USX Corp. v. Champlin ( 1993 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 92-4796
USX CORP., ET AL.,
Plaintiffs-Appellees,
versus
H. H. CHAMPLIN, ET AL.,
Defendants-Appellants.
******************************
GLADSTONE DEVELOPMENT CORP.,
Plaintiff-Appellant,
versus
USX FINANCIAL CORP., A Division
of USX CORP.,
Defendant-Appellee.
Appeals from the United States District Court
for the Western District of Louisiana
(May 31, 1993)
Before WISDOM,* GARWOOD, and HIGGINBOTHAM, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:
This appeal comes from the trial of two cases consolidated for
trial. The first case was a suit for declaratory judgment by USX
Corporation against H.H. Champlin and the FDIC to declare
Champlin's remedy as the holder of a second mortgage extinguished
when USX foreclosed its first mortgage without giving Champlin
*
Because of illness, Judge John Minor Wisdom was not present
at the oral argument of this case; however, having had available
the tape of oral argument, he participated in this decision.
notice. Champlin had not requested notice under a Louisiana
statutory procedure nor contracted for notice in subordinating his
mortgage to the first position of USX. The second is a suit by
Gladstone Development Corporation against USX for specific
performance of a contract for the sale of the property USX acquired
in the foreclosure sale. The district court ruled that the
foreclosure sale was constitutionally deficient, did not extinguish
the mortgages, and ordered a resale by private auction. The court
denied Gladstone's claim for specific performance. We affirm.
I.
In 1985, H.H. Champlin obtained a mortgage on the Tiffany
Plaza Shopping Center located in Vermilion Parish, Louisiana, to
secure a debt of $959,712.85. Champlin later assigned the debt due
him to Republic Bank in Oklahoma City to secure his debt to the
Bank.1 In December 1986, Paramount Investment Properties, Ltd.
purchased the Shopping Center and refinanced its debt. As part of
the refinancing transaction, USX and Landmark Savings Bank acquired
a $3.8 million mortgage on the Shopping Center, and for a fee of
$50,000 Champlin agreed to subordinate his mortgage to the USX
mortgage. The subordination agreement did not require USX to
notify Champlin or the Republic Bank in the event of foreclosure.
Paramount did not meet its obligations under the refinancing
arrangement, and in late 1988 USX started foreclosure proceedings
in Louisiana state court. A foreclosure sale was held on February
22, 1989. USX gave no notice to Champlin or the FDIC of the
1
The FDIC obtained the note when the bank failed in 1987.
2
foreclosure proceeding or the sale. The parties agree that the
foreclosure complied with Louisiana law, because no notice was
required in the absence of a request for notice of seizure, a
request no one made. See La. R.S. 13:3886.2
At the time of the foreclosure sale, the balance due on the
Champlin mortgage was $1,331,308. The FDIC had the Shopping
Center appraised in September 1988, six months before the sale, at
$2,250,000. The Shopping Center was appraised for $3,500,000 in
the foreclosure proceeding, and the balance owed on the USX
mortgage at that time was $4,031,936. USX successfully bid with a
credit against the USX note and mortgage of $2,450,000, 70% of the
appraised value.
Following the foreclosure sale, USX contracted to sell the
Shopping Center to Gladstone. The contract provided for a purchase
price of $3,500,000, $525,000 in cash, with $50,000 in earnest
money. USX financed the balance of $2,975,000. The agreement
provided for closing on June 20, 1990 unless the parties agreed
otherwise.
2
La. R.S. 13:3886 provides:
A. Any person desiring to be notified of the seizure of
specific immovable property or of a fixture located upon
specific immovable property shall file a request for notice
of seizure in the mortgage records of the parish where the
immovable property is located. The request for notice of
seizure shall state the legal description of the immovable
property, the owner of the property, and the name and
address of the person desiring notice of seizure. The
person requesting notice of seizure shall pay the sum of ten
dollars to the sheriff.
. . .
3
As required by the contract, Gladstone furnished USX with a
commitment of title insurance. As a prerequisite for insurance,
the commitment required the cancellation of record of the Champlin
mortgage and a release from Champlin. USX attempted to secure the
required waiver from Mr. Champlin and the FDIC and ultimately filed
this suit for a declaratory judgment to resolve the issues
attending the failure to give notice.
