IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 96-30237
IN THE MATTER OF: DIBERT, BANCROFT
& ROSS COMPANY, LIMITED; Debtor,
JOHN ROSS, Deceased, GLORIA ROSS,
individually and as the duly
appointed Administratrix of the
Succession of John Ross, substituted
as a party plaintiff in place and
stead of John Ross; CAROLYN ROSS;
KATHLEEN PENICK; HANCOCK NATIONAL
BANK,
Appellants,
versus
ROBERT L. MARRERO, CENTRAL
PROGRESSIVE BANK; DIBERT, BANCROFT
& ROSS COMPANY, LIMITED; UNITED
STATES OF AMERICA,
Appellees.
Appeal from the United States District Court
for the Eastern District of Louisiana
June 30, 1997
Before JOLLY, JONES and WIENER, Circuit Judges.
WIENER, Circuit Judge:
This appeal arises from the bankruptcy proceedings of Dibert,
Bancroft & Ross Company, Limited (“the Debtor”). Appellants (“the
Ross Group”1) appeal the judgment of the bankruptcy court, as
affirmed by the district court, rejecting the Ross Group’s claim
and recognizing the claim of the Internal Revenue Service of the
United States Department of the Treasury (“the Government”).
Specifically, the court awarded to the Government the proceeds of
a court authorized sale by the Debtor’s trustee in bankruptcy of
property located in Amite, Tangipahoa Parish, Louisiana, and at the
same time denied the Ross Group’s claim to those proceeds.
Agreeing with the Ross Group that its collateral mortgage claim to
those proceeds subsists and primes the Government’s tax lien
claims, we reverse the ruling of the bankruptcy court that awarded
those sales proceeds to the Government, render judgment awarding
the proceeds to the Ross Group, and remand the case to that court
for further proceedings consistent with this opinion.
I
FACTS AND PROCEEDINGS
A. The Sale and Leaseback Agreement
In 1965, the Debtor entered into an industrial inducement
financing arrangement with Tangipahoa Parish (“the Parish”),
crafted as a sale-and-leaseback with right of redemption (“the
Lease”), under the terms of which the Debtor would (1) purchase
property in Amite, (2) construct a foundry on it to replace the
1
Collectively, Hancock National Bank, Raphael Ross, Jr.
(whose interest was later assigned to Carolyn Ross), Kathleen
Penick, John Ross (now deceased), and Gloria Ross, together the
original secured creditors as collateral mortgagees of Debtor’s
leasehold interest in property in Tangipahoa Parish, Louisiana.
See infra note 8.
2
Debtor’s New Orleans facility that had been badly damaged by
Hurricane Betsy, (3) transfer record title of the improved property
to the Parish, reserving the right to reacquire record title by
exercising a so-called repurchase option and paying a nominal
amount to do so, and (4) without ever relinquishing possession,
immediately lease the property back from the Parish.2 Pursuant to
the Lease, the Debtor purchased the land and built an iron and
steel foundry, pattern shop, and machine shop on it (collectively,
“the Foundry”). When construction of the Foundry was completed in
1967, the Debtor transferred record title of the Foundry to the
Parish, including in the package all machinery and equipment that
the Debtor had relocated on the property. Contemporaneously with
its transfer of title to the Parish, the Debtor leased the Foundry
back from the Parish, retaining the right to redeem record title at
(1) any time during the original term or extended term of the Lease
(2) after repayment in full of the Parish’s bond financing.
To raise the funds required to do the long-term financing deal
with the Debtor, the Parish issued and sold general obligation
2
In Louisiana, a lease of immovable (real) property is a
hybrid, a personal contract which nonetheless enjoys a number of
attributes of a real contract, including public records protection,
the right to peaceable possession, the right to evict, and the
like. See 2 A.N. Yiannopoulos, Louisiana Civil Law Treatise, §
226, at 422-25 (3d ed. 1991); La. Rev. Stat. Ann. § 2721-2721.1 &
2754-56 (West 1991); and also Rivet v. Regions Bank of Louisiana,
108 F.3d 576, 580 n. 2 (5th Cir. 1997). Significant here is that
the personal contract of lease produces a right of the lessee to
encumber his interest by use of the special mortgage, originally a
pignorative device for hypothecating immovable property. See La.
Civ. Code Ann. art. 3286(4) (West 1994) (providing that a “lessee’s
rights in a lease of an immovable with his rights in the buildings
and other constructions on the immovable” are “susceptible of
mortgage”); and id. rev. cmt. f.
3
bonds, then delivered the proceeds of the bond sale to the Debtor
which used them to “take out” its interim construction loans. The
bonds were secured by the Parish’s record title to the Foundry and
the Debtor’s obligation under the Lease. The rental payments that
the Debtor obligated itself to pay to the Parish under the Lease
were calculated to amortize these bonds over the course of twenty
years.
Section § 1901 of the Lease gave the Debtor as lessee the
option to extend the Lease beyond the original twenty year primary
term for five consecutive extension terms of five years each, at an
annual rental of $10,000.3 Section 2002 of the Lease spelled out
the Debtor’s right of redemption in the form of an option to
repurchase the Foundry from the Parish for the nominal sum of
$1,000 at any time after the bonds had been retired, provided the
Lease was in effect and current at the time of the exercise of the
option.
Almost twenty years later, in April 1986, the Debtor made the
final payment to the Parish under the initial term of the Lease in
a sum sufficient to retire the last of the bonds. Despite having
thus entirely repaid the financing arrangement embodied in the
Lease, the Debtor nevertheless found it economically advantageous
not to reacquire record title to the Foundry immediately but
3
These $10,000 per year lease payments, also known as
“payment in lieu of tax” payments, or “PILOT” payments, amount to
far less than the property taxes that Dibert would have owed had
the foundry been on the Parish’s ad valorem tax rolls. This
explains the financial reason for a lessee’s preference to extend
the lease term, time and again, rather than exercising the right to
reacquire record title immediately upon amortization of the bonds.
4
instead to exercise the first of its five year lease renewal
options. Thus, at no time —— from the Debtor’s original purchase
of land in the Parish and construction of the Foundry in the mid
1960's to the eventual bankruptcy sale of the Foundry to third
parties in 1992 —— was the Debtor ever out of occupancy and
possession of the Foundry property.
B. The Collateral Mortgage
Faced with a cash shortage at approximately the same time in
1986 that it was paying off the last of the “rent” under the
initial term of the Lease, the Debtor borrowed approximately
$447,000 from the Ross Group. This loan was represented by a
Promissory Hand Note. Repayment of that note was secured by the
pledge of a “Bearer” collateral mortgage note which was paraphed
for identification with and thus secured by a leasehold collateral
mortgage (“the Mortgage”) in the amount of $2,000,000. Like the
Lease, the Mortgage was duly recorded in the Office of the Recorder
of Mortgages for the Parish in December 1986.
The Mortgage encumbered “all of the Debtor’s leasehold
interests in and to” the land on which the Foundry was constructed,
as well as all the buildings and improvements situated on the
premises and all machinery, appliances and equipment, all component
parts, all immovables by nature and destination, and all corporeal
movables. Also, by its own terms, the Mortgage was made subject to
all terms and conditions of the Lease, which was conditionally
assigned to the holder of the Mortgage.4
4
See infra note 6.
5
The Ross Group and its successors in interest have at all
times remained in possession, as pledgees, of the collateral
mortgage note secured by the Mortgage. Although the Mortgage does
not contain an express “after acquired property” clause,5 it does
contain —— in addition to a standard “pact de non alienando” by
which the Debtor as mortgagor was obligated “[n]ot to sell or
transfer the Property without the prior written consent of the
Mortgagee [the Ross Group]” —— an analogous but more specific
covenant in § 11(1)(3), which expressly applies “[i]n the event
that the Property shall consist of Mortgagor’s interest in a
leasehold estate and/or lease.”6
5
An “after acquired property” clause, as distinct from an
“after acquired title” provision, operates to allow a mortgage to
encumber immovable property that the mortgagor does not yet own at
the time that the mortgage is executed but is subsequently acquired
by the mortgagor. Such clauses have been recognized as lawful
special mortgages in Article 3292 of the Louisiana Civil Code,
which “combines and clarifies the provisions of Former Civil Code
Articles 3308 (prohibiting the mortgage of ‘future property’) and
3304 (validating a mortgage of property of which the mortgagor is
not then the owner if the property is subsequently acquired).” La.
