Bustamante v. Cueva (In Re Cueva) , 371 F.3d 232 ( 2004 )

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
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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
8
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
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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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