Wells Fargo Bank, N.A. v. 804 Cong., L.L.C. (In re 804 Cong., L.L.C.), CAUSE NO. A-11-CA-360 LY

• Decision Date: 28 March 2012
• Docket Number: CAUSE NO. A-11-CA-392LY,CAUSE NO. A-11-CA-391 LY,CAUSE NO. A-11-CA-360 LY,BANKRUPTCY NO. 10-12184-CAG
• Parties: In re: 804 CONGRESS, L.L.C., WELLS FARGO BANK, N.A. AND GRETA GOLDSBY, SUBSTITUTE TRUSTEE, APPELLANTS, v. 804 CONGRESS, L.L.C., APPELLEE. In re: 804 CONGRESS, L.L.C., GRETA GOLDSBY, SUBSTITUTE TRUSTEE, APPELLANT, v. 804 CONGRESS, L.L.C., APPELLEE. In re: 804 CONGRESS, L.L.C., WELLS FARGO BANK, N.A., APPELLANT, v. 804 CONGRESS, L.L.C., APPELLEE.
• Court: U.S. District Court — Western District of Texas

IN RE: 804 CONGRESS, L.L.C., WELLS FARGO BANK, N.A. AND GRETA GOLDSBY, SUBSTITUTE TRUSTEE, APPELLANTS,
v.
804 CONGRESS, L.L.C., APPELLEE.
IN RE: 804 CONGRESS, L.L.C., GRETA GOLDSBY, SUBSTITUTE TRUSTEE, APPELLANT,
v.
804 CONGRESS, L.L.C., APPELLEE.
IN RE: 804 CONGRESS, L.L.C., WELLS FARGO BANK, N.A., APPELLANT,
v.
804 CONGRESS, L.L.C., APPELLEE.

CAUSE NO. A-11-CA-360 LY
BANKRUPTCY NO. 10-12184-CAG
CAUSE NO. A-11-CA-391 LY
CAUSE NO. A-11-CA-392LY

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS AUSTIN DIVISION

Dated: March 28, 2012

MEMORANDUM OPINION AND ORDER

Before the court are the above styled and numbered related bankruptcy appeals. Appellants Wells Fargo Bank, N.A., a secured creditor, and Greta Goldsby, a substitute trustee pursuant to a deed of trust central to these appeals, contend that the bankruptcy court erred in rendering three orders in Appellee 804 Congress, L.L.C.'s Chapter 11 bankruptcy proceeding: (1) Final Order on

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Motion To Authorize Distribution of Proceeds signed March 9,2011 (Bankr. Clerk's Document.No. 116); (2) Order on Objection to Claim of Greta Goldsby, Trustee signed March 14, 2011 (Bankr. Clerk's Document No. 122); and (3) Order on Objection To Claim of Wells Fargo signed March 28, 2011 (Bankr. Clerk's Document No. 139). This court ordered the parties to file combined briefing and set one oral argument for the three separately docketed appeals (Clerk's Document No. 6). The parties submitted briefing, and on August 12, 2011, the court held oral argument on the appeals. At issue is whether the bankruptcy court has jurisdiction over the proceeds generated from a foreclosure sale that occurred after the bankruptcy court granted Wells Fargo relief from the automatic stay in order to proceed with the foreclosure under Texas law. Having considered the parties' briefing and arguments, the bankruptcy court's orders, the record before the bankruptcy court, and the applicable law, the court is of the opinion that the bankruptcy court lacked jurisdiction over the proceeds and erred in rendering each of the orders. The court will sustain Wells Fargo and Golsby's appeals, reverse the bankruptcy court's orders, and remand the action to the bankruptcy court for further proceedings.

Background

On May 31, 2006, 804 Congress purchased real property and improvements consisting of an office building in Austin, Travis County, Texas (the "Property"). In connection with the acquisition, 804 Congress obtained a purchase-money loan from Wells Fargo in the amount of $3,062,500, which was evidenced by a Real Estate Lien Note ("Note") dated May 31, 2006, payable to Wells Fargo. To secure repayment of the loan, 804 Congress executed and delivered a Deed.of Trust Security Agreement/Financing Statement dated May 31, 2006 ("Deed of Trust"), granting Wells Fargo a purchase-money first-priority lien against the Property.

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The Deed of Trust provides that, in the event of a default, Wells Fargo, as beneficiary under the Deed of Trust, may direct the trustee to foreclose the lien granted by the Deed of Trust and disburse the proceeds consistent with the Deed of Trust.

804 Congress is a limited liability company whose sole asset was the Property. In August 2009, 804 Congress defaulted under the terms of the Note as well as a separate promissory note with VIA Lending, a secured creditor with a subordinate second lien against the Property. VIA Lending posted the Property for foreclosure. Soon after, 804 Congress filed its first bankruptcy petition under Chapter 11 of the Bankruptcy Code, which stayed VIA Lending's scheduled foreclosure sale of the Property. See In re 804 Congress LLC, No. 09-12482 (W.D. Tex. Bankr. Sept. 1, 2009).

