In re Haake

483 B.R. 524

In re Laurie K. HAAKE, Debtor.

No. 12–11398–11.

United States Bankruptcy Court, W.D. Wisconsin.

Sept. 18, 2012.

Galen W. Pittman, Esq., Galen W. Pittman, S.C., La Crosse, WI, for Debtor.

David B. Russell, Esq., Hale, Skemp, Hanson, Skemp & Sleik, La Crosse, WI, for Creditor Gary Rasmussen.

ORDER

THOMAS S. UTSCHIG, Bankruptcy Judge.

Laurie Haake, the debtor in this case, has her principal place of business in Wisconsin but lives in Minnesota.¹ She was unable to obtain a traditional mortgage and financed the purchase of her home from the creditor, Gary Rasmussen, through the use of a contract for deed (or a land contract, as it is called in Wisconsin). She testified that she had been renting the home for some time before deciding to purchase it. She tried to get a loan from Park Bank, the lender which financed her business (a “dog center” located in La Crosse, Wisconsin), but was unsuccessful. She and Mr. Rasmussen therefore opted to pursue an alternate form of financing on their own. See Shields v. Goldetsky (In re Butler), 552 N.W.2d 226, 229 (Minn.1996) (a contract for deed is a financing arrangement for a real estate sale in which the buyer “has all the incidents of ownership except legal title” and the buyer effectively borrows the money for the purchase from the seller).

The contract for deed was executed in September of 2010. The purchase price for the property was $152,000.00.² Ms. Haake made a $20,000.00 down payment. The contract contemplated that Ms. Haake would make monthly payments and that the balance would be due in full on September 1, 2011. It appears she made some, but not all, of the monthly payments and did not pay the balance when it came due. On March 12, 2012, Mr. Rasmussen served her with a notice of cancellation of the contract of deed. This case was filed two days later.

A little over two months after the petition was filed, Mr. Rasmussen filed a motion for relief from the automatic stay. He requests that he be permitted to finalize the cancellation of the contract for deed as necessary in Minnesota state court. The debtor objected to the motion and has made an offer of adequate protection (pending confirmation of a plan, she has offered to make monthly payments consisting of interest on the principal balance and a prorated portion of the accruing real estate taxes).

The Court conducted a hearing on the matter on August 28, 2012. This is a core proceeding under 28 U.S.C. § 157(b)(2)(G), and the Court has jurisdiction under 28 U.S.C. § 1334. This order constitutes the Court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052, as applicable in a contested matter under Fed. R. Bankr.P. 9014(c). The essential issue before the Court is whether the debtor has an interest in the property which is sufficient to permit her to reorganize or restructure the debt in a chapter 11 plan. Ms. Haake contends that the buyer under a contract for deed should be regarded as holding redemption rights analogous to those of a debtor under a traditional mortgage. In contrast, Mr. Rasmussen contends that her rights to the property have terminated and there is nothing for her to reorganize.

Property interests are created and defined by state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (“Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.”); see also Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2616, 180 L.Ed.2d 475 (2011). Although this case was filed in Wisconsin, the property is located in Minnesota, the debtor is a Minnesota resident, and the contract for deed was executed and recorded in Minnesota. The rights of the parties under the contract are determined and controlled by Minnesota law, and Ms. Haake's interest in the property must be defined by reference to the substantive law of the state of Minnesota. In re Edina Dev. Corp., 370 B.R. 894, 900 (Bankr.D.Minn.2007) (determination as to whether debtor's interest under contract for deed had been properly canceled was governed by Minnesota law); see also In re Sumpter, 171 B.R. 835, 842 (Bankr.N.D.III.1994) (Illinois law controlled determination as to whether the debtors had any remaining legal or equitable interest in property when the property was located in Illinois, the agreement was made in Illinois, and the parties were residents of that state). ³

Under Minnesota law, the vendee under a contract for deed holds equitable title to the property, while the vendor retains the legal title as security for the purchase price. Butler, 552 N.W.2d at 229. One of the remedies available to a vendor in the event of the purchaser's default is the ability to cancel the contract pursuant to Minn.Stat. § 559.21, a process which is “in the nature of a statutory strict foreclosure.” Id. at 230. As the Butler court observed:

A statutory cancellation of a contract for deed results in the vendee's forfeiture of all payments made and restoration of full legal and equitable title in the property to the vendor. This result is different from that in a mortgage foreclosure sale, where the defaulting party may receive proceeds of a mortgage foreclosure sale above the amount owed on the property.

