In re Johnson

• Decision Date: 16 July 1987
• Docket Number: Bankruptcy No. 587-42.
• Parties: In re Bruce David JOHNSON, Sharon Lynne Johnson, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

75 B.R. 927 (1987)

In re Bruce David JOHNSON, Sharon Lynne Johnson, Debtors.

Bankruptcy No. 587-42.

United States Bankruptcy Court, N.D. Ohio.

July 16, 1987.

Robert M. Whittington, Akron, Ohio, for debtors.

Richard A. Wilson, Kent, Ohio, for creditors.

Jerome Holub, Akron, Ohio, Trustee.

FINDING AS TO OBJECTION TO CONFIRMATION OF CHAPTER 13 PLAN

H.F. WHITE, Bankruptcy Judge.

This matter came before the court on the objection of Burdette A. Machamer and Arletta M. Machamer, creditors, filed April 28, 1987, to the first amended chapter 13 plan of Bruce David Johnson and Sharon Lynne Johnson, debtors, filed April 15, 1987. A hearing was held on the objection on June 8, 1987; Robert M. Whittington, Jr. appeared on behalf of the debtors, and Richard A. Wilson appeared on behalf of the creditors. On June 8, 1987 the debtors filed a memorandum in support of confirmation of plan, and on June 18, 1987 the creditors filed a memorandum in support of objection to confirmation. The parties have stipulated to the validity of a land contract document which is central to the issue before this court. Based upon the representations of counsel, the exhibits and the case files, the court makes the following Finding of Fact and Law.

FINDING OF FACT

1. On January 16, 1987 the debtors filed a petition for relief under chapter 13 of title 11 of the United States Code.

2. On January 28, 1987 the debtors filed their schedules listing total secured claims of $67,930, the majority of which, $63,200, arises from the listed security interest of the Machamers as vendors of a land contract for the sale of the residential real estate located at 3036 Randolph Road, Mogadore, Ohio. The debtors list total unsecured claims of $3,200.

3. On January 28, 1987 the debtors also filed a chapter 13 plan providing for payment of the Machamers' claim outside the plan.

4. On February 9, 1987 the Machamers filed a motion for relief from stay and/or for adequate protection and other equitable relief, alleging that the debtors had defaulted in performing the obligations under the land contract, and that $63,200 plus interest was immediately due and payable.

5. On April 15, 1987 the debtors filed their first amended chapter 13 plan providing 100% payment of delinquent land contract payments of $16,500 plus interest of $3,208.95 inside the plan over 48 months, and payment of all current monthly payments on the land contract outside the plan.

6. On April 23, 1987 the Machamers filed a proof of claim in the total sum of $65,352.55, consisting in part of arrearages of $16,352.55 as of March 26, 1987. A copy of the land installment contract is appended thereto. The contract was signed by the Machamers and the debtors on June 16, 1986. It provides for an initial down payment of $800, and an additional balloon payment of $14,200 on or before July 26, 1986 as down payment, and installment payments of $450 per month over 84 months.

7. All parties agree that the debtors are in default of payment of the lump sum of $14,200 and that the land installment contract was duly recorded in the land records by the recorder of Portage County, Ohio on July 1, 1986. See debtors' memorandum filed June 8, 1987 at 1 and creditors' memorandum filed June 18, 1987 at 1.

ISSUES

1. Whether a land installment contract duly executed and recorded under the laws of the State of Ohio is an executory contract, or is in the nature of a financing device?

2. Whether a default in the timely payment of a balloon payment due under a land installment contract can be treated as a default under § 1322(b)(5) and cured by periodic payments over 48 months as proposed by the chapter 13 plan?

DISCUSSION OF LAW

The debtors argue in their brief that the land installment contract is not governed by § 365, but is in the nature of a financing device, and that the debtors may treat the vendors' interest as a lien, and provide for the curing of default pursuant to § 1322(b)(5). The Court is in partial agreement with these premises. The court notes the thorough analysis of Judge Mabey in In re Booth, 19 B.R. 53 (Bankr.D.Utah 1982). See also, In re Leazier, 55 B.R. 870 (Bankr.N.D.Ind.1985); Reich v. Burke (In re Reich), 54 B.R. 995, 1003 (Bankr.E.D. Mich.1985); Thorpe v. Jones (In re Jones), 54 B.R. 697 (Bankr.E.D.Ark.1985); Chapman v. Britton (In re Britton), 43 B.R. 605 (Bankr.E.D.Mich.1984); and In re Cox, 28 B.R. 588 (Bankr.D.Idaho 1983). But see, Ledford v. McKinney (In re Bilberry), 32 B.R. 197 (Bankr.S.D.Ohio) (assumes without discussion that land contract is executory contract, and consequently, automatically rejected after 60 days after order for relief in chapter 7 case).

