Cal-Bay International, Inc. v. Supertrail Manufacturing Co. , 383 F. App'x 475 ( 2010 )

Case: 09-60270 Document: 00511151405 Page: 1 Date Filed: 06/23/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
June 23, 2010
No. 09-60270
Lyle W. Cayce
Clerk
In the Matter of: SUPERTRAIL MANUFACTURING CO., INC.,
Debtor
______________________________________
CAL-BAY INTERNATIONAL, INC.,
Appellant
v.
SUPERTRAIL MANUFACTURING CO., INC.; MUSTAFA ATAC,
Appellees
Appeal from the United States District Court
for the Northern District of Mississippi
USDC No. 1:08-cv-00038
Before JONES, Chief Judge, and HIGGINBOTHAM and ELROD, Circuit
Judges.
EDITH H. JONES, Chief Judge:*
Supertrail Manufacturing Co., Inc. owned real estate in Florida secured
by a mortgage held by Dr. Mustafa Atac. Supertrail entered bankruptcy in
*
Pursuant to 5TH CIR . R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR .
R. 47.5.4.
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Mississippi, the property was sold, and Dr. Atac received the proceeds of that
sale. After the property was sold, Cal-Bay International, Inc. sued Dr. Atac and
Supertrail in bankruptcy court, claiming to have been the rightful owner of the
mortgage and its sale proceeds. Supertrail and Dr. Atac moved for summary
judgment. The bankruptcy court held in their favor and concluded that Cal-Bay
was collaterally estopped from pursuing its claim because of a prior ruling in a
Utah state court. The district court affirmed.
Although the bankruptcy court erred in its analysis, the error is harmless.
The Utah court determined only whether the mortgage’s assignment to Dr. Atac
was authorized under Utah corporate law. Cal-Bay seeks a determination on an
issue the Utah court never addressed, whether under Florida property law
Dr. Atac or Cal-Bay has superior title. On this issue, the pleadings and record
are sufficient to grant the motion for summary judgment for Dr. Atac.
Consequently, we affirm.
I. BACKGROUND
In 1994, Kristol Management and Investment (“KMI”) owned the mortgage
in dispute which secured Supertrail’s property in Palm Beach County, Florida,
that was slated to become a golf course development. KMI assigned the
mortgage twice: first to Dr. Atac and then to Ararat LLC (Cal-Bay’s predecessor
in title).1 These conflicting assignments are the core of the dispute now before
the court.
On August 12, 1994, Deborah Doherty, KMI’s president, assigned the
mortgage to Dr. Atac on behalf of KMI. On February 28, 1995, Dr. Atac recorded
the assignment in the Palm Beach County property records. The assignment set
off an internal dispute within KMI. Paul Schwenke, KMI’s chairman of the
board, claimed that Doherty fraudulently transferred the mortgage and lacked
the authority to assign the mortgage to any party. On July 10, 1995, Schwenke
1
Ararat purported to assign the mortgage to Cal-Bay on September 20, 2005.
2
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entered a “Notice of Invalid Assignment of Mortgage” into the Palm Beach
County property records, which informed title investigators of these allegations
of fraud.
On January 8, 1996, under the direction of Schwenke, KMI sued Doherty
in Utah court, asserting that she committed fraud against KMI and lacked the
authority to assign the mortgage to Dr. Atac.2 Because of deficient service,
Doherty did not file an answer to the complaint. The Utah court issued a default
judgement on March 26, holding that Doherty did not have authority to assign
the mortgage to Dr. Atac. On April 4, the default judgment was recorded in the
Palm Beach County property records. Doherty finally moved to set aside the
default judgment on April 12. While Doherty’s motion was pending in Utah,
KMI assigned the mortgage to Ararat, Cal-Bay’s predecessor in title, on June 5,
and Ararat recorded the assignment the next day. On September 4, 1996, the
Utah court granted Doherty’s motion and vacated its default judgment. The case
went to trial. Five years later, the Utah court ruled in favor of Doherty, finding
that she had authority to assign the mortgage and that the original assignment
to Dr. Atac was valid (the “Utah Judgment”). The Utah court judgment was
recorded in Palm Beach County’s property records on December 12, 2001. At no
time did Dr. Atac, Cal-Bay, or Ararat participate in the KMI litigation.
