IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 96-30237

IN THE MATTER OF: DIBERT, BANCROFT

& ROSS COMPANY, LIMITED; Debtor,

JOHN ROSS, Deceased, GLORIA ROSS,

individually and as the duly

appointed Administratrix of the

Succession of John Ross, substituted

as a party plaintiff in place and

stead of John Ross; CAROLYN ROSS;

KATHLEEN PENICK; HANCOCK NATIONAL

BANK,

Appellants,

versus

ROBERT L. MARRERO, CENTRAL

PROGRESSIVE BANK; DIBERT, BANCROFT

& ROSS COMPANY, LIMITED; UNITED

STATES OF AMERICA,

Appellees.

Appeal from the United States District Court

for the Eastern District of Louisiana

June 30, 1997

Before JOLLY, JONES and WIENER, Circuit Judges.

WIENER, Circuit Judge:

This appeal arises from the bankruptcy proceedings of Dibert,

Bancroft & Ross Company, Limited (“the Debtor”). Appellants (“the1 Collectively, Hancock National Bank, Raphael Ross, Jr.

(whose interest was later assigned to Carolyn Ross), Kathleen

Penick, J ohn Ross (now deceased), and Gloria Ross, together the

o riginal secured creditors as collateral mortgagees of Debt or’s

leasehold interest in property in Tangipahoa P arish, Louisiana.

See infra note 8.

2 Ross Group” 1 ) appeal th e judgment of the bankruptcy court, as

affirmed by the district cour t, rejecting the Ross Group’s claim

and recognizing the claim of the Internal Revenue Service of the

United States Department of the T reasury (“the Government”).

Specifically, the court awarded to the Government the proceeds of

a court authorized sale by the Debtor’s trustee in bankruptcy of

property located in Amite, Tangipahoa Parish, Louisiana, and at the

same time denied the Ross Group’s claim to those proceeds.

Agreeing with the Ross Group that its collateral mortgage claim to

those proceeds subsists and prime s the Government’s tax lien

claims, we reverse the ruling of the bankruptcy court that awarded

those sales proceeds to the Government, render judgment awarding

the proceeds to the Ross Group, and remand the case to that court

for further proceedings consistent with this opinion.

I

FACTS AND PROCEEDINGS

A. The Sale and Leaseback Agreement

In 1965, the Debtor entered into an industrial induce ment

financing arrangement with Tangipahoa Parish (“the Parish”),

crafted as a sale-and-leaseback with right of redempt ion (“the

Lease”), under the terms of which the Debtor would (1) purchase

property in Amite, (2) c onstruct a foundry on it to replace the2 In Louisiana, a lease of immovable (real) property is a

hybrid, a personal contract which non etheless enjoys a number of

attributes of a real contract, including public records protection,

the right to peaceable possession, the right to evict, and the

like. S ee 2 A.N. Yiannopoulos, Louisiana Civil Law Treatise

, §

226, at 422-25 (3d ed. 1991); La. Rev. Stat. Ann. § 2721-2721.1 &

2754-56 (West 1991); and also Rivet v. Regions Bank of Louisiana

, 108 F.3d 576, 580 n. 2 (5th Cir. 1997). Significant here is that

the personal contract of lease produces a right of the lessee to

encumber his interest by use of the special mortgage, originally a pignorative device for hypothecating immovable property. S ee La.

Civ. Code Ann. art. 3286(4) (West 1994) (providing that a “lessee’s

rights in a lease of an immovable with his rights in the buildings

and other constructions on the immovable” are “susceptible of

mortgage”); and id. rev. cmt. f.

3 Debtor’s New Orleans facility tha t had been badly damaged by

Hurricane Betsy, (3) transfer record title of the improved property

to the Parish, reserving the right to reacquire record title by

exercising a so-called repurchase option and paying a nominal

amount to do so, and (4) without ever relinquishing possession,

immediately lease the property back from the Parish. 2 Pursuant to

the Lease, the Debtor purchased the land and built an i ron and

steel foundry, pattern shop, and machine shop on it (collectively,

“the Foundry”). When construction of the Foundry was completed in

1967, the Debtor transferred record title of the Foundry to the

Parish, including in the package all machinery and equipment that

the Debtor had relocated on the property. Contemporaneously with

its transfer of title to the Parish, the Debtor leased the Foundry

back from the Parish, retaining the right to redeem record title at

(1) any time during the original term or extended term of the Lease

(2) after repayment in full of the Parish’s bond financing.

To raise the funds required to do the long-term financing deal

with the Debtor, the Parish issued and sold general obligation3 These $10,000 per year lease payments, also known as

“payment in lieu of tax” payments, or “PILOT” payments, amount to

far less than the property taxes that D ibert would have owed had

the foundry been on the Parish’s ad valorem tax rolls. This

explains the financial reason for a lessee’s preference to extend

the lease term, time and again, rather than exercising the right to

reacquire record title immediately upon amortization of the bonds.

4 bonds, then delivered the proceeds of the bond sale to the Debtor

which used them to “take out” its interim construction loans. The

bonds were secured by the Parish’s record title to the Foundry and

the Debtor’s obligation under the Lease. The rental payments that

the Debto r obligated itself to pay to the Parish under the Lease

were calculated to amortize these bonds over the course of twenty

years.

