Hsbc Bank U.S. v. William F. Perkins In His Capacity As Liquidating Tr. For Bill Heard Enterprises Inc.

• Decision Date: 31 March 2011
• Docket Number: No. 5:10–cv–02058–SLB.,5:10–cv–02058–SLB.
• Citation: 451 B.R. 555
• Parties: HSBC BANK USA, Appellant,v.William F. PERKINS in his capacity as Liquidating Trustee for Bill Heard Enterprises, Inc., et al., Appellee.
• Court: U.S. District Court — Northern District of Alabama

451 B.R. 555

HSBC BANK USA, Appellant,

v.William F. PERKINS in his capacity as Liquidating Trustee for Bill Heard Enterprises, Inc., et al., Appellee.

No. 5:10–cv–02058–SLB.

United States District Court, N.D. Alabama, Northeastern Division.

March 31, 2011.

James R. Bussian, Jayna Partain Lamar, Robert Harris Fowlkes, Maynard Cooper & Gale PC, Birmingham, AL, Kevin C. Gray, Maynard Cooper & Gale PC, Huntsville, AL, for Appellant.Clifton Charles Mosteller, Derek F. Meek, Marc P. Solomon, Robert B. Rubin, Burr & Forman LLP, Birmingham, AL, Jeffrey P. Fuller, Mark A. Fink, Kilpatrick Stockton LLP, Atlanta, GA, Mark D. Taylor, Kilpatrick Stockton LLP, Washington, DC, for Appellee.

MEMORANDUM OPINION

SHARON LOVELACE BLACKBURN, Chief Judge.

This case is before the court on appeal from a judgment of the United States Bankruptcy Court for the Northern District of Alabama granting summary judgment in favor of Appellee Twentieth Century Land Corporation (“Twentieth Century”) and against Appellant HSBC Bank USA, as Trustee for the Registered Holders of Falcon Auto Dealership Loan Trust 2003–1 Loan Backed Bonds (“HSBC”). ( See docs. 1–3 & 1–4.) ¹ Upon consideration of the record, the submissions of the parties, and the relevant law, the court finds that the decision of the bankruptcy court is due to be reversed and the case remanded for further proceedings not inconsistent with this Memorandum Opinion.

I. FACTUAL AND PROCEDURAL HISTORY

The facts of this case are undisputed. This appeal focuses on the bankruptcy court's application of the law to the undisputed facts. Therefore, the court fully sets forth herein the factual background from the bankruptcy court's Memorandum Opinion, (doc. 1–3), below:

The property at issue is located at 911 North Freeway, Houston, Texas [ (“the subject property”) ]. Landmark Chevrolet has operated a Chevrolet franchised dealership on the property since the 1970's. On October 1, 1985, Twentieth Century purchased the subject property.

In October of 1985, [Bill Heard Enterprises, Inc.] [ (“]BHE[”) ], through Landmark Chevrolet Corporation which

is now known as Landmark Chevrolet, Ltd., purchased the Chevrolet dealership (“Landmark Chevrolet”) and Twentieth Century leased the property to the dealership. At all times, Landmark Chevrolet operated the automobile dealership on the subject property under the name Landmark Chevrolet. Landmark Chevrolet's operation of the property as an automobile dealership was visible to the public and did not materially change since it first began leasing the property from Twentieth Century in 1985 until the filing of BHE's bankruptcy petition.

Falcon Financial, LLC (“Falcon”), is a company that specializes in lending to automobile dealerships. In October of 2002, Falcon agreed to make a $20,000,000.00 loan to BHE. To make the loan, Falcon required BHE to form a “bankruptcy remote single purpose entity” that would act both as the borrower under the loan and owner of the subject property securing the loan. On November 15, 2002, BHE formed the bankruptcy remote single purpose entity named Landmark North Freeway, Ltd [ (“Landmark North”), a Texas limited partnership].

On December 4, 2002, as part of the loan transaction, Twentieth Century, as grantor, executed a Warranty Deed conveying the subject property to Landmark North, as grantee. There was no visible change to Landmark Chevrolet's possession or operation of the property after Twentieth Century transferred the subject property to Landmark North.

The December 4, 2002 Warranty Deed transferring the property from Twentieth Century to Landmark North was never recorded. The Warranty Deed, a Deed of Trust by which Landmark North mortgaged the subject property to Falcon, and other loan documents were forwarded to Falcon's counsel who then forwarded the Deed of Trust and other loan documents to the escrow agent, Lawyers Title Insurance Company, for closing and recording. The Warranty Deed was not, however, forwarded to Lawyers Title. The original, unrecorded, Warranty Deed was found in the files of Falcon Financial's counsel during this litigation. Falcon's attorney, Greg Murphy, Esq., testified in his deposition that he did not know the Warranty Deed had not been recorded until he first learned of this lawsuit.

