as sellers, and Debtor and Mr. Menchaca, as buyers, entered into the REC for the sale of property located at 651 Old Sequoia Rd, Chaparral New Mexico (the "Property").[2]The purchase price for the Property under the REC was $114,000, payable in 144 equal monthly installments of $1,026.02 with the unpaid principal balance bearing interest at the rate of 4.5% per annum.[3] The REC was not recorded. Instead, a Notice of Escrow signed by the Herrings, Debtor, and Mr Menchaca referencing the REC and including the legal description of the Property was recorded in the real property records of Dona Ana County, New Mexico on January 4, 2021.[4] Mountain States Escrow, Inc. ("MSE") is the escrow agent appointed under the REC.[5]
The REC provides for a 30-day cure period following notice of default. The REC provides further that if the default is not timely cured, the Herrings at their option may either accelerate the due dates of all payments under the REC or terminate the buyers' rights in the Property and retain all sums paid as liquidated damages for the use of the Property through that date.[6] Upon termination of the buyers' rights in the Property, "all rights of Buyer in the Property will end."[7]
The default notice provision in the REC is as follows:
Time is of the essence in this Contract. If Buyer fails to pay or perform any obligation of Buyer under this Contract, the failure will constitute a default and Seller may give notice of default to Buyer, specifying the default and the curative action required (the "Default Notice"), at Buyer's mailing address . . . . [8]
The REC provides further:
If the buyers fail to cure a default, the REC provides that the sellers may elect to "terminate Buyer's rights in the Property and retain all sums paid as liquidated damages to that date for the use of the Property . . . . "[11] A provision in the REC titled "Affidavit of Uncured Default and Election of Termination" provides:
A recordable affidavit (the "Default Affidavit") made by Seller, Seller's Agent, or Escrow Agent, identifying the parties, stating the legal description of the Property or the recording date of this Contract, stating the date the Default Notice was given, stating that the specified default has not been cured within the time allowed and that Seller has elected to terminate Buyer's right in the Property, and delivered to Escrow Agent, will be conclusive proof of the uncured default and election of termination of Buyer's rights in the Property.[12]
Debtor and Mr. Menchaca failed to make the April 2021 payment under the REC. On June 9, 2021, the Herrings' attorney, Matthew Watson, sent a Notice of Default to Debtor and Mr. Menchaca (the "First Notice of Default").[13] The First Notice of Default indicates that it was sent by certified mail.[14] The First Notice of Default stated, among other things, that Debtor and Mr. Menchaca failed to make two monthly installment payments, notified them that they had 30 days within which to cure the default, and that if the default was not cured within 30 days, the Herrings would terminate their interest in the Property.[15]
On July 7, 2021, Mr. Watson sent a letter to Kelly O'Connell[16] by email stating that the payment of $2,671.00 from Debtor and Mr. Menchaca was short by $238.79 and that Debtor and Mr. Menchaca have failed to provide proof of insurance.[17] On July 14, 2021, Mr. Watson sent a follow up letter via email to Ms. O'Connell stating that the letter is "a revised Notice of Default."[18] The letter indicates that the Debtor and Mr. Menchaca are in default for the July, 2021 payment of $1012.02, plus taxes and insurance, plus late charges, and escrow fee, together totaling $1634.69, and that proof of insurance has not been provided.[19] The July 14, 2021 letter indicates that if the defaults are not cured within 30 days, the REC will be terminated and the Property forfeited. [20]
On October 8, 2021, Mr. Watson sent a "Final Notice of Default" via certified mail to Debtor and Mr. Menchaca, with a copy by email and hand-delivery to Mountain States Escrow, and by email to Ms. O'Connell.[21] There is no evidence that the notice was sent to Debtor and Mr. Menchaca by certified mail, return receipt requested or by regular U.S. mail or that it actually was received by them. The Final Notice of Default identifies late payments for August, September, and October, 2021, plus taxes and insurance, a collection fee, late charges, and escrow fee, totaling $4,217.41 and also states that proof of hazard insurance has not been provided.[22] The Final Notice of Default makes a demand to cure the default within 30 days of the date of the letter by paying the past due balance and providing proof of insurance.[23] It also provides that failure to cure the default "will result in termination of this agreement and a forfeiture of the property."[24]
On Sunday, November 8, 2022, the Herrings signed an Affidavit of Uncured Default.[25]The Affidavit of Uncured Default states that 1) the Herrings are sellers under the REC with Debtor and Anthony Menchaca as buyers, 2) a default notice was sent to Debtor and Anthony Menchaca on October 8, 2021, 3) the buyers did not cure the default within 30 days after the notice of default, and 4) the Herrings elect to terminate the REC.[26] The Affidavit of Uncured Default is notarized.[27] The Affidavit of Uncured Default does not include the legal description or address for the Property and does not include any recording information relating to the REC.[28]
On November 9, 2022, the Herrings' attorney, Matthew Watson, sent a letter by U.S. Mail and by email to MSE enclosing the Affidavit of Uncured Default signed by the Herrings together with a copy of the Final Notice of Default. The letter states that the buyers have defaulted and failed to cure the default, and that the sellers elect to terminate the REC. The letter requests return of the Special Warranty Deed signed by the buyers and held by MSE to Mr. Watson.[29]
Mr. Herring received the Special Warranty Deed but did not get instructions on what to do with it. The Special Warranty Deed transferring Debtor's and Mr. Menchaca's interest in the Property to the Herrings was not recorded.
The Herrings sold their property located at 1640 N. Vinton, Anthony, NM 88021-2947 and moved to Falls City, Texas in the fall of 2021. Before they left, sometime before Christmas, Mrs. Herring provided Debtor and Mr. Menchaca with the Herrings' new address in Texas. The Herrings also arranged to have their mail forwarded from their former 1640 N. Vinton, Anthony, NM 88021-2947 address to their Falls City, Texas address.
Debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code on December 23, 2021.[30] Notice of the bankruptcy filing, the meeting of creditors, and the preliminary confirmation hearing was sent to the Herrings at 1640 N Vinton, Anthony, NM 88021-2947 (the address for the Herrings identified in the REC) and to Grover and Fran Herring, c/o Watson Smith, LLC, 1100 S....
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