Civ. Code Ann. art. 3292 rev. cmt. (West 1994).
6
The covenant at § 11(e)(3) provides in full:
Mortgagor will not surrender any of its leasehold
interests hereinabove described, nor terminate or cancel
the Lease, and will not, without the prior written
consent of the Mortgagee modify, change, supplement,
alter or amend the Lease, either orally or in writing,
and any such termination, cancellation, modification,
change, supplement, alteration or amendment of the lease
without prior written consent of the Mortgagee shall be
void and of no force and effect. As further security to
the Mortgagee, Mortgagor does hereby deposit with the
Mortgagee the original copy of the Lease and the
Assignment thereof to be retained by the Mortgagee until
all indebtedness secured hereby is fully paid.
6
The Debtor continued to suffer cash shortages, so it borrowed
$500,000 from Central Progressive Bank (“CPB”) in 1987 and gave CPB
a first mortgage on the Rolling Mill, a facility constructed in the
late 1960's on land owned by the Debtor adjacent to the Foundry.
The Rolling Mill was not part of the Foundry sale and leaseback
transaction between the Debtor and the Parish and was not
encumbered by the Mortgage.
C. The Act of Cash Sale and the Debtor’s Demise
Unable to eliminate its cash-flow problems despite those two
borrowings, the Debtor shut down both the Foundry and the Rolling
Mill in the summer of 1988. By the end of 1989, these facilities
had been closed for more than a year and many employees had been
laid off. In response, Parish officials publicly threatened to
cancel the Lease and seize the Foundry even though the Lease
neither expressly nor implicitly requires the Debtor to maintain
any level of employment, and even though the Debtor continued to
make its specified lease payments to the Parish.
Whether motivated by fear of political repercussions, the need
to reorganize the business, or anticipation of seeking bankruptcy
protection, the Debtor elected to recover its record title to the
property by exercising its repurchase option under the Lease.
Accordingly, on September 5, 1989, the Parish executed an Act of
Cash Sale (“the Deed”), transferring record title of the Foundry
and all associated machinery and equipment back to the Debtor for
the nominal $1,000.00 specified in the option; however, the Deed
was not immediately registered in the Conveyance Records of the
7
Parish. In the Deed, the Parish and the Debtor expressly
recognized that (1) the Foundry was still subject to the Mortgage,
(2) the encumbrance created by the Mortgage was still valid, (3)
the Deed did not cancel the Lease and thus could not nullify the
Mortgage, and (4) the Mortgage would continue to encumber the
Foundry to the “fullest extent allowed by law.”
On September 15, 1989, only ten days after the execution of
the still-unregistered Deed, the Debtor filed a petition for relief
under chapter 11 of the Bankruptcy Code. The following summer, the
Debtor’s bankruptcy was converted to a chapter 7 proceeding, and
Appellee Robert Marrero (“the trustee”) was appointed trustee in
bankruptcy for the Debtor. For reasons not apparent from the
record on appeal, the Deed was not filed for record until September
1990, roughly a year after its execution and some months after the
appointment of the chapter 7 trustee.
An unsurprising side effect of the Debtor’s financial demise
was its failure to pay various taxes. As a result of delinquencies
in the payment of federal employment taxes, the Government had
filed the first of several notices of federal tax liens in
September 1988, approximately one year before the Parish executed
the Deed and the Debtor filed its petition in bankruptcy.
Additional pre-petition federal tax liens were filed in November
1988, January 1989, March 1989, and June 1989. The mortgage
records of the Parish confirm that the Mortgage had been recorded
prior to the recording of any of the numerous judicial mortgages
(42 in total) and tax liens against the Debtor, including those
8
filed by the Government. Assuming its continuing validity, the
Mortgage was at all times the most senior encumbrance against the
Debtor’s property in the Parish.
D. The Trustee’s Sale; Allocation of the Sale Proceeds
After receiving joint and interdependent bids for the Foundry
and the Rolling Mill, the trustee filed a motion in the bankruptcy
court for authority to sell both facilities. The bid on the
Foundry was submitted by Timco, Inc. and Southern Enterprises,
Inc., in the amount of $495,412, and the bid on the Rolling Mill
was submitted by Anne Guzzardo-Knight in the amount of $468,000.7
As these bids were interdependent, the trustee urged the bankruptcy
court either to approve or reject both bids in their entireties.
Several parties, including the Ross Group, objected to the
trustee’s proposed sale.8 The Ross Group objected on the ground
that it was the holder of the Mortgage which the Debtor had granted
years earlier, and had made an offer to purchase the Foundry,
subject to the Mortgage. According to the Ross Group, its bid was
greater than the Timco and Southern Enterprises bid, which the
trustee was considering.9
7
Guzzardo-Knight’s bid for the Rolling Mill also included a
portion of the Foundry property, to which $19,000 of her bid was
allocated.
8
By this time members of the Ross family had formed Amite
Castings, Inc. for the purpose of purchasing the Foundry from the
bankruptcy estate. It was Amite Castings which filed the objection
to the trustee’s proposed sale; however, we continue to identify
Amite as the Ross Group to avoid confusion.
9
The Ross Group offered to bid the amount of the total debt
on the Mortgage, some $867,334.00, including principal, interest
and attorneys’ fees.
9
The Ross Group also complained that the trustee’s allocation
of the bids between the Foundry and the Rolling Mill was arbitrary
and contradicted a prior independent appraisal which had been
conducted in conjunction with a previous attempt to sell the
facilities. That appraisal had allocated three-quarters of the
value of the properties to the Foundry (approximately $1,200,000)
and one-quarter to the Rolling Mill (approximately $400,000). The
Government agreed with the Ross Group that the allocation between
the Foundry and Rolling Mill was not reflective of the previously
appraised values or of the relative values of the Foundry and the
Rolling Mill. Finally, the Ross Group argued that, as holder of
the note secured by the Mortgage, it was entitled to a priority
claim —— superior to the claim of the Government under its tax
liens —— to the proceeds of any eventual sale of the Foundry.
Reserving the issue whether the Mortgage still provided a
secured claim to the proceeds of the sale of the Foundry (the
Government and the Ross Group being the only lienholders whose
secured debts could be substantially or completely paid by the
proceeds of the sale of the Foundry), the bankruptcy court, in
October 1992, granted the trustee’s application to sell the Foundry
and the Rolling Mill. The court’s order authorized the trustee to
sell the Foundry to Timco and Southern Enterprises for $495,412.00,
free and clear of all liens, to sell the Rolling Mill to Ms.
Guzzardo-Knight for $468,000.00, subject to CPB’s mortgage, and to
hold the combined sales proceeds in escrow, pending further orders
10
of the court.10
The Ross Group appealed the bankruptcy court’s order to the
district court, seeking, inter alia, a reapportionment of the
proceeds from the trustee’s sale between it and CPB, the holder of
the first mortgage on the Rolling Mill. In January 1993, the
district court affirmed the bankruptcy court’s sale order and
dismissed the Ross Group’s appeal.
E. The Instant Action
1. Interpleader
This litigation was commenced after the sale of the
Foundry and Rolling Mill when the trustee filed an interpleader in
the bankruptcy court to determine the proper disposition of the
proceeds of the sale of the Foundry, which had been deposited into
the registry of that court. The Ross Group, on the basis of the
Mortgage, and the Government, on the basis of its tax liens, each
insisted that it held the more senior lien on the proceeds of the
10
Realizing that the Ross Group had the right, under 11 U.S.C.
§ 363(k), to bid in the Mortgage and the Government’s competing tax
lien claim of $270,921.75, the bankruptcy court offered the Ross
Group the opportunity to bid $270,921.75 in cash (the amount of the
Government’s tax liens) plus a portion of the balance due on the
Mortgage sufficient to make the Ross Group’s total offer for the
Foundry exceed the offer pending from Timco and Southern
Enterprises. The court’s proposal required the cash portion of the
bid to be placed in escrow, and specified that if the Ross Group
could establish that the Mortgage outranks the tax liens, the Ross
Group would be entitled to recoup its cash. In other words, the
court proposed to permit the Ross Group to bid its Mortgage except
to the extent that it was in dispute. But the Ross Group was
unable to come up with a deposit of 10% of the total bid, or
$49,700, by the end of the next day after the hearing in which this
opportunity was first presented. The court therefore authorized
the sale of the Foundry to Timco and Southern Enterprises, and the
Rolling Mill to Ms. Guzzardo-Knight.