Section § 1901 of the Lease gave the Debtor as lessee the

option to extend the Lease beyond the original twenty year primary

term for five consecutive extension terms of five years each, at an

annual r e ntal of $10,000. 3 Section 2002 of the Lease spelled out

t he Debtor’s right of redemption in the form of an op tion to

repurchase the Foundry from the Parish for the nominal sum of

$1,000 at any time after the bonds had been retired, provided the

Lease was in effect and current at the time of the exercise of the

option.

Almost twenty years later, in April 1986, the Debtor made the

final payment to the Parish under the initial term of the Lease in

a sum sufficient to retire the last of the bonds. Despite having

thus entirely repaid the financing arrangement embodi ed in the

Lease, the Debtor nevertheless found it economically advantageous

not to reacquire record title to the Foundry immediately but4 See infra note 6.

5

instead to exercise the first of its five year lease renewal

options. Thus, at no time —— from the Debtor’s original purchase

o f land in the Parish and construction of the Foundry in the mid

1960's to the eventual bankruptcy sale of the Foundry to third

parties in 1992

—— was the Deb tor ever out of occupancy and

possession of the Foundry property.

B. The Collateral Mortgage

Faced with a cash shortage at approximately the same time in

1986 that it was paying off the last of the “rent” un der the

initial term of the Lease, the De btor borrowed approximately

$447,000 from the Ross Group. This loan was represented by a

Promi ssory Hand Note. Repayment of that note was secured by the

pledge of a “Bearer” collateral mortgage note which was paraphed

for identification with and thus secured by a leasehold collateral

mortgage (“the Mortgage”) in the amount of $2,000,000. Like the

Lease, the Mortgage was duly recorded in the Office of the Recorder

of Mortgages for the Parish in December 1986.

The Mortgag e encumbered “all of the Debtor’s leasehold

interests in and to” the land on which the Foundry was constructed,

as well as all the buildings and improvements situated on the

premises and all machinery, appliances and equipment, all component

parts, all immovables by nature and destination, and all corporeal

movables. Also, by its own terms, the Mortgage was made subject to

all terms and conditions of the Lease, which was conditionally

assigned to the holder of the Mortgage. 45 An “after acquired p roperty ” clause, as distinct from an

“after acquired title ” provision, operates to allow a mortgage to

encumber immovable property that the mortgagor does not yet own at

the time that the mortgage is executed but is subsequently acquired

by the mortgagor. Such clauses have been recognized as lawful

special mortgages in Article 3292 of the Louisiana Civil Code,

which “combines and clarifies the provisions of Former Civil Code

Articles 3308 (prohibiting the mortgage of ‘future property’) and

3304 (validating a mortgage of property of which the mortgagor is

not then the owner if the property is subsequently acquired).” La.

Civ. Code Ann. art. 3292 rev. cmt. (West 1994).

6 The covenant at § 11(e)(3) provides in full:

Mortgagor will not surrender any o f its leasehold

interests hereinabove described, nor terminate or cancel

the Lease, and will not, without the prior written

consent of the Mortgagee modify, change, supplement,

alter or amend the Le ase, either orally or in writing,

and any such termination, cancellation, modification,

change, supplement, alteration or amendment of the lease

without prior written consent of the Mortgagee shall be

void and of no force and effect. As further security to

the Mo rtgagee, Mortgagor does hereby deposit with the

Mortgagee the o riginal copy of the Lease and the

Assignment thereof to be retained by the Mortgagee until

all indebtedness secured hereby is fully paid.

6 The Ross Group and its successors in interest have at all

times remaine d in possession, as pledgees, of the collateral

mortgage note secured by the Mortgage. Although the Mortgage does

not contain an express “after acquired property” clause, 5 it does

contain

—— in addition to a standard “pact de non alienando” by

which the Debtor as mortgagor was obligated “[n]ot to sell or

transfer the Property without the prior written consent of the

Mortgagee [the Ross Group]”

—— an analogous but more specific

covenant in § 11(1)(3), which expressly applies “[i]n the event

that the Property shall consist o f Mortgagor’s interest in a

leasehold estate and/or lease.” 67

The Debtor continued to suffer cash shortages, so it borrowed

$500,000 from Central Progressive Bank (“CPB”) in 1987 and gave CPB

a first mortgage on the Rolling Mill, a facility constructed in the

late 1960's on land owned by the Debt or adjacent to the Foundry.

The Rolling Mill was not part of the Foundry sale and leaseback

transaction between the Debtor and the Parish and was not

encumbered by the Mortgage.

C. The Act of Cash Sale and the Debtor’s Demise

Unable to eliminate its cash-flow problems despite those two

borrowings, the Debtor shut down both the Foundry and the Rolling

Mill in the summer of 1988. By the end of 1989, these facilities

had b een closed for more than a year and many employees had been

laid o ff. In response, Parish officials publicly threatened to

cancel the Lease and seize the Foundry even though the Lease

neither expressly nor implicitly requires the Deb tor to maintain

any level of employment, and even though the Debtor continued to

make its specified lease payments to the Parish.

Whether motivated by fear of political repercussions, the need

to reorganize the business, or anticipation of seeking bankruptcy

protection, the Debtor elected to recover its record title to the

property by exercising its repurchase option under the Lease.