The initial closing date was extended numerous times until
July 20, 1991. The parties did not agree to any further
extensions. On July 15, 1991, Gladstone notified USX that it
wished to close the transaction and proposed that should USX be
unable to cancel the Champlin mortgage before closing, Gladstone
would accept a bond or similar indemnification to give USX
additional time to do so. On July 16, 1991, USX advised Gladstone
that the Champlin matter had not been resolved and would not be
resolved before the July 20th closing date. USX stated that it had
no obligation to clear the Champlin mortgage and that under the
contract, Gladstone had the choice of either purchasing the
Shopping Center subject to the Champlin mortgage or terminating the
agreement. Gladstone continued to insist that USX had a duty to
satisfy the mortgage and refused to take title. USX therefore
concluded that the agreement was terminated and returned
Gladstone's $50,000 deposit. Gladstone's suit against USX for
specific performance followed.
In the consolidated trial, the district court held:
(1) Champlin and FDIC's Fourteenth Amendment due process right to
4
notice was violated, (2) Champlin and FDIC were not injured because
there was no equity in the property above the first mortgage, (3)
both the USX mortgage and the Champlin mortgage survived the sale,
and (4) the property should be resold at private auction at which
USX, Champlin, and others could bid.
The court also refused to order specific performance of the
USX-Gladstone contract, finding that under the agreement USX had no
duty to cure the title objection, that Gladstone could have
purchased the property or terminated the agreement, and that
Gladstone's failure to close terminated the agreement. Champlin,
FDIC, and Gladstone appealed.
II.
We first consider Gladstone's claim for specific performance
of its contract with USX. We must interpret section 2.1 of the
USX-Gladstone contract:
Title. Buyer at its sole expense shall, on or before May 5,
1990, furnish to Seller a commitment from Title Insurer to
issue an ALTA Owner's Policy of Title Insurance (the
"Commitment") and an ALTA survey relating to the Land. Buyer
shall have fifteen days after its actual receipt of the
Commitment to examine same and to notify Seller in writing of
its objections to title due to the existence of any material
items not described in Exhibit B hereto which are
objectionable to Buyer. Failure of Buyer to notify Seller in
writing of any such objections within such time period shall
be conclusively deemed to be approved by Buyer of all items.
If Buyer timely notifies Seller of any such objections, Seller
shall have the right to cure or remove same to the
satisfaction of the Title Insurer to enable the Title Insurer
to insure at the closing good and marketable title in Buyer or
its assigns to the Land subject only to easements not
affecting the use of the Property as a shopping center, and
subject to the purchase money mortgage described herein.
Notwithstanding the foregoing, Buyer may not object to any of
the items described in Exhibit B hereto after the Inspection
Date. If Seller does cure or remove all such objections
within fifteen days, Buyer shall be obligated to proceed with
5
closing. If Seller does not cure or remove all such
objections, Buyer shall have the right to either proceed with
the closing subject to such uncured objections or to terminate
this Agreement. Seller shall not be obligated to cure or
remove any title objections.
(emphasis added). Under Louisiana law whether a contract is
ambiguous is a question of law as is the interpretation of an
unambiguous contract. Spohrer v. Spohrer, 610 So. 2d 849, 853 (La.
Ct. App. 1992); Bellina v. Graybar, 532 So. 2d 847, 850 (La. Ct.
App. 1988). Therefore our review is de novo.
Gladstone first contends that because the purchase agreement
does not define "objection to title" its meaning should be implied
from custom. See La. Civ. Code Art. 2054.3 The argument continues
that, generally, Louisiana law provides that a prior mortgage is
not a title defect in breach of the warranty of merchantable title
where the purchase price exceeds the amount of the mortgage.
Jaenke v. Taylor, 106 So. 711 (La. 1925); Tolar v. Pacific
International Petroleum, Inc., 465 So. 2d 925, 928 (La. Ct. App.
1985). The immediate flaw in this argument urging the court to
draw upon custom is that the parties anticipated this event in
their contract and there are no relevant provisions that custom
need furnish. Moreover, even if we were to resort to custom, the
custom urged by Gladstone has little relevance here; section 3.2(C)
3
Art. 2054. No provision of the parties for a particular
situation
When the parties made no provision for a particular
situation, it must be assumed that they intended to bind
themselves not only to the express provisions of the contract,
but also to whatever the law, equity, or usage regards as implied
in a contract of that kind or necessary for the contract to
achieve its purpose.
6
of the contract waives all warranties, including the warranty of
merchantability.
Gladstone also argues that we should look to the parties'
course of performance to interpret "objection to title." See La.
Civ. Code Art. 2053.4 USX agreed to extend the closing deadline
and filed for a declaratory judgment to resolve the problem with
the Champlin mortgage. Gladstone argues these actions support its
reading that USX was obligated to cure the problem with the
Champlin mortgage. The extensions by USX were consistent with the
agreement. USX had the right to cure any objections and obligate
Gladstone to purchase the Shopping Center, but the contract
expressly provides that USX had no obligation to do so. This
agreement contemplated attempts by USX to cure objections.
