James v. Oliver Heights, LLC

• Decision Date: 06 September 2013
• Docket Number: No. 108,758.,108,758.
• Parties: James and Sharon SMITH, Appellees, v. OLIVER HEIGHTS, LLC, Appellant, and Board of County Commissioners, Atchison County, Kansas, Appellee.
• Court: Kansas Court of Appeals

49 Kan.App. 384

311 P.3d 1139

James and Sharon SMITH, Appellees,

v.OLIVER HEIGHTS, LLC, Appellant,andBoard of County Commissioners, Atchison County, Kansas, Appellee.

No. 108,758.

Court of Appeals of Kansas.

Sept. 6, 2013.

Syllabus by the Court

1. Chapter 11 of the United States Bankruptcy Code authorizes reorganization of the assets and debts of a debtor—usually a business—rather than liquidation.

2. The confirmation of a Chapter 11 reorganization plan discharges a debtor from any debt that arose before the date of confirmation. Moreover, confirmed reorganization plans replace preconfirmation obligations with new obligations in accordance with a creditor's treatment under the plan.

3. Confirmed reorganization plans are essentially new and binding contracts—sanctioned by the bankruptcy court—between debtors and creditors.

4. The underlying creditors' rights asserted in bankruptcy proceedings are creatures of state law. Consequently, the use of state court remedies to enforce a confirmed reorganization plan is proper.

5. A confirmed reorganization plan establishes new contractual obligations that are enforceable in state court.

6. Contract law principles govern the interpretation of confirmed reorganization plans. Accordingly, interpretation of reorganization plans is a question of law subject to unlimited review.

7. Whether a party has defaulted on a contractual obligation is a question of fact.

8. Waiver is an affirmative defense that must be set forth in an answer or other responsive pleading.

9. An agreement may be construed as an equitable mortgage when the parties intend to utilize real property as security for an obligation.

10. A purchaser of real property under contract may be an equitable owner of the property and entitled to the right of redemption as guaranteed by K.S.A. 2012 Supp. 60–2414(a).

Charles T. Engel and Gage A. Rohlf, of Engel Law, P.A., of Topeka, for appellant.

John W. Fresh, of Larry R. Mears, Chartered, of Atchison, for appellees James and Sharon Smith.

Before BRUNS, P.J., HILL, J., and ERNEST L. JOHNSON, District Judge Retired, assigned.

BRUNS, J.

Oliver Heights, LLC entered into an installment contract for sale of real estate with James and Sharon Smith. Less than 2 years later, Oliver Heights filed for Chapter 11 bankruptcy, and a reorganization plan was confirmed by the bankruptcy court. Subsequently, the Smiths filed a foreclosure action in state court alleging that Oliver Heights defaulted under the terms of both the installment contract and the reorganization plan.

After a bench trial, the district court found that Oliver Heights was in default, that the Smiths had given adequate notice of the default to Oliver Heights, and that the Smiths had not waived their rights by accepting an untimely payment. Moreover, the district court ordered that possession of the real property be immediately returned to the Smiths and granted a judgment for damages against Oliver Heights in the amount of $3,000. Thereafter, Oliver Heights timely appealed.

On appeal, we find substantial evidence to support the district court's findings on the issues of default, notice, and waiver. But we find that the confirmed reorganization plan created an equitable mortgage, which is subject to foreclosure and a right of redemption under Kansas law. Accordingly, we affirm the district court's decision in part, reverse it in part, and remand this case to the district court for further proceedings.

Facts

On August 13, 2009, the Smiths entered into an installment contract for sale of real estate in which they agreed to sell Oliver Heights certain real property located in Atchison, Kansas, for the sum of $120,000. The installment contract required Oliver Heights to make 120 monthly payments in the amount of $577.92 to the Smiths. In addition, the installment contract required Oliver Heights to make a lump-sum payment of $60,000 to the Smiths on September 1, 2019.

In an Addendum to the installment contract, the parties agreed:

“Upon execution hereof, [the Smiths] shall execute a General Warranty Deed to the subject property, in which [the Smiths] shall be grantor and [Oliver Heights] shall be grantee, and said Deed shall be held by [the Smiths' attorney], until the full performance of this Agreement by the parties, whereupon the same shall be delivered to [Oliver Heights].”

On December 1, 2010, Oliver Heights filed for Chapter 11 bankruptcy protection in federal court. See 11 U.S.C. § 1129 (2006). After negotiating with its creditors, Oliver Heights submitted a final reorganization plan that was confirmed by the United States Bankruptcy Court. Under the confirmed reorganization plan, Oliver Heights was to retain possession of the real property it was purchasing from the Smiths—subject to any liens. Likewise, the reorganization plan recognized that the Smiths held “legal title” to the real property and they were to retain their interest in it to the extent of any outstanding balance owed to them by Oliver Heights.