Accordingly, on September 5, 1989, the Parish executed an Act of

Cash Sale (“the D eed”), transferring record title of the Foundry

and all associated machinery and equipment back to the Debtor for

the nominal $1,000.00 spe cified in the option; however, the Deed

was not immediately registered in the Conveyan ce Records of the8

Parish. In the Deed, the Parish and the Debtor expressly

recognized that (1) the Foundry was still subject to the Mortgage,

(2) the encumbrance created by the Mortgage was still valid, (3)

the Deed did not cancel the Lease and thus could not nullify the

Mortgage, and (4) the Mortgage would continue to encumber the

Foundry to the “fullest extent allowed by law.”

On September 15, 1989, only ten days after the execution of

the still-unregistered Deed, the Debtor filed a petition for relief

under chapter 11 of the Bankruptcy Code. The following summer, the

D ebtor’s bankruptcy was converted to a chapter 7 proceeding, and

Appellee Robert Marrero (“the tru stee”) was appointed trustee in

bankruptcy for the Debtor. For reasons not apparent from the

record on appeal, the Deed was not filed for record until September

1990, roughly a year after its execution and some months after the

appointment of the chapter 7 trustee.

An unsurprising side effect of the Debtor’s financial demise

was its failure to pay various taxes. As a result of delinquencies

in the payment of federal employment taxes, the Government had

filed the first of several notices of federal tax liens in

September 1988, approximately one year before the Parish executed

the Deed an d the Debtor filed its petition in bankruptcy.

Additional pre-petition federal tax liens wer e filed in November

1988, January 1989, March 1989, and June 1989. The mortgage

records of the Parish confirm that the Mortgage had been recorded

prior to the recording of any of the numerous judicial mortgages

(42 in total) and tax liens against the Debtor, including those7 Guzzardo-Knight’s bid for the Rolling Mill also included a

portion o f the Foundry property, to which $19,000 of her bid was

allocated.

8 By this time members of the Ross family had formed Amite

Castings, Inc. for the purpose of purchasing the Foundry from the

bankruptcy estate. It was Amite Castings which filed the objection

to the trustee’s proposed sale; however, we continue to identify

Amite as the Ross Group to avoid confusion.

9 The Ross Group offered to bid the amount of the total debt

on the Mortgage, some $867,334.00, including principal, inter est

and attorneys’ fees.

9 fil ed by the Government. Assuming its continuing validity, the

Mortgage was at all times the most senior encumbrance against the

Debtor’s property in the Parish.

D. The Trustee’s Sale ; Allocation of the Sale Proceeds

After receiving joint and interdependent bids for the Foundry

and the Rolling Mill, the trustee filed a motion in the bankruptcy

court for authority to sell both facilities. The bid on the

Foundry was submitted by Timco, Inc. and Southern Enterprises,

Inc., in the amount of $4 95,412, and the bid on the Rolling Mill

was submitted by Anne Guzzardo-Knight in the amount of $468,000. 7

As these bids were interdependent, the trustee urged the bankruptcy

court either to approve or reject both bids in their entireties.

Several parties, including the Ross Group, objected to the

trustee’s pro posed sale. 8 The Ross Group objected on the ground

that it was the holder of the Mortgage which the Debtor had granted

years earlier, and had made an offer to purchase the Foundry,

subject to the Mortgage. According to the Ross Group, its bid was

greater than the Timco and Southern Enterprises bid, which the

trustee was considering. 910

The Ross Group also complained that the trustee’s allocation

of the bids between the Foundry and the Rolling Mill was arbitrary

and contradicted a prior independent appraisal which had been

conducted in conjunction with a p revious attempt to sell the

facilities. That appraisal had allocated three-quarters of the

value of the properties to the Foundry (approximately $1,200,000)

and one-quarter to the Rolling Mill (approximately $400,000). The

Government agreed with the Ross Group that the allocation between

the Foundry and Rolling Mill was not reflective of the previously

appraised values or of the relative values of the Foundry and the

Rolling Mill. Finally, the Ross Group argued that, as holder of

the note secured by the Mortgage , it was entitled to a priority

claim

—— superior to the claim of t he Government under its tax

liens —— to the proceeds of any eventual sale of the Foundry.

Reserving the issue whether the Mortga ge still provided a

secured claim to the proceeds of the sale of the Foundry (the

Government and the Ross Group being the only lienholders whose

secured debts could be substantially or completely paid by the

proceeds of the sale of the Foundry), the bankruptcy court, in

October 1992, granted the trustee’s application to sell the Foundry

and the Rolling Mill. The court’s order authorized the trustee to

sell the Foundry to Timco and Southern Enterprises for $495,412.00,

free and clea r of all liens, to sell the Rolling Mill to Ms.

Guzzardo-Knight for $468,000.00, subject to CPB’s mortgage, and to

hold the combined sales proceeds in escrow, pending further orders1 0 Realizing that the Ross Group had the right, under 11 U.S.C.

§ 363(k), to bid in the Mortgage and the Government’s competing tax

l ien claim of $270,921.75, the bankruptcy court offered the Ross

Group the opportunity to bid $270,921.75 in cash (the amount of the

Government’s tax liens) plus a portio n of the balance due on the

Mortgage sufficient to make the Ross Group’s total offer for the

F oundry exceed the offer pending from Timco and Southern

Enterprises. The court’s proposal required the cash portion of the

bid to be placed in escrow, and specified tha t if the Ross Group

could establish that the Mortgage outranks the tax liens, the Ross

Group would be en titled to recoup its cash. In other words, the

court proposed to permit the Ross Group to bid its Mortgage except

to th e extent that it was in dispute. But the Ross Group was

unable to come up with a deposit of 10% of the total bid, or

$49,700, by the end of the next day after the hearing in which this

opportunity was first presented. The court therefore authorized

the sale of the Foundry to Timco and Southern Enterprises, and the

Rolling Mill to Ms. Guzzardo-Knight.