On December 12, 2002, Lawyers Title closed the loan and distributed the loan proceeds as instructed. Landmark North directed that $7,187,393.32 of the loan proceeds be used to satisfy existing mortgages on the property in favor of General Motors Acceptance Corporation (“GMAC”). After the loan closing, GMAC recorded three documents entitled “Release of Lien,” which evidenced that three separate GMAC deeds of trust on the subject property had been released. Landmark North also used $317,034.84 of the loan proceeds to pay Twentieth Century's outstanding tax liability. The remaining loan proceeds were advanced directly to BHE to refinance debt it had incurred over time.

On December 23, 2002, Lawyers Title recorded the Deed of Trust in the real property records of Harris County, Texas. Although the Warranty Deed had not been recorded, on December 23, 2002, Lawyers Title issued a final Mortgage Policy of Title Insurance insuring Falcon from any defect in, invalidity or unenforceability in its lien on the subject property. Because the Warranty Deed was not recorded, a claim was made under the title policy and Lawyers Title is providing the defense in this adversary proceeding.

On December 23, 2002, Falcon assigned its interest in the loan documents to ABN AMRO Bank, NV. Subsequently, on July 18, 2003, ABN assigned its interest in the loan documents to HSBC.

In connection with the loan, Landmark North entered into a lease agreement with Landmark Chevrolet for the property. The real property consists of two tracts of land divided into four parcels. The property tax records from the Harris County Tax Accessor–Collector indicate that Landmark Chevrolet is the owner of at least one of the parcels. In addition to the tax records, the Harris County Appraisal District records identify Landmark Chevrolet as the owner of one of the parcels.

Since 1985 and at the time of the loan transaction in 2002, Landmark Chevrolet operated a car dealership, service center and related facilities on the property. The Landmark Chevrolet dealership was located adjacent to Interstate 45, a heavily trafficked freeway that runs through the city of Houston. It is undisputed that Landmark Chevrolet signage was visible to the public throughout the property and that there was no signage anywhere on the property for Twentieth Century nor Landmark North.

(Doc. 1–3 at 19–21 (footnotes omitted).)

On September 28, 2008, BHE and several related entities filed for relief under Chapter 11 of the Bankruptcy Code and sought joint administration of their petitions. (B.P. Doc. 1.) On February 6, 2009, Twentieth Century, one of the jointly administered debtors, filed a complaint in an adversary proceeding against Landmark North and others to avoid the prepetition transfer of the subject property to Landmark North pursuant to 11 U.S.C. § 544(a)(3) and to determine the validity, priority, or extent of Landmark North's interest in the property. (B.C. Doc. 1.) Twentieth Century sought to set aside the prepetition transfer on grounds that the Warranty Deed transferring the property from Twentieth Century to Landmark North was never recorded and was, therefore, void under Texas law as to a hypothetical subsequent purchaser for value without notice. ( Id.) On March 19, 2009, Twentieth Century filed an amended complaint adding HSBC as a defendant. (B.C. Doc. 7.) Through the amended complaint, Twentieth Century sought to avoid Landmark North's granting of the Deed of Trust to Falcon, HSBC's predecessor in interest. ( Id.) On March 31, 2009, HSBC filed several counterclaims against Twentieth Century, including equitable subrogation, subrogation under the Deed of Trust, implied subordination, equitable lien, declaratory judgment, constructive trust, and unjust enrichment. (B.C. Doc. 18.)

On August 19, 2009, Twentieth Century filed a Motion for Summary Judgment against HSBC. (B.C. Doc. 88.) Twentieth Century sought an order granting summary judgment as to its claims under the amended complaint and the counterclaims asserted by HSBC. ( Id.) Also on August 19, 2009, HSBC filed a Motion for Summary Judgment against Twentieth Century. (B.C. Doc. 90.) HSBC sought an order granting summary judgment on Twentieth Century's amended complaint and partial summary judgment on its counterclaims against Twentieth Century. ( Id.)

On September 11, 2009, the bankruptcy court entered a Memorandum Opinion and Order tentatively granting Twentieth Century's Motion for Summary Judgment against HSBC and denying HSBC's Motion for Summary Judgment against Twentieth Century. ( See generally doc. 1–3 at 17–33.) The bankruptcy court found that Twentieth Century was entitled to avoid its transfer of the subject property to Landmark North under § 544(a)(3) of the Bankruptcy Code because the Warranty Deed transferring the property to Landmark North was not recorded and a hypothetical purchaser would not have had notice of documents recorded outside the chain of title. ( Id. at 21–24.) The bankruptcy court further found that Landmark Chevrolet's possession as a tenant under the written lease agreement between Landmark Chevrolet and Landmark North was not sufficiently open, visible, exclusive, and unequivocal to impart constructive notice of Landmark North's interest in the subject property. ( Id. at 25–28.) The bankruptcy court also found that Twentieth Century was entitled to summary judgment on the counterclaims asserted by HSBC. ( Id. at 28–32.) The bankruptcy court, however, gave the parties additional time to submit a statement of disagreement, if any, with the ruling before the bankruptcy court made its final ruling. HSBC and Twentieth Century both submitted additional briefs....