While KMI and Doherty litigated their dispute in Utah, Supertrail filed
for Chapter 11 bankruptcy on January 4, 1996. The bankruptcy case proceeded
under the assumption that Dr. Atac owned the mortgage, and Dr. Atac was
heavily involved in Supertrail’s Chapter 11 case. In September 1996, the
Supertrail estate moved to sell the Palm Beach property that secured the
mortgage outside the ordinary course of business. See generally 11 U.S.C.
§ 363(b). After several hearings, the court eventually approved the sale in 2003.
2
Kristol Management and Investment, Inc. v. Doherty, Third Judicial District Court
of Salt Lake County, No. 96-0900196-CV, which took place in Utah because KMI is a Utah
corporation governed by Utah corporate law.
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Under the sale order, Dr. Atac would receive the proceeds after settling some
priority obligations on the property.
In March 2006, with the sale proceeds yet undistributed, Cal-Bay sued
Supertrail and Dr. Atac, asserting Cal-Bay’s status as the rightful owner of the
mortgage and any sales proceeds. Cal-Bay claimed that while the Utah
Judgment determined that Doherty had authority to assign the mortgage to Dr.
Atac, Ararat was a bona fide purchaser for value without notice under Florida
law.3 Thus, even though Ararat was assigned the mortgage after Dr. Atac, Cal-
Bay, through Ararat, asserted superior rights to the mortgage. Supertrail and
Dr. Atac moved for summary judgment, arguing that Ararat was not a bona fide
purchaser because it had constructive notice of the Utah lawsuit.
The bankruptcy court ruled sua sponte that Cal-Bay was collaterally
estopped from pursuing its claim because the Utah court had effectively
determined which party owned the mortgage.4 The court held that Cal-Bay was
also collaterally estopped by an October 18, 1996, hearing in which the
bankruptcy court allegedly determined that Dr. Atac was the proper owner of
the mortgage. Cal-Bay appealed and the district court affirmed without
analysis. Cal-Bay now appeals to this court. During the pendency of this
appeal, the bankruptcy court ordered the proceeds to be distributed. Cal-Bay
objected unsuccessfully to the distribution and failed to seek a stay, and the
proceeds were distributed to Dr. Atac.
II. JURISDICTION
3
See FLA . STAT . § 701.02(1) (2009):
An assignment of a mortgage upon real property or of any interest therein, is
not good or effectual in law or equity, against creditors or subsequent
purchasers, for a valuable consideration, and without notice, unless the
assignment is contained in a document that, in its title, indicates an assignment
of mortgage and is recorded according to law.
4
The Appellees did not argue this issue in their motion for summary judgment, but
did raise it in their answer to Cal-Bay’s complaint.
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As an initial matter, Appellees assert that the appeal is moot. First,
Appellees contend that 11 U.S.C. § 363(m) moots the appeal because the
property is sold and Cal-Bay did not seek a stay. Section 363(m) does not apply,
because Cal-Bay is appealing to determine which party has a superior interest
to the mortgage proceeds, not to determine whether the sale of the underlying
property was valid. BMG Music v. Martinez, 74 F.3d 87, 89 n.3 (5th Cir. 1996).
Second, Appellees assert mootness because the proceeds have been distributed
and Cal-Bay never sought a stay.5 “An appeal may be dismissed when an
appellant has made no effort to obtain a stay and has permitted ‘such a
comprehensive change of circumstances to occur as to render it inequitable’ for
the appellate court to reach the merits of the appeal.” In re Crystal Oil Co.,
854 F.2d 79, 82 (5th Cir. 1988). Nevertheless, a stay of a bankruptcy court’s
action is not a per se requirement for relief on appeal. Id. In this case, there has
been no such comprehensive change of circumstances as to render a remedy
inequitable. If Appellees’ appeal is successful, the court can fashion effective
relief by issuing a judgment against Dr. Atac for the proceeds.