11 of the court. 10

The Ross Group appealed t he bankruptcy court’s order to the

district court, seeking, inter alia, a reapportionment of the

proceeds from the trustee’s sale between it and CPB, the holder of

the first mortgage on the Rolling Mill. In January 1993, the

district court affirmed the bankruptcy court’s sale order and

dismissed the Ross Group’s appeal.

E. The Instant Action

1. Interpleader

This litigation was commenced after the sale of the

Foundry and Rolling Mill when the trustee filed an interpleader in

the bankruptcy court to determin e the proper disposition of the

proceeds of the sale of the Foundry, which had been deposited into

the registry of that court. The Ross Group, on the basis of the

Mortgage, and the Government, on the basis of its tax liens, each

insisted that it held the more senior lien on the proceeds of the1 1 The Government also contends “in the alt ernative” that,

regardless of the lease’s continued existence, the Go vernment is

entitled to all of the Foundry sale proceeds because those proceeds

derived from the sale of the tangible Foundry property and not from

the sale of the Debtor’s leasehold interest. As the Ross Group’s

security interest was limited to the Debtor’s leasehold, asserts

the Government, the Ross Group has no claim to the proceeds

12 sale of the Foundry.

2. The Government’s Position

The Government fi l ed a motion for summary judgment,

arguing principally t hat, under the Louisiana doctrine of

confusion

, (1) the Lease was extinguished, i pso facto

, at the

instant that the Debtor became the Foundry’s owner by virtue of the

execution of the Deed on September 5, 1989; and (2) upon extinction

of the Lease, being the thing mortgaged, the Mortgage too was

extinguished, ipso facto

. In essence, the Government insists that

the thing mortgaged

—— the Debtor’s leasehold interest

—— ceased to

exist at the exact moment that, by virtue of confusion, the Lease

ceased to exist, i.e., when the Debtor as lessee and mortgagor

acquired the leased premises upon execution of the Deed and

irrespective of the fact that the Deed was no t filed in the

conveyance records. It follows, asserts the Government, that its

tax liens against the Debtor attached to the Foundry property at

that precise instant, on September 5, 1989, when the Debtor again

became owner of the formerly leased premises that it repurchased

from the Parish. The Government concludes that, as the Mortgage

was extinguished by operation of law, it (the Government) held the

senior encumbrances on the Foundry, and was still holding them

when, only days later, the Debtor’s bankruptcy petition was filed. 11resulting from the sale of the Foundry.

This, of course, is just another way of stating the

Government’s principal argument that the Mortgage its elf was

extinguished by virtue of the Lease’s extinction under the doctrine

of confusion. It suffices that the Government’s persistent

attempts

—— in its briefs and at oral argument

—— to dress its one

substantive argument in various semantic robes has neither advanced

its cause nor aided our understanding of the case.

13 3. The Ross Group’s Position

T he Ross Group first counters that, as the Louisiana

public records doctrine specifies that unrecorded sales, contracts

and judgments are ineffective as to third persons, the redemption

sale of the Foundry from the Parish to the Debtor was ineffective

as to the Ross Group because the Deed had never been registered in

the Conveyance Records and remained unregistered on t he date the

bankruptcy petition was filed. Stated differently, the Ross

Group’s first argument is that as to third parties the confusion

doctrine did not extinguish the leasehold, which the Mortgage

encumbered, because, as to such parties, the Debtor did not acquire

ful l and perfect ownership of the Foundry, which must include

record title, until the Deed was registered

—— well after the

bankruptcy petition was filed and the Ross Group’s priority lien in

the leasehold was rendered inextinguishable for all time.

Second, the Ross Group argues that, to any extent that the

sale from the Parish to the Debtor extinguished the Lease by

confusion, the sale and all of its legal effects were nevertheless

void as to the Mortgage. This is so, insists the Ross Group,

because (1) the purported lease termination by confusion directly14

violated § 11(l)(3) of the Mortgage, which proscribed such

unilateral action of the Debtor without the prior written approval

of the Ross Group, and (2) the Deed expressly acknowledges and

provides for the continuing validity of the Mortgage.

Finally, the Ross Group also contends, in the a lternative,

that the Debtor had purchased certain machinery and equipment

several years after the Foundry was constructed and leased and that

this machinery and equipment, which was thus owned outright by the

Debtor, was placed on the Foundry and was additionally subject to

the Mortgage. Consequently, argues the Ross Group, this machinery

and equipment remained encumbered by the Mortgage despite confusion

of the Lease, and therefore, at a minimum, the proceeds of the sale

of these items belong to the Ross Group.

4. The Bankruptcy Court’s Decision

Rejecting the Ross Group’s arguments, the bankruptcy

court granted the Government’s summary judgment motion. The court

first reasoned that even though, under the Public Records Doctrine,

the Deed was not effective against third parties, it was still

effective “as between the parties”

—— the Parish and the Debtor

——

to transfer ownership (although not r ecord title) to the Debtor.

