New Asset Subsidiary, L.L.C. v. Zelms (In re BFA Liquidation Trust)
Docket: No. CIV 04-0406-PHX-EHC
Court: District Court, D. Arizona; September 27, 2005; Federal District Court
Plaintiffs/Appellees have appealed the Bankruptcy Court's summary judgment favoring Defendant/Appellant regarding a breach of contract claim in their Second Amended Complaint. The central issue of the appeal is the enforceability of an offer to release individual lots from a deed of trust for $12,500 each. William Blair managed Desert Diamond Estates, L.L.C., which, in 1997, received an $800,000 line of credit from New Church Ventures Credit Corporation to develop a residential subdivision. To secure this loan, Blair executed a deed of trust covering 78 lots, but the deed lacked provisions for releasing individual lots. In June 1998, ATI Title Agency sought terms for such releases from New Church, which responded with a letter offering the $12,500 release price per lot. Desert Diamond used this offer to obtain necessary approvals from the Arizona Department of Real Estate and began selling lots through its related entity, Cholla Homes, L.L.C.
New Church, along with related entities, filed for Chapter 11 Bankruptcy in November 1999, leading to the establishment of Appellant New Asset Subsidiary, L.L.C., which took over the Blair Note and the beneficial interest in the deed. By November 1998, the Blair Note was in default, and in early 2001, Appellant discovered that lots were being sold without proper release payments, with only one sale mentioning the correct price. Despite some payments referenced, they did not match the stipulated release price, and none were paid to New Church. Appellant communicated its lien on the unsold lots to Fidelity National Title Insurance Company, acting as the title insurer and escrow agent, but received no response to its notifications.
In July 2001, Appellant filed a Notice of Trustee’s Sale for various lots in Maricopa County. In October 2001, Appellees, the purchasers of these lots, initiated an adversary proceeding in Bankruptcy Court to block the sale. Both parties sought summary judgment. On February 12, 2004, the court ruled in favor of Appellees on one count regarding a breach of the McKelvie Letter and in favor of Appellant on another count concerning promissory estoppel, which is not part of this appeal. The Bankruptcy Court subsequently enjoined the Trustee's Sale and mandated Appellant to release 22 lots upon Appellees' payment of $12,500 per lot, totaling $275,000 after attorney fees. On February 25, 2004, Appellant appealed the summary judgment favoring Appellees.
The legal standard for summary judgment allows it if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Appellant presents three main arguments: (1) the McKelvie Letter does not modify the New Church Deed; (2) bankruptcy law permits the Trustee to disregard the unrecorded McKelvie Letter; and (3) Appellees cannot invoke their right to a partial release due to default on the Blair Note.
Under Arizona law, the McKelvie Letter can modify the New Church Deed if there is an offer to modify, acceptance of that offer, and consideration. Appellant does not dispute that the letter was an offer or that there was consideration, focusing instead on whether the offer was accepted. Acceptance can occur in any reasonable manner unless otherwise specified, and conduct may signify acceptance if it indicates that the offeree assents to the offer's terms.
Seeking government approval for a property development plan can indicate acceptance of an offer under specific circumstances. In *Adair Homes, Inc. v. Jarrell*, the court established a binding contract when the defendant obtained a building permit and negotiated building plans and pricing. The court noted that the defendant's actions demonstrated an understanding that a contract was formed, as well as the plaintiff's recognition of this agreement. The ruling suggests that government approval, in conjunction with negotiation and subsequent actions, can confirm the existence of a contract.
In the current case, similar conditions were present. Desert Diamond engaged in negotiations before seeking governmental approval for a subdivision, specifically when ATI informed New Church that a public subdivision report would not be issued without releasing lots. New Church responded with the McKelvie Letter, offering to release the lots. Just as in *Adair Homes, Inc.*, Desert Diamond sought approval after negotiations, resulting in a public subdivision report based on the McKelvie Letter. This implies the parties had agreed to release lots from the New Church Deed for $12,500 each, as evidenced by Desert Diamond subdividing the property and selling lots, actions requiring the release provisions in the McKelvie Letter.
Subsequent communications from the appellant, reflecting the belief that release provisions existed, further support this conclusion. The appellant contends that the McKelvie Letter modifying the New Church Deed of Trust cannot be enforced because it was unrecorded, citing Arizona law that renders unrecorded deeds void against creditors and subsequent bona fide purchasers without notice.
Unrecorded instruments are binding between the parties and their heirs, as well as subsequent purchasers with notice or without valuable consideration, pursuant to Ariz.Rev.Stat. Ann. 33-412(B). To gain protections under Arizona's recording statutes, the Appellant must demonstrate that it is a purchaser for valuable consideration without notice of the McKelvie Letter. However, the Appellant asserts that its role as the agent of the Bankruptcy Trustee entitles it to these protections. The Trustee has the authority to avoid obligations incurred by the debtor that could be voided by a bona fide purchaser of the debtor's real property, as stated in 11 U.S.C. 544(a)(3).
The avoidance power applies only if the obligation is linked to the debtor’s real property. The court evaluates whether a hypothetical bona fide purchaser of the debtor’s real property could avoid the obligation, focusing on the New Church Deed under Arizona law. Notably, a deed of trust does not automatically qualify as real property under 544(a)(3); it must convey more than bare legal title. The case Willson v. MLA, Inc. illustrates that if a deed of trust merely transfers legal title, then the Trustee cannot invoke avoidance powers under 544(a)(3).
Congress did not intend for 544(a)(3) to apply when the underlying real property is undisputed, nor did it grant the Trustee the rights of a bona fide purchaser of a security interest. The court must follow state law to determine the nature of a deed of trust. In Arizona, a deed of trust is not considered real property under 544(a)(3) because it only grants legal title, allowing the trustor to retain ownership rights. Therefore, the bankruptcy trustee lacks the authority to utilize the 544(a)(3) avoidance power concerning obligations tied to a deed of trust governed by Arizona law.
Appellant seeks to utilize the avoidance power to negate the partial release provisions added by the McKelvie Letter to the New Church Deed, which is not enforceable against bona fide purchasers as the letter was unrecorded. Under Arizona law, the New Church Deed, a deed of trust, does not constitute real property under 11 U.S.C. 544(a)(3), preventing Appellant from claiming protections as a purchaser for value without notice. Furthermore, Appellant contends that Appellees cannot enforce the McKelvie Letter due to a default on the Blair Note, arguing that neither a mortgagor nor a transferee can exercise a lien release right after default. However, Appellant's cited cases involved the mortgagor or transferees of the entire mortgaged estate, not individual lot purchasers in a subdivision context.
The argument is countered by cases like Chrisman v. Hay and Vawter v. Crafts, which allow individual lot purchasers to exercise release rights post-default, preventing unjust liabilities for debts on properties they do not fully own. The McKelvie Letter's provisions were intended to protect individual purchasers from being liable for the entire mortgage due to New Church's default. Therefore, Appellees retain the right to exercise the release provision of the McKelvie Letter despite the default. The court concludes that the McKelvie Letter modified the New Church Deed, affirming the enforceability of the partial release rights and denying Appellant’s appeal against the Bankruptcy Court's summary judgment for Appellees, while remanding for further proceedings.