11
sale of the Foundry.
2. The Government’s Position
The Government filed a motion for summary judgment,
arguing principally that, under the Louisiana doctrine of
confusion, (1) the Lease was extinguished, ipso facto, at the
instant that the Debtor became the Foundry’s owner by virtue of the
execution of the Deed on September 5, 1989; and (2) upon extinction
of the Lease, being the thing mortgaged, the Mortgage too was
extinguished, ipso facto. In essence, the Government insists that
the thing mortgaged —— the Debtor’s leasehold interest —— ceased to
exist at the exact moment that, by virtue of confusion, the Lease
ceased to exist, i.e., when the Debtor as lessee and mortgagor
acquired the leased premises upon execution of the Deed and
irrespective of the fact that the Deed was not filed in the
conveyance records. It follows, asserts the Government, that its
tax liens against the Debtor attached to the Foundry property at
that precise instant, on September 5, 1989, when the Debtor again
became owner of the formerly leased premises that it repurchased
from the Parish. The Government concludes that, as the Mortgage
was extinguished by operation of law, it (the Government) held the
senior encumbrances on the Foundry, and was still holding them
when, only days later, the Debtor’s bankruptcy petition was filed.11
11
The Government also contends “in the alternative” that,
regardless of the lease’s continued existence, the Government is
entitled to all of the Foundry sale proceeds because those proceeds
derived from the sale of the tangible Foundry property and not from
the sale of the Debtor’s leasehold interest. As the Ross Group’s
security interest was limited to the Debtor’s leasehold, asserts
the Government, the Ross Group has no claim to the proceeds
12
3. The Ross Group’s Position
The Ross Group first counters that, as the Louisiana
public records doctrine specifies that unrecorded sales, contracts
and judgments are ineffective as to third persons, the redemption
sale of the Foundry from the Parish to the Debtor was ineffective
as to the Ross Group because the Deed had never been registered in
the Conveyance Records and remained unregistered on the date the
bankruptcy petition was filed. Stated differently, the Ross
Group’s first argument is that as to third parties the confusion
doctrine did not extinguish the leasehold, which the Mortgage
encumbered, because, as to such parties, the Debtor did not acquire
full and perfect ownership of the Foundry, which must include
record title, until the Deed was registered —— well after the
bankruptcy petition was filed and the Ross Group’s priority lien in
the leasehold was rendered inextinguishable for all time.
Second, the Ross Group argues that, to any extent that the
sale from the Parish to the Debtor extinguished the Lease by
confusion, the sale and all of its legal effects were nevertheless
void as to the Mortgage. This is so, insists the Ross Group,
because (1) the purported lease termination by confusion directly
resulting from the sale of the Foundry.
This, of course, is just another way of stating the
Government’s principal argument that the Mortgage itself was
extinguished by virtue of the Lease’s extinction under the doctrine
of confusion. It suffices that the Government’s persistent
attempts —— in its briefs and at oral argument —— to dress its one
substantive argument in various semantic robes has neither advanced
its cause nor aided our understanding of the case.
13
violated § 11(l)(3) of the Mortgage, which proscribed such
unilateral action of the Debtor without the prior written approval
of the Ross Group, and (2) the Deed expressly acknowledges and
provides for the continuing validity of the Mortgage.
Finally, the Ross Group also contends, in the alternative,
that the Debtor had purchased certain machinery and equipment
several years after the Foundry was constructed and leased and that
this machinery and equipment, which was thus owned outright by the
Debtor, was placed on the Foundry and was additionally subject to
the Mortgage. Consequently, argues the Ross Group, this machinery
and equipment remained encumbered by the Mortgage despite confusion
of the Lease, and therefore, at a minimum, the proceeds of the sale
of these items belong to the Ross Group.
4. The Bankruptcy Court’s Decision
Rejecting the Ross Group’s arguments, the bankruptcy
court granted the Government’s summary judgment motion. The court
first reasoned that even though, under the Public Records Doctrine,
the Deed was not effective against third parties, it was still
effective “as between the parties” —— the Parish and the Debtor ——
to transfer ownership (although not record title) to the Debtor.
Relying next on the Civil Law doctrine of confusion, the bankruptcy
court concluded that when the Debtor repurchased the Foundry from
the Parish, the Lease between the Parish and the Debtor —— and thus
also the leasehold interest, which was the thing mortgaged —— were
extinguished by operation of law. Consequently, concluded the
court, (1) the Lease was gone; (2) as a result, the Mortgage was
14
gone; (3) therefore, the Debtor owned the Foundry, unleased and
free of the Mortgage, on the day the petition in bankruptcy was
filed, even though the Debtor did not have record title to that
property until approximately one year later; and (4) as the Debtor
became the owner of the Foundry, free of the Lease and the
Mortgage, at the instant the Deed was executed —— which was prior
to the filing of the bankruptcy petition —— the Government’s tax
liens had attached to the Foundry and become the ranking
encumbrances against it at that same instant, and so stood on the
day that the bankruptcy petition was filed. Implicit in this
determination is the proposition that the Debtor could not prevent
recorded liens and judicial mortgages from attaching to property
acquired by the Debtor merely by withholding its redemption deed
from the conveyance records.
The bankruptcy court went on to reject the Ross Group’s
argument that the Deed’s recognition of the continuing validity of
the Mortgage prevented extinction of the Lease by confusion. The
court concluded that such a contractual agreement constituted an
impermissible derogation of “laws enacted for the public interest”
or the “public good.”
Finally, the bankruptcy court reasoned that if it were to
assume arguendo that the sale of the Foundry was void pursuant to
(1) § 11(l)(3) of the Mortgage, and (2) the statement to that
effect in the Deed, then title to the Foundry would have remained
in the Parish and would still have been there at the time the
bankruptcy commenced. Had that been the case, concluded the court,
15
the Foundry would not have been the trustee’s to sell. But, the
court observed, any argument based on such a premise would be
untimely now, as it would have to have been raised at the time the
bankruptcy court approved the sale of the Foundry.12 Given all
these determinations, the bankruptcy court recognized the
Government’s otherwise junior federal tax liens as the senior
encumbrances over the proceeds from the sale of the Foundry.13
The bankruptcy court did not address the Ross Group’s
alternative argument concerning the later purchased machinery and
equipment. This is the equipment that the Ross Group contends
remained encumbered by the Mortgage despite confusion of the Lease.
5. The District Court’s Decision on Appeal
In its appeal to the district court, the Ross Group re-
asserted the arguments that it had advanced to the bankruptcy court
and, for the first time in this action, also contended that the
bankruptcy court had incorrectly allocated the sale proceeds
between the Foundry and the Rolling Mill. The district court
12
We note that the Ross Group did make an argument based on
§11(l)(3) of the Mortgage at the sale application hearing before
the bankruptcy court, but the court stated that it was not yet
ready to rule on any arguments concerning the validity and relative
rank of the Mortgage vis-à-vis the federal tax liens at that time.
Indeed, that was the reason the bankruptcy court ordered proceeds
of the sale of the Foundry to be held in escrow.
Notwithstanding the bankruptcy and district courts’ erroneous
conclusions of law on this argument, which we will address below,
both the bankruptcy and district courts’ holdings that any argument
based on the actual terms of the Mortgage was foreclosed as
untimely strikes us as puzzling to say the least.
13
The bankruptcy court also determined that the Government’s
lien right was entitled to priority over the Debtor’s other lien
creditors, none of whom have appealed the bankruptcy court’s
judgment.
16
invited CPB, as the holder of the first mortgage on the Rolling
Mill, to appear and address the allocation issue. CPB accepted the
invitation and argued that the allocation issue had been raised and
rejected by both the bankruptcy and district courts in their
consideration of the Ross Group’s objection to the trustee’s
application to sell the Foundry and the Rolling Mill in 1992,
thereby rendering any present appeal of those decisions untimely
and subject to a defense of estoppel.
In affirming, the district court essentially reiterated the
bankruptcy court’s holding that confusion had extinguished the
Lease, and along with it the leasehold interest that was the thing
mortgaged. Thus, concluded the district court, the Ross Group’s
encumbrance evaporated, preserving to the holder of the erstwhile
Mortgage no interest whatsoever in the proceeds of the trustee’s
subsequent sale of the Foundry. The district court further agreed
with the bankruptcy court that (1) the language contained in the
Deed purporting to preserve the effect of the Mortgage, (2) the
Debtor’s covenant in the Mortgage not to surrender the leasehold or
terminate or modify the Lease, and (3) the public records doctrine,
were all ineffective to sustain a security interest for the Ross
Group in the proceeds of the sale of the Foundry.