Relying next on the Civil Law doctrine of confusion, the bankruptcy

court concluded that when the Debtor repurchased the Foundry from

the Parish, the Lease between the Parish and the Debtor

—— and thus

also the leasehold interest, which was the thing mortgaged

—— were

extinguished by operation of law. Consequently, concluded the

court, (1) the Lease was gone; (2) as a result, the Mortgage was15

gon e; (3) therefore, the Debtor owned the Foundry, unleased and

free of the Mortgage, on the day the pet ition in bankruptcy was

filed, even th ough the Debtor did not have r ecord title to that

property until approximately one year later; and (4) as the Debtor

became the owner of the Foundry, free of the Le a se and the

Mortgage, at the instant the Deed was executed —— which was prior

to the filing of the bankruptcy petition

—— the Government’s tax

liens had attached to the Foundry and become the ranking

encumbrances against it at that same instant, and so stood on the

day that the bankruptcy petition was filed. Implicit in this

determination is the proposition that the Debtor could not prevent

recor ded liens and judicial mortgages from attaching to property

acquired by the Debtor merely by withholding its redemption deed

from the conveyance records.

The bankruptcy court went on to reject the Ross Group’s

argument that the Deed’s recognition of the continuing validity of

the Mortgage prevented extinction of the Lease by confusion. The

court concluded that such a c ontractual agreement constituted an

impermissible derogation of “laws enacted for the public interest”

or the “public good.”

Finally, the bankruptcy court reasoned that if it were to

assume arguendo that the sale of the Foundry was void pursuant to

(1) § 11(l)(3) of the Mortg age, and (2) the statement to that

effect in the Deed, then title to the Foundry would have remained

in the Parish and would still have been there at the time the

bankruptcy commenced. Had that been the case, concluded the court,1 2 We note that the Ross Group did mak e an argument based on

§ 11(l)(3) of the Mortgage at the sale application hearing before

the bankruptcy court, but the court stated that it was not yet

ready to rule on any arguments concerning the validity and relative

rank of the Mortgage vis-à-vis the federal tax liens at that time.

Indeed, that was the reason the bankruptcy court ordered proceeds

of the sale of the Foundry to be held in escrow.

Notwithstanding the bankruptcy and district courts’ erroneous conclusions of law on this argument, which we will address below,

both the bankruptcy and district courts’ holdings that any argument

based on the actual terms of the Mortgage was foreclosed as untimely strikes us as puzzling to say the least.

13 The bankruptcy court also determined that the Government’s

lien right was entitled to priority over the Debtor’s other lien

creditors, no ne of whom have appealed the bankruptcy court’s

judgment.

16 the Foundry would not have been the trustee’s to sell. But, the

court observed, any argument based on such a premise would be

untimely now, as it would have to have been raised at the time the

bankruptcy court approved the sale of the Foundry. 1 2 Given all

these determinations, the bankruptcy court recognized the

Government’s otherwise junior federal tax liens as the senior

encumbrances over the proceeds from the sale of the Foundry. 13

The bank ruptcy court did not address the Ross Group’s

alternative argument concerning the later purchased machinery and

equipment. This is the equipment that the Ross Group contends

remained encumbered by the Mortgage despite confusion of the Lease.

5. The District Court’s Decision on Appeal

In its appeal to the district court, the Ross Group reasserted the arguments that it had advanced to the bankruptcy court

and, for the firs t time in this action, also contended that the

bankruptcy court had incorrectly allocated the sale proceeds

between the Foundry and the Rolling Mill. The district court17

inv ited CPB, as the holder of the first mortgage on the Rolling

Mill, to appear and address the allocation issue. CPB accepted the

invitation and argued that the allocation issue had been raised and

rejected by both the bankruptcy a nd district courts in their

consideration of the Ross Group’s objection to the trustee’s

application to sell the Foundry and the Rolling Mill in 1992,

thereby rendering any present appeal of those decisions untimely

and subject to a defense of estoppel.

In affirming, the district court essentially reiterated the

bankruptcy court’s holding that confusion had extinguished the

Lease, and along with it the leasehold interest that was the thing

mortg aged. Thus, concluded the district court, the Ross Group’s

encumbrance evaporated, preserving to the holder of the erstwhile

Mortgage no i nterest whatsoever in the proceeds of the trustee’s

subsequent sale of the Foundry. The district court further agreed

with the bankruptcy court that (1) the language contained in the

Deed purporting to preserve the effect of the Mortgage, (2) the

Debtor’s covenant in the Mortgage not to surrender the leasehold or

terminate or modify the Lease, and (3) the public records doctrine,

were all ineffective to sustain a security interest for the Ross

Group in the proceeds of the sale of the Foundry.

Finally, the distri ct court stated that it need not address

the Ross Group’s contention that the bankruptcy court’s allocation

of the sale proceeds between the Foundry and the Rolling Mill was

flawed. The district court observed that (1) it had already

decide d that the Ross Group did not have an interest in the1 4 The district court also rejecte d the Ross Group’s

alternative contention not addressed by the bankruptcy court, i.e.,

that the Mortgage encumbered machinery and equipment actually owned

by the Debtor and never conveyed to and leased back from the Parish

(at least as to those items purchased after the bond issue). The

court reasoned that (a) such movables were not legally susceptible

of being encumbered by a collateral mortgage that was not also a

collateral chattel mortgage, and (b) t o the extent that these

movables were deemed to be “immovable” by virtue of a “declaration

of immobilization,” that declaration was ineffective to subject the

movables to the Mortgage. This was so, according to the district

court, because the declaration had not been executed until several

months after execution and recordation of the Mortgage, which

contained no after acquired property provision.

