Opinion
Bankruptcy No. 03-18339
December 12, 2003
MEMORANDUM OPINION
Before the Court is the Motion of the Secretary of Veterans Affairs (the "Secretary") for Relief from Automatic Stay (the "Motion"), and the objection thereto of the Debtor, Elzona Robinson (hereinafter "Robinson"). For the reasons stated herein the Motion shall be denied.
BACKGROUND
The relevant facts are not in dispute, and therefore no testimony was presented at the hearing on the Motion. Robinson filed the instant bankruptcy petition on May 30, 2003 (the "Petition"). A month before the Petition was filed, the Secretary filed a Complaint for Ejectment against Robinson in the Court of Common Pleas, Philadelphia County, Pennsylvania (the "Ejectment Action"). The Ejectment Action was not litigated on its merits. For reasons not presented on this record, Robinson did not respond to the Ejectment Action, and the Secretary was granted a default judgment and a Writ of Possession for the Residence.
I shall take judicial notice of the docket entries in this case. Fed.R.Evid. 201, incorporated in these proceedings by F.R.Bankr.P. 9017. See Maritime Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1200 n. 3 (3d Cir. 1991); Levine v. Egidi, 1993 WL 69146, at *2 (N.D.I11. 1993); In re Paolino, 1991 WL 284107, at * 12 n. 19 (Bankr. E.D. Pa. 1991); see generally In re Indian Palms Associates. Ltd., 61 F.3d 197 (3d Cir. 1995).
I will also take judicial notice of the pleadings filed inSecretary of Veterans Affairs v. Elzona Robinson, No. 030400757 (C.C.P. Phila. 2003). Court documents, filed as a matter of public record, are proper for judicial notice. See e.g. Gwynedd Properties. Inc. v. Lower Gwynedd Tp., 970 F.2d 1195, 1206 n. 18 (3d Cir. 1992) (district court may take judicial notice of court documents after giving both parties an opportunity to respond to ensure that its view of the state proceedings is a complete one) (citing Fed.R.Evid. 201, incorporated in these proceedings by F.R.Bankr.P. 9017).
In the Ejectment Action, the Secretary alleged that he and Robinson are vendor and vendee respectively, of real property located at 155 West Sylvania St., Philadelphia, Pennsylvania (the "Residence") pursuant to an "Installment Contract for Sale of Real Estate" (the "Contract") and that Robinson is in default of the Contract. Complaint in Ejectment ¶ 1; Exhibit I to Complaint in Ejectment. While Robinson disputes the legal effect of the agreement between herself and the Secretary, she does not object to the document attached to the Ejectment Action which is labeled as quoted above and admitted by reason of her failure to answer the Complaint. Moreover, my review of public records indicates that the Secretary holds legal title to the Residence. This is consistent with a typical installment sale land contract. While the vendee takes possession and makes periodic installment payments, legal title to the property is retained by the vendor until the terms of the contract are satisfied.See Anderson Contracting Co. v. Daugherty, 417 A.2d 1227, 1231 (Pa.Super. 1979). I therefore find that the Contract is an installment sale contract.
Before instituting the Ejectment Action (on or about March 2, 2002), the Secretary's servicing agent, Countrywide Home Loans, served Robinson with a notice of default (the "Notice"). Ejectment Action ¶ 7; Exhibit A to Ejectment Action. Notwithstanding that the agreement between the parties is an installment contract, the Notice does not mention the Contract or the possibility of a Complaint in Ejectment, but instead characterizes the agreement between the parties as a mortgage. Specifically, the Notice states: "This is an official notice that the mortgage on your home is in default and the lender intends to foreclose." Exhibit A to Ejectment Action at 1. The Notice further states:
The Secretary asserts serving the Notice in the Ejectment Action, and Robinson concedes receiving this Notice in her memorandum of law opposing the Motion. "Factual assertions in pleadings are judicial admissions against the party that made them, Larson v. Gross Bank, 204 B.R. 500, 502 (W.D. Tex. 1996) (statements in schedules).See also In re Musgrove, 187 B.R. 808 (Bankr. N.D. Ga. 1995) (same).
HOW TO CURE THE DEFAULT — You may cure this default within THIRTY (30) DAYS of the date of this letter, by paying to us the above amount of $3,209.15, plus any additional monthly payments, late charges fees . . .
IF THE MORTGAGE IS FORECLOSED UPON — If the mortgage is foreclosed, the mortgaged property will be sold by the Sheriff to pay off the mortgage debt. . . .
