In re Jay

Decision Date30 September 2003
Docket NumberBankruptcy No. 01-11000-RLJ-13. Adversary No. 02-1009.
Citation308 B.R. 251
PartiesIn re James Albert JAY, Debtor. James Albert Jay and Ann C. Jay, Plaintiffs, v. Nesco Acceptance Corporation, Nesco, Inc., Bank One, Oklahoma, N.A., and Linc Acquisition One, L.L.C., Defendants.
CourtU.S. Bankruptcy Court — Northern District of Texas

Sammy Clay Gregory, Lubbock, TX, Jim Parker, Comanche, TX, for Plaintiffs.

James R. Jordan, Shannon, Gracey, Ratliff and Miller, Matthew M. Julius, Dallas, TX, John Y. Bonds, III, Shannon, Gracey, Ratliff and Miller, Ft. Worth, TX, for Defendants.


ROBERT L. JONES, Bankruptcy Judge.

The claims raised by this adversary proceeding were, at the parties' request, bifurcated for trial. Presently before the court is the claim made by James Albert Jay and Ann Jay (collectively "Jays"), seeking to cancel a deed purportedly conveying their interest in a .85 acre tract of land as an allegedly pretended sale of their business homestead in violation of the Texas Constitution. Defendants Nesco Acceptance Corp. ("Nesco Acceptance"), Nesco Inc., Bank One Oklahoma, and Linc Acquisition One ("Linc") (collectively "Nesco Defendants") argue that the .85 acre tract was not the Jays business homestead when conveyed by them to Nesco Acceptance, and that, accordingly, Nesco Acceptance has clear title to such tract. Trial on all issues concerning this claim was held on July 23, 2003.1

This court has jurisdiction of this matter under 28 U.S.C. §§ 1334 and 157(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(1) and (b)(2). This Memorandum Opinion contains the court's findings of fact and conclusions of law. Fed. R. Bankr.P. 7052 and Fed. R. Bankr.P. 9014.


The Jays acquired title to the .85 acre tract, which abuts Interstate 20 in the City of Ranger, Texas, sometime in 1984. At that time, and through to the present, the Jays have used such tract to operate a service station and convenience store. The Jays also acquired an adjoining 1.04 acre tract, which they sometimes leased to others, or operated as a liquor store. The 1.04 acre tract was not being used by the Jays in 1999. The Jays have never resided or maintained a home on either the .85 acre tract or the 1.04 acre tract, nor have they ever intended to maintain a home on either tract.

Beginning in 1997, the Jays decided to upgrade their facilities on the .85 acre tract to allow them to better compete with their competition. In November, 1999, the Jays entered into negotiations with Nesco2 to finance the improvements on the .85 acre tract. Nesco told the Jays that conveyance of both tracts was necessary to the transaction. Mr. Jay testified that Nesco agreed to build the new facility and would "somehow" lease it back to the Jays. The first written instrument between the Jays and Nesco is the Retail Store Lease ("lease") signed on December 15, 1999. Nesco Acceptance is the landlord and the Jays are the tenants under the lease. The lease generally provides that its term would begin April 1, 2000, and run twenty years, with the Jays holding an option to extend such term for some period thereafter. The lease also provides the Jays with an option to repurchase both tracts at any time during the lease or upon its termination. Appended to the lease is a schedule for payments to be made by the Jays for the "[t]erm of [l]oan." The schedule reflects a "[l]oan [a]mount" of $1,281,001 with an "[a]nnual [i]nterest [r]ate" of 11%, compounded monthly. To exercise their option to repurchase the tracts, the Jays pay a flat fee (which decreases over time), plus the unpaid principal balance owing under the schedule at the time they exercised the option.

The Jays closed down operations on the .85 acre tract in late December, 1999, in preparation for demolition of the existing facilities, which began on January 1 or 2, 2000, and was completed January 7, 2000. On January 13, 2000, the Jays conveyed, by warranty deed, title to the .85 acre tract to Nesco Inc. On the same date, the Jays conveyed their interest, if any, to the 1.04 acre tract to Saul Pullman by quitclaim deed. Contemporaneously with such deed, Saul Pullman executed a warranty deed covering the 1.04 acre tract to Nesco Inc. This was structured to avoid any questions concerning title to the 1.04 acre tract given the Jays' contention that Saul Pullman, apparent owner of such tract, had acquired the 1.04 acre tract through a wrongful foreclosure. As part of the transaction, Nesco paid Saul Pullman in full for the debt apparently owing to him by the Jays. Nesco also paid other judgment liens that had been recorded against both tracts.