15 In re McDaniel , 70 F.3d. 841, 842-43 (5th Cir. 1995).

18 Foundry, and that the Government, which did, had not joined in the

Ross Group’s request for reallocation, and (2) the time for

appealing the bankruptcy court’s order authorizing the sale

—— and

specifying how the sales proceeds were to be allocated

——had long

since passed. 14

II

ANALYSIS

A. Standard of Review

As the parties note, we review a bankruptcy court’s findings

of fact under a clearly erroneous standard and decide issues of law

de novo

. 15 In this appeal, the parties have not challenged the

bankruptcy court’s findings of fact; rather, they have focu sed

their arguments solely on its conclusions of law. Our review,

therefore, is entirely plenary.

B. Extinguishing a Mortgage Under Louisiana Law

We begin our consideration of the continued validity and

effectiveness of the Mortgage where we must

—— with the article of1 6 La. Civ. Code art. 3411 (1870) (West 1972 Compiled Edition).

A s all the events pertinent to this appeal (the execution of the

Lease, the execution and recordation of the Mortgage, the execution

of the Deed, and the filing of the bankruptcy petition) occurred

prior to January 1, 1993, the effective date of new Louisiana Civil

Code Article 3319, which repealed and replaced Former Article 3411

(1870), we apply the former article in this case. As the Revision

Comments to new Article 3411 explain, however, the new article

reproduced the substance of the former article and only added one

extra method of extinction, applicable to mortgages that secure

future obligations (i.e., “a revolving line” of future indefinite

obligations). S ee La. Civ. Code Ann. art. 3319 (West 1994). Thus

our ana lysis would have been the same had we been applying new

Article 3319 instead.

1 7 New Article 3319 provides that “a mortgage is extinguished:

(1) By the extinction or destruction of the thing

19 the Louisiana Civil Code that governs the extinction of mortgages.

Former Article 3411 of the Lo uisiana Civil Code (1870) specified

six ways by which mortgages are extinguished:

1. By the extinction of the thing mortgaged.

2. By the creditor a cquiring the ownership of the

thing mortgaged.

3. By the extinction of the mortgagor’s right.

4. By the extinction of the debt, fo r which the

mortgage was given.

5. By the creditor renouncing the mortgage.

6. By prescription. 16

In this case, the parties have suggeste d —— and we agree —— that

the first two methods listed in Article 3411 are the only ones

among the six that could conceivably be applicable. We consider

these two in inverse order.

1. Creditor’s Acquiring Ownership of the Thing

Mortgaged

The method outlined in Article 3411(2) prov ides that a

mortgage is extinguished when the creditor, i.e., the mortgag e e

,

acquires ownership of the thing mortgaged. As new Article 3319(2)

makes clear, 17 this method of extinguishing a mortgage was designedmortgaged.

(2) B y confusion as a result of the [mortgagee’s]

acquiring ownership of the thing mortgaged

. . . . La. Civ. Code Ann. art. 3319 (West 1994) (emphasis added).

18 La. Civ. Code Ann. art. 1903 (West 1987).

19 See Saul Litvinoff, The Law of Obligations

, 5 Civil L a w

Treatise § 20.10, at 691 (1992); see also Dept. of Culture,

Recreation & Tourism v. Fort McComb Development Corp. , 385 So.2d

1233, 1235-36 (La. Ct. App. 4th Cir.), writ denied , 394 So.2d 613

(1980) (“In order for a mortgage to be extinguished by confusion,

either the principal obligation securing it must be extinguished by

confusion or the mortgaged property must be acquired by the

mortgagee .”) (emphasis added).

20 to apply to situations in which the Civil Law doctrine of

“confusion” would operate to extinguish a mortgage. Despite the

seemingly curi ous English translation of its French label, this

traditional Civilian doctrine of the law of obligations is actually

quite straigh tforward. As expressed in Louisiana Civil Code

Article 1903, it simply means that “[when] the qualities of obligee

and obligor are united in the same person, the obligation is

extinguished.” 18 In the specific context of mortgage —— an

accessory contract granted to provide security for the performance

of the underlying or “principal” obligation

—— confusion will

operate to extinguish the mortgage contract itself either (a) when

confusion extinguishes th e principal obligation, as when, for

example, the promissory note that is secured by the mortgage is

acquired by its maker, or (b) when confusion extinguishes the thing

mortgaged, as when, for example, an encumbered building is acquired

by the mortgagee

. 19

As the Ross Group correctly observes, the particu lar

manifestation of confusion co ntemplated by Article 3411(2) could2 0 Application of Article 3411(2) is w ell illustrated by the

Fort McComb case. There, a development company granted a mortgage

on it s lessee’s interest in a lease of an historic fort and

simultaneously assigned the lease to the bank-mortgagee. When the

lessor (the State) sought, inter alia, to cancel the mortgage of

the leasehold interest on the theory that it was extinguished by

the doctrine of confusion, the court held that the mortgage was not

extinguished in this manner because the mortgagor’s “assignment of

the lease [to the bank] was not an act translative of title; it

merely represented a security device in order to further secure the

advance of money by the bank.” 385 So.2d at 1236. Had there been,

though, an act translative of title of the lessee’s interest from

the development company to the bank, confusion would have

extinguished the Mortgage under Former Article 3411(2).

