PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
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No. 20-3496
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In re: BELARMINIO PERALTA,
d/b/a Peralta Groceries,
Appellant
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On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 2:20-cv-02380)
District Judge: Honorable Paul S. Diamond
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Argued: June 21, 2022
Before: McKEE, RESTREPO, and BIBAS, Circuit Judges
(Filed: September 7, 2022)
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Ronald G. McNeil [ARGUED]
MCNEIL LEGAL SERVICES
1333 Race Street
Philadelphia, PA 19107
Counsel for Appellant
Joseph P. Kerrigan [ARGUED]
KERRIGAN LAW
461 North 3rd Street, Suite 2B
Philadelphia, PA 19123
Counsel for Appellee
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OPINION OF THE COURT
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BIBAS, Circuit Judge.
Rather than taking out a mortgage, homebuyers can pay the
seller in installments. In Pennsylvania, these installment contracts are treated like mortgages. So if homeowners default on
them, they can cure that default in bankruptcy—but only until
the seller gets a judgment for possession to evict them. Yet
Belarminio Peralta tried to cure the default after the seller got
a judgment for possession. Because his home was not part of
his bankruptcy estate, he had no right to cure his default. We
will thus affirm.
I. BACKGROUND
When Peralta wanted to buy a house, he did not take out a
mortgage. Instead, he promised to pay the seller, Recon International, in installments. For years, he followed through. But
he eventually stopped making payments.
Recon sued Peralta for breaching his installment contract.
But it relented, giving him a second chance. It proposed new
terms: Peralta could keep his house if he made payments. But
if he breached again, Recon could get a judgment for possession and immediately kick him out of the house. Plus, that
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second breach would “extinguish[ ] any and all rights, liens,
and/or interest” that Peralta had in the house. Supp. App. 39.
Peralta agreed.
Once again, Peralta fell short and stopped paying. Recon
went to court and got a judgment for possession. But Peralta
did not keep his side of the bargain. Rather than leave, he
stayed in the house and filed for a Chapter 13 bankruptcy, hoping to revive his installment contract, finish paying, and keep
his house.
Normally, Peralta’s house would not be part of his bankruptcy estate. That bundle includes only his “legal or equitable
interests … in property” when he filed. 11 U.S.C. § 541(a)(1).
And when he breached his contract that second time, he lost
any interest in his home.
Even so, Peralta thought he could show an equitable interest. Chapter 13 lets a bankrupt homebuyer “cure[ ]” a “default”
on a mortgage during the bankruptcy process until the home
“is sold at a foreclosure sale.” 11 U.S.C. § 1322(c)(1). Though
Peralta had breached an installment contract, not a mortgage,
he thought that § 1322 could also cure his “default.” JA 24–25.
And because Pennsylvania treats foreclosed installment contracts like mortgages, Peralta added, that cure gave him an interest in his property.
Though plausible, Peralta’s position is tricky: § 1322 does
not fit installment contracts well. An installment contract never
has a “foreclosure sale.” The seller need never take title back
from the defaulting homebuyer because it stays with the seller
until the contract is paid off. See Anderson Contracting Co. v.
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Daugherty, 417 A.2d 1227, 1231 (Pa. Super. Ct. 1979), appeal
dism’d,
425 A.2d 329 (Pa. 1980).
Still, the bankruptcy court agreed with Peralta’s theory.
Though a judgment for possession had been entered against
him, he still lived in the house. So, the judge reasoned, Peralta
still had “an interest in a property subject to a land installment
sale contract” and a § 1322 remedy. JA 29. Thus the judge included Peralta’s home in his bankruptcy estate. 11 U.S.C.
§ 541(a)(1).
On appeal, the District Court vacated the bankruptcy
court’s order. It reasoned that, for installment contracts, the
closest analogue to a foreclosure sale is a judgment for possession. But Recon got a judgment before Peralta tried to cure, so
that remedy was unavailable. And because that judgment was
entered before Peralta filed for bankruptcy, his home was not
part of his bankruptcy estate. Mere possession without a good-faith claim to it did not change that.
Peralta appeals. We review de novo. In re Connors, 497
F.3d 314, 318 (3d Cir. 2007).
II. SECTION 1322 APPLIES TO PENNSYLVANIA
INSTALLMENT CONTRACTS
Before we decide whether Peralta’s § 1322 remedy expired,
we must decide whether he had one in the first place. He did.
Section 1322 kicks in to “cure[ ]” a “default with respect to, or
that gave rise to, a lien on the debtor’s principal residence.” 11
U.S.C. § 1322(c)(1). Peralta had that kind of default.