The confirmed reorganization plan required Oliver Heights to continue to pay the Smiths $577.92 per month until September 1, 2019, when a lump-sum payment of $60,000 would become due. Moreover, Oliver Heights was to pay the Smiths an additional sum of $150 per month for 33 months. The reorganization plan also obligated Oliver Heights to keep property taxes current and to maintain insurance on the real property.

In addition to the specific terms relating to the sale of the real property by the Smiths to Oliver Heights, the confirmed reorganization plan included a general provision—which was applicable to all secured creditors—entitled “Means for Execution of the Plan.” This provision stated that “[i]f at any time [Oliver Heights] is unable to make payments as they become due to any secured creditor, [it] will surrender the collateral to satisfy the indebtedness to that creditor in lieu of the payments as outlined within this Plan.” Furthermore, this provision gave Oliver Heights 30 days from the date a payment was due in which to cure any default.

On April 6, 2012, the Smiths filed a petition in state court naming Oliver Heights and Atchison County as defendants. In the petition, the Smiths alleged that Oliver Heights defaulted under both the installment sale contract and the confirmed reorganization plan by failing to timely make installment payments, by failing to keep the property taxes current, and by failing to keep the real property insured. According to the petition, it also named Atchison County as a party because it held a lien on the real property for “unpaid real estate taxes” for several years.

In the petition, the Smiths explicitly requested that any rights or interest that Oliver Heights held in the real property “should be forthwith foreclosed as provided by law, and any amount found due” to them from Oliver Heights “should be decreed a first and prior lien on all of said real estate.” Likewise, the petition alleged “[t]hat less than one-third (1/3rd) of the original amount advancedhas been paid, and that therefore any redemption period herein should not exceed three (3) months.” The petition, however, did not include a request for immediate possession of the property or a demand for a monetary judgment.

Oliver Heights filed an answer to the petition, asserting that it had kept the property taxes current and had kept the real property insured. But the answer did not assert waiver as an affirmative defense. Likewise, the final pretrial order entered by the district court did not list waiver as an affirmative defense. After denying Oliver Heights' motion for summary judgment, the district court conducted a bench trial on August 29, 2012.

Following the trial, the district court filed a memorandum decision in which it found that Oliver Heights was in default under the terms of the real estate installment contract and the reorganization plan for failing to make timely installment payments to the Smiths and for failing to keep the property taxes current. The district court also found that the Smiths had given sufficient notice of default to Oliver Heights. But rather than granting the remedy of foreclosure as requested by the Smiths in their petition, the district court granted the Smiths immediate possession of the real property, purportedly under the terms of the installment sale contract, and entered a monetary judgment against Oliver Heights in the amount of $3,000.

Analysis

Chapter 11 Reorganization Plan

On appeal, we must first determine the effect of the Chapter 11 reorganization plan confirmed by the bankruptcy court on the legal rights and responsibilities of the parties in this case. As a general rule, “Chapter 11 of the Bankruptcy Code authorizes reorganization of any assets [and debts of] the debtor (usually a business) rather than liquidation under Chapter 7.” Fyler v. Brundage–Bone Concrete Pumping, Inc., 48 Kan.App.2d 615, 618, 297 P.3d 1180 (2013). Furthermore, as the Kansas Supreme Court has found: “[T]he provisions of a confirmed plan [under 11 U.S.C. § 1141(a) (2006) ] bind the debtor and any creditor whether or not such creditor has accepted the plan.” Waterview Resolution Corp. v. Allen, 274 Kan. 1016, Syl. ¶ 6, 58 P.3d 1284 (2002).

“[T]he confirmation of a [Chapter 11] plan ... discharges the debtor from any debt that arose before the date of such confirmation.” 11 U.S.C. § 1141(d)(1)(A) (2006). “[T]he effect of confirmation is to discharge the entire preconfirmation debt, replacing it with a new indebtedness as provided in the confirmed plan; the plan is essentially a new and binding contract, sanctioned by the Court, between a debtor and his [or her] preconfirmation creditors.” In re Consumers Realty & Development Co., Inc., 238 B.R. 418, 425 (8th Cir. BAP 1999) (citing In re Ernst, 45 B.R. 700, 702 [Bankr.D. Minn.1985] ). In other words, “[a] confirmed plan of reorganization is in effect a contract between the parties and the terms of the plan describe their...