Mid City Management Corp. v. Loewi Realty Corp., 80-1158

• Decision Date: 24 April 1981
• Docket Number: No. 80-1158,80-1158
• Citation: 643 F.2d 386
• Parties: Bankr. L. Rep. P 68,044 MID CITY MANAGEMENT CORP. et al., Plaintiffs-Appellants, v. LOEWI REALTY CORPORATION, Defendant-Appellee. . Unit A
• Court: U.S. Court of Appeals — Fifth Circuit

Page 386

643 F.2d 386

Bankr. L. Rep. P 68,044

MID CITY MANAGEMENT CORP. et al., Plaintiffs-Appellants, v. LOEWI REALTY CORPORATION, Defendant-Appellee.

No. 80-1158.

United States Court of Appeals, Fifth Circuit.

Unit A

April 24, 1981.

Rehearing Denied June 3, 1981.

Coplin & Ruhe, Gerald R. Coplin, Richardson, Tex., for Ballato.

Shank, Irwin, Conant, Williamson & Grevelle, A. B. Conant, Jr., Dallas, Tex., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GEE, TATE and WILLIAMS, Circuit Judges.

TATE, Circuit Judge:

This Texas diversity action raises on appeal the issue of the validity of a foreclosure sale by state proceedings held in contravention of a federal bankruptcy court stay order. The stay was subsequently declared by a federal circuit court to have been issued without statutory authorization. The essential issue is whether, under state (Texas) law, the foreclosure sale is valid. No issue of federal bankruptcy law is implicated, because, in the federal bankruptcy proceedings, the validity of the sale was subsequently recognized by the bankruptcy judge. Finding the sale to have been valid under Texas law, we affirm the district court's judgment upholding the validity of the foreclosure sale.

The Facts

The facts, summarily stated, are: the defendant-appellee, Loewi Realty Corporation (Loewi), the holder of a second mortgage on the Chanticleer Apartments, located in Dallas, Texas, bought the apartments as sole bidder at a nonjudicial foreclosure sale brought to enforce Loewi's second mortgage. Foreclosure proceedings were initially instituted pursuant to a New York federal bankruptcy court order declaring the debtor-owner Chanticleer Associates in default on its obligations to Loewi as set forth in a third amended plan of arrangement confirmed in bankruptcy proceedings under Chapter XII of the Bankruptcy Act, 11 U.S.C. §§ 801-926.

However, on the morning of April 4, 1978, the scheduled sale date, the bankruptcy court issued an order staying the sale of the Chanticleer Apartments. The property was nevertheless sold to Loewi, the sole bidder. In subsequent, separate proceedings brought to attack the validity of the stay order, the bankruptcy court was declared to have exceeded its statutory authority in issuing the order, and the order was reversed. In Re Chanticleer Associates, Ltd., 592 F.2d 70 (2nd Cir. 1979). The bankruptcy court thereafter ordered Chanticleer Associates to turn over possession of the foreclosed property to Loewi, the purchaser at the foreclosure sale, and to account for operation of the property since April 4, 1978.

The Present Diversity Proceedings

The plaintiffs-appellants Mid City Management Corporation (Mid City), Ballato, and Hopkins, the holders of a third mortgage on the Chanticleer Apartments, bring this diversity action for a determination of the validity of the April 4, 1978, foreclosure sale. ¹ The district court below held the foreclosure sale valid, and declared that therefore the plaintiffs' third mortgage on the Chanticleer Apartments was extinguished.

The Issues

1. On appeal, the plaintiffs argue, inter alia, that the foreclosure sale is invalid on the basis that the bankruptcy court order staying the sale, although subsequently declared to have been issued without statutory authorization, was never declared void in order to validate retroactively the foreclosure sale. ²

We need not decide whether, under bankruptcy law, the bankruptcy court order was void ab initio rather than merely voidable. The bankruptcy judge, by ordering an accounting from Chanticleer Associates (the debtor) and a turnover of possession of the property to Loewi in accordance with the April 4, 1978, foreclosure sale, in effect recognized the invalidity of its stay order with respect to the sale, as well as the validity of the foreclosure sale itself. Under these circumstances, the foreclosure sale was valid under Texas law so as to convey title to the foreclosure purchaser. Lawson v. Gibbs, 591 S.W.2d 292, 295 (Tex.Civ.App. Houston (14th Dist.) 1979, writ ref'd. n. r. e.).

2. The plaintiffs also attack the validity of the foreclosure sale on the basis of Texas law governing non-judicial foreclosure sales and deeds of trust. We find these contentions without merit. The district court correctly concluded that a failure to name an original trustee in Loewi's second lien deed of trust was so palpable a mistake that proceedings for reformation of the instrument were unnecessary. See Kimberly Development Corporation v. First State Bank, 404 S.W.2d 631, 636 (Tex.Civ.App. Houston 1966, writ ref'd. n. r. e.); Hart v. Estelle, 34 S.W.2d 665, 669 (Tex.Civ.App. Austin 1930), aff'd 55 S.W.2d 510 (Tex.Comm.App.1932). Thus, the appointment of a substitute trustee pursuant to the terms of the deed of trust is not nullified by the failure to first reform the deed of trust to name the...