To start, this house was Peralta’s primary home. And there
was a lien on it. Under the Bankruptcy Code, a lien is a “charge
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against or interest in property to secure payment of a debt or
performance of an obligation.” 11 U.S.C. § 101(37). And Peralta’s contract fits the bill. Under Pennsylvania law, installment contracts are “secured by a lien upon real property.” Anderson Contracting Co., 417 A.2d at 1230–32 (internal quotation marks omitted); cf. Stern v. Marshall,
564 U.S. 462, 495
(2011) (looking to state law to define property interests in federal bankruptcy). So when Recon sold Peralta his home, it got
a lien on his property.
Finally, when Peralta breached his revised contract, he “default[ed] with respect to … [that] lien.” 11 U.S.C. § 1322(c)(1).
He failed to pay his installments and fulfill his duties under the
contract. That conduct is an “omission or failure to perform a
legal or contractual duty.” Default, Black’s Law Dictionary
(11th ed. 2019); see also Am. Hous. Tr., III v. Jones,
696 A.2d
1181, 1183–84 (Pa. 1997) (defining installment-contract
breach the same way);
13 Pa. Cons. Stat. § 2612(c) (same). So
§ 1322(c)(1) can be used to cure installment-contract breaches,
like Peralta’s.
III. PERALTA’S SECTION 1322 REMEDY
ENDED BEFORE BANKRUPTCY
But Peralta’s effort to use § 1322(c)(1) came too late. Section 1322 lets debtors cure defaults only until their homes are
“sold at a foreclosure sale that is conducted in accordance with
applicable nonbankruptcy law.” 11 U.S.C. § 1322(c)(1). That
provision does not map onto installment contracts well: unlike
a defaulted mortgage, a breached installment contract never
ends in a foreclosure sale. But that mismatch cannot mean that
§ 1322(c)(1) can cure a breached installment contract forever.
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Section 1322 lets homeowners cure their defaulted mortgages,
but only before a foreclosure sale. It is not a get-out-of-jail-free
card for all defaults at all times, and we will not read it to smuggle in large loopholes for unmentioned, non-mortgage defaults.
See In re Majestic Star Casino, LLC, 716 F.3d 736, 751 (3d
Cir. 2013) (“[F]iling for bankruptcy does not create new property rights or value where there previously were none.”) (internal quotation marks omitted); cf. Whitman v. Am. Trucking
Ass’ns, Inc.,
531 U.S. 457, 468 (2001) (no elephants in mouseholes).
Besides, this mismatch stems from letting state law define
property in federal bankruptcy. See, e.g., In re Majestic Star
Casino, LLC, 716 F.3d at 736 (describing a similar challenge
for deciding which law governs “whether [federal] tax status
constitutes a property interest of the taxpayer” in bankruptcy).
Even when they do not conflict, state property law and federal
bankruptcy law may not align smoothly. Federal courts must
confront any jagged edges. To make sense of this one, we reason by analogy. See, e.g., In re Bos. Reg’l Med. Ctr., Inc.,
410
F.3d 100, 112–13 (1st Cir. 2005). For installment contracts, the
best analogue to a foreclosure sale is a judgment for possession—and that moment passed for Peralta before he filed for
bankruptcy, even though he stayed in the house.
A. The best installment-contract analogue is a
judgment for possession
Though the Bankruptcy Code “does not define ‘foreclosure
sale,’ ” we have. In re Connors, 497 F.3d at 320. In a case about
an ordinary mortgage, we considered two definitions of “sold
at a foreclosure sale”: Could a debtor cure a mortgage default
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only until the gavel fell at the foreclosure auction (“the gavel
rule”)? Id. at 318–19. Or could he cure it until the deed is later
delivered to the winning bidder (“the deed-delivery rule”)?
Id.
We adopted the gavel rule. Though the legal interest passes
at delivery of the deed, a property is “sold” as soon as there is
a new equitable owner. Id. at 320–21. That sale happens when
a bidder wins an auction. So a property is “sold at a foreclosure
sale” as soon as the gavel falls.
Id. at 320–21 (emphasis added).
Connors thus pegged the “foreclosure sale” to the transfer
of equitable ownership. So the installment-contract analogue
must be when a default removes the bankrupt homebuyer’s
equitable title. Under Pennsylvania law, that happens when a
judgment for possession is entered against the homeowner. See
In re Butko,
624 B.R. 338, 378–80 (Bankr. W.D. Pa. 2021)
(analyzing a state statute akin to § 1322(c)(1)); In re Rowe,
110
B.R. 712, 722 (Bankr. E.D. Pa. 1990) (same).
