HELEN L. COOTS                                       CASE NO. 05-71543



     This matter having come before the court on Motion for Rescission

of Reaffirmation Agreement and Refund of Payments (DOC 35), and the

matter having been heard on November 12, 2008, and the matter having

been taken under submission, the court hereby issues this memorandum

opinion and order.

     This matter is submitted to the court on the issue of whether the

debtors may rescind a reaffirmation agreement on real estate after the

trustee has avoided the mortgage by default judgment in an adversary



     1. On October 15, 2005, debtors filed a voluntary chapter 7


     2. On January 17, 2006, debtors entered into a reaffirmation

agreement (DOC 12) with National City Bank in the amount of $28,765.96

secured by real estate with the address of 18858 Highway 160 Lineford,

KY 41833.

     3. On July 3, 2007, the trustee filed an adversary proceeding

against National City Bank seeking to avoid its mortgage.

     4. On September 6, 2007, a default judgment was granted to the


     5. On October 1, 2008, the trustee filed a notice of proposed

sale of the real estate. On October 27, 2008, an order was entered

allowing the sale of the property by the trustee free and clear of


     6. On October 8, 2008, the debtors filed their motion. The

debtors seek rescission of the reaffirmation agreement, and a refund

of $17,562.60 which is the total paid to National City Bank since the

filing of the bankruptcy.

     Conclusions of Law.

     A reaffirmation agreement is a contract between debtor and

creditor, to which conventional contract principles apply. See In re

Schott, 282 B.R. 1 (B.A.P. 10th Cir. 2002). Both parties give and

receive consideration in a contract. “When a party does not perform at

all, the case resolves itself; there is a failure of consideration,

and the party cannot enforce the contract.” Zemco Mfg., Inc. v.

Navistar Intern. Transp. Corp., 270 F.3d 1117, 1126 (7th Cir. 2001).

Here, the debtors did not receive consideration due to the fact that

the trustee was able to avoid the mortgage by default judgment.

     When the debtors and National City Bank entered into the

reaffirmation agreement, they both believed that the agreement was

based on a legally binding mortgage. However, the parties were

incorrect as the trustee was able to subsequently avoid the mortgage.

Thus at the time of the reaffirmation agreement, both the debtors and

National City Bank acted under a mutual mistake that National City

Bank had an enforceable and unavoidable mortgage. “Where a mistake of

both parties at the time a contract was made as to a basic assumption

on which the contract was made has a material effect on the agreed

exchange of performances, the contract is voidable by the adversely

affected party unless he bears the risk of the mistake . . .” Rest 2d

Contr § 152 (1981). A debtor can recover payments made pursuant to a

reaffirmation agreement where that agreement was entered under a

mutual mistake that creditor had an enforceable security interest, but

it was subsequently determined that security agreement was never

perfected. See In re Mandrell, 50 B.R. 593 (Bankr. Tenn. 1985). If a

reaffirmation agreement is voided under contract principles, it is

unenforceable. When interpreting contracts, a court looks to state

law. See In re Sickels, 2008 WL 4975878 (Bankr. N.D. Iowa 2008). Where

parties assumed a certain state of facts to exist, and contracted on

the faith of that assumption, they should be relieved from their

bargain if the assumption is erroneous. See Hatfield v. Blair, 2006 WL

572922 (Ky.App. 2006).

     Frustration of purpose is a defense to enforcement of a contract.

It occurs when an unforeseen event undermines a party’s principal

purpose for entering into a contract. “Accordingly, it has been held

that an event that substantially frustrates the objects contemplated

by the parties when they made the contract excuses a failure to

perform it.” Amjur Contracts § 651 (2008). Here, the unforeseen event

was the trustee’s avoidance of the mortgage and subsequent notice of

sale, and the debtors’ principal purpose for entering into the

reaffirmation agreement was to keep the real estate. Thus frustration

of purpose is a proper defense of the debtors to enforcement of the

reaffirmation agreement in this matter.

     It defies logic to believe that the debtors would reaffirm

if they believed there was any prospect that they could not keep the

real estate. National City Bank had a duty to successfully defend in

the adversary proceeding if it wished to enforce the reaffirmation

agreement with debtors and failed to do so, leading to default

judgment being granted to the trustee. National City Bank cannot

deliver its end of the reaffirmation bargain and should be required to

refund to the debtors all payments made after the entry of the

reaffirmation agreement.

     For those reasons, the Motion for Rescission of Reaffirmation

Agreement and Refund of Payments (DOC 35) is hereby SUSTAINED. The

reaffirmation agreement (DOC 12) with National City Bank is hereby

RESCINDED. National City Bank is hereby ordered to refund to the

debtors all payments made after entry of the reaffirmation agreement.


Copies to:


Jeanne K. Channell, Esq.

John L. Day, Jr., Esq.

Phaedra Spradlin, Esq.

U.S. Trustee