Bustamante v. Cueva (In Re Cueva)

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
For the Fifth Circuit May 19, 2004

Charles R. Fulbruge III
Clerk
No. 03-20608

IN THE MATTER OF: JOSE D. CUEVA
------------------------------

VINCENT BUSTAMANTE,

Appellant - Cross-Appellee,

VERSUS

JOSE C. CUEVA; OCWEN FEDERAL BANK, FSB; NORWEST BANK MINNESOTA,
INDIVIDUALLY AND AS TRUSTEE FOR THE AMRESCO RESIDENTIAL
SECURITIES MORTGAGE LOAN TRUST 1998-3; AMRESCO RESIDENTIAL
SECURITIES MORTGAGE LOAN TRUST 1998-3,

Appellees,

SETTLE & POU PROFESSIONAL CORPORATION,

Appellee - Cross-Appellant.

Appeals from the United States District Court
for the Southern District of Texas, Houston

Before REAVLEY, DAVIS and DeMOSS, Circuit Judges.

DeMoss, Circuit Judge:

This is an appeal of the district court’s reversing in part,

affirming in part, and remanding the case back to the bankruptcy

court. There was a foreclosure sale of property owned by Cueva

that was part of a bankruptcy proceeding and therefore subject to

an automatic stay pursuant to 11 U.S.C. § 362. Bustamante
purchased a one-half interest in that property at a foreclosure

sale and then subsequently purchased the other one-half interest.

In an adversary action brought by Bustamante, the bankruptcy court

awarded him a one-half interest in the property and awarded Cueva

the other one-half interest. The parties appealed. The district

court reversed the portion of the bankruptcy court’s award that

granted Bustamante a one-half interest in the property.

Bustamante, inter alia, now appeals.

BACKGROUND

This appeal arises from the district court’s reversal in part

of a judgment by the bankruptcy court. The following facts were

found by the bankruptcy court in its Memorandum Opinion entered

July 24, 2001, and are undisputed.

The real property that is the subject of this appeal is

located at 6006 Memorial Drive in Houston, Texas (the “Property”).

After Appellee Cueva defaulted on his note on the Property,

Appellee - Cross-Appellant Settle & Pou, P.C., obtained an order

for foreclosure.1

Jonathan Campbell and Appellant - Cross-Appellee Bustamante

often purchased property at foreclosure sales. On December 6,

1
Cueva executed a nonrecourse note to Champion Credit
Corporation on June 5, 1998, for $170,000.00. The note was secured
by a lien on the Property. The lien was assigned to Norwest Bank
Minnesota, N.A., as trustee for Amresco Residential Securities
Mortgage Loan Trust 1998-3. Amresco assigned servicing of the loan
to Ocwen Federal Bank FSB effective December 1, 1999.

2
1999, the day before the foreclosure sale at issue, Campbell

visited the Property twice and spoke with a man on the Property.

Cueva testified he spoke with Campbell on the evening of

December 6, 1999. Cueva told Campbell that the Property would not

be foreclosed because he had filed for bankruptcy. Bustamante did

not speak with Cueva or visit the Property before the sale.

Bustamante did not know about Campbell’s visit until June 2000.

Cueva’s bankruptcy proceeding actually was filed on

December 7, 1999, sometime between 9:00 a.m. and 9:30 a.m. On

December 7, 1999, Cueva’s bankruptcy attorney faxed a notice of the

bankruptcy to Appellee - Cross-Appellant Settle & Pou, which

received the notice at 9:32 a.m. Settle & Pou were the attorneys

and the authorized agents for Appellees Norwest, Amresco, and Ocwen

(the “Lienholders”), and thus those parties were charged with

notice of the bankruptcy three to four hours prior to the

foreclosure. Settle & Pou did not notify the substitute trustee of

the bankruptcy filing and the foreclosure sale went forward.

On the day of the sale, Bustamante and Campbell agreed they

would each purchase an undivided one-half interest in the Property.

