UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION



IN RE:


RICHARD COOTS and

HELEN L. COOTS                                       CASE NO. 05-71543


DEBTORS



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


proceeding.


     Facts.


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


petition.


     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


trustee.

     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


liens.


     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:

Debtors

Jeanne K. Channell, Esq.

John L. Day, Jr., Esq.

Phaedra Spradlin, Esq.

U.S. Trustee