RIGHT TO CURE THE DEFAULT PRIOR TO FORECLOSURE SALE — If you have not cured the default within the THIRTY(30) DAY period and foreclosure proceedings have begun, you still have the right to cure the default and prevent the sale at any time up to one hour before the foreclosure sale. . . .
EARLIEST POSSIBLE FORECLOSURE SALE — It is estimated that the earliest date that a foreclosure sale could be held would be approximately six(6) months from the date of this letter. A notice of the date of the foreclosure sale will be sent to you before the sale. . . .
EFFECT OF FORECLOSURE SALE — You should realize that a foreclosure sale will end your ownership of the mortgaged property and your right to remain in it. If you continue to live in the property after the Sheriffs sale, a lawsuit to remove you and your furnishings and other belongings could be started by Countrywide at any time.
Exhibit A to Ejectment Action at 3.
Contrary to the above-quoted Notice, the Secretary instituted the Ejectment Action rather than a foreclosure action. While the Secretary obtained a default judgment and resultant Writ of Possession prepetition, he instituted a post-petition lockout of the Residence on July 5, 2003. Thus, execution of the Writ was not completed prepetition. Recognizing that the lockout constitutes a violation of the automatic stay, the Secretary now seeks not only to obtain relief from stay, but also an annulment of the automatic stay to legitimize the post-petition lockout.
A "lockout" is not specifically provided for by the Pennsylvania Rules of Civil Procedure. A writ of possession is the legal means of executing on a judgment for possession. Johnson y. Martofel, 797 A.2d 943, 947 (Pa.Super. 2002). Execution of the writ is commenced by filing a praecipe for issuance of the writ, Pa. R. Civ. P. 3161.1, and is completed when the sheriff makes a return of service attesting his delivery of the property to the party who received judgment. Pa. R. Civ. P. 3164. As no factual record was made, I can only speculate that the lockout was the vehicle used under the auspices of the sheriffs office to dispossess Robinson of the Residence.
DISCUSSION
The automatic stay of § 362 is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors by stopping all collection efforts, all harassment and all foreclosure actions. It permits the debtor to be free of the financial pressures that drove him into bankruptcy and relevant here, to attempt a repayment or reorganization plan. H.R. Rep. No. 595, 95th Cong., 1st Sess 174-75 (1977); S. Rep. No. 989, 95th Cong.2d Sess. 49-50 (1978). It also protects creditors by preventing a race to seize the debtor's assets. Id. To accomplish this objective, the statue prohibits a broad scope of creditor activities against the debtor and the estate. See 11 U.S.C. § 362(a)(1)-(8). As noted above, the lockout carried out by the Secretary was such a prohibited action. Id. § 362(a)(2), (3).
While not providing the applicable authority for relief in this case, the Secretary's request is presumably grounded in § 362(d)(1) which provides that relief from stay may be granted for "cause" 11 U.S.C. § 362(d)(1). The party seeking relief from the stay has an initial burden to demonstrate cause for relief. In re Ward, 837 F.2d 124, 128 (3d Cir. 1988); In re Purnell, 92 B.R. 625, 631 (Bankr. E.D. Pa. 1988); In re Kim, 71 B.R. 1011, 1015 (Bankr. C.D. Cal. 1987). This follows from the principle that a party seeking to alter the status quo has some initial burden to justify the relief sought. See generally In re Fries, 68 B.R. 676, 684-85 (Bankr. E.D. Pa. 1986).
The Secretary focuses his memorandum on whether annulment of the stay is warranted. Memorandum of Law in Support of Motion of Secretary of Veterans Affairs for Relief from Stay ("Secretary's Mem."). The plain language of § 362(d) makes clear that the discretion afforded a bankruptcy judge to grant relief from the automatic stay includes the authority to grant an annulment of the stay in exceptional curcumstances, thereby validating an act done in violation of the stay which would otherwise be deemed to be void ab initio. In re Siciliano, 13 F.3d 748, 751 (3d Cir. 1994) (annulment of the stay may validate a post-petition sheriff's sale as an exception to the void ab initio rule). However, until I find it appropriate to lift the automatic stay, the issue of annulment is premature. Thus, I will first consider whether the Secretary is entitled to relief from stay in the first place. The Secretary also seeks an order granting in rem relief, i.e., bankruptcy filings made within 180 days will not prevent the Secretary from exercising his state court remedies. No grounds are pled and no evidence was presented to support this demand which will be denied.