Bustamante and Campbell were the successful bidders at the

foreclosure sale. Bustamante and Campbell signed a “Purchaser’s

Acknowledgment” acknowledging, among other things, that the sale

was subject to bankruptcy by the debtor. The Property was

purportedly conveyed to Bustamante and Campbell by deed dated

December 7, 1999, and recorded December 13, 1999. Ocwen received

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the proceeds of the sale on December 29, 1999. After learning of

the bankruptcy case, Ocwen reinstated Cueva’s debt and returned the

funds to the foreclosing attorneys, Settle & Pou. Bustamante

learned of Cueva’s presale bankruptcy filing in March 2000.

Nonetheless, Bustamante purchased Campbell’s one-half interest on

May 24, 2000.

Bustamante brought an adversarial proceeding in bankruptcy

court. Bustamante sought a declaration from the bankruptcy court

and relief from the automatic stay to the effect that his and

Campbell’s post-bankruptcy purchase of real property of the debtor,

Cueva, at the foreclosure sale, was valid and was not voided by the

automatic stay. Bustamante also alleged that the Lienholders

caused the foreclosure sale to proceed despite receiving notice of

Cueva’s bankruptcy, and he sought damages from them under the Texas

Deceptive Trade Practices Act (“DTPA”). Cueva counterclaimed

against Bustamante seeking avoidance of the foreclosure sale under

the bankruptcy code’s automatic stay provision and alleged third-

party damages against the Lienholders, Campbell, and Settle & Pou

for violation of the automatic stay. The Lienholders

counterclaimed against Cueva for judicial foreclosure of the lien

against the Property.

On January 3, 2002, the bankruptcy court entered a Final

Judgment in the adversarial proceeding based on its findings of

fact and conclusions of law in its Memorandum Opinion entered

July 24, 2001, and its Order Supplementing Memorandum Opinion

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entered December 5, 2001. The bankruptcy court awarded Bustamante

an undivided one-half interest in the Property based on his status

as a good faith purchaser without notice of the bankruptcy at the

time of the foreclosure sale, together with judgment for one-half

of the accrued rents on the Property. The court held that although

the foreclosure sale violated § 362, the automatic stay provision

of the bankruptcy code, under 11 U.S.C. § 549(c) of the bankruptcy

code Bustamante did not have notice of the bankruptcy and therefore

was a good faith purchaser, meaning his purchase of a one-half

interest of the Property was valid. The bankruptcy court awarded

the other one-half interest in the Property and the rents thereon

to Cueva, holding that Campbell’s purchase of a one-half interest

at the foreclosure sale was void because he had notice of the

bankruptcy at the time of the sale. The bankruptcy court held that

because Campbell’s purchase was void, Campbell transferred no

interest in the Property to Bustamante. The bankruptcy court also

determined that Bustamante was not entitled to damages under the

Texas DTPA against the other defendants (the Lienholders). The

bankruptcy court also concluded that Cueva could recover attorney’s

fees, rents, and damages from the Lienholders and Settle & Pou for

the value of the undivided one-half interest in the Property that

was sold to Bustamante; and that Ocwen could recover the proceeds

from the foreclosure sale.

Bustamante appealed to the district court, contesting only the

denial to him of the Property share awarded Cueva, rents on it and,

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alternatively, a lien on the Cueva share. Bustamante did not

dispute or appeal the denial of damages on his DTPA claim.

Cueva also appealed. He contested the award to Bustamante of

a one-half interest in the Property and rents associated with that

interest. Neither Bustamante nor Cueva objected to or appealed the

award of the foreclosure bid proceeds to Ocwen.

After the issuance of the judgment of the bankruptcy court and

during the course of the district court appeal, the Property was

sold with the approval of the bankruptcy court. The Lienholders

received the sales proceeds of $191,962.00 in satisfaction of the

lien, and Settle & Pou paid the money judgments without prejudice

to any issues on appeal.

On March 3, 2003, the district court entered its Memorandum

and Order, holding that the foreclosure sale violated the automatic

stay imposed by § 362. Observing that no party had sought

retroactive annulment of the automatic stay, the district court

reversed the award to Bustamante of his share in the Property. The

award to Cueva of his interest in the Property was affirmed, as was

the denial of a lien against the Property. Because the district

court reversed part of the bankruptcy court’s judgment, it remanded

the case to the bankruptcy court for further proceedings.