Finally, the district court stated that it need not address
the Ross Group’s contention that the bankruptcy court’s allocation
of the sale proceeds between the Foundry and the Rolling Mill was
flawed. The district court observed that (1) it had already
decided that the Ross Group did not have an interest in the
17
Foundry, and that the Government, which did, had not joined in the
Ross Group’s request for reallocation, and (2) the time for
appealing the bankruptcy court’s order authorizing the sale —— and
specifying how the sales proceeds were to be allocated —— had long
since passed.14
II
ANALYSIS
A. Standard of Review
As the parties note, we review a bankruptcy court’s findings
of fact under a clearly erroneous standard and decide issues of law
de novo.15 In this appeal, the parties have not challenged the
bankruptcy court’s findings of fact; rather, they have focused
their arguments solely on its conclusions of law. Our review,
therefore, is entirely plenary.
B. Extinguishing a Mortgage Under Louisiana Law
We begin our consideration of the continued validity and
effectiveness of the Mortgage where we must —— with the article of
14
The district court also rejected the Ross Group’s
alternative contention not addressed by the bankruptcy court, i.e.,
that the Mortgage encumbered machinery and equipment actually owned
by the Debtor and never conveyed to and leased back from the Parish
(at least as to those items purchased after the bond issue). The
court reasoned that (a) such movables were not legally susceptible
of being encumbered by a collateral mortgage that was not also a
collateral chattel mortgage, and (b) to the extent that these
movables were deemed to be “immovable” by virtue of a “declaration
of immobilization,” that declaration was ineffective to subject the
movables to the Mortgage. This was so, according to the district
court, because the declaration had not been executed until several
months after execution and recordation of the Mortgage, which
contained no after acquired property provision.
15
In re McDaniel, 70 F.3d. 841, 842-43 (5th Cir. 1995).
18
the Louisiana Civil Code that governs the extinction of mortgages.
Former Article 3411 of the Louisiana Civil Code (1870) specified
six ways by which mortgages are extinguished:
1. By the extinction of the thing mortgaged.
2. By the creditor acquiring the ownership of the
thing mortgaged.
3. By the extinction of the mortgagor’s right.
4. By the extinction of the debt, for which the
mortgage was given.
5. By the creditor renouncing the mortgage.
6. By prescription.16
In this case, the parties have suggested —— and we agree —— that
the first two methods listed in Article 3411 are the only ones
among the six that could conceivably be applicable. We consider
these two in inverse order.
1. Creditor’s Acquiring Ownership of the Thing
Mortgaged
The method outlined in Article 3411(2) provides that a
mortgage is extinguished when the creditor, i.e., the mortgagee,
acquires ownership of the thing mortgaged. As new Article 3319(2)
makes clear,17 this method of extinguishing a mortgage was designed
16
La. Civ. Code art. 3411 (1870) (West 1972 Compiled Edition).
As all the events pertinent to this appeal (the execution of the
Lease, the execution and recordation of the Mortgage, the execution
of the Deed, and the filing of the bankruptcy petition) occurred
prior to January 1, 1993, the effective date of new Louisiana Civil
Code Article 3319, which repealed and replaced Former Article 3411
(1870), we apply the former article in this case. As the Revision
Comments to new Article 3411 explain, however, the new article
reproduced the substance of the former article and only added one
extra method of extinction, applicable to mortgages that secure
future obligations (i.e., “a revolving line” of future indefinite
obligations). See La. Civ. Code Ann. art. 3319 (West 1994). Thus
our analysis would have been the same had we been applying new
Article 3319 instead.
17
New Article 3319 provides that “a mortgage is extinguished:
(1) By the extinction or destruction of the thing
19
to apply to situations in which the Civil Law doctrine of
“confusion” would operate to extinguish a mortgage. Despite the
seemingly curious English translation of its French label, this
traditional Civilian doctrine of the law of obligations is actually
quite straightforward. As expressed in Louisiana Civil Code
Article 1903, it simply means that “[when] the qualities of obligee
and obligor are united in the same person, the obligation is
extinguished.”18 In the specific context of mortgage —— an
accessory contract granted to provide security for the performance
of the underlying or “principal” obligation —— confusion will
operate to extinguish the mortgage contract itself either (a) when
confusion extinguishes the principal obligation, as when, for
example, the promissory note that is secured by the mortgage is
acquired by its maker, or (b) when confusion extinguishes the thing
mortgaged, as when, for example, an encumbered building is acquired
by the mortgagee.19
As the Ross Group correctly observes, the particular
manifestation of confusion contemplated by Article 3411(2) could
mortgaged.
(2) By confusion as a result of the [mortgagee’s]
acquiring ownership of the thing mortgaged. . . .
La. Civ. Code Ann. art. 3319 (West 1994) (emphasis added).
18
La. Civ. Code Ann. art. 1903 (West 1987).
19
See Saul Litvinoff, The Law of Obligations, 5 Civil Law
Treatise § 20.10, at 691 (1992); see also Dept. of Culture,
Recreation & Tourism v. Fort McComb Development Corp., 385 So.2d
1233, 1235-36 (La. Ct. App. 4th Cir.), writ denied, 394 So.2d 613
(1980) (“In order for a mortgage to be extinguished by confusion,
either the principal obligation securing it must be extinguished by
confusion or the mortgaged property must be acquired by the
mortgagee.”) (emphasis added).
20
not operate here to extinguish the Mortgage: First, no one acquired
the principal obligation from the Ross Group; and second, if anyone
acquired “ownership” of the thing mortgaged (the leasehold
interest), it was the Debtor (the mortgagor/obligor/debtor), not
the Ross Group (the mortgagee/obligee/creditor). Regardless of
whether or not the provisions of Article 3411(2) might have
extinguished the Mortgage if the Debtor had acquired the hand note
or if the Ross Group had acquired the Debtor’s leasehold interest,20
neither of those transactions occurred here. Consequently, we
agree with the Ross Group that Article 3411(2) cannot provide a
basis for finding that the Mortgage was extinguished by confusion.
2. Extinction of the Thing Mortgaged
Former Article 3411(1) identifies the other potentially
applicable method of extinguishing a mortgage: “extinction of the
thing mortgaged.”21 The most recognizable example of this method
of extinguishing a mortgage occurs when the thing mortgaged is
uninsured corporeal (tangible) property —— such as a building ——
20
Application of Article 3411(2) is well illustrated by the
Fort McComb case. There, a development company granted a mortgage
on its lessee’s interest in a lease of an historic fort and
simultaneously assigned the lease to the bank-mortgagee. When the
lessor (the State) sought, inter alia, to cancel the mortgage of
the leasehold interest on the theory that it was extinguished by
the doctrine of confusion, the court held that the mortgage was not
extinguished in this manner because the mortgagor’s “assignment of
the lease [to the bank] was not an act translative of title; it
merely represented a security device in order to further secure the
advance of money by the bank.” 385 So.2d at 1236. Had there been,
though, an act translative of title of the lessee’s interest from
the development company to the bank, confusion would have
extinguished the Mortgage under Former Article 3411(2).
21
La. Civ. Code Ann. art. 3411(1) (1870) (West 1972 Compiled
Edition). The current counter part is new Article 3319(1).
21
and that thing is physically destroyed.22 Contrary to the Ross
Group’s protestations, this method of extinction is not limited in
application to the physical destruction of corporeal things.
Albeit relatively rare, an incorporeal —— such as a leasehold
interest —— that (1) exists in the eyes of the law because it is
“comprehended by the understanding,”23 and (2) is the thing
mortgaged, is susceptible not of destruction but of extinction,
such as when it terminates by its express provisions, by the mutual
consent of the parties, or by operation of law.
In this case, reacquisition of record title of the Foundry
(the leased premises) by the Debtor (lessee) from the Parish
(lessor), by virtue of their executing the Deed, had the potential
of extinguishing the Lease by confusion and with it the Debtor’s
leasehold interest. Under the doctrine of confusion “the qualities
of obligee and obligor [were] united in the same person.”24 Indeed,
Louisiana law has long recognized that when the lessor’s interest
and the lessee’s interest are consolidated in the same person —— in
this instance, the Debtor —— the lease is extinguished by
confusion.25 Regardless of the existence of any contractual
22
See e.g., Coen v. Gobert, 154 So.2d 443, 445 (La. Ct. App.