We agree with the district court that the Champlin mortgage,
raised by the title insurer in the commitment, was an "objection to
title" within the meaning of section 2.1. Because USX did not cure
the objection before closing, Gladstone had the option of
purchasing the Shopping Center despite the defect in title.
III.
A.
Turning to USX's suit for declaratory judgment, the district
court correctly found that USX's failure to notify Champlin and the
4
Art. 2053. Nature of contract, equity, usages, conduct of
the parties, and other contracts between same parties
A doubtful provision must be interpreted in light of the
nature of the contract, equity, usages, the conduct of the
parties before and after the formation of the contract, and of
other contracts of a like nature between the same parties.
7
FDIC violated their right not to be deprived of property without
due process under the Fourteenth Amendment. In Mennonite Board of
Missions v. Adams, 462 U.S. 791 (1983), the Supreme Court held that
"[n]otice by mail or other means as certain to ensure actual notice
is a minimum constitutional precondition to a proceeding which will
adversely affect the liberty or property interests of any party,
whether unlettered or well-versed in commercial practice, if its
name and address are reasonably ascertainable." Id. at 800.
Applying this holding to the case before it, the Court concluded
that due process entitles a mortgagee with a recorded mortgage to
actual notice of a tax sale. In this case, there is no dispute
that the Champlin mortgage was a property interest and that this
interest was reasonably ascertainable from the public records.
Soon after the foreclosure sale in this case, we decided Davis
Oil Co. v. Mills, 873 F.2d 774 (5th Cir. 1989), holding that a
failure to request notice under La. R.S. 13:3886 is not a waiver of
due process notice under Mennonite. See also Small Engine Shop,
Inc. v. Cascio, 878 F.2d 883, 890 (5th Cir. 1989) (holding that La.
R.S. 13:3886 does not shift the constitutional burden of notice to
the party desiring to be notified). In Sterling v. Block, 953 F.2d
198 (5th Cir. 1992), we held that Davis Oil applies retroactively.
Against this background it is clear that although Louisiana law did
not entitle Champlin and the FDIC to notice of foreclosure, the
Fourteenth Amendment did require USX to notify them.
We are not persuaded by USX's attempt to distinguish these
decisions on their facts. USX refers to the fact that the Shopping
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Center in this case sold for 70% of its appraised value at the
foreclosure sale whereas the property involved in Mennonite and
Sterling sold at a fraction of their fair market value.
Additionally, Champlin knew of the USX mortgage, unlike the
situation in Mennonite, Sterling, and Davis Oil where the inferior
interest holder was unaware of the superior interest. Finally, it
is true that Champlin's inferior mortgage proved to offer little
security, given the value of the property at the time of
foreclosure and the existence of USX's first mortgage. Champlin
nonetheless held a valid, but inferior, and at the time of sale a
nigh valueless, mortgage. Champlin's interest, even though
terminable by foreclosure of the superior loan was sufficient to
trigger due process.
B.
In its complaint for declaratory judgment, USX sought a
declaration upholding the foreclosure sale and declaring that the
Champlin mortgage was extinguished. Alternatively, if the court
found that the Champlin mortgage was not extinguished, USX
requested a private auction of the property or an order annulling
the foreclosure and returning both the USX and Champlin mortgages
to their positions before the sale. Champlin contested these
remedies arguing that the foreclosure sale extinguished the USX
mortgage but not the Champlin mortgage, leaving Champlin as first
mortgagee. The district court found that the USX mortgage and the
Champlin mortgage survived foreclosure and ordered the property
resold at private auction, giving USX the right to bid to the full
9
amount due under its first mortgage. Champlin urges us to reverse
the district court's remedy and make him first mortgagee.
Champlin first argues that the district court's remedy
effectively nullifies the foreclosure sale in violation of
Louisiana law. La. R.S. 13:4112 provides that a judicial sale of
immovable property may not be annulled. La. Civ. Code Art. 2619
further provides that a sale may only be set aside in the case of
fraud. However, the remedy for the violation of a federal
constitutional right is a matter of federal law, and therefore
these provisions are not controlling. In any event, even
Champlin's proposed remedy would not leave the foreclosure sale in
tact.5
We cannot agree that Champlin is entitled to a first mortgage
to remedy the lack of notice. This primitive remedy would put
Champlin and the FDIC in a better position than they enjoyed before
the sale; it would elevate their subordinated mortgage to a first
mortgage. Cf. Verba v. Ohio Cas. Ins. Co., 851 F.2d 811, 816 (6th
Cir. 1988). In Verba, the IRS foreclosed on an interest in real
estate to satisfy a tax lien without giving actual notice to Ohio
Casualty, an inferior judicial lienor. After finding a
constitutional violation under Mennonite, the court stated:
we wish to clearly emphasize our belief that this conclusion
does not entitle Ohio Casualty to have its lien elevated in
priority over that of the United States. Although it is for
the district court to determine the precise procedures by
which Ohio Casualty's rights will be vindicated, the remedy
5
We also note that Louisiana has recently enacted La. R.S.