Bustamante filed a motion for reconsideration that was denied.

Bustamante and Settle & Pou filed notice of appeal to this

Court. Bustamante now appeals the district court’s ruling in its

entirety. He argues that he was entitled to both his one-half

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interest and Campbell’s one-half interest in the Property. Settle

& Pou appeals only the district court’s reversal of the portion of

the bankruptcy court’s judgment awarding one-half of the Property

and the rents thereon to Bustamante. It is Settle & Pou’s

contention on this appeal that the bankruptcy court reached the

correct result in this case for the wrong reason, and that its

judgment should have been affirmed by the district court, and

should now be reinstated by this Court. The Lienholders argue in

favor of affirming the district court. Cueva also argues for

affirming the district court and makes some additional arguments

that relate more to the disposition of the case on remand to the

bankruptcy court.

DISCUSSION

Whether the district court erred in holding that Bustamante could
not use 11 U.S.C. § 549(c) as an exception to the automatic stay
imposed by 11 U.S.C. § 362.

The findings of fact of the bankruptcy court are not

contested. This appeal concerns a challenge to the bankruptcy and

district courts’ legal conclusions, which this Court reviews de

novo. In re Bradley, 960 F.2d 502, 507 (5th Cir. 1992). This

Court “may affirm if there are any grounds in the record to support

the judgment, even if those grounds were not relied upon by the

courts below.” In re Besing, 981 F.2d 1488, 1494 (5th Cir. 1993).

When a bankruptcy case is filed, § 362 automatically imposes

a statutory stay against “any act to . . . enforce any lien against

7
property of the estate.” 11 U.S.C. § 362(a)(4). Such actions are

invalid, whether or not a creditor acts with knowledge of the stay.

See, e.g., In re Caulder, 907 F.2d 953, 956 (10th Cir. 1990), cited

with approval in In re Jones, 63 F.3d 411, 412 n.3 (5th Cir. 1995).

Through the broad discretion granted bankruptcy courts, however,

§ 362(d) provides that under certain conditions, when a party

pursues retroactive annulment or modification of the automatic

stay, a court may grant relief from a stay by “terminating,

annulling, modifying, or conditioning such stay.” 11 U.S.C.

§ 362(d). In this case, the bankruptcy court and district court

found that no party requested retroactive relief from the stay and

no relief was granted. Bustamante claims, in his brief on appeal,

to have asked for retroactive relief from the automatic stay. But

it appears he did not specifically request relief under § 362(d).

It is clear the bankruptcy court and district court never

considered Bustamante to be requesting retroactive relief under

§ 362(d). The issue of whether he requested such relief or whether

he can still request such relief, however, can be addressed on

remand to the bankruptcy court.2

2
Settle & Pou argues on appeal that the bankruptcy court
reached the right result for the wrong reasons. Settle & Pou
admits the bankruptcy court’s decision based on § 549(c) was
erroneous but that the bankruptcy court could have exercised its
discretion under § 362(d)(1) to retroactively annul the automatic
stay in order to render Bustamante’s purchase of a one-half
interest in the Property at the foreclosure sale valid. Settle &
Pou is correct that the bankruptcy court is afforded this
discretion under § 362(d)(1), but because such relief is

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 Section 362 delineates eighteen exceptions to the automatic

stay. 11 U.S.C. § 362(b)(1) - (18). There is no exception for

bona fide purchasers. Because § 362 does not prohibit a debtor

from disposing of property belonging to the bankruptcy estate,

§ 549 provides additional protection to the estate for post-

petition transactions neither subject to § 362(a) nor authorized by

the court. 11 U.S.C. § 549. In pertinent part, § 549(a) provides:

Except as provided in subsection (b) or (c) of this
section, the trustee may avoid a transfer of property of
the estate - (1) that occurs after the commencement of
the case; and (2) . . . (B) that is not authorized under
this title or by the court.