Resisting that outcome, Peralta cites the policy behind 11
U.S.C § 1322(c)(1): helping homeowners keep their homes.
But our task is to interpret the statutory text, not to define a
policy behind it. Only legislators, not courts, can craft policy.
In short, entry of a judgment for possession shuts the
§ 1322(c)(1) window to cure defaults on installment contracts
in Pennsylvania.
B. One pre-Connors bankruptcy case disagreed, but it
is not good law
With that rule, we agree with almost every bankruptcy
court to face this question. See, e.g., In re Belmonte, 240 B.R.
843, 852 (Bankr. E.D. Pa. 1999), aff’d in part, rev’d in part on
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other grounds, 279 B.R. 812 (E.D. Pa. 2001); In re Callahan,
2004 WL 350753, at *3–4 (E.D. Pa. Jan. 29, 2004).
One court has disagreed. In re Grove, 208 B.R. 845, 846–
47 (Bankr. W.D. Pa. 1997). In that case, a couple bought a
home by installment contract, breached, and had a judgment
for possession entered against them.
Id. at 846. Still in the
house, the couple filed for bankruptcy under Chapter 13.
Id.
The seller asked for relief from the bankruptcy stay, arguing
that the couple had lost its rights in the property before bankruptcy.
Id.
The court disagreed, denying the seller relief. It did not deal
with the absence of a foreclosure sale for installment contracts.
Instead, the bankruptcy judge held, any breach after judgment
“[could] be cured” by § 1322, because the couple’s “possessory interest [was] sufficient.” Id. at 846–47. In support, the
opinion cited In re Atlantic Business & Community Corp., 901
F.2d 325 (3d Cir. 1990). There, we held that a tenant-at-sufferance’s possessory interest was enough to invoke bankruptcy
protection. Id. at 328.
The bankruptcy court here relied on Grove to let Peralta
cure his breach. But Grove is not good law, and future bankruptcy courts should not rely on it.
For one, Grove does not grapple with the text of
§ 1322(c)(1). It never explains what “foreclosure sale” means
for an installment contract. See 208 B.R. at 847.
Next, Grove relies on a distinguishable case, Atlantic Business. Although that case involved a tenancy-at-sufferance, the
landlord did not try to evict the tenant until two years after he
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filed for bankruptcy. In re Atl. Bus., 901 F.2d at 326. So when
he filed for bankruptcy, the “debtor was effectively in possession … with [the landlord’s] permission, and therefore had an
interest in property protected by” a different provision of the
Bankruptcy Code. Id. at 328 (emphasis added); see also In re
St. Clair, 251 B.R. 660, 667–68 (D.N.J. 2000) (reading Atlantic
Business thus), aff’d sub nom. St. Clair v. Wood,
281 F.3d 224
(3d Cir. 2001). But both in Grove and here, the homebuyers
overstayed without permission. Grove,
208 B.R. at 846 (ejectment action).
Plus, Grove’s rule is unworkable. Mere possession would
let squatters who never paid anything get bankruptcy relief. Cf.
In re Turner, 326 B.R. 563, 573 (Bankr. W.D. Pa. 2005). Yet
bankruptcy courts “routinely” hold that only “possession accompanied by other interests in property is protected by [bankruptcy].” In re Glob. Outreach, S.A.,
2009 WL 1606769, at *8
(Bankr. D.N.J. June 8, 2009); see, e.g., In re St. Clair,
251 B.R.
at 666 (requiring a “good-faith, colorable claim to possession”).
So Grove does not guide us and should not guide future
bankruptcy cases. We hold that a debtor’s mere possession of
a property, without a good-faith claim to it, does not save an
installment contract for § 1322(c)(1) relief.
C. Any Section 1322(c)(1) cure expired when judgment was entered
Now return to this case. Recall that after Peralta’s first
breach, he worked with Recon to revise his installment contract. Yet he stopped paying his bills, breaching again. The revised contract gave him several chances to right his wrongs,
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but he did not. So Recon got a judgment for possession against
him, ending any interest that he had.
Thus, when Peralta filed for bankruptcy months later, he
had already lost his equitable interest in the house. The analogue of a foreclosure sale had passed, and it was too late to
cure. And though he still lived there, he had no other good-faith
claim to possession. So when he filed for bankruptcy, he had
no property interest in his home, and it was not part of his bankruptcy estate. 11 U.S.C. § 541(a)(1).
…
Peralta made most of the payments on his installment contract. But he missed some. He could have used the Bankruptcy
Code to cure that breach, but only until judgment was entered
against him. Because he filed for bankruptcy after that, the District Court got it right: Peralta’s house is not part of his bankruptcy estate. We will affirm.
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