Bankruptcy and Land Contract Forfeiture

Inquiry: What does a land contract vendor (seller) do when he has served an eviction notice upon the buyer for non-payment of rent, and the vendee (buyer) responds by filing for bankruptcy?

Response:The bankruptcy filing puts a temporary stop on the eviction proceeding and places an automatic stay to prevent the seller creditor from proceeding with or continuing legal action against the buyer debtor. While the automatic stay of bankruptcy can stall eviction proceedings, the stay is not permanent as the seller can ask the court to “lift” the automatic stay. The courts usually grant such requests, which means that eviction proceedings can resume. Now the seller is a creditor and must act as any creditor in a bankruptcy case does and file proof of a claim. The issue then arises as to whether the land contract may be rejected as an executory contract by the bankrupt vendee.

What is an executory contract? In the context of bankruptcy, this is a contract that has not as yet been fully performed and is so far unperformed that failure to complete performance constitutes a material breach excusing either party’s performance. 11 USC 365 provides that the land contract can be construed as an executory contract that can be assumed, assigned or rejected by the trustee in bankruptcy or debtor in possession.

In the case of Terrell v Albaugh, (In re Terrell) 892 F.2d 469 (6th Cir. 1989), the Sixth Circuit Bankruptcy Court of Appeals found that a land contract was an executory contract because there were material obligations left to be performed by the parties to the contract. Since there were such obligations, the failure of either to perform them would constitute a material breach of the contract and therefore allow the other party to avoid continued performance.

The alternative is that the contract would be treated like a mortgage securing the vendor’s claim. Rather than an executory contract, the land contract is a sale with a continuing security interest with material obligations to be performed other than delivery of the deed upon payment of the purchase price.

Executory contracts are important in bankruptcy. They must be listed separately in the bankruptcy schedules and are not treated as any other unsecured claim in bankruptcy. Under 11 USC 365, the debtor or bankruptcy trustee may elect to assume (perform) or reject (refuse to perform) the contract within a certain time period, which is 60 days from filing in a Chapter 7 case. Furthermore, the vendor must perform as if no bankruptcy had been filed unless the court grants relief. If the contract is assumed, the debtor or bankruptcy trustee has to pay in full any outstanding payments and prove it can pay in the future too.

The bottom line is that the vendor’s only recourse is to request the court to lift the stay to proceed with the eviction proceedings. However, since the law does allow the debtor to assume the contract by paying up, it seems likely that the court would allow the debtor the time allotted to assume. The creditor should file a motion to compel the debtor to make payments under the contract in accordance with the terms thereof, and force the debtor to assume or reject within a certain time period.

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