UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
JAMES W. SEALS and
MELISSA SEALS CASE NO. 05-71248
MEMORANDUM OPINION AND ORDER
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
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
Jeanne K. Channell, Esq.
Shea W. Conley, Esq.
Phaedra Spradlin, Esq.