804 Congress sought leave of the bankruptcy court to sell the Property free and clear of liens. See 11 U.S.C. § 363(f).¹ After reviewing several contracts signed by representatives of a prospective third-party buyer, the bankruptcy court approved a Section 363(f) sale of the Property.

Shortly before the sale was to close, Wells Fargo learned that the prospective buyer had defaulted on the sales contract. Additionally, 804 Congress stated that it would continue to operate the Property only until January 31, 2010. Upon learning of 804 Congress's intent to abandon the Property, the United States Trustee moved the bankruptcy court to convert the Chapter 11 proceeding to a Chapter 7 proceeding or dismiss the case. The bankruptcy court dismissed the bankruptcy.

Wells Fargo became a mortgagee-in-possession, installed a management company to operate the Property, and funded the operational cash shortfalls to preserve the value of the Property in

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preparation for a foreclosure sale. On June 14, 2010, Wells Fargo appointed Goldsby substitute trustee under the Deed of Trust.²

Wells Fargo posted the Property for foreclosure and scheduled a July 6, 2010 foreclosure sale. Prior to the July 6 sale, 804 Congress notified Wells Fargo that it had received a purchase agreement from a prospective third-party purchaser. On July 2,2010, Wells Fargo and 804 Congress executed a Forbearance Agreement ("Agreement") whereby Wells Fargo agreed to pass the scheduled July 6 foreclosure sale, subject to certain terms and conditions that allowed Wells Fargo to take all necessary and reasonable steps to prepare for a nonjudicial foreclosure sale of the Property on August 3, 2010. Wells Fargo and 804 Congress agreed that if 804 Congress filed a new bankruptcy petition, Wells Fargo would be entitled "to the lifting of the automatic stay without the necessity of an evidentiary hearing, without the necessity or requirement [] to establish or prove up the value of the Property covered by the Deed of Trust, or the necessity of proving lack of adequate protection of [Wells Fargo's] interest in the Property covered by the Deed of Trust." Further, they agreed that the lifting of the automatic stay "by an appropriate bankruptcy court shall be deemed for cause." See 11 U.S.C. § 362(d).

804 Congress filed a second Chapter 11 bankruptcy petition on August 3,2010, hours ahead of the scheduled foreclosure sale of the Property the same day. Soon after, Wells Fargo requested relief from the bankruptcy court from the automatic stay,³ or in the alternative, that the bankruptcy court dismiss 804 Congress's bankruptcy. Wells Fargo argued that it had shown cause for the bankruptcy court "to allow [Wells Fargo] to take any and all steps necessary under applicable non-

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bankruptcy law and the applicable loan documents to foreclose, liquidate, or otherwise take possession, custody or control of the Property." See 11 U.S.C. § 362(d)(1); Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1072-73 (5th Cir. 1986).

After hearing argument on Wells Fargo's motion, the bankruptcy court ordered that

Wells Fargo is entitled to conditional relief from the automatic bankruptcy stay to permit it to post the [Property] for a foreclosure sale subject to certain contingencies which can further postpone any such foreclosure sale to afford [804 Congress] an opportunity to complete a possible sale of the [P]roperty to [a third party].

The bankruptcy court further permitted Wells Fargo to post the Property for a foreclosure sale to occur on September 7, 2010, in accordance with applicable Texas law, if any of three conditions were not met by 804 Congress. 804 Congress failed to meet the conditions, and Wells Fargo proceeded with the scheduled September 7 foreclosure sale under Texas law.⁴

On September 7, Goldsby conducted the foreclosure sale and sold the Property to a third party who was the highest bidder, for $4,355,000. Goldsby turned to the Deed of Trust for her duties following foreclosure. The Deed of Trust provides that the trustee shall

from the proceeds of the sale, pay, in this order:

(a) expenses of foreclosure, including a commission to Trustee of 5% of the bid;
(b) to [Wells Fargo], the full amount of principal, interest, attorney's fees, and other charges due and unpaid;
(c) any amounts required by law to be paid before payment to [804 Congress]; and
(d) to [804 Congress], any balance.

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In calculating the amounts of the various payments and the order of payment, Goldsby determined that after paying first the expenses of foreclosure, including her 5% trustee's commission, the full amount of the principal, interest, attorney's fees, and other charges to Wells Fargo, and the entire debt owed to VIA Lending, there would be $221,695.72 in excess proceeds remaining, which Goldsby intended to pay 804 Congress.⁵

What was Goldsby to do with the proceeds she determined were payable to 804 Congress? Her problem was that 804 Congress lacked a debtor-in-possession account into which Goldsby could deposit the excess proceeds. Given this fact, Goldsby filed a "Motion To Approve Distribution of Suplus Proceeds From Foreclosure Sale to Debtor's Counsel," requesting that the bankruptcy court allow her to deposit the excess proceeds from the foreclosure sale into the trust account of 804 Congress's attorney.

The United States Trustee objected to Goldsby's request, contending that

the proceeds must be deposited in a debtor in possession bank account. Because [804 Congress] has not opened such an account and for other cause, the [United States Trustee]

...