2 1 La. Civ. Code Ann. art. 3411(1) (1870) (West 1972 Compiled

Edition). The current counter part is new Article 3319(1).

21 not operate here to extinguish the Mortgage: First, no one acquired

the principal obligation from the Ross Group; and second, if anyone

acquired “ownership” of the thing mortgaged (the leasehold

interest), it was the Debtor (the mor tgag o r /obligor/debtor), not

the Ross Group (the mortg ag ee / obligee/creditor). Regardless of

whether or not the provisions of Article 3411(2) might have

extinguished the Mortgage if the Debtor had acquired the hand note

or if the Ross Group had acquired the Debtor’s leasehold interest, 20

neither of those transactions occurred here. Consequently, we

agree with the Ross Group that Article 3411(2) cannot provide a

basis for finding that the Mortgage was extinguished by confusion.

2. Extinction of the Thing Mortgaged

Former Article 3411(1) identifies the other potentially

applicable method of extinguishing a mortgage: “extinction of the

thing mortgaged.” 2 1 The most recognizable example of this method

of extinguishing a mortgage occurs when the thing mortgaged is

uninsured corporeal (tangible) property

—— such as a buil ding ——2 2 See e.g.

, Coen v. Gobert , 154 So.2d 443, 445 (La. Ct. App.

2nd Cir. 1963) (destruction and removal of frame dwelling located

on tract of land subject to mortgage extinguished mortgage on the

dwelling under Article 3411(1)).

23 La. Civ. Code Ann. art. 461 (West 1980).

24 La. Civ. Code Ann. art. 1903 (West 1987).

2 5 S ee Saul Litvinoff, T he Law of Obligations

, 5 Civil Law

Treatise § 20.1, at 679 (1992) (citing Fernandez v. Soulie

, 28 La.

Ann. 311 (1876); Bartels & Dana v. Their Creditors

, 11 La. Ann. 433

(1856)); see also Ranson v. Voiran , 146 So. 681, 682 (La. 1931).

22 and that thing is physically destroyed. 2 2 Contrary to the Ross

Group’s protestations, this method of extinction is not limited in

application to the physical destruction of corporeal things.

Albeit relatively rare, an incorporeal —— such as a leasehold

interest —— that (1) exists in the eyes of the law because it is

“comprehende d by the understanding,” 2 3 and (2) is the thing

mortgaged, is susceptible not of des truction but of extinction,

such as when it terminates by its express provisions, by the mutual

consent of the parties, or by operation of law.

In this case, reacquisiti on of record title of the Foundry

(the leased p remises) by the Debtor (lessee) from the Parish

(lessor), by virtue of their executing the Deed, had the potential

of extinguishing the Lease by confusion and with it the Debtor’s

leasehold interest. Under the doctrine of confusion “the qualities

of obligee and obligor [were] united in the same person.” 24 Indeed,

Louisiana law has long recognized that when the lessor’s interest

and the lessee’s interest are consolidated in the same person

—— in

this instance, the Debtor —— the lease is extinguished by

confusion. 25 Regardless of the existence of any contractual23

agreements between the parties to the Deed or to the Mortgage that

(1) would limit or vary the e ffects of confusion on the parties’

interests under the Mortgage , and (2) would not contravene public

policy, the Debtor/Lessee’s September 5, 1989, redemption of

record title to the Foundry from the Parish/Lessor did in fact

terminate the L ease

, i.e., extinguish it, under the doctrine o f

confusion. This does not end our inquiry though, for what remains

to be seen is whether such extinction of the Debtor’s leasehold

interest, being the thing expressly encumbered in the Mortgage,

must as a matter of public policy extinguish the Mortgage by

confusion under former Article 3411(1) despite bona fide efforts of

the parties to prevent that result. Before we parse the Mortgage

to see whether under the instant facts an y of its provisions are

effective to vary or limit the effects of the doctrine of confusion

without violating public policy, we take a short detour to analyze

the effects of Louisiana’s public records doctrine on this case.

C. Public Records Doctrine

The conclusion reached by both t he bankruptcy court and the

district court, that the public records doctrine does not preclude

application of the confusion doctrine to extinguish the Lease under

Article 3411(1), is correct

—— as far as it goes . Both courts

accurately noted that Louisiana’s public reco rds doctrine, which

has now been made statutory in Revised Statute § 9:2756, specifies

that all unrecorded sales, contracts, and judgments affecting

immovable property “shall be utterly null and void, except between2 6 La. Rev. Stat. Ann. § 9:2756 (West. 1991) (emphasis added).

2 7 In one illustrative case, a Louisiana court held that the

execution of a dation en paiement from a mortgagor (Continental) to

a mortgagee (Hibernia) extinguished two collateral mortgages under

the doctrine of confusion, so as to allow a judicial mortgage filed

in the interval between the execution of the dation and its

recordation to create a lien on the immovable property that was the

subject of the dation. S ee Hibernia Nat’l Bank v. Continental

Marble & Granite Co.