2nd Cir. 1963) (destruction and removal of frame dwelling located
on tract of land subject to mortgage extinguished mortgage on the
dwelling under Article 3411(1)).
23
La. Civ. Code Ann. art. 461 (West 1980).
24
La. Civ. Code Ann. art. 1903 (West 1987).
25
See Saul Litvinoff, The Law of Obligations, 5 Civil Law
Treatise § 20.1, at 679 (1992) (citing Fernandez v. Soulie, 28 La.
Ann. 311 (1876); Bartels & Dana v. Their Creditors, 11 La. Ann. 433
(1856)); see also Ranson v. Voiran, 146 So. 681, 682 (La. 1931).
22
agreements between the parties to the Deed or to the Mortgage that
(1) would limit or vary the effects of confusion on the parties’
interests under the Mortgage, and (2) would not contravene public
policy, the Debtor/Lessee’s September 5, 1989, redemption of
record title to the Foundry from the Parish/Lessor did in fact
terminate the Lease, i.e., extinguish it, under the doctrine of
confusion. This does not end our inquiry though, for what remains
to be seen is whether such extinction of the Debtor’s leasehold
interest, being the thing expressly encumbered in the Mortgage,
must as a matter of public policy extinguish the Mortgage by
confusion under former Article 3411(1) despite bona fide efforts of
the parties to prevent that result. Before we parse the Mortgage
to see whether under the instant facts any of its provisions are
effective to vary or limit the effects of the doctrine of confusion
without violating public policy, we take a short detour to analyze
the effects of Louisiana’s public records doctrine on this case.
C. Public Records Doctrine
The conclusion reached by both the bankruptcy court and the
district court, that the public records doctrine does not preclude
application of the confusion doctrine to extinguish the Lease under
Article 3411(1), is correct —— as far as it goes. Both courts
accurately noted that Louisiana’s public records doctrine, which
has now been made statutory in Revised Statute § 9:2756, specifies
that all unrecorded sales, contracts, and judgments affecting
immovable property “shall be utterly null and void, except between
23
the parties thereto.”26 It follows that even though the Deed, until
filed for registry, would have been primed by a third party’s
subsequently executed but previously recorded conveyance or
encumbrance, this unrecorded act was nonetheless capable of
translating ownership (as distinct from record title) between the
parties, i.e., the Debtor and the Parish, but only to the extent
the Parish “owned” the Foundry (as distinct from holding record
title to it) —— assuming arguendo that ownership (as distinct from
record title) had ever passed from the Debtor to the Parish in the
first place.
As such, for purposes of confusion the Deed was, with respect
to the obligations under the Lease, legally sufficient to
consolidate —— “confuse” —— in the person of the Debtor the
qualities of both obligee and obligor and thereby extinguish the
Lease.27 Consequently, in the absence of operative facts or
effective stipulations of the parties to the contrary, the public
26
La. Rev. Stat. Ann. § 9:2756 (West. 1991) (emphasis added).
27
In one illustrative case, a Louisiana court held that the
execution of a dation en paiement from a mortgagor (Continental) to
a mortgagee (Hibernia) extinguished two collateral mortgages under
the doctrine of confusion, so as to allow a judicial mortgage filed
in the interval between the execution of the dation and its
recordation to create a lien on the immovable property that was the
subject of the dation. See Hibernia Nat’l Bank v. Continental
Marble & Granite Co., 615 So.2d 1109 (La. Ct. App. 5th Cir. 1993).
Importantly, the court’s holding hinged on its finding that “[a]s
between the parties to an act effecting the transfer of an
immovable, effectiveness of the transaction does not depend upon
the act’s recordation in the public records. The law clearly
provides that the transaction was complete and effective between
the parties the moment it was executed . . .
. . . not the later moment of its recordation in the public
records.” Id. at 1111 (emphasis added).
24
records doctrine could not prevent the Deed from effectively
extinguishing the Lease —— and thus the Mortgage —— pursuant to
Article 3411(1). This is so because the leasehold, as the thing
mortgaged, ceased to exist the instant the Deed was executed ——
assuming, of course, that nothing in the Mortgage or about the
Lease transaction would vary the result supplied by Article
3411(1).
By the same token, the public records doctrine does, however,
afford protection to the holder of the note secured by the Mortgage
against third parties to the extent that this security device
contains provisions proscribing unilateral acts of the mortgagor,
whether or not in concert with third parties, to the prejudice of
the mortgage. This doctrine likewise protects provisions of the
Lease, such as extension and repurchase options, against
intervening acts of third parties that might otherwise destroy the
efficacy of such provisions.
D. Contractual Variations From Article 3411(1) —— Suppletive and
Imperative Laws in the Louisiana Civil Code and the Pact de
Non Alienando
Up to this point, our analysis essentially replicates the
principal thrust of the Government’s argument as well as the
conclusions of the bankruptcy and district courts: Execution of the
Deed would directly extinguish the Lease by confusion, and
indirectly extinguish the Mortgage by confusion. Where we depart
is in our recognition that there could be something about the
transaction or some enforceable stipulation, such as an after-
acquired property clause, that might produce a different result.
25
Indeed, it is at precisely this point that the Government, the
bankruptcy court, and the district court (1) misapprehended —— and
thus misapplied —— an important principle of Civilian methodology
and (2) overlooked basic features of Louisiana mortgage law,
thereby producing reversible error. The methodology to which we
refer is the one employed in classifying provisions of law as
either “imperative” or “suppletive” and the role of public policy
in achieving the proper classification. The “basic features” of
mortgage law to which we refer are the pact de non alienando and
its statutory counterpart, the anti-alienation rule as currently
manifested in both Article 3307 of the Civil Code and Article 2701
of the Louisiana Code of Civil Procedure. And the reversible error
to which we refer is the failure of those courts to (1) classify
Article 3411(1) as merely suppletive, and (2) enforce the
stipulations of the parties in the Mortgage. In short, the court
erred in mischaracterizing and misconstruing the key anti-
alienation stipulation in § 11(1)(3) of the contract between the
Debtor and the Ross Group as the parties to the Mortgage, a
stipulation obviously intended to limit, vary, or prohibit the
results of transactions that would otherwise be governed by former
Article 3341(1)’s rule that extinction of the thing mortgaged
extinguishes the mortgage.
1. The Suppletive/Imperative Distinction
One tenet that is basic to every Civilian legal system is
the distinction between “imperative” and “suppletive” laws. Former
Article 11 of the Louisiana Civil Code (which was in effect when
26
the Mortgage was executed and recorded and the substance of which
was not affected when in 1988 it and Article 12 were replaced by
Article 7) expressed this distinction succinctly:
Individuals cannot by their conventions, derogate from
the form of laws made for the preservation of public
order or good morals.
But in all cases in which it is not expressly or
impliedly prohibited, they can renounce what the law has
established in their favor when the renunciation does not
affect the rights of others, and is not contrary to the
public good.28
Although neither former Article 11 nor its replacement employ the
precise terms “imperative” or “suppletive,” traditional civilian
doctrine has, in the words of Professor Alejandro Garro, long
characterized:
as imperative those legal precepts rooted in public
policy which may not be set aside by private agreement.
Suppletive laws, on the other hand, are those legal norms
designed to supplement the parties’ will in cases wherein
its application is not excluded.29
With this clear distinction in mind, then, we must ask whether
former Article 3411(1)’s provision for the extinguishing of
mortgages when the thing mortgaged ceases to exist is imperative or
suppletive.
2. Enforcement of the Covenant as a Pact de Non Alienando
The task of distinguishing between suppletive and
imperative laws is best approached, not in an abstract inquiry into
28
La. Civ. Code Ann. Art. 11 (1870) (West 1972 Compiled Ed.);
see also La. Civ. Code Ann. Art. 7 cmt. a (West 1993).
29
Alejandro M. Garro, Codification Technique and the Problem
of Imperative and Suppletive Laws, 41 La. L. Rev. 1007, 1008 (1981)
(emphasis added).
