## Facts

- Louis and Cheryle Guido filed Chapter 13 and proposed a plan treating McEntire Farms, Inc. as a secured creditor based on a contract for approximately 22.66 acres in Van Buren County, Arkansas.
- On May 10, 2005, the Guidos and McEntire executed a real estate sales contract for $37,530, payable in 240 monthly installments of $295.85.
- The contract required the deed to be held in escrow and delivered only upon full performance of the contract’s conditions.
- The contract contained a “time is of the essence” clause and a forfeiture provision allowing McEntire, after a 30-day grace period and additional notice and cure time, to terminate the contract, retake possession, and treat prior payments as rent.
- The Guidos made payments for a period, then became delinquent; after a double payment in December was applied to cure earlier missed installments, they made no further payments before filing bankruptcy.
- McEntire accepted at least one partial payment during delinquency, warned the Guidos that failure to cure would result in forfeiture, and treated the contract as canceled under the forfeiture clause before the bankruptcy filing.
- McEntire objected to confirmation, contending the contract was an executory contract with a valid forfeiture clause, that forfeiture occurred prepetition, and that the Guidos therefore had no interest in the property as of the petition date.

## Issues

1. Whether the real estate sales contract should be treated under Arkansas law as a mortgage (or mortgage substitute) or as an executory installment land contract with an enforceable forfeiture clause.
2. If the contract was executory with a forfeiture clause, whether McEntire waived forfeiture by accepting late or partial payments and whether it effectively canceled the contract before the petition date.
3. Whether the Guidos held any legal or equitable interest in the property on the petition date that became property of the estate under 11 U.S.C. § 541.

## Decision

- The court sustained McEntire’s objection to confirmation.
- The court held the agreement was an executory contract with a valid forfeiture clause, not a mortgage or mortgage substitute under Arkansas law.
- The court held McEntire did not waive its right to enforce forfeiture and effectively canceled the contract prepetition.
- The court held the Guidos had no legal or equitable interest in the property on the petition date; the property was not property of the estate and McEntire was not a secured creditor.
- The court required the debtors to amend their schedules and Chapter 13 plan to remove the property and any secured treatment of McEntire.

## Legal Principles

- Under Arkansas law, an installment land-sale contract that reserves title in the seller pending full performance and includes clear “time is of the essence” and forfeiture terms may be enforced as an executory contract rather than treated as a mortgage.
- A seller’s acceptance of late or partial payments does not necessarily waive a contractual forfeiture right when the seller gives clear notice requiring strict compliance and the buyer fails to cure after the final opportunity provided by the contract.
- Under 11 U.S.C. § 541, only the debtor’s legal or equitable interests existing at the commencement of the bankruptcy case become property of the estate; a valid prepetition forfeiture can eliminate any estate interest in the subject property.

## Conclusion

The bankruptcy court concluded that the debtors’ installment purchase agreement was an executory contract with an enforceable forfeiture clause, that the seller effectively completed forfeiture and cancellation before the Chapter 13 filing without waiver, and that the debtors therefore had no estate interest in the property and could not treat the seller as a secured creditor.


In re Guido, 345 B.R. 656 (Bankr. E.D. Ark. 2006)