MELISSA SEALS                                                                                          CASE NO. 05-71248



     This matter having come before the court on Debtors’ Renewed

Motion for Refund of Mortgage Payments (DOC 39), and the matter having

been heard on July 15, 2009, 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

CitiFinancial Inc. should be ordered to refund to the debtors

or refund to the trustee all payments made on a mortgage after the

filing of the bankruptcy because the trustee has avoided the mortgage

by default judgment in an adversary proceeding.


     1. On October 11, 2005, debtors filed a voluntary chapter 7


     2. On January 22, 2007, the trustee filed an adversary proceeding

against CitiFinancial Inc. seeking to avoid its mortgage.

     3. On February 28, 2007, a default judgment was granted to the


     4. The trustee now proposes to sell the Debtors’ home free and

clear of liens.


     5. Debtors have paid to CitiFinancial Inc. $14,063.04 in payments

since the filing of the bankruptcy.

     6. On May 26, 2009, the debtors filed their motion. The debtors

seek a refund of $14,063.04 to themselves pursuant to the motion, or

alternatively to the trustee for distribution to unsecured creditors

pursuant to statements made on the record at the hearing.

     Conclusions of Law.

     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 CitiFinancial Inc. entered into a contract,

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 contract,

both the debtors and CitiFinancial Inc. acted under a mutual mistake

that CitiFinancial Inc. 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). 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

contract was to keep the real estate. Thus frustration

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

contract in this matter.

     It defies logic to believe that the debtors would enter into a

contract if they believed there was any prospect that they could not

keep the real estate. CitiFinancial Inc. had a duty to successfully

defend in the adversary proceeding if it wished to enforce the

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

judgment being granted to the trustee. CitiFinancial Inc. cannot

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

refund all payments made after the filing of the bankruptcy.


     Those payments should not be refunded to the debtors because the

debtors did not stand in the shoes of the mortgage holder in the

adversary proceeding. Those payments should be refunded to the trustee

because the trustee did stand in the shoes of the mortgage holder in

the adversary proceeding.

     For those reasons, Debtors’ Renewed Motion for Refund of Mortgage

Payments (DOC 39) is hereby SUSTAINED. CitiFinancial Inc. is hereby

ordered to refund to the trustee all payments made after filing of the



Copies to:


Jeanne K. Channell, Esq.

Shea W. Conley, Esq.

Phaedra Spradlin, Esq.

U.S. Trustee