11 U.S.C. § 549(a).

Subsection § 549(c) gives a “bona fide purchaser” a defense to

a trustee’s avoidance powers under § 549(a). It states in

pertinent part:

The trustee may not avoid under subsection (a) of this
section a transfer of real property to a good faith
purchaser without knowledge of the commencement of the
case and for present fair equivalent value unless a copy
or notice of the petition was filed, where a transfer of
such real property may be recorded to perfect such
transfer, before such transfer is so perfected that a
bonafide purchaser of such property, against whom
applicable law permits such transfer to be perfected,
could not acquire an interest that is superior to the
interest of such good faith purchaser.

11 U.S.C. § 549(c). In other words, § 549(c) only applies as a

discretionary and this issue has not been addressed by either the
bankruptcy court or the district court (because both courts
believed Bustamante did not request such relief), we will let the
bankruptcy court address this issue of its discretionary authority
on remand.

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defense to the limited authority of a bankruptcy trustee to “avoid”

certain transfers of property under § 549(a).

Bustamante argues that § 549(c) is not only a defense to

avoidance actions, but also an affirmative cause of action for

purchasers. This argument ignores the plain language of § 549(c)

and is not supported by case law.

A recent case, In re Pierce, presented this same issue.

272 B.R. 198, 204 (Bankr. S.D. Tex. 2001). In an unpublished

order, the district court affirmed the bankruptcy court’s decision

that a foreclosure in violation of the automatic stay of § 362 is

invalid unless the stay is retroactively annulled and § 549 is

inapplicable to acts taken in violation of § 362. The bankruptcy

court noted:

[The purchaser] mistakes the nature of the relief
afforded by section 549. That section does not validate
sales to good faith purchasers. Section 549 empowers a
trustee in bankruptcy to avoid certain post-petition
transfers and gives good faith purchasers a defense if
the trustee attempts to nullify their (otherwise valid)
transactions. [The purchaser] postures its suit as
seeking a declaratory judgment that an avoidance action,
if brought by the trustee, would not succeed. But the
suit is actually a suit to declare that the sheriff’s
sale is valid, notwithstanding violation of the automatic
stay. If [the purchaser] had asked, in a straightforward
way, for that relief, section 549 would clearly not
apply. It is only by contorting the request for relief
that [the purchaser] can raise the issue of “good faith
purchaser.” This adversary is not brought by a trustee
to avoid a transfer. Section 549 simply does not apply.

Pierce, 272 B.R. at 205. The bankruptcy decision went on to

explain that the sale was contrary to federal law and was invalid

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when it occurred. Id. at 208. And “[a]lthough it can be made

valid by retroactive relief from the [automatic] stay, no one has

a right to rely on the transaction until and unless it is validated

by court action.” Id. This case was appealed and affirmed in a

unpublished opinion by a panel of this Court; however, this issue

was not raised on appeal and therefore not addressed by the panel.

The conclusions of the bankruptcy and district courts in

Pierce are consistent with Texas law. Texas law has long held that

foreclosures in violation of the automatic stay are invalid, even

if the parties did not have notice of the bankruptcy, unless

retroactive relief from the stay is granted by the court. See,

e.g., Cont’l Casing Corp. v. Samedan Oil Corp., 751 S.W.2d 499, 501

(Tex. 1988) (per curiam); Paine v. Sealy, 956 S.W.2d 803, 805 (Tex.

App.-Houston [14th Dist.] 1997, no writ).

This Court has dealt with this issue only indirectly in Jones.

There the Chapter 13 debtor argued that a post-petition foreclosure

sale was void and absolutely barred because it violated the

automatic stay. 63 F.3d at 412. The bankruptcy court declined to

void the transfer of title, finding that the purchasers bought in

good faith without notice of bankruptcy and were therefore

protected by § 549(c). Id. The district court affirmed on appeal,

but not on § 549(c) grounds. Rather, the district court modified

the automatic stay retroactively pursuant to § 362(d), thus

validating the sale and transfer. Id. This Court affirmed the

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district court, finding neither error nor an abuse of discretion

because “[t]he judgment appealed specifically relie[d] upon section

362(d) for its modification of the automatic stay,” id. at 413, and

the “section 549(c) exception [was] not implicated in [the] case.”