Construction of the new facilities on the .85 acre tract began sometime shortly thereafter. Construction was not completed within the time frame contemplated. This was due, apparently in large part, to several change orders submitted by the Jays. These change orders had the additional affect of substantially increasing the cost to Nesco of erecting the new facilities. Mr. Jay testified that he understood he was to receive $240,000 cash from Nesco upon conveyance of the two tracts. The value of the .85 acre tract and the 1.04 acre tract was, according to an appraisal done December 13, 1999, $130,000 and $176,000, respectively. Nesco, according to Jay, would satisfy liens against the tracts of approximately $60,000. The remaining equity of approximately $240,000 would then be paid by Nesco. In addition, Nesco agreed to provide $150,000 for inventory and capital. In July, 2000, Nesco did pay $50,000 to the Jays. Nesco did not pay the Jays the $240,000 equity that Mr. Jay testified they were owed. Instead, in August, 2000, Nesco Acceptance attempted to secure a new lease agreement with the Jays, and conditioned "paying" the $240,000 on the Jays agreeing to such new lease. The new lease called for an increase of monthly payments from $13,102.24 to $17,754.00.

Construction of the new facilities was eventually completed, and the Jays reopened the service station and convenience store. The Jays failed to make timely lease payments to Nesco as required by the December 15, 1999, lease.

On June 27, 2001, Nesco Inc. granted a lien to Bank One by executing a deed of trust covering the .85 acre tract. The lien was granted to secure financing provided to Nesco Inc. by Bank One. Sometime thereafter, Bank One sold its interests in the Nesco note and the deed of trust to Linc. The Jays filed a lis pendens concerning both tracts on September 23, 2002.

In June, 2001, Nesco obtained judgment in the Justice of the Peace Court Number 2, in Eastland County, granting Nesco a writ of forcible detainer and possession of the properties. The Jays subsequently appealed this judgment to the District Court for Eastland County. The Jays filed a voluntary petition under Chapter 13 of the Bankruptcy Code on October 24, 2001. Upon filing their Chapter 13 petition, the Jays removed the state court action to federal district court, where, at that time, the Jays already had a separate action pending against Nesco. The federal district court consolidated the two actions and, by order dated March 8, 2002, referred such consolidated case, which forms the present adversary, to this court.

Nesco Inc. filed for Chapter 11 bankruptcy protection in the Bankruptcy Court for the Northern District of Oklahoma, on November 26, 2001. The Jays filed a proof of claim as unsecured creditors in Nesco's Chapter 11 case. The Jays received notice of Nesco's disclosure statement, Chapter 11 plan, and of the order and notice for hearing on the disclosure statement and plan. The Jays did not file an objection to confirmation of Nesco's plan, which the Oklahoma bankruptcy court confirmed on June 6, 2003.


A resolution of the claim under consideration involves an analysis of several questions. The issues are as follows:

1. Whether the operative date of the parties' transaction for purposes of homestead laws is January 13, 2000, — the date the deed was executed, — or whether such date may be related-back to December 15, 1999, or earlier.

2. Whether the .85 acre tract constituted the Jays' business homestead on December 15, 1999, resolution of which involves determination of:

— when a constitutional amendment takes effect;

— whether the amendment in this case required enabling legislation;

— whether such constitutional amendment applied retroactively to homesteads created before its effective date; and

— whether the .85 acre tract met the substantive requirements of a business homestead on December 15, 1999.

3. Whether the deed to the .85 acre tract executed in favor of Nesco was a pretended sale of a homestead, such as is prohibited by the Texas Constitution, resolution of which involves a determination of:

— whether section 41.006 of the Texas Property Code provides the exclusive method of determining whether a sale is a pretended sale;

— whether the sale, under Texas common law, was a pretended sale thereby converting the deed into a disguised mortgage; and

— whether Nesco may nevertheless be granted an equitable lien on the property.

4. Whether the Jays' failure to object to confirmation of Nesco's plan serves as res judicata in the present litigation.

5. Whether Linc is an innocent purchaser for value.

A. Time of Conveyance

For purposes of fixing the parties' rights concerning the homestead issues involved, the court first determines the date on which the transaction in question occurred. Nesco argues that the appropriate date is January 13, 2000, the date on which the Jays executed the deed conveying title to the .85 acre tract to Nesco; the Jays argue that the operative...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT