UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
RICHARD COOTS and
HELEN L. COOTS CASE NO. 05-71543
MEMORANDUM OPINION AND ORDER
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,
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
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.
Jeanne K. Channell, Esq.
John L. Day, Jr., Esq.
Phaedra Spradlin, Esq.