III. DISCUSSION
We review the decision of a district court, sitting as an appellate court, by
applying the same standards of review to the bankruptcy court’s findings of fact
and conclusions of law as applied by the district court. In re Gerhardt, 348 F.3d
89, 91 (5th Cir. 2003). Generally, a bankruptcy court’s findings of fact are
reviewed for clear error and conclusions of law are reviewed de novo. Id. This
court reviews a grant of summary judgment de novo. Gowesky v. Singing River
Hosp. Systems, 321 F.3d 503, 507 (5th Cir. 2003). Summary judgment is
appropriate “if the pleadings, depositions, answers to interrogatories, and
5
Appellees also contend that the appeal is equitably moot because the proceeds have
been distributed. This claim is meritless. Equitable mootness only applies to confirmed plans,
not to sales outside the ordinary course of business. See In re Pacific Lumber, 584 F.3d 229,
240 (5th Cir. 2009); In re Hilal, 534 F.3d 498, 500 (5th Cir. 2008).
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admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.” F ED. R. C IV. P. 56(c); see also Celotex Corp. v.
Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
A.
Issue preclusion, also referred to as collateral estoppel, prevents the same
parties or their privies from relitigating issues that were litigated and decided
in a prior action. A bankruptcy court’s decision to give preclusive effect to a
state court judgment is a question of law that we review de novo. In re Keaty,
397 F.3d 264, 269 (5th Cir. 2005). “[T]he preclusive effect of prior state court
proceedings on federal proceedings is determined by the treatment those state
court proceedings would receive in the courts of the state . . . in which those
prior proceedings were held.” Norris v. Hearst Trust, 500 F.3d 454, 460-61 (5th
Cir. 2007). Technically, instead of the federal rule of collateral estoppel, the
bankruptcy court should have applied Utah law. In Utah, the party seeking to
invoke the doctrine of collateral estoppel must satisfy four requirements:
First, the party must show that the issue challenged in the case at
hand is identical to the issue decided in the previous action. Second,
the issue in the previous action must have been decided in a final
judgment on the merits. Third, the issue in the previous action must
have been competently, fully, and fairly litigated. Fourth, the
opposing party in the action at hand must have been either a party
or privy to the previous action.
Sevy v. Security Title Co., 902 P.2d 629, 632 (Utah 1995).
The bankruptcy court held that two previous decisions estopped this
litigation: the Utah Judgment and a 1996 bankruptcy court hearing. As to the
preclusive effect of the Utah Judgment, Cal-Bay correctly contends that the
Utah court did not render judgment on the issue here at hand. The Utah
Judgment did not determine who had title to the mortgage, but simply whether
Doherty was authorized to assign the mortgage to Dr. Atac under Utah corporate
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law.6 Thus, “the [Utah] Court concludes that Doherty’s actions on behalf of KMI
in [assigning the mortgage] were authorized, proper and legitimate in every
respect.” The Utah Judgment is not dispositive in determining the relative
priorities between Atac and Ararat, a task that would require applying Florida
real property law.
The bankruptcy court also relied on its alleged earlier ruling emanating
from Supertrail’s motion to sell the property free and clear of liens and outside
the ordinary course of business, which the court heard on October 18, 1996.
Unfortunately, there is no written order reflecting that the court adjudicated at
that time the respective claims of KMI and Dr. Atac to the mortgage. The docket
sheet references no transcripts or affidavits, nor does the order authorizing the
sale deal with this issue. The bankruptcy court’s recollection, many years later,
that KMI was served and failed to appear and that it did rule for Dr. Atac is a
slender reed on which to hang estoppel. Even more troubling, by the time of the
October 18, 1996 hearing, KMI had assigned the mortgage to Ararat, but Ararat
evidently was not informed of the hearing even if KMI was served with notice.
With the record offering no assurance that KMI or Ararat was properly served
with notice, or deliberately defaulted, or that KMI suffered an actual adverse
adjudication by the bankruptcy court, we may not hold Cal-Bay, as Ararat’s
successor, bound to an undocumented October 18, 1996 bankruptcy court order.
B.
At this point, we could reverse and remand to the bankruptcy court for
resolution of the ultimate issue, but judicial efficiency mandates our disposing
of the case at last. No facts are in dispute. If Ararat was a bona fide purchaser
for value without notice, then Ararat might have had superior property rights
6
As the Utah court stated: “At the heart of KMI’s claims for relief based on common
law fraud and the shareholder consent statute is its assertion that Doherty, as KMI’s sole
officer and director, was not authorized by Schwenke, who is alleged to have been KMI’s sole
shareholder, to assign [the mortgage] to Atac.”