The thrust of the Secretary's position in support of the relief he seeks is that any property interest Robinson may have had in the Residence was extinguished by the prepetition default judgment and Writ of Possession. Robinson counters that, regardless of the judgment, she may nevertheless cure her default within the confines of her Chapter 13 plan under 11 U.S.C. § 1322(b) and thus reinstate the Contract. 11 U.S.C. § 1322(b) informs as to what a Chapter 13 plan may accomplish, including "provide for the curing or waving of any default." 11 U.S.C. § 1322(b)(3). This provision is supplemented by subsection (c)(1), which states that the right to cure a default "with respect to, or that gave rise to, a lien on the debtor's principal residence" expires when the residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law. 11 U.S.C. § 1322(c)(1). Since presumably the Residence is not subject to a lien that is foreclosed at a publically held sale, § 1322(c)(1) does not on its face answer the question of whether Robinson had the right to cure the Contract on the date the bankruptcy petition was filed. Thus, the presenting issue in this contested matter is when do rights under an installment contract expire?
The Secretary also asserts that: (1) he did not have notice of Robinson's bankruptcy when he instituted the lockout; and (2) Robinson is not residing in the Residence. While the first assertion is a relevant factor when deciding whether annulment of the stay is proper, In re Siciliano, 167 B.R. 999, 1007 (Bankr. E.D. Pa. 1994) (on remand), or whether a willful stay violation has occurred, it has no bearing on whether the Secretary is entitled to relief from stay in the first place. As to the second assertion, the Secretary provides no authority that states that a debtor must reside in a property for the estate to have an interest in it upon the filing of the bankruptcy petition. Such an assertion is contrary to the broad definition of property of the estate, which is comprised of all legal and equitable interests of the debtor in property, wherever located, as of the commencement of the case. 11 U.S.C. § 541(a)(1).
Robinson also asserts that her mere possession of the Residence was sufficient interest to invoke the automatic stay, citing Cuffee v. Atlantic Business and Community Development Corporation (In re Atlantic Business and Community Development Corporation, 901 F.2d 325 (3d Cir. 1990), where the Third Circuit Court of Appeals held that "the language of Section 362 makes clear that mere possession of property at the time of filing is sufficient to invoke the protection of the automatic stay." Id. at 328. This argument, however, does not address whether the Secretary is entitled to relief from stay. Bare possession does not warrant continued protection of the automatic stay. See, e.g., In re Liggett., 118 B.R. 213, 218 (Bankr. S.D.N.Y. 1990) ("Even if bare occupancy were deemed to be an equitable interest in the [property], and thus property within the meaning of Code § 541, it would not assist the Debtor because that interest is so tenuous as to represent merely a scintilla of an interest insufficient to warrant the continued protection of the automatic stay."); Matter of R.R.S., Inc., 7 B.R. 870, 873 (Bankr. M.D. Fla. 1980) ("[T]he automatic stay provision of § 362 of the Bankruptcy Code does protect the debtor's naked right of possession of the premises, but for a very limited time only."). No purpose would be served by finding a technical violation of the stay if the default judgment divested her of any legal or equitable right to the Residence, including the right to cure. Resolution of the Motion therefore turns on Robinson's alleged cure right.
The determination of property rights in the assets of a debtor's estate is determined by state law. Burner v. United States, 440 U.S. 48, 54 (1979). Pennsylvania's Installment Land Sales Contract Law, 68 P.S. § 901 et seq., however, provides no guidance and in any event is not applicable to the Secretary. Id. § 903(c). I turn then to the two Pennsylvania cases referred to me by the parties that have addressed this question, albeit reaching different conclusions. In In re Grove, 208 B.R. 845 (Bankr. W.D, Pa. 1997), the court held that the debtor could cure an installment contract that had matured prepetition notwithstanding the entry of a judgment for possession in favor of the vendor. The court reasoned that under Pennsylvania law "installment land sale contracts are to be treated as mortgages for the purposes of foreclosure and execution." 208 B.R. at 847 (citingAnderson Contracting Co. v. Daugherty, 417 A.2d 1227 (Pa.Super. 1978)). Since only a judgment for possession, and not a foreclosure sale, had occurred prepetition, the Grove court applied § 1322(c)(1) and held that the debtor's cure rights had not expired and he should be allowed to cure his default through his Chapter 13 plan. Id. at 848. While it appears that Grove is concluding that in Pennsylvania the only way to cut off a vendee's rights in an installment sale contract is through the vehicle of a foreclosure sale, it does not reconcile the common view that installment sales contracts may be enforced by a judgment for possession and a subsequent ejectment so that no foreclosure sale will ever occur.