27
the character of a particular provision in light of the elusive
concepts of public order or the public interest, but, as Professor
Garro instructs, by examining “the particular clause of the
agreement which does away with a rule of law, and . . . ask[ing]
whether the enforcement of the clause would be against public
policy.”30 When we follow this sage counsel in the instant case,
we discover that enforcement of the Mortgage’s covenant addressing
the encumbering of a leasehold interest, as stipulated by the
Debtor and the Ross Group, would not be violative of public policy.
To the contrary, its terms are entirely consistent with Louisiana
mortgage law and practice.31
We recall first that § 11(l)(3) of the Mortgage specifically
provides:
Mortgagor will not surrender any of its leasehold
interests hereinabove described, nor terminate or cancel
the Lease, and will not, without the prior written
30
Garro, 41 La. L. Rev. at 1014.
31
Both the bankruptcy and district courts did purport to apply
Article 7's and former Article 11's implicit distinctions between
imperative and suppletive laws, but did so in connection with the
provisions of the Deed between the Debtor and the Parish, which
attempted to recognize the continuing validity of the Mortgage,
holding that this constituted an impermissible effort to derogate
from an imperative law (public policy) because it affected the
rights of others. What those two courts failed to recognize,
though, is that the only relevant application of the imperative/
suppletive dichotomy in this case is not to the Deed but to the
Mortgage; specifically, its covenant that proscribes unilateral
acts of the mortgagor to the prejudice of the Mortgage or the
mortgagee. This is so because the Mortgage is the only contractual
agreement between the Ross Group and the Debtor; the pact de non
alienando (the covenant at § 11(l)(3) of the Mortgage) sees to it
that no act of the Debtor and the Parish subsequent to the
execution and recordation of the Mortgage and the Lease can affect
those of the mortgagee’s rights that arise from any stipulation
that does not contravene public policy.
28
consent of the Mortgagee modify, change, supplement,
alter or amend the Lease, either orally or in writing,
and any such termination, cancellation, modification,
change, supplement, alteration or amendment of the lease
without prior written consent of the Mortgagee shall be
void and of no force and effect. As further security to
the Mortgagee, Mortgagor does hereby deposit with the
Mortgagee the original copy of the Lease and the
Assignment thereof to be retained by the Mortgagee until
all indebtedness secured hereby is fully paid.
By including this stipulation in the Mortgage, the Debtor as
mortgagor expressly agreed not to take any action unilaterally that
might terminate, cancel or modify the Lease or the Debtor’s
leasehold interest. Thus the Debtor agreed, inter alia, not to
alienate or modify the property encumbered to secure the
indebtedness owed to the holder of the collateral mortgage note in
any way that would prejudice the Mortgage.32 By proscribing such
prejudicial actions of the mortgagor, the parties to the Mortgage
were acknowledging between themselves —— and, through the public
records, were informing the rest of the world —— that an action
taken by the mortgagor in contravention of this covenant shall be
of no effect vis-à-vis the Mortgage or the mortgagee. In this
regard, the covenant is a specialized version of the venerable pact
de non alienando,33 or non-alienation clause, uniquely tailored here
to fit the collateral mortgaging of a lessee’s interest in a lease.
32
See Federal Land Bank of New Orleans v. Mulhern, 157 So. 370
(La. 1934) (enforcing mortgage covenant requiring mortgagors not to
deteriorate mortgaged property to the prejudice of the mortgage)
and discussion infra at note 42 and accompanying text.
33
For discussion of the pact de non alienando’s Spanish and
early Louisiana origins, see Andrew Lane Plauche, Comment, The Pact
de Non Alienando in Louisiana, 21 Tul. L. Rev. 238, 241 (1946), and
Citizens Bank of Louisiana v. Miller, 10 So. 779, 780 (La. 1892).
29
In its earliest form, the pact de non alienando (or “pact de
non”) simply prohibited the mortgagor from selling, alienating, or
encumbering the mortgaged property to the prejudice of the
mortgagee or the creditor’s mortgage.34 Not an absolute contractual
prohibition against sale,35 however, this prototype pact de non
primarily served as a procedural tool: It allowed a mortgage
creditor to disregard a violation of the pact and proceed to
foreclose via executiva on mortgaged property that had passed into
the hands of a third party.36 This in turn made unnecessary the
preliminary step, in foreclosing via ordinaria, of first obtaining
a judgment against the mortgagor and then naming the third party as
a defendant in a subsequent suit. In short, the pact de non
allowed the foreclosing mortgage creditor to ignore any transfers
and encumbrances of the mortgaged property executed after
recordation of the mortgage.
Ever since the Louisiana Supreme Court reaffirmed the validity
of the pact de non in several early 19th century challenges to the
device, reasoning that the sole basis for the effect of the clause
derives from its mutual introduction by the parties into the
mortgage contract,37 Louisiana courts have consistently pointed to
34
Michael D. Rubin, Notice of Seizure in Mortgage Foreclosures
and Tax Sale Proceedings: The Ramifications of Mennonite, 48 La. L.
Rev. 535, 545 (1988).
35
See Citizens Bank, 10 So. at 780; Freeman v. Ratcliff, 162
So. 783, 785 (La. 1935).
36
Rubin, 48 La. L. Rev. at 545.
37
Donaldson v. Maurin, 1 La. 29, 40 (1830); see also Nathan
v. Lee, 2 Mart. (N.S.) 32, 33 (La. 1823).
30
the pact de non when permitting mortgagees to foreclose directly on
mortgaged property. This is permitted notwithstanding subsequent
transfers or alienation, in a wide variety of contexts, including
involuntary expropriations,38 dissolution of marital communities,39
insolvency,40 and successions.41 Some courts have also held that
when the pact de non is carefully worded, it can serve as a
contractual bar to certain activities and may even allow a
mortgagee to foreclose on mortgaged property despite the mortgage
payments being current.42 Finally, we note that the Louisiana
legislature enshrined the pact de non’s protections for mortgagees,
at least as far as sales or subsequent encumbrances of the
mortgaged property are concerned, in Article 3397 of the Louisiana
Civil Code of 1870 and in current Article 3307(2),43 as well as in
38
See Avengo v. Schmidt & Ziegler, 35 La. Ann. 585, 590
(1883), aff’d, 113 U.S. 293, 5 S.Ct. 487, 28 L.Ed.2d 976 (1885);
Shields v. Shiff, 36 La. Ann. 644, 648 (1884), aff’d, 124 U.S. 351,
8 S.Ct. 510, 31 L.Ed.2d 445 (1888).
39
See Slayton v. Swor, 165 So. 85, 86 (La. 1940); Spencer v.
Collins, 338 So.2d 148 (La. Ct. App. 2nd Cir. 1976); Shifflet v.
Brewer, 208 So.2d 31, 34 (La. Ct. App. 1st Cir. 1968).
40
See W.W. Carre v. Int’l Car Co., 55 So. 9, 10-11 (La. 1911).
41
See Bourgeois v. De Soto, 280 So.2d 271, 274 (La. Ct. App.
2nd Cir. 1972).
42
See Federal Land Bank of New Orleans v. Mulhern, 157 So.
370, 373-74 (La. 1934); Harrelson v. Hogan, 451 So.2d 592, 596 (La.
Ct. App. 2nd Cir. 1984).
43
Former Article 3397 (1870) provides:
1. That the debtor can not sell, engage, or mortgage the
same property to other persons, to the prejudice of the
mortgage which is already made to another creditor.
2. That if the mortgaged thing goes out of the debtor’s
hands, the creditor may follow it in whatever hands it may
have passed . . .
31
Article 2701 of the Louisiana Code of Civil Procedure.44
This brief history of judicial and statutory recognition of
the pact de non in Louisiana law sets the stage for us to answer
the crucial question whether enforcement of this particular
covenant in the particular mortgage at issue under these particular
circumstances would violate public policy. We answer this question
in the negative.
Our threshold inquiry is whether the parties sought by their
own stipulations to vary the results that would otherwise be
“supplied” under Article 3411(1) if, but only if, the parties
should fail to adopt a contrary contractual provision. Here, the
covenant embodied in the Mortgage, prohibiting the Debtor from
unilaterally canceling, terminating, or in any way modifying his
leasehold interest to the prejudice of the Mortgage, is undeniably
a pact de non. Moreover, this one is specifically tailored to
recognize that the thing mortgaged is the lessee’s interest in a
La. Civ. Code Ann. art. 3397 (1870) (West 1972 Compiled Ed.)