13:3886.1 which provides for an action for damages as the
exclusive remedy for failure to give notice.
10
should provide Ohio Casualty with no interest greater than
that which it possessed when the foreclosure proceedings were
first instituted.
Id. (emphasis added).
Champlin's authorities do not support the remedy he seeks. In
Magee v. Amiss, 502 So. 2d 568 (La. 1987), Dr. and Mrs. Magee had
received a judgment of separation and were waiting for a judgment
of divorce and a settlement of their community property. Dr. Magee
contracted with Reynolds Roofing Company, Inc. for the repair of
the community home. After refusing to pay Reynolds Roofing, Dr.
Magee allowed the home to be seized and sold at a sheriff's sale.
The original Act of Sale to Dr. Magee reflected Mrs. Magee's
ownership interest in the property; however, she was not given
notice before the sheriff's sale. La. Civ. Code Art. 2347 requires
the concurrence of both spouses for the alienation of immovable
property. The Louisiana court held that the foreclosure sale did
not extinguish her interest, because the sale was without Mrs.
Magee's consent and her due process right to notice under Mennonite
was violated. Therefore, the subsequent purchasers only owned Dr.
Magee's one-half interest. Id. at 572-73. The interest of co-
owner, not mortgagee, was at issue in Magee. Moreover, the court's
holding did not give Mrs. Magee a greater interest after the sale
than she enjoyed before. Magee does not support elevating Champlin
to first mortgagee.
In Myers v. United States, 647 F.2d 591 (5th Cir. 1981), we
considered the effect of a Louisiana foreclosure sale on an
inferior federal tax lien where the Government was not given proper
11
notice of the sale. Because the sale was an "other sale" under 26
U.S.C. § 7425(b), the foreclosing creditor's failure to serve
notice upon the United States precluded the discharge of the tax
liens. Section 7425(b) provides that a foreclosure sale is made
subject to federal tax liens unless the United States is given the
proper notice. If seen as an elevation of a tax lien to first
position, it is a federally prescribed remedy. Regardless, this
federal remedy has no comfort for Champlin. His strange contention
for a "leapfrogging" lien is even more problematic given USX's
payment to Champlin of $50,000 to subordinate his mortgage and
Champlin's failure to require notice from USX in the subordination
agreement. These facts are relevant to the crafting of an
equitable remedy.
We think the district court's order that the Shopping Center
be resold at private auction is an appropriately tailored remedy.
It does not completely restore the parties to the status quo, but
it does restore the opportunity to bid the property and purchase at
the foreclosure sale while avoiding the wastefulness of a second
foreclosure proceeding.
Finally, the district court found that Champlin had failed to
show any damage from USX's failure to give notice. As we
explained, the FDIC appraised the property six months before the
sale at $2,250,000. The USX appraisal, at the time of the
foreclosure, was $3,500,000. The balance due USX at that time was
$4,032,000. From these facts, the court concluded "[i]t is
impossible for this court to believe that Champlin, as second
12
mortgage holder, would have bid in excess of $4,032,000 to acquire
property valued at between $2,250,000 and $3,500,000." We agree.
AFFIRMED.
GARWOOD, Circuit Judge, concurring:
I join in the affirmance and in all of Judge Higginbotham's
cogent opinion except only part III A thereof. While I agree that
Champlin's subordinated lien was a sufficient property interest to
trigger due process, I have grave reservations about extending
Mennonite Board of Missions v. Adams, 462 U.S. 791 (1983) so far as
to invalidate as to Champlin USX's foreclosure sale under the
circumstances here. Perhaps we have already gone this far in Davis
Oil Co. v. Mills, 873 F.2d 774 (5th Cir. 1989); Small Engine Shop,
Inc. v. Cascio, 878 F.2d 883 (5th Cir. 1989); and Sterling v.
Block, 953 F.2d 198 (5th Cir. 1992), but I would leave that
question open until necessary for decision. For the reasons so
well explained by Judge Higginbotham, even if there were a
Mennonite violation neither Champlin nor Gladstone has any valid
grounds to complain of the judgment below, and USX may not do so as
it has not appealed.
13