Indeed, the Anderson court viewed the term "lien" rather broadly "as a party's right to proceed against a certain piece of property to enforce an obligation." 417 A.2d at 1231. This view is consistent with the broad definition of lien used in the Bankruptcy Code,i.e. a "charge against or interest in property to secure payment of a debt or performance of an obligation." 11 U.S.C. § 101(37). In the context of an installment land contract,Anderson holds that "a vendor who retains title has an interest which, although strictly speaking is not a lien, may be enforced as though it were." Id.
Clearly the laws of other states may be different, rendering the bankruptcy consequences likewise different. For example, in In re Kingsmore, 295 B.R. 812 (Bankr. D.S.C. 2002), the court applied South Carolina law which grants an equitable right of redemption to allow a purchaser to pay the entire contract price before a court would enforce the contract's forfeiture provision. Since that right had not expired when the debtor filed her bankruptcy case, she argued that she should be permitted to restructure the indebtedness in her Chapter 13 plan pursuant to § 1322(c)(2) and 1325(a)(5). However, South Carolina law, contrary to Pennsylvania law, treats an installment sale contract as an executory contract and not a financing arrangement. Accordingly, the debtor had to cure its default promptly under § 365(b)(1) rather than stretch out the payments over the life of the plan under § 1322. Since it is clear under Pennsylvania law that an installment sales contract is treated as a security instrument, a debtor should be able to cure arrears over the life of the plan if her interest in that contract has otherwise not expired. In In re Seversen, 1995 WL 29634 (N.D.Ill. Jan. 24, 1995), the court found the cut-off point for cure of an installment sale contract to be fixed under Illinois law when the statutory period for redemption expired. Since the buyers had no right of redemption, Chapter 13 could not provide them with an opportunity to cure.
A subsequent decision, however, takes that issue head on. In re Belmonte, 240 B.R. 843 (Bankr. E.D. Pa. 1999), aff'd in part and rev'd in part, 279 B.R. 812 (2001), the bankruptcy court found that a state court had determined, after a bench trial, that the debtor had no legal or equitable title to property being purchased through an installment sales contract. Finding, albeit erroneously, that it was bound to accept that determination as conclusive, the bankruptcy court turned to whether it was possible under the Bankruptcy Code for the debtor to resurrect the agreement. Apparently the seller argued that the agreement was an executory contract, an argument not advanced here and one soundly rejected by the Court which recognized, as did Grove, that under Pennsylvania law installment contracts are treated as security instruments. However, the bankruptcy court disagreed with Grove that this characterization means that the ability to cure a default under a installment sale contract expires as it would in the case of a mortgage. Reasoning that a vendor does not effect its remedies through foreclosure, it concluded that a foreclosure sale could not be the relevant temporal measure. "The purpose of conducting a sheriff's sale would be to cutoff the debtor's underlying legal and/or equitable interest in the property, but that goal in Grove was already achieved with the entry of judgment for possession." Belmonte, 240 B.R. at 854. At that point, the court reasoned, the purchaser's interest in the property ended. While § 1322(c) does not apply to installment sales contracts, the court found by analogy that the cutoff point for cure of an installment sales contract is the entry of a judgment terminating a purchaser's rights, reasoning that it "is tantamount to a sheriffs sale because it represents the point at which a vendee's underlying equitable interest in the property is extinguished."Id. at 853.
The district court reversed, concluding that the judgment was not final for issue preclusion purposes since there were pending post-trial motions pending when the bankruptcy case was filed. However, it concluded that the bankruptcy court was correct in granting relief from the stay to allow the parties to proceed in state court to seek a resolution of those motions. In re Belmonte, 279 B.R. 812 (E.D. Pa. 2001). Given the district court reversal, the bankruptcy court's determination as to when the debtor's cure rights were terminated is dicta since it was premised on the finding that a final judgment had been entered prior to bankruptcy. In this case, Robinson does not challenge the finality of the judgment for possession, only the termination of his cure rights.