Current Article 3307(2) replaced former Article 3397 in 1993 and
provides simply: “The mortgaged property may not be transferred or
encumbered to the prejudice of the mortgage.” La. Civ. Code Ann.
art. 3307(2) (West 1994).
44
La. Code Civ. Proc. art. 2701 (West 1961) (providing
statutory pact de non alienando and seeking to eliminate need for
a conventional one). We also note, however, that in recent years
constitutional due process considerations have lead courts and
commentators to suggest that actual notice to third persons,
including third possessors and holders of inferior mortgages, must
be given before the property may be seized and sold pursuant to
Louisiana’s executory process scheme. See generally Rubin, 48 La.
L. Rev. 535 (discussing ramifications of Mennonite Board of
Missions v. Adams, 462 U.S. 791, 103 S.Ct. 2706, 77 L.Ed.2d 180
(1983) and Bonner v. B-W Utilities, Inc., 452 F.Supp. 1295 (W.D.
La. 1978)); and Patrick S. Ottinger, Enforcement of Real Mortgages
by Executory Process, 51 La. L. Rev. 87, 106-08 (1990).
32
lease. As such, its clear intent is to protect the mortgagee from
any transactions unilaterally undertaken by the mortgagor with
respect to the mortgaged leasehold interest that would prejudice
the mortgagee’s rights or the value or nature of its collateral.
Just as clearly the parties intended results different from those
that would be supplied by Article 3411(1) in the absence of a
contractual provision. So, the Mortgage’s provision, if not
proscribed by public policy, will trump Article 3411(1)’s
suppletive rule that extinction of the thing mortgaged extinguishes
the mortgage.
3. Public Policy
Even if we were to grant arguendo that the extinguishing
of a lease by confusion under Article 1903 somehow embodies public
policy, we still would discern no embodiment of public policy in
Article 3411(1)’s provision for extinguishing a mortgage when the
thing mortgaged is destroyed or extinguished. We hold therefore
that under the instant circumstances enforcing the contractual
covenant in such a manner that the effects of the Mortgage would
continue to affect the Foundry (now, the proceeds of its sale)
cannot be a violation of public policy; to the contrary, it is
consistent with Louisiana’s well established policy of favoring the
pact de non’s protection of a mortgagee’s interests in collateral
from the untoward effects of transactions undertaken by a mortgagor
that would otherwise prejudice the mortgage or the thing that it
encumbers.
To put it another way, our examination of the role of the pact
33
de non in Louisiana mortgage law in general and the subject
covenant in the Mortgage in particular —— especially in the context
of the financing arrangement which includes a merely pignorative
transfer of record title coupled with a right of redemption,45 all
45
Louisiana law has long recognized that certain contracts of
sale of immovable property containing a right of redemption and
unaccompanied by delivery of the thing sold are merely pignorative
contracts intended to secure the party borrowing funds (the vendor)
not to transfer property onerously. See e.g., Marbury v. Colbert,
29 So. 871, 872 (La. 1901) (holding that “redeemable sales of
immovable property, unaccompanied by delivery of the thing sold,
will be considered, as between the parties, in the absence of
evidence to the contrary, as mere contracts of security”);
Latiolais v. Breaux, 98 So. 620, 621 (La. 1923)(“[T]he one test by
which to determine whether a contract evidences a real sale with a
right of redemption [capable of transferring title], or a mere
contract of security, . . . is whether the purchaser has gone into
actual possession.”); Ruffino v. Hunt, 99 So.2d 34, 37 (La. 1958)
(applying rule in building and loan association industry wherein
immovable property is sold to a homestead for cash and
simultaneously resold by the homestead to its owner, thus serving
to provide the homestead with the security of a vendor’s lien and
first mortgage, but not actually transferring title); Succession of
Tucker, 449 So.2d 1020, 1022 (La. 1984) (same); Lerner Shops of
Louisiana, Inc. v. Reeves, 73 So.2d 490, 495-97 (La. Ct. App. 1st
Cir. 1954) (construing purported sale and leaseback of immovable
property as a pignorative contract or security device when
arrangement provided (1) the vendor with an option to repurchase
the realty from the purchaser during the term of the lease and for
the consideration paid by the purchaser and (2) the purchaser with
the right to compel the vendor to repurchase the realty during the
same period and for the same amount); Bagala v. Bagala, 110 So.2d
526, 529 (La. 1959) (finding pignorative contract in sale and
resale situation outside homestead context); Jackson v. Golson, 91
So.2d 394, 399 (La. Ct. App. 2nd Cir. 1956) (same and containing
thorough review of pertinent cases); In re Chase Manhattan Leasing
Corp., 626 So.2d 433, 434 (La Ct. App. 4th Cir. 1993), writ denied,
630 So.2d 797 (La. 1994) (financed sale designed in form to appear
as lease does not alter true nature of transaction).
The Ross Group has not stressed the pignorative nature of the
sale and leaseback agreement between the Debtor and the Parish.
Yet considering that the sale and leaseback was designed solely as
a financing mechanism and contained a right of redemption, and that
the Debtor never relinquished actual possession of the Foundry, the
Ross Group could argue that the Debtor never in fact transferred
ownership to the Parish to the degree necessary to extinguish the
effects of the Mortgage when the Debtor redeemed the leased
34
of which is patently obvious from the provisions of the recorded
instrument —— convinces us that (1) Article 3411(1)’s provision for
the extinguishing of mortgages when the thing mortgaged is
extinguished or destroyed is merely suppletive, reflecting no
identifiable public policy, and is thus susceptible of being
subordinated by otherwise valid and non-absurd contractual
variations that are in substance pacts de non, and (2) the
particular covenant present here is fully susceptible of being
enforced as a contractual alternative to Article 3411(1)’s
suppletive provision without reaching any absurd result. Indeed,
it is only the enforcement of this stipulation that avoids an
absurd result, i.e., giving the Government an unintended windfall
and saddling the Ross Group with an unintended “gotcha.”46
This determination is reinforced by the realization that, in
the context of Louisiana’s public records doctrine, (1) both the
Mortgage and the Lease were filed for record long before the
subject tax liens were filed; (2) the Mortgage contained language
expressly proscribing any prejudicial effects of unilateral
premises. Such an argument would lend support to the principal
argument based on the pact de non which we have developed in this
opinion.
46
As noted above, other contractual variations that trump the
provisions of Article 3411(1) are common place and taken for
granted, e.g., provisions that call for replacement or substitution
of collateral, and —— especially —— after-acquired property
provisions. Were the results proscribed in Article 3411(1)
reflective of public order, provisions in the agreement that direct
substitution or replacement of collateral or attachment of the
mortgage to property subsequently acquired by the mortgagor would
be unenforceable. Recognizing the instant covenant also comports
with Louisiana’s policy favoring freedom of contract, which also
supports the enforceability of these other provisions.
35
alienation by the lessee qua lessee; and (3) the Lease, containing
inter alia both extension and repurchase (right of redemption)
options in favor of the Debtor as lessee, all of which puts the
world on notice that this is not a “true lease” situation but a
pignorative arrangement under which only record title (but not
ownership) is transferred.47 It follows inescapably that no third
party, including the Government, is entitled to disregard the
reasonably anticipated legal effects of any provisions of the Lease
or the Mortgage, or their interplay with each other, once those
documents were inscribed on the public records.
By merging or consolidating into the person of the Debtor the
Parish’s underlying precarious record title as nominal lessor with
the Debtor’s existing interest as lessee coupled with its right to
redeem record title of the underlying leased premises, the
repurchase retroactively re-vested the Debtor with full title to
the Foundry property in the condition that such title existed when
the Lease was first registered in the Conveyance Records of the
Parish. Thus, repurchase restored the Debtor’s interest to that of
full ownership, which it had held before making the pignorative
transfer of record title to the Parish as the collateral aspect of
the sale and leaseback bond financing arrangement. The only result
that would not be absurd, then, is that the Mortgage attached, ipso
47
We take additional comfort in the fact that when the
Louisiana legislature adopted Article 9 of the UCC, it recognized
that a “financed lease” of movables (personalty), as opposed to a
“true lease” of such property, would, as a pignorative contract, be
subject to Louisiana’s version of Article 9 governing security
interests in movables. See La. Rev. Stat. Ann. §§ 9:3309-3310.1
(West 1991).
