In re Prime Ventures, Ltd.
| Decision Date | 29 December 1986 |
| Docket Number | Adv. No. 485-0087 AW.,No. C-86-5219 SAW,Bankruptcy No. 4-84-03174 W,C-86-5219 SAW |
| Citation | 68 BR 686 |
| Parties | In re PRIME VENTURES, LTD., Debtor. Charles DUCK, Trustee, Plaintiff, v. MANHATTAN SAVINGS BANK, Syntek Management, Inc., Syntek Corporation, Westview Drive Associates and Southmark Corporation, Defendants. |
| Court | U.S. District Court — Northern District of California |
McCutchen, Doyle, Brown & Enersen, William Bates, III, Randy Michelson, San Francisco, Cal., for defendants.
Dinkelspiel & Dinkelspiel, Peter J. Benvenutti, Michael St. James, San Francisco, Cal., for plaintiff.
Prime Ventures, Ltd.'s trustee in bankruptcy, Charles Duck (Trustee), brought this action to determine the validity of two promissory notes with an outstanding balance of approximately $3.6 million held by defendant Manhattan Savings Bank (Manhattan). The notes are secured by a first deed of trust encumbering an apartment complex (Apartments) located in Houston, Texas and owned by Prime Ventures. The Trustee argues that the notes and trust deed are void because Manhattan failed to sue to foreclose the lien within the four-year period provided by the Texas statute of limitations. Manhattan argues that the notes and trust deed are still enforceable. The United States Bankruptcy Court for the Northern District of California, Wolfe, J., granted Manhattan's motion for summary judgment and denied the Trustee's cross-motion for summary judgment. The Trustee appeals.
The facts are not in dispute. Manhattan's lien upon the Apartments was created by two deeds of trust granted in 1968 and 1969 to Manhattan's predecessor in interest by the then owner of the real property, Prime Ventures' predecessor in interest. The deeds of trust secured loans totalling $5.9 million from Manhattan's predecessor in interest to the owner and were duly recorded in the mortgage records of Harris County, Texas. Through a series of conveyances not contested here, the deeds were ultimately consolidated and assigned, along with the notes they secured, to Manhattan.
Manhattan did not receive its monthly payments in October, November, and December, 1975, and consequently declared a default and accelerated the obligation under the notes. The parties interested in the property then engaged in workout negotiations, which resulted in January, 1976 in an agreement (Forbearance Agreement) under which the default would be cured and the notes renewed upon the subsequent execution and recording of a Renewal Note and Renewal Deed of Trust. Until delivery of the Renewal Deed of Trust, however, monthly payments of $45,479.17 were to be made as contemplated under the original notes. These monthly payments resumed immediately and continued until Prime Ventures filed its bankruptcy petition in October, 1984. The Forbearance Agreement provided for the tolling of the four-year Texas statute of limitations for actions on notes secured by deeds of trust until the earlier of July 1, 1977 or the delivery of the Renewal Deed of Trust.
The Forbearance Agreement itself did not cure, renew, or extend the promissory notes and deed of trust; it explicitly provided that such renewal, rearrangement, and extension of the original notes would be effected only by a Renewal Note and Renewal Deed of Trust. No Renewal Note or Renewal Deed of Trust was ever prepared, executed, or recorded against title to the property. As a result, the Trustee argues, the statute of limitations resumed running on July 1, 1977 and expired on June 30, 1981, barring foreclosure by Manhattan. Manhattan counters that the following events resulted in an extension of its lien that was sufficient to suspend the limitations period under Texas law.
In November, 1976, Prime Ventures' predecessor in interest, defendant Westview Drive Associates, grantor, executed a wraparound deed of trust (Wraparound Deed) to a predecessor in interest of defendants Syntek Management, Inc., Syntek Corporation, and Southmark Corporation ("Syntek Defendants"), as beneficiary. Prime Ventures' predecessor in interest, as debtor, promised to make regular payments to the predecessor in interest of the Syntek Defendants, who in turn promised to make payments to Manhattan under the original notes.
The Wraparound Deed explicitly recognized and provided for payment of the prior liens held by Manhattan. The issue in this appeal is whether, under Texas law, the Wraparound Deed was an "extension agreement" suspending the statute of limitations.
Manhattan argues that New York law should govern this action because the debt is payable in that state. The bankruptcy judge found the law of Texas to be applicable for the following reasons: (1) the original deeds of trust adopted the law of Texas; (2) the Forbearance Agreement contemplated the application of Texas law with respect to the tolling of the statute of limitations; and (3) under California choice of law doctrine, Texas has the greater "governmental interest" in the action because the real property at issue is located in that state. It is unnecessary to decide the question of choice of law, however, because even under the law of Texas, which is the law most favorable to the position of the Trustee, the Court finds that the judgment for Manhattan must be affirmed.
Under Texas law, actions to foreclose a vendor's deed of trust securing a note must be instituted within four years after the cause of action accrues. Tex.Rev. Civ.Stat.Ann. art. 5520 . Unlike the law of most states, the law of Texas does not toll the limitations period when, as in this case, payments are resumed on the obligation. The limitations period can be tolled, however, by a written agreement that extends the maturity date of the lien. An extension agreement that is properly recorded and acknowledged is binding against bona fide third-party successors in interest of the debtor. Tex.Rev.Civ.Stat.Ann. art. 5520 (Vernon 1958).
A trustee in bankruptcy is considered a bona fide purchaser of real property in the bankruptcy estate, and may avoid obligations of the debtor that are voidable by such a purchaser, 11 U.S.C. § 544(a)(3), but he is also charged with notice of the state of record title to the property under state law, In re Gurs (Walsh v. Saghi), 27 B.R. 163, rehrg. denied, 34 B.R. 755 (B.A.P. 9th Cir.1983). Thus, since the Wraparound Deed was properly recorded, Prime Ventures' trustee in bankruptcy is bound by it if it otherwise satisfies the criteria for an extension agreement.
Aside from the recording requirement, Texas statutes are vague as to the elements of an extension agreement. See, e.g., Mercer v. Daoran Corp., 676 S.W.2d 580, 581 (Tex.1984) (). Tex.Rev. Civ.Stat.Ann. art. 5522 provides that a "contract of extension" must be "signed and acknowledged ... by the party ... obligated to pay such indebtedness ... and filed for record in the county clerk's office...." (Vernon 1958). Manhattan argues that the statute embodies two criteria, both of which are satisfied by the Wraparound Deed: it is a recorded contract, and it was signed and acknowledged by the party obligated thereunder, namely Prime Ventures' predecessor in interest. The Trustee argues that the statutory requirement of a "contract" contemplates a meeting of the minds between the debtor and lienholder, and that...
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