Opinion
CIVIL ACTION NO. 03-6447
January 29, 2004
MEMORANDUM AND ORDER
Patricia Callahan Young and her husband Paul Young (collectively, the "Youngs") have appealed the Bankruptcy Court Order of October 24, 2003, which granted Neal B. Katz ("Katz") relief from the automatic stay and prospective relief. The Court will affirm in part and reverse in part.
I. BACKGROUND
On October 1, 1999, Paul Young executed a contract for sale for a 15-acre property in Villanova with a home on its grounds for approximately $400,000. The Youngs entered into a joint venture agreement ("JVA") with Katz and other developers in order to finance the purchase of the property.
Under the terms of the JVA, Katz and his associates put up the entire purchase price (less the $1,000 deposit made by the Youngs) for the property. The home is on one of the three original parcels that made up the 15-acre property. Under the JVA, Katz held title to the property. The residential parcel was to be subdivided into four lots. Three of those lots were to be developed and sold. The Youngs would be permitted to remain in possession of the house on the fourth lot pending approval of the subdivision plan. They were to gain title to that home and lot once Katz received at least $400,000 from the proceeds of the sales of the other three lots. JVA, R. at Tab 7, Ex. M-1.
After closing on the property, Katz sued the Youngs in state court claiming that they had misrepresented the number of lots that could be created by subdividing the residential parcel. On February 12, 2002, the parties entered into a settlement agreement. The Court of Common Pleas entered the settlement agreement as a Consent Order. R. at Tab 7, Ex. M-2.
The settlement agreement provided that the residential parcel was to be divided into two separate lots, one with the home on it. The Youngs were to pay Katz $231,000 for the lot with the home within 30 days of approval of the subdivision plan. The obligation to pay was not contingent on any event. The settlement agreement gave the Youngs a revocable license to stay on the property pending subdivision. Failure to make the payment would void the settlement agreement and require the Youngs to vacate the residential parcel. Settlement Agreement, R. at Tab 7, Ex. M-2.
In the Response Ms. Young filed to the Motion for Relief from Automatic Stay, she did not deny that she and her husband had been represented by counsel throughout the negotiation and execution of the settlement agreement. Answer, at ¶ 24, R. at Tab 6.
On March 24, 2003, the subdivision was approved. The Youngs failed to close by April 24, 2003, as required by the settlement agreement. The Youngs petitioned the Delaware County Court of Common Pleas to enforce the settlement agreement, alleging that Katz and his associates had breached. After a hearing, the state court ordered the Youngs to close by June 12, 2003. The order also provided that the provisions for remedy in the settlement agreement in the event of breach remained intact. R. at Tab 7, Exs. M-3 and M-4.
On June 11, 2003, the Youngs made an emergency application for a further extension, claiming they were still trying to obtain the necessary funds. The court granted a four day extension, which the Youngs failed to meet.
On July 22, 2003, the state court entered a judgment for possession in favor of Katz and his associates over the cross-petition of the Youngs to set aside the settlement agreement (the "Possession Order"). R. at Tab 7, Ex. M-8. The Youngs did not vacate the house.
On August 11, 2003, Ms. Young, but not her husband, filed for Chapter 13 bankruptcy. On August 13, 2003, Katz filed an expedited Motion for Relief from the automatic stay so that he could proceed with the eviction. The Bankruptcy Court held a preliminary hearing on August 27, 2003, and a final hearing on October 7, 2003. The Bankruptcy Court granted Katz's motion.
The Youngs appealed the decision to this Court on October 30, 2003. After filing the appeal, the Youngs filed a Motion to Stay Eviction Pending Appeal in the Bankruptcy Court. The Bankruptcy Court denied that motion. It ordered, however, that no eviction could take place before January 16, 2004, provided that the Youngs made certain payments to Katz. The Youngs then filed a Motion to Stay with this Court. The Court heard argument on that motion and on the merits of the appeal on January 14, 2004. At oral argument, counsel for Katz agreed not to institute eviction proceedings until after the end of January. In return, the Youngs were to pay Katz $1,500. Because the Court has now decided the appeal, the motion to stay is denied as moot.
II. JURISDICTION
This Court has jurisdiction over this appeal under 28 U.S.C. § 158(a)(1), which gives district courts jurisdiction over appeals from final orders of bankruptcy courts. A grant of relief from the automatic stay is a final order in bankruptcy court. In re Graves, 33 F.3d 242, 246 n. 9 (3d Cir. 1994). Because the Bankruptcy Court's order provided that no future bankruptcy filing by either of the Youngs would operate to stay eviction, Mr. Young is entitled to join in Ms. Young's appeal, even though he was not a Debtor before the Bankruptcy Court. See In re Dykes, 10 F.3d 184, 187-88 (3d Cir. 1993).
III. DISCUSSION
In granting Katz's motion for relief, the Bankruptcy Court saw the key issue in the case as "whether [Ms. Young] retained an interest in the real estate on the date of the bankruptcy filing sufficient to invoke rights under Chapter 13 to remain in possession of the residential parcel." Bankr. Ct. Opinion, R. at Tab 2, at 2-3. The Bankruptcy Court answered this question in the negative.
First, the Bankruptcy Court held that the decision of the state court giving Katz immediate possession of the residential parcel was entitled to preclusive effect. The Court agrees with the Bankruptcy Court. The four requirements for preclusion are:
(1) the issue decided in the prior case was identical with the one presented in the later action;
(2) there was a final judgment on the merits;
(3) the party against whom the plea is asserted was a party or in privity with a party to the prior adjudication; and
(4) the party to be precluded had a full and fair opportunity to litigate the issue in the earlier action.Greenleaf v. Garlock, Inc., 174 F.3d 352, 357-58 (3d Cir. 1999).
These requirements are met here. The issue in the Bankruptcy Court, as it was in the state proceedings, was whether Ms. Young (and her husband) had any interest in the property; Ms. Young was a party in both proceedings; Ms. Young had a full and fair opportunity to litigate the issue, and did in fact do so, in the state court; and the Possession Order, as well as the earlier state court orders upon which it was predicated, were final judgments on the merits.
Katz also argued that the Court is precluded from a review of the Pennsylvania state court proceeding terminating the Youngs' interest in the property by the Rooker-Feldman doctrine. See, e.g., In re 421 Willow Corp., No. 3-182, 2003 U.S. Dist. LEXIS 18029 (E.D. Pa. Oct. 9, 2003) (finding that Rooker-Feldman prevented review of a state court order terminating a debtor's leasehold interest). The Court will not reach this issue because it will affirm on the grounds articulated by the Bankruptcy Court.
Having decided that the state court judgment had preclusive effect, the Bankruptcy Court then considered whether it was, nevertheless, possible for Ms. Young to resurrect the settlement agreement so that she could include it in her bankruptcy plan. Ms. Young argued that the settlement agreement was an executory contract and that an executory contract is property of the estate. Ms. Young also argued that she ought to be able to cure the default under the settlement agreement pursuant to 11 U.S.C. § 1322 (b)(3). The Bankruptcy Court rejected both arguments. The Court is persuaded by the Bankruptcy Court's analysis of the two issues.
An executory contract is a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other. In re Columbia Gas Sys., Inc., 50 F.3d 233, 239 (3d Cir. 1995). The Bankruptcy Court found that there was no evidence in the record that Katz had failed to perform any material duties under the settlement agreement, and that there was nothing more for him to do. The Youngs had the only remaining unperformed material duty to effect transfer of title — namely, paying for the property. After carefully reviewing the record, the Court concludes that this finding is not clearly erroneous.
Under 11 U.S.C. § 1322(b)(3), a Chapter 13 plan may "provide for the curing or waiving of any default. . . ." The Youngs argue that they ought to be able to cure their default under the settlement agreement now. The right to cure a default, however, is not without limit. For example, the right to cure a residential mortgage expires upon the sale of property at foreclosure. See 11 U.S.C. § 1322(c)(1). Although there is no similar code provision for other conveyances of land, Bankruptcy Courts have extrapolated deadlines by analogy. See, e.g., In re Belmonte, 240 B.R. 843 (Bankr. Ct. E.D. Pa. 1999) aff'd in part, rev'd in part 279 B.R. 812 (E.D. Pa. 2001).
In Belmonte, the Bankruptcy Court Judge in this case held that in an installment land contract, the right to cure ends upon entry of a judgment terminating the purchaser's rights. The court reasoned that a vendor in an installment contract does not effect his or her remedies through foreclosure. A foreclosure sale, therefore, could not be the correct temporal measure. The only purpose a foreclosure sale serves is to cut off the vendee's equitable title, but that cut-off occurs at the moment an entry for judgement of possession takes place. Belmonte, 240 B.R. at 854 (citing dicta in In re Rowe, 110 B.R. 712 (Bankr. Ct. E.D. Pa. 1990)).
But see In re Grove, 208 B.R. 845, 847 (Bankr. Ct. W.D. Pa. 1997) (holding that mere possessory interest of tenant-at-sufferance sufficient to invoke stay protection notwithstanding entry of judgment of possession because property not yet sold at foreclosure sale).
The Bankruptcy Court Judge applied the reasoning of Belmonte to this case, opining that "upon entry of the judgment of possession, [Ms. Young's] rights under the Settlement Agreement merged into that judgment." Bankr. Ct. Opinion, R. at Tab 2, at 8. This Court agrees.
Katz and his associates are not the Youngs' mortgagees. The settlement agreement was a negotiated contract between the Youngs and Katz and his associates that involved a conveyance of residential property upon the satisfaction of certain conditions. The Youngs went into state court to enforce the terms of this contract. Their petition was granted; but, it was the Youngs who failed to perform on the settlement agreement. The state court, in accord with the terms of the settlement agreement which the court had entered as an order, entered the judgment of possession against the Youngs. Under these circumstances, neither logic nor fairness requires that they be given another opportunity to comply with the settlement agreement.
Ms. Young also argued in the Bankruptcy Court that she and her husband had an irrevocable license in the residential parcel because they substantially improved it. The Court agrees with the Bankruptcy Court that the Youngs did not have an irrevocable license.
Under Pennsylvania law, a license to use land becomes irrevocable when the licensee, in justifiable reliance upon the licensors' representations, expends money for improvements on the land that he or she otherwise would not have made. See Bieber v. Zellner, 220 A.2d 17, 19 (Pa. 1966).
Earlier case law suggests that the doctrine was applicable only to parol licenses. See, e.g., Cole v. Ellwood Power Co., 65 A. 678, 680 (1907). However, the doctrine has been considered in more recent cases involving written licenses. See, e.g., LARA, Inc. v. Dorney Park Coaster Co., 542 A.2d 220 (Pa.Commw. 1988).
There is no dispute that the Youngs spent several thousand dollars in improvements. Nothing in the record, however, indicates that the expenditures were made upon the reliance of any representations made by Katz, other than what was expressly stated in the settlement agreement. The agreement is very clear that the license is revocable. A license cannot be made irrevocable by a party's unilateral decision to improve the property. See Harkins v. Amichelli, 405 A.2d 495, 498 ( Pa. Super. 1979).
The case cited by the Youngs also contemplates the necessity of showing reliance on a representation. See In re Greenfield, 249 B.R. 634, 643 (Bankr. Ct. E.D. Pa. 2000) (noting that the license contained a termination date, which "should have discouraged any continued possession of the premises").
The Bankruptcy Court granted Katz prospective relief from any automatic stay that might be triggered by any future bankruptcy petition that Ms. Young or her husband might file. The Court will affirm the Bankruptcy Court's grant of prospective relief as to Ms. Young; but, it will reverse the grant of such relief as to Mr. Young.
Section 105 of the Bankruptcy Code provides that courts may issue any order or judgment necessary or appropriate to carry out the provisions of the code. 11 U.S.C. § 105(a). Section 349(a) of the Bankruptcy Code provides that a case may be dismissed with prejudice where cause exists. See 11 U.S.C. § 349(a). Several courts have held that together these two provisions enable bankruptcy courts to restrict a debtor's ability to file subsequent petitions. Such restrictions are appropriate where debtors file for bankruptcy in bad faith to prevent foreclosure on property. See, e.g., In re Casse, 198 F.3d 327, 337 (2d Cir. 1999).
Several courts have concluded that the more moderate remedy of granting prospective relief from the stay is also appropriate in cases of bad-faith filing. Prospective relief from the automatic stay serves the purpose of ending abusive practices of debtors without interfering with their right to file bankruptcy. See, e.g., In re Hamer, No. 00-1180, 2000 WL 12304096, *6-*9 (E.D. Pa., Aug. 18, 2000). The Court finds this reasoning persuasive.
The issue then is whether the debtor, Ms. Young, filed her petition with a good faith belief that she could reorganize her affairs or as a means to thwart eviction. Mr. Young was not a debtor in the proceeding.
The Bankruptcy Court found that after three years of litigation which determined that neither she nor her husband had any rights to the property, her filing could not have been in good faith. She failed to meet every opportunity she was provided to pay for the property. The settlement agreement stated that failure to close required her and her husband to immediately vacate the property. Ms. Young waited almost three weeks after the state court divested her and Mr. Young's interest in the property before filing her petition. The Bankruptcy Court found these facts constituted a bad-faith attempt to use bankruptcy to thwart eviction. This finding is not clearly erroneous.
The Bankruptcy Court did not provide, nor can this Court find, any basis for granting prospective relief as to future filings by Mr. Young. Mr. Young was not a debtor, and thus was not technically before the Bankruptcy Court. The Court has been given no legal authority that brings Mr. Young under the jurisdiction of the Bankruptcy Court. Katz argues that the grant of prospective relief as to Mr. Young is appropriate, because Mr. Young can no longer have a good faith basis to believe he can make future use of Chapter 13 proceedings to keep the property. This argument may ultimately be successful in the event Mr. Young does file for bankruptcy; but, it is different from a finding that Mr. Young had used the bankruptcy process in bad faith.
The Bankruptcy Court's October 24, 2003 Order will be affirmed in part and reversed in part.
An appropriate order follows.
ORDER
AND NOW, this 29th day of January, 2004, upon consideration of Patricia Callahan Young and Paul Young's appeal of the Bankruptcy Court's Order of October 24, 2003 in Bankruptcy No. 03-31962SR, IT IS HEREBY ORDERED that said Order is AFFIRMED in part and REVERSED in part, for the reasons discussed in a memorandum of today's date.
The Order is AFFIRMED as it pertains to Ms. Young and it is REVERSED with respect to the grant of prospective relief from the automatic stay of any future bankruptcy filing by Mr. Young.