36
facto, to the underlying property at the instant it was merged into
or consolidated with the already-encumbered leasehold, in the
person of the Debtor, by virtue of confusion. Without questioning
that (1) the Lease was extinguished by confusion when the Deed was
executed by the Parish, or (2) the Mortgage no longer encumbered
just the leasehold rights of the Debtor as lessee when the Lease
itself was extinguished by confusion, we nevertheless conclude that
—— at precisely the same instant —— the Mortgage attached to and
encumbered the Foundry property nunc pro tunc, with its title in
the same condition as it had been when the Lease (and thus the
repurchase option contained in the lease) was registered. In a
nutshell, the Mortgage’s expanded, particularized pact de non,
coupled with the possession and redemption rights retained in the
Lease, allowed the Mortgage to retain its rank senior to the liens
of the Government and other junior encumbrances when the Debtor’s
re-acquisition of record title to the underlying Foundry property
extinguished the Lease by confusion into the person of the
mortgagor.
We speculate that we might not be here today if the Mortgage
had coupled its pact de non with an express after-acquired property
clause. Nevertheless, the law neither insists on perfection nor
requires the uttering of talismanic words when, as here, it is gin
clear from the four corners of the duly recorded documents —— the
Lease and the Mortgage —— that re-consolidation of all facets of
ownership, i.e., record title (the lessor’s portion of those
rights) and peaceable possession and enjoyment of fruits and
37
revenues (the lessee’s portion of those rights), in the Debtor (the
person of the current and future owner) never divested the debtor
of those rights of possession and enjoyment. This re-consolidation
occurred by operation of law (confusion) upon execution of the Deed
in redemption of its record title by the Debtor pursuant to the re-
purchase option. It follows that the Mortgage, by virtue of its
covenants and provisions —— that were no more violative of public
policy than would have been an after-acquired property clause or a
replacement or substitution of collateral provision —— thereafter
encumbered all rights of ownership to the same extent as it had
always encumbered the possession, use, and enjoyment rights, via
the leasehold, from its inception. We need not and therefore do
not speculate on whether the same results would appertain had the
transaction not been a pignorative arrangement or had confusion
resulted in consolidation of ownership of the Foundry in a person
other than a lessee/mortgagor.
4. The Bankruptcy and District Courts’ Treatment of the
Mortgage’s Pact de Non.
Having said all this, we briefly address the bankruptcy
and district courts’ response to the Ross Group’s arguments based
on the Mortgage’s anti-alienation covenant, i.e., the pact de non.
Both courts held that this stipulation could only be given effect
by finding that the Foundry continues to be owned by the Parish and
never formed part of the Debtor’s bankruptcy estate, making the
trustee’s sale of the Foundry a nullity. But, stated both courts,
the Ross Group should have raised this argument prior to the
trustee’s sale of the Foundry, not subsequently as a basis for
38
claiming the proceeds of that sale. The district court also agreed
with the Government’s alternative position that even if the
Debtor’s reacquisition of the Foundry was a breach of the covenant,
it only gave rise to an action against the Debtor and did not
render the Deed void.
Both the bankruptcy and district courts’ holdings on this
issue miss the mark.48 As the district court’s brief alternative
holding recognizes, a breach of a pact de non alienando, like the
mortgage covenant at issue here, does not invalidate a transfer.49
What it does do, however, —— and what those courts failed to
recognize —— is alter the effects of the transfer: The covenant
prevents a transfer that is prohibited by the pact de non from
invalidating or prejudicing the creditor’s mortgage.50 In this
48
As we noted above, the Ross Group did assert at the sale
application hearing before the bankruptcy court that, inter alia,
the seniority of its Mortgage was protected by the pact de non
alienando, but the court responded that at the time it was not yet
ready to rule on any arguments concerning the validity and relative
ranking of the Mortgage. Thus, the two courts’ holdings that any
argument based on the actual terms of the Mortgage was foreclosed
cannot stand.
49
See Freedman v. Ratcliff, 162 So. 783, 785 (La. 1935) (“The
pact de non alienando does not prevent the mortgagor from selling
the property, subject to the mortgage, but gives the mortgagee the
right to ignore a sale of the mortgaged property and to proceed
only against the mortgagor”); Miller, 10 So. at 780 (quoting Ducros
v. Fortin, 8 Rob. 164 (La. 1844)) (noting that the pact de non
“does not absolutely prevent a sale of the property by the
mortgagor. The latter may transfer the property, subject to the
right which such a clause gives the mortgagee of proceeding
summarily against it, as if it still belonged to the mortgagor”).
50
See First National Bank of Shreveport v. Houseman, 160 So.
618, 620 (La. 1935) (citing Maisonneuve v. Martin, 99 So. 704 (La.
1924)) (“The pact de non alienando in a recorded act of mortgage
makes a subsequent mortgage or other disposition of the property
ipso jure void so far as the original mortgagee and his assigns are
39
instance, the covenant “supplied” by the parties to the Mortgage
allows the Mortgage to (1) survive the mortgagor’s acts that would
unilaterally extinguish the Lease by confusion to the benefit of
the mortgagor, i.e., the Debtor’s acquisition of the underlying
property by exercise of its repurchase option, and (2) continue as
an encumbrance on the Foundry as the underlying property that gave
rise to the leasehold interest in the first place (more accurately
now, to the proceeds of the trustee’s sale of that property).
D. The Allocation Issue and the Ross Group’s Alternative Argument
On appeal the Ross Group continues to protest the way that the
proceeds of the trustee’s sales between the Foundry and the Rolling
Mill were allocated. Even though we reverse the bankruptcy and
district courts’ determinations that the Ross Group has no interest
in the proceeds of the sale of the Foundry and hold instead that
the Ross Group’s security right in the leasehold interest followed
it into the full ownership of the leased premises when those
interests were merged by confusion into ownership in the person of
the Debtor as mortgagor, we nevertheless agree with those courts
and with CPB that the Ross Group’s present challenge to the
bankruptcy court’s allocation of the proceeds of the trustee’s sale
must fail.
First, and most importantly, the Ross Group sought essentially
identical relief on these very allocation issues in its objections
at the October 1992 sale authorization hearing, and in its
unsuccessful district court appeal of the bankruptcy court’s sale
concerned.”) (emphasis added).
40
order. Accordingly, its present claims on these issues are
precluded under the doctrines of res judicata51 and collateral
estoppel.52 Furthermore, under Bankruptcy Rule 8002, these claims
are untimely as appeals of the 1992 sale order.53 Therefore, the
rulings of the bankruptcy and district courts on the allocation
issues will not be addressed here, and the Ross Group’s complaints
in that regard are dismissed.
Second, we note that the Ross Group’s alternative argument ——
that the leasehold collateral mortgage encumbered assets other than
the leasehold —— is moot. We have already determined that the
Mortgage encumbered the Foundry itself and provides the Ross Group
with the senior lien over the proceeds of the trustee’s in globo
sale of that property.
III
CONCLUSION
We do not disturb the bankruptcy court’s allocation of the
sales proceeds between the Foundry and the Rolling Mill.
Concluding, however, that the effects of the Mortgage were not
51
Eubanks v. FDIC, 977 F.2d 166, 170 (5th Cir. 1992) (assuming
other requirements of res judicata are met, a prior judgment may
bar a subsequent action brought even by a person who was not a
party to the original litigation when the non-party’s interests are
closely aligned with and adequately represented by a party to the
prior action).
52
Recoveredge L.P. v. Pentecost, 44 F.3d 1284, 1290 (5th Cir.
1995).
53
Bankruptcy Rule 8002(a) provides a 10 day time period for
filing notice of appeal. As the sale allocation between the
foundry and the rolling was made in the bankruptcy court’s October
9, 1992 Sale Order, the Ross Group’s belated attempts to re-
litigate the allocation issue are clearly untimely.
41
extinguished when the Lease was extinguished by confusion upon the
Debtor’s pre-petition redemption of record title to the Foundry
property, we reverse the judgment of the bankruptcy court, as
affirmed by the district court, that awarded the proceeds of the
sale of the Foundry to the Government. We therefore render
judgment in favor of the Ross Group, recognizing its entitlement to
the proceeds of the trustee’s sale of the Foundry, and remand this
matter to the bankruptcy court for further proceedings consistent
with this opinion.
AFFIRMED in part; REVERSED and RENDERED in part; and REMANDED with
instructions.
42
Ross v. Marrero
Court: Court of Appeals for the Fifth Circuit
Date filed: 1997-07-01
Citations: 117 F.3d 160
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