Id. at 413 n.6. In confirming a court’s broad power to modify or

annul the automatic stay, even retroactively, this Court noted that

§ 549(c) simply serves as an “exception to the discretionary

authority of the bankruptcy trustee to ‘avoid’ certain transfers of

property under section 549(a).” Id. The opinion further explained

that the post-petition foreclosure sale was “not one of the class

of transactions [i.e., a § 549(a)(2)(B) court order] which § 549(a)

allows the bankruptcy trustee to avoid” because the sale had been

retroactively validated by the district court pursuant to § 362(d).

Id.

In short, § 549(c) is not a exception to the automatic stay

imposed by § 362, and there is no authority to support Bustamante’s

position to the contrary. As the district court noted, the

bankruptcy court erroneously relied on dicta in a Ninth Circuit

opinion that has subsequently been criticized by that Circuit and

is contrary to the law in this Circuit.3 Therefore, the district

3
Bustamante, like the bankruptcy court, relies on dicta in
a Ninth Circuit case which appears to suggest that § 549(c) can be
used as an exception to the § 362 stay. See In re Schwartz,
954 F.2d 569, 573 (9th Cir. 1992). The Ninth Circuit Bankruptcy
Appellate Panel has since rejected any interpretation of the dicta
in Schwartz as permitting the use of § 549 to retroactively
validate creditor-initiated transactions in violation of the stay

12
court did not err in reversing that part of the bankruptcy court’s

decision.

Additionally, for the same reasons that the sale was invalid

as to Bustamante’s interest, i.e., the foreclosure sale was in

violation of the automatic bankruptcy stay and therefore invalid,

the sale was also invalid as to Campbell’s interest. Bustamante

purchased Campbell’s interest as speculation in the outcome of a

known title dispute and not as a good faith purchaser from a void

foreclosure title holder. Accordingly, the district court

correctly affirmed the decision of the bankruptcy court awarding

Campbell’s one-half interest that Bustamante purchased to Cueva.

Bustamante also raises several other claims. First, he claims

he is due damages under 11 U.S.C. § 550 of the bankruptcy code.

This claim, however, is incorrect because § 550 damages are only

available when a trustee files an avoidance action and not for

§ 362 invalidation of the foreclosure sale. 11 U.S.C. § 550.

Second, Bustamante claims that state law regarding equitable

subrogation grants him a lien against the Property. Equitable

subrogation is a matter left to the court’s discretion; Bustamante

has not challenged the findings of fact and therefore would have to

prove as a matter of law that he is entitled to a lien. See First

Nat’l Bank of Kerrville v. O’Dell, 856 S.W.2d 410, 415-16 (Tex.

and held, consistent with the plain language of § 549 and this
Circuit’s case law, that § 549(c) cannot be used in such a way. In
re Mitchell, 279 B.R. 839, 842-44 (9th Cir. B.A.P. 2002).

13
1993); see also In re Mendoza, 111 F.3d 1264, 1271 (5th Cir.

1997)(Justice, J., concurring and dissenting in part). He has not

done so.

Finally, the bankruptcy court awarded no damages or other

relief under the DTPA. Bustamante neither complained about nor

appealed that decision. The issue was first raised in Bustamante’s

motion to modify the district court’s order reversing all relief

awarded him. Because the issue was not timely raised and therefore

waived, the district court correctly rejected the complaint. See

In re GGM, P.C., 165 F.3d 1026, 1031-32 (5th Cir. 1999).

CONCLUSION

The foreclosure sale was invalid, the stay was not modified,

and therefore Bustamante was not entitled to possession or

ownership of the Property. For the same reasons, Bustamante is not

entitled to ownership or possession through Campbell’s interest.

Additionally, Bustamante’s other claims fail. Therefore, the

decision of the district court was correct and is affirmed.

Accordingly, we remand the case to the bankruptcy court for any

further determinations not inconsistent with this opinion or the

opinion of the district court.

AFFIRMED.

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