Id.

Once the statutory notice has been served and cancellation effected, all rights between the parties under a contract for deed are terminated. Id.; see also West v. Walker, 181 Minn. 169, 231 N.W. 826, 827 (1930) (once cancellation is completed, “there remains to neither vendee nor vendor any cause of action against the other growing out of the land transaction”). Given that the cancellation of a vendee's interest in a contract for deed is in the nature of a strict foreclosure, there is no possibility of redemption if the vendee's default “persists past the period for cure of default.” Edina Development, 370 B.R. at 900.

The notice of cancellation of the contract for deed in this case indicated that the default consisted of Ms. Haake's failure to pay “all outstanding principal and interest” that was due on September 1, 2011. This totaled $130,971.34. The notice also indicated that she had not paid the 2011 real estate taxes. In accordance with Minn.Stat. § 559.21, Ms. Haake was notified that the contract would terminate 60 days after service upon her unless she paid the amount due, together with the costs of service and $250.00 in attorneys' fees.

Minnesota courts strictly construe the notice statute so as to avoid unnecessary forfeitures. Hoffman v. Halter, 417 N.W.2d 747, 750 (Minn.Ct.App.1988). However, despite the need to “closely adhere” to the required forms, some discrepancies in the notice will not render it fatally defective. Id. at 751. The purpose of the cancellation procedure is “to give vendees notice of an impending cancellation and a reasonable period of time to redeem their interest.” Conley v. Downing, 321 N.W.2d 36, 39 (Minn.1982). Ms. Haake has not argued that the notice was inaccurate or that it was defective in any way.⁴ Even if the outstanding balance was somehow calculated in error, the failure to state the amount due is not fatal to a notice of cancellation because the vendee is presumed to know the contract terms and is not prejudiced by a mistaken amount. Id. The contract itself called for payment in full on September 1, 2011. The notice of cancellation informed Ms. Haake that she had not made that payment. She had 60 days from the date of service to cure the default. Instead, she filed bankruptcy. Mr. Rasmussen does not deny that at the time of filing she still had the right to cure. The question is what she could do with it.

Ms. Haake notes that courts have historically been troubled by the fact that this type of transaction holds the potential for highly inequitable results. For example, in Butler the property might have been worth as much as $1.2 million more than the amount due under the contract, and the debtor's default meant the loss of that equity. 552 N.W.2d at 229. Even this case hints at the problem, in that Ms. Haake made a $20,000 down payment and at least some of the monthly payments. In the context of a traditional foreclosure sale, she would be entitled to receive the net equity after payment of the balance due Mr. Rasmussen. Minnesota law, however, dictates that her default under the contract for deed causes title to revert to Mr. Rasmussen without regard to her potential equity position. The property—and her equitable title to it—are simply gone.

Ms. Haake's suggestion is that there is an emerging trend among courts to acknowledge this inequity and grant debtors a greater range of redemption rights or other protections (perhaps even the requirement of judicial oversight before the vendor could terminate the contract). Were the Court to adopt such a perspective, she would propose a plan that restructures the obligation and avoids the forfeiture that would otherwise result. But the reality is that Minnesota has acknowledged the problems associated with contracts for deed and provided vendees with the right to cure under Minn.Stat. § 559.21 specifically to avoid arbitrary action by the seller. See Butler, 552 N.W.2d at 230 (the “potentially severe consequences” of cancellation of a contract for deed have been “ameliorated” by § 559.21). ⁵

As indicated previously, Ms. Haake's property rights are shaped by state law, and this Court cannot simply fashion substantive redemption rights where none otherwise exist. Her interest in the property is that of a vendee under a Minnesota contract for deed who defaulted and received a notice of cancellation from the vendor. Under Minnesota law, cancellation terminates the contract for deed if the vendee's default “persists past the period for cure of default.” Edina Development, 370 B.R. at 900. She is left with one final argument: namely, that because the...