The United States Court of Appeals for the Third Circuit recently ruled that because the seller of the house in an installment sale agreement received a possession judgment before the buyer filed for bankruptcy, the house was not part of the buyer’s bankruptcy estate.
A copy of the notice in In re Belarminio Peralta is available on: Link to Reviews.
The buyer here purchased a house through an installment sale agreement with the seller. The buyer stopped paying and the seller sued. To get a second chance, the buyer agreed that if he committed another offense, the seller could get a judgment for possession and evict him immediately. Another breach would extinguish any rights the buyer had to the home.
Nevertheless, the buyer again stopped paying and the seller obtained a judgment of possession. The buyer stayed in the home and filed for Chapter 13 bankruptcy. In the bankruptcy petition, the buyer argued that Chapter 13 allows a bankrupt homebuyer to “heal”a ‘default’ on a mortgage during the bankruptcy process until the house ‘is sold in a foreclosure sale‘ 11 USC § 1322(c)(1). Pennsylvania treats foreclosed installment contracts as mortgages, and therefore the purchaser also alleged that the said remedy gave him an interest in his property.
The bankruptcy court accepted the buyer’s theory. The judge held that because the buyer was still living in the property, he still had an interest in the property that was the subject of the installment contract and a remedy under § 1322(c)(1). Thus, the judge-commissioner included the housing of the purchaser in his estate in bankruptcy. 11 USC § 541(a)(1).
On appeal, the trial court reversed the bankruptcy court’s order, finding that because the possession judgment had been entered before the buyer filed for bankruptcy, no recourse under Section 1322 (c)(1) existed and the house was not part of the bankruptcy estate. . The buyer appealed in due time.
Section 1322 of the Bankruptcy Code only allows debtors to cure defaults until their homes are “sold in a foreclosure sale that is conducted in accordance with applicable non-bankruptcy law. “. 11 USC §1322(c)(1).
However, unlike a mortgage in default, a broken installment contract never ends in a foreclosure sale; title remains with the seller until the contract is paid. Thus, to determine whether a §1322(c)(1) remedy existed here, the Third Circuit needed an analog of a foreclosure sale applicable to installment contracts.
The Third Circuit adopted the hammer rule to define a “foreclosure sale.” According to the hammer rule, although legal interest passes upon issuance of the deed, a property is “sold” as soon as there is a new equitable owner. In re Connors, 497 F.3d 314, 320-21 (3d Cir. 2007). This sale occurs when a bidder wins an auction. Thus, a property is “sold in a foreclosure sale” as soon as the hammer falls. Identifier.
In re Connors thus links the “foreclosure sale” to the transfer of equitable ownership. The Court here determined that the installment contract analog of a foreclosure sale is when a default removes equitable title from the bankrupt homebuyer. Under Pennsylvania law, this occurs when a judgment for possession is entered against the home buyer. See In re Butko624 BR 338, 378–80 (Bankr. WD Pa. 2021) (analyzing state law similar to §1322(c)(1)).
Thus, the Third Circuit concluded that when the buyer filed for bankruptcy months after the seller had obtained a judgment of possession, the buyer had already lost his equitable interest in the house and the house was not part of his bankruptcy estate. 11 USC §541(a)(1). The analog of a foreclosure sale had passed, and it was too late to heal. And although the buyer had always lived in the house, he had no other bona fide claim to possession.
Accordingly, the Third Circuit accepted the trial court’s assessment that the buyer’s effort to use §1322(c)(1) came too late, and the court upheld the court’s decision. of first instance.