United States Court of Appeals,
Fifth Circuit.
No. 96-60162.
In the Matter of Tommy Ray HENSON; Viola Norwood Henson,
Debtors.
Tommy Ray HENSON; Viola Norwood Henson, Appellants,
v.
FIRST TOWER LOAN, INC., doing business as Tower Loan of Prentiss,
Appellee.
Jan. 22, 1997.
Appeal from the United States District Court for the Southern
District of Mississippi.
Before GARWOOD, DAVIS and STEWART, Circuit Judges.
STEWART, Circuit Judge:
Tommy Ray Henson and Viola Norwood Henson ("the Hensons")
appeal a district court order, which affirms a ruling from the
Bankruptcy Court for the Southern District of Mississippi. The
order being appealed overruled the Hensons' objection to First
Tower Loan, Inc.'s, ("Tower") proof of claim and ruled that a
second Deed of Trust which was executed by the Hensons in favor of
Tower was valid and enforceable despite the presence of a covenant
in a first Deed of trust held by the Farmers Home Administration
("FmHA") providing that "[n]either the property nor any portion
thereof or interest therein shall be leased, assigned, sold,
transferred, or encumbered, voluntarily or otherwise, without the
written consent of the Government." For the following reasons, we
affirm the order of the district court.
FACTS
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On May 25, 1982, the Hensons executed a Deed of Trust to FmHA
in the amount of $24,000.00 ("the first Deed of Trust"). On
December 29, 1993, the Hensons executed a Promissory Note,
Disclosure Statement, and Security Agreement with Tower in the
amount of $3,124.09. On the same date, the Hensons executed a Deed
of Trust to Tower ("the second Deed of Trust") on the same piece of
property on which the FmHA holds the first Deed of Trust.
On February 22, 1994, the Hensons commenced a case under
Chapter 13 of the Bankruptcy Code. On April 20, 1994, Tower filed
a proof of claim for $4,140.00 as secured interest based upon its
second Deed of Trust. On August 2, 1994, the Hensons filed an
objection to the proof of claim filed by Tower, alleging that the
second Deed of Trust was void because of Tower's failure to obtain
the written consent of the FmHA. In addition, the Hensons claimed
that Tower should be relegated to the status of unsecured creditor
and an Order be entered canceling the second Deed of Trust. On
August 5, 1994, Tower filed an answer to the Hensons' Objection to
Tower's proof of claim.
On June 27, 1995, Edward R. Gaines, Bankruptcy Judge for the
Southern District of Mississippi, entered an order denying the
Hensons' objection to Tower's proof of claim. The court concluded
that the Hensons' argument that the second Deed of Trust is void
for failure to obtain consent by the FmHA is unsupported by law.
The decision was appealed to the United States District Court for
the Southern District of Mississippi.
On February 7, 1996, Judge Charles W. Pickering, Sr., affirmed
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the decision of the bankruptcy court denying the Hensons'
objection. In his opinion, Judge Pickering adopted and expanded
the reasoning of the Bankruptcy Court opinion, stating: "Like the
bankruptcy court, this Court is unaware of any positive law which
would require a finding that the second Deed of Trust held by Tower
Loan should be declared void." Record Vol. I:3.
On March 6, 1996, the Hensons' filed a Notice of Appeal to
this court from the order of the district court.
DISCUSSION
The facts of this case are not disputed and have been
stipulated by the parties. As such, we review the district court's
ruling de novo. This is an issue of first impression for this
Court.
The first Deed of Trust executed by the Hensons' to the FmHA
on May 25, 1982, provides, in pertinent part, as follows:
BORROWER for Borrower's self, Borrower's heirs,
executors, administrators, successors, and assigns COVENANTS
AND AGREES as follows:
....
(12) Neither the property or any portion thereof or
interest therein shall be leased, assigned, sold, transferred,
or encumbered, voluntarily or otherwise, without the written
consent of the Government (FmHA). The Government shall have
the sole and exclusive rights as beneficiary hereunder,
including but not limited to the power to grant consents,
partial releases, subordinations, and satisfaction, and no
insured holder shall have any right, title or interest in or
to the lien or any benefits hereof.
Appellants' R.E. at 18-19 (emphasis added).
Both of the lower courts' rulings were based on the fact that
the preceding excerpt, although prohibitive, did not contain
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language declaring transfers or assignments without consent to be
void. In the absence of "legal or contractual authority," both
courts declined to make a determination that the second Deed of
Trust was void. Furthermore, the district court noted that the
contract provided that failure "to abide by the covenants set forth
in the first Deed of Trust would amount to an incident of default,
thereby permitting the Farmers Home Administration to declare the
entire amount immediately due and payable and allowing
foreclosure." Record Vol. I:2.
The statement by the district court indicates its analysis of
the first Deed of Trust incorporated a reading of paragraph twelve
with the remedies paragraph, paragraph eighteen which reads as
follows:
(18) SHOULD DEFAULT occur in the performance of discharge
of any obligations in this instrument or secured by this
instrument, ... the Government (FmHA), at its option, with or
without notice, may: (a) declare the entire amount unpaid
under the note and any indebtedness to the Government hereby
secured immediately due and payable, ...
Appellants' R.E. at 19 (emphasis added).
Thus, the district court's analysis has the effect of reading
paragraphs twelve and eighteen together as a "due on sale clause."
We agree.
Specifically, we hold that the contract language contained in
the first deed of trust clearly states that failure to obtain
written consent from the FmHA prior to further encumbering the
Hensons' property creates an incident of default only, and that the
clause at issue is analogous to a "due-on-sale" clause and is
thereby enforceable at the option of the FmHA against the Hensons.
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The Hensons argue that the rulings of the lower courts are in
error; the second Deed of Trust should be declared void as
violative of the first Deed of Trust; conveyance instruments like
the first Deed of Trust are recorded instruments and a
sophisticated lender, such as Tower, had a the burden of examining
the documents previously recorded, and; the Hensons and their five
children should not lose their home because Tower was not diligent.
The Hensons, however, do not provide any specific legal or
contractual authority supporting their position. In the absence of
any positive law which would require a finding that the second Deed
of Trust should be declared void, we find the Hensons' arguments
unpersuasive.
Our decision today is consistent with prior decisions of the
Mississippi Supreme Court. That court has held that a valid due on
sale clause can give the first lienholder the right to foreclose on
the property, but does not necessarily have the effect of voiding
a subsequent encumbrance on the property. See Unifirst Federal
Savings & Loan Assoc. v. Tower Loan of Mississippi, 524 So.2d 290
(1988). In Unifirst, a holder of a second Deed of Trust, which had
foreclosed its interest, brought a civil action against the first
deed of trust holder seeking declaratory, injunctive, and other
relief after the first Deed of Trust holder invoked the due on sale
clause in its Deed of Trust. There, the court held that although
the specific due on sale clause did not prohibit subordinate
encumbrance on the property, the clause was valid and enforceable
upon foreclosure of the junior lienholder.
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CONCLUSION
For the foregoing reasons, the ruling of the district court is
AFFIRMED.
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