The first inquiry to be made by this court is the nature of the parties' property interests by reference to the underlying principles of state law. Ohio v. Collins (In re Madeline Marie Nursing Homes), 694 F.2d 433 (6th Cir.1982). Ohio has enacted legislation to govern the creation and operation of the land installment contract; it is defined as

an executory agreement which by its terms is not required to be fully performed by one or more of the parties to the agreement within one year of the date of the agreement and under which the vendor agrees to convey title in real property located in this state to the vendee and the vendee agrees to pay the purchase price in installment payments, while the vendor retains title to the property as security for the vendee\'s obligation. Option contracts for the purchase of real property are not land installment contracts.

Ohio Rev. Code Ann. § 5313.01(A) (Anderson 1981) (emphasis added). Each land installment contract must conform with "the formalities required by law for the execution of deeds and mortgages," id. at § 5313.01(D), and must be recorded by the vendor within 20 days after its execution; id. at § 5313.01(C). See also, Ohio Rev. Code Ann. § 5301.25(A) (Anderson Supp.1986). If the vendee has paid a sum equal to, or in excess of 20 percent of the purchase price, or has paid in accordance with the terms of the contract for five years, the vendor may recover possession of the property only by use of proceedings for foreclosure and judicial sale. Cuyahoga Metropolitan Housing Authority v. Watkins, 23 Ohio App.3d 20, 491 N.E.2d 701 (1984). The vendor retains legal title and the vendee does not take legal title to the subject property until he or she has performed all the obligations under the contract. Blue Ash Building & Loan Co. v. Hahn, 20 Ohio App.3d 21, 23, 484 N.E.2d 186 (1984). The vendor may not place a mortgage on the property in excess of the balance due by the vendee without his or her consent. Ohio Rev. Code Ann. at § 5313.02(B).

The statutory language clearly describes the vendor's retention of title "as security for the vendee's obligation" to pay the balance of the installment payments under the land contract. The vendee "stands as an equitable owner of property sold under the contract." 20 Ohio App. at 21 (Syllabus Para. 2). In an unreported decision of an Ohio appellate court which held that a judgment lien of the vendor's creditor is subordinate to the vendee's interest, the court described the rights of the parties to a land as follows:

Both the vendor and purchaser have a beneficial interest in property which is the subject matter of a land contract. Cogshall v. Marine Bank Co. (1900), 63 Ohio St. 88; In Re Appropriation of Land for Highway Purposes (1962), 118 Ohio App. 207. The vendor holds more than naked title; he may mortgage his interest, up to the amount of the balance due, without the consent of the purchaser. R.C. 5313.02(B). The land contract vendor\'s interest consists of two parts, a right to payment of a sum of money and an interest in the land which declines in value with each payment. The vendor also has the right of forfeiture if the purchaser defaults. Although a judgment creditor may intercept the payments by attachment of garnishment, only this declining interest in the land is subject to foreclosure on a judgment lien as "lands and tenements" under R.C. 2329.02.

Myers v. Parsley, No. 85 CA 9 (Ohio 4th Dist.Ct.App. Mar. 14, 1986) Available on WESTLAW, OH-CS database (LEXIS, Ohio library, Cases file). The court also finds persuasive the unreported decision of the Sixth Circuit Court of Appeals in which it affirmed the bankruptcy court which held that under Michigan law, a land contract is not an executory contract. Petz v. Hertzberg (In re Warren Estates Mobile Home Park, Inc.), 811 F.2d 607 (6th Cir. 1986). Under Michigan law, as interpreted by the bankruptcy court and affirmed by the Sixth Circuit, "`the vendee in a land contract is vested with equitable title in the land and . . . legal title remains in the vendor and is held as security for payment of the purchase price of the land.'" Id. (quoting Barker v. Klinger, 302 Mich. 282, 288, 4 N.W.2d 596 (1942)).

The interest of a vendor in real property subject to a land installment contract is like that of a mortgagee or a judgment lien creditor in real property, it is a "charge against or interest in property to secure payment of a debt or performance of an obligation." 11 U.S.C. § 101(31) (Collier 1986). The interests of the vendor and vendee are recorded, the contract must comply with the...