Belmonte found support for its conclusion in the dicta of In re Rowe, 110 B.R. 712 (Bankr. E.D. Pa. 1990) (Scholl, J):
[The vendees] had until the installment land sale contract analogue of one hour before a sheriffs sale to effect a cure. Since the vendor in an [installment land] transaction remains in title, and no sheriff's sale is necessary, the right to cure an installment land sale contract presumably extends until one hour before the vendee's interests are cut off. This would not occur, in our view, until there is a court judgment terminating the vendee's rights in the property subject to the . . . contract.
240 B.R. at 852 (quoting Rowe, 110 B.R. at 722).
Based on the facts of this case, I need not reconcile these conflicting decisions. Even assuming the proper cure deadline for an installment sale land contract in Pennsylvania is generally the date of judgment for possession, the Notice that the Secretary served upon Robinson provided otherwise. It explicitly and unequivocally states that: (1) that Robinson is in default of a mortgage; (2) a foreclosure judgment would be sought; (3) even after such a judgment, Robinson would still receive notice of a foreclosure sale, which would not happen until at least six months; (4) Robinson would then still have the right to cure her default up until one hour prior to such a foreclosure sale; and (5) only a foreclosure sale would end her ownership of the Residence. Exhibit A to Ejectment Action. Thus, even if Belmonte's more limited view of the purchaser's interest after a judgment of possession has been entered is correct, the Secretary voluntarily provided the Debtor with the rights enuciated by the Grove court.
That these expanded rights should be given effect in this bankruptcy case is supported by the legislative history of § 1322(c)(1), a provision added to the Code in 1994 in response to the decision of the Third Circuit Court of Appeals in In re Roach, 824 F.2d 1370 (3d Cir. 1987). Roach held that under New Jersey law a debtor's right to cure and reinstate a home mortgage terminates upon entry of the foreclosure judgment. Prior to Roach, the circuit courts to speak to the issue had held that a home mortgage default could be cured up until the foreclosure sale. Section 1322(c)(1) was enacted to overruleRoach and codify the majority view as the uniform standard for when a Chapter 13 debtor loses his right to cure and reinstate a home mortgage. In re Townsville, 268 B.R. 95, 110 (Bankr. E.D. Pa. 2001). In so doing, Congress made clear that cure rights are not limited by the Bankruptcy Code: "if the State provides the debtor more extensive `cure' rights (through, for example, some later redemption period), the debtor would continue to enjoy such rights in bankruptcy." H.R. Rep. No. 835, 103rd Cong., 2d Sess. (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3360-61. Section 1322(c)(1) thus confers a minimum right of cure which can be exceeded but not contracted. It seems unlikely, therefore, that Congress intended to prohibit the lender — or in his case, the vendor — from providing a more extensive cure right. That is precisely what occurred here.
Congress considered the Roach holding to be "in conflict with the fundamental bankruptcy principle allowing the debtor a fresh start through bankruptcy." H.R. Rep. No. 835, 103 Cong., 2d Sess. 52 (1994).
For whatever reasons, the Secretary himself treated the Contract as a mortgage for the purpose of Robinson's default and granted her a defaulting mortgagee's cure rights, i.e., notice of a future foreclosure sale and right to cure until one hour before a foreclosure sale, and waived certain contractual rights. The subsequent Ejectment Action was inconsistent with the procedures and rights promised by the Notice. Prior to the commencement of this bankruptcy case, no six month notice of foreclosure was issued as promised and no foreclosure sale occurred, even though they might have otherwise not been required in this context. Nevertheless, having caused the Notice to be issued, the Secretary is left with the rights he granted to Robinson upon which Robinson was able to rely. Because Robinson's right to cure had not expired when she filed her petition, she may now seek to cure her default through her Chapter 13 plan.
As no factual record was made it is unclear whether the Notice was sent inadvertently or under the belief that Pennsylvania law mandated its issuance. In any case, it is undisputed that the Notice was served upon Robinson.
In short, I reject the Secretary's position that the default judgment terminated all of Robinson's rights. To the contrary, he expressly granted her the right to cure beyond the prepetition judgment he obtained. Whether Robinson will be able to take advantage of this right made available in bankruptcy by proposing a confirmable plan is not before me presently. However, because she has the opportunity to do so, there is a reorganization in progress in this case and no cause exists to lift the automatic stay. As stay relief has not been granted, the request for annulment is likewise denied.
As there was no evidence presented, I make no finding as to whether it is even possible for Robinson to cure the default under a Chapter 13 plan based on her current income and expenses. Needless to say, if her disposable income cannot fund a plan to do so, the outcome of this Motion will be short-lived.
An Order consistent with this Memorandum Opinion shall issue.