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to the mortgage, which would have accrued to Cal-Bay as successor in title. In
their motion for summary judgment, however, the Appellees argued that as a
matter of law Ararat could not be a bona fide purchaser because the Palm Beach
County property records gave Ararat constructive notice of the KMI lawsuit in
Utah.
Florida law governs whether Ararat was a bona fide purchaser. Butner v.
United States, 440 U.S. 48, 54, 99 S. Ct. 914, 59 L.Ed.2d 136 (1979) (“Congress
has generally left the determination of property rights in the assets of a
bankrupt’s estate to state law.”). To be a bona fide purchaser for value without
notice in Florida, a party must satisfy three conditions. “The purchaser must
have (1) acquired the legal title to the property in question, (2) paid value
therefore, and (3) been innocent of knowledge of the equity against the property
at the time when consideration was paid and title acquired.” DGG Development
Corp. v. Estate of Capponi, 983 So.2d 1232, 1234 (Fla. Dist. Ct. App. 2008). The
Appellees’ motion for summary judgment only challenges whether Ararat had
constructive notice of the KMI litigation based on the Palm Beach County
property records. Property records provide “constructive notice to subsequent
purchasers, not only of its own existence and contents, but also of any other fact
concerning the instrument that would have been ascertained from the record if
it had been examined and if inquiries suggested by it had been prosecuted.” Id.
at 1235. Thus, subsequent purchasers have a duty of due diligence. “If a person
has information that would lead a reasonable man to make further inquiry for
his own protection, but fails to further investigate and learn what the inquiry
would reasonably have uncovered, the person must suffer the consequence of his
neglect.” Starlines Int’l Corp. v. Union Planters Bank, 976 So.2d 1172, 1177
(Fla. Dist. Ct. App. 2008) (citation and quotation omitted).
When KMI assigned the mortgage to Ararat on June 5, 1996, the Palm
Beach County property records contained three pertinent entries:
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1. Assignment of Mortgage from KMI to Dr. Atac dated February 28,
1995;
2. Notice of Invalid Assignment of Mortgage by KMI dated July 10,
1995;
3. Judgment from the Utah court dated March 26, 1996, which states
that Assignment of Mortgage from KMI to Dr. Atac was “null and
void and wholly ineffective for any purpose . . . .”
The question is whether these entries“would lead a reasonable man to make
further inquiry for his own protection[?]” Id. The answer is yes.
The property records made Ararat aware of the KMI litigation and
Dr. Atac’s potential property interest in the mortgage. While the Utah
Judgment appears to invalidate the assignment to Dr. Atac, judgments are often
appealed and reversed. A reasonable person would have researched further to
determine whether the Utah Judgment was truly final or whether it was on
appeal, especially because Ararat purchased the mortgage only two months after
the Utah judgment was issued. Moreover, a simple inquiry to the Utah court
would have revealed that the Utah Judgment was not yet final and that Doherty
had moved to set it aside. Several additional features of the Utah Judgment
would also prompt further inquiry. First, Dr. Atac, the mortgage transferee, was
not a party to the KMI litigation. Consequently, the Utah judgment does not
order Dr. Atac to assign the mortgage back to KMI. Second, it is not clear that
the Utah court had jurisdiction over Dr. Atac. Third, the Utah court does not
make a title determination at all. It does not analyze Florida property law, or
determine whether Dr. Atac himself might have been a bona fide purchaser from
KMI for value without notice. All these loose ends dangling from the Utah
judgment begged for further investigation by any reasonable assignee in Ararat’s
position. Ararat plainly had constructive notice of Dr. Atac’s competing
property interest and could not qualify as a bona fide purchaser for value
without notice. Cal-Bay, coming on the scene nine years later, also cannot
qualify as a BFP.
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IV. CONCLUSION
Cal-Bay was not collaterally estopped from pursuing this litigation.
Nevertheless, we affirm the judgment because Ararat had constructive notice as
a matter of law from the Palm Beach County property records that Dr. Atac
potentially retained his property rights in the mortgage. Ararat could not have
been a bona fide purchaser for value without notice of the cloud on title.
AFFIRMED.
10