DEBTOR CASE NO. 94-10076





This matter is before the Court on creditor First American Bank's Motion to Lift Automatic Stay, filed herein on April 15, 1994. First American Bank ("the Bank") seeks to foreclose its mortgage lien on property which the debtor acquired pursuant to a land contract. The debtor filed a Response to Motion to Lift Automatic Stay on May 4, 1994. The Bank filed its Reply on May 23, 1994, and the matter was submitted for decision pursuant to an Order entered herein on June 15, 1994.

The record in this case reveals that the debtor filed his Chapter 13 petition in this Court on March 3, 1994. He filed his Chapter 13 Plan on March 23, 1994. In regard to the subject property, 1440-1442 Winchester Avenue, Ashland, Kentucky, where the debtor's business is located, the debtor's Schedule D--Creditors Holding Secured Claims lists a $219,287.00 obligation to William Hale for "assumption of obligation".

An Amendment to Schedule D filed on May 4, 1994, lists First Bank & Trust Co. (First American Bank?) as a creditor on the debtor's $142,182.00 mortgage assumption from Vernon D. Holbrook and his wife Nevelyn Holbrook by virtue of the land contract. Vernon D. Holbrook Jr. and his wife Johnda Holbrook are also listed as creditors for the amended balance on the land contract in the amount of $77,105.00.

The debtor's Plan deals with this debt at & 7:

....shall be a .... sum sufficient to bring current the post-petition delinquencies and payments on the land contract, together with interest at such rate as the Court shall fix within 18 months from the date of the filing of the Petition herein; thereafter the land contract shall be paid at a rate of not less than $2600.00 per month until December 15, 2004 with interest at the current market rate or not more than 8% per annum as fixed by the Court.

The Chapter 13 Trustee did not recommend confirmation of the Plan because it did not specify treatment of the land contract to Vernon Holbrook. The Trustee's Report and Recommendation also noted that no proof of secured claim had been filed in regard to the property.

The Bank's Motion states that the debtor acquired title to the property with notice of a pending foreclosure action against Vernon and Nevelyn Holbrook, and that his title is subject to the Bank's right to proceed to foreclose on its mortgage lien which was in default at the time the debtor acquired title. While the debtor admits that he took title to the property with full notice of the pending foreclosure action, he contends that he assumed the underlying mortgage.

The Court's first task is to determine if the debtor had an interest in the property at the time he filed his Chapter 13 petition. As stated in In re Bunt, 165 B.R. 894 (Bkrtcy.E.D.Ark. 1994), a case in which the debtor was also a land sale contract purchaser:

Property of the estate includes 'all legal or equitable interests of the debtor in property as of the commencement of the case. ' 11 U.S.C. '541(a). While federal bankruptcy law determines the effect of legal or equitable interests in property, N.S. Garrott & Sons v. Union Planters National Bank (In re N.S. Garrott & Sons), 772 F.2d 462, 466 (8th Cir. 1985), the Court looks to state law to determine the nature and extent of the interest, Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979);

At page 895. Pursuant to Kentucky law, an interest in property purchased by land sale contract is conveyed to the purchaser, here the debtor. KRS 382.010.

Next, the Court looks to the issue of whether that interest may be treated in the debtor's Chapter 13 Plan. This question was dealt with by the court in Matter of Lumpkin, 144 B.R. 240 (Bkrtcy.D.Conn. 1992). In that case, the debtor's mother transferred her interest in her residence to the debtor. The property was subject to a mortgage which contained a due-on-sale clause which provided that the mortgagee could require immediate payment of the mortgage note if the residence were sold or transferred without the mortgagee's consent.

After the transfer the mortgagee began a foreclosure action in state court, and a judgment of foreclosure was entered. The debtor then filed a Chapter 13 petition and plan which proposed to pay the mortgage arrearage over a five year period. The mortgagee filed a motion for relief from stay, asking that the foreclosure action be allowed to proceed.

The mortgagee argued that the debtor could not submit a confirmable Chapter 13 plan which would cure the default in the mortgage on the debtor's residence. It contended that this was so in part because the debtor was not the maker of the mortgage note due the mortgagee and no debtor-creditor relationship existed between them. Matter of Lumpkin, pp. 240-241.

The court responded:

The movant's final argument is that the debtor, not being the maker of the mortgage note and not having assumed the mortgage, has no personal liability thereon and thus the movant does not hold a 'claim' against the debtor as described in '1322(b)(2) subject to curing under chapter 13. This contention is also unavailing. The Supreme Court in Johnson v. Home State Bank, ____ U.S. ____, ____, 111 S.Ct.2150, 2154, 115 L.Ed.2d 66 (1991), utilizing straightforward statutory construction, held that even if a debtor has no personal liability on a mortgage loan, the in rem 'claim' of a mortgagee is a 'claim' subject to inclusion in a chapter 13 plan. Johnson ruled that a mortgagee's right to payment in the form of a right to proceeds from sale of property and a right to foreclose are sufficient to constitute a 'claim.' Admittedly, Johnson dealt with a so-called chapter 20 background where the chapter 13 debtor had extinguished his personal liability for the mortgage loan by receiving a discharge in a prior chapter 7 case. The reasoning, however, of Johnson clearly governs the present proceeding involving a property transfer to a debtor where an existing mortgage has not been assumed.

At pp. 241-242. The court went on to deny the motion for relief from stay.

While the Bank herein has not couched its argument in terms of whether the debtor may cure any mortgage arrearage in his Chapter 13 plan, it has contended that the debtor must have assumed the mortgage and be found to be personally liable on it in order to prevent the Bank from receiving relief from the automatic stay to proceed with its foreclosure action. The holding in Matter of Lumpkin, supra, makes it clear that this is not the case.

Even if personal liability and assumption of the mortgage were at issue here, however, the Bank would not prevail. In Kentucky Realty Co. v. Wade, 89 S.W.2d 640, 642, Ky. (1935), the Court of Appeals held that where a mortgage indebtedness was deducted from the purchase price and not paid by the purchasers, the purchasers assumed the mortgage indebtedness. The land contract between the debtor and William Hale provides on its face:

All payments due the party of the first part [Hale] shall, with the exception of the down payment, be made directly to First American Bank of Ashland, Kentucky, for application against the outstanding debts owed by the parties (sic) of the first part to First American Bank of Ashland, Kentucky on the subject real estate.

The mortgage indebtedness was obviously deducted from the purchase price herein, and the debtor assumed the mortgage pursuant to the holding in Kentucky Realty Co. v. Wade, supra.

In consideration of all of the foregoing it is therefore the opinion of this Court that First American Bank's Motion to Lift Automatic Stay should be overruled, and the debtor should be allowed to treat the subject mortgage in his Chapter 13 Plan. An order in conformity with this opinion will be entered separately.


By the Court -





Copies to:


Dan D. Brock, Jr., Esq.

O. John Short, Jr., Esq.

Chapter 13 Trustee