, 615 So.2d 1109 (La. Ct. App. 5th Cir. 1993).

Importantly, the court’s holding hinged on its finding that “[a]s

between the parties to an act effecting the transfer of an

immovable, effectiveness of the transaction does not depend upon

the act’s recordation in the public records. T he law clearly

provides that the transac tion was complete and effective between

the parties the moment it was executed

. . .

. . . not the later moment of its recordation in the public

records .” Id. at 1111 (emphasis added).

24 the parties thereto .” 26 It follows that even though the Deed, until

filed for registry, would have been primed by a third party’s

subsequently executed but previously recorded conveyance or

encumbrance, this unrecorded act was nonetheless capable of

translating ownership (as distinct from record title) between the

parties, i.e., the Debtor and the Parish, but only to the extent

the Parish “owned” the Foundry (as d istinct from holding record

title to it)

—— assuming arguendo that ownership (as distinct from

record title) had ever passed from the Debtor to the Parish in the

first place.

As such, for purposes of confusion the Deed was, with respect

to the obligations under the Lease, legally sufficient to

consolidate

—— “confuse”

—— in the person of the Debtor the

qualities of both obligee and obligor and thereby extinguish the

Lease. 27 Consequently, in the absence of operative facts or

effective stipulations of the parties to the contrary, the public25

records doctrine could not preven t the Deed from effectively

extinguishing the Lease

—— and thus the Mortgage

—— pursuant to

A rticle 3411(1). This is so because the leasehold, as the thing

mortgaged, ceased to exist the instant the Deed was executed

——

assuming, of course, that nothing in the Mortgage or about the

Lease transa ction would vary the result supplied by Article

3411(1).

By the same token, the public records doctrine does, however,

afford protection to the holder of the note secured by the Mortgage

against third parties to the extent that this security device

contains provisions proscribing unilateral acts of the mortgagor,

whether or not in concert with third parties, to the prejudice of

the mortgage. This doctrine likewise protects provisions of the

Lease, such as extension and repurchase options, against

intervening acts of third parties that might otherwise destroy the

efficacy of such provisions.

D. Contractual Variations From Article 3411(1)

—— Suppletive and

Imperative Laws in the Louisiana Civil Code and the Pact de

Non Alienando

Up to this point, our analysis essentia lly replicates the

principal thr ust of the Government’s argument as well as the

conclusions of the bankruptcy and district courts: Execution of the

Deed wo uld directly extinguish the Lease by confusion, and

indirectly extinguish the Mortgage by confusion. Where we depart

is in our recognition that there could be something about the

transaction or some enforceable stipulation, such as an a fteracquired property clause, that might produce a different result.26

Indeed, it is at precisely this point that the Government, the

bankruptcy court, and the district court (1) misapprehended

—— and

thus misapplied —— an important principle of Civilian methodology

and (2) overlooked basic features of Louisiana mortgage law,

thereby p roducing reversible error. The methodology to which we

refer is the one employed in classifying provisions of law as

either “imperative” or “suppletive” and the role of public policy

in achieving the proper classification. The “basic features” of

mortgage law to which we refer are the p act de non alienando and

its statutory counterpart, the anti-alienation rule as curren tly

manifested in both Article 3307 of the Civil Code and Article 2701

of the Louisiana Code of Civil Procedure. And the reversible error

to which we refer is the failure of those courts to (1) classify

Article 3411(1) as merely suppletive, and (2) enforce the

stipulations of the parties in the Mortgage. In short, the court

erred in mischaracterizing and misconstruing the key antialienation stipulation in § 11(1)(3) of the contract betw een the

Debtor and the Ross Group as the parties to the Mortgage, a

stipulation obv iously intended to limit, vary, or prohibit the

results of transactions that would otherwise be governed by former

Article 3341(1)’s rule that extinction of the thing mortgaged

extinguishes the mortgage.

1. The Suppletive/Imperative Distinction

One tenet that is basic to every Civilian legal system is

the distinction between “imperative” and “suppletive” laws. Former

Article 11 of the Louisiana Civil Code (which was in effect when2 8 La. Civ. Code Ann. Art. 11 (1870) (West 1972 Compiled Ed.);

see also La. Civ. Code Ann. Art. 7 cmt. a (West 1993).

2 9 Alejandro M. Garro, Codification Technique and the Problem

of Imperative and Suppletive Laws

, 41 La. L. Rev. 1007, 1008 (1981)

(emphasis added).

27 the Mortgage was executed and recorded and the substance of which

was not affected when in 1988 it and Article 12 were replaced by

Article 7) expressed this distinction succinctly:

Individuals cannot by their conventions, derogate from

the form of laws made for the preservation of public

order or good morals.

But in all cases in which it is not expressly or impliedly prohibited, they can renounce what the law has

established in their favor when the renunciation does not

affect the rights of others, and is not contrary to the

public good. 28

Although neither former Article 11 nor its replacement employ the

precise terms “imperative” or “suppletive,” traditional civilian

doctrine has, in the words of Professor Alejand ro Garro, long

characterized:

as imperative those legal precepts rooted in pub l ic

policy which may not be set aside by private agreement.

Suppletive laws, on the other hand, are those legal norms designed to supplement the parties’ will in cases wherein

its application is not excluded. 29

With this clear distinction in mind, then, we must ask whether

former Article 3411(1)’s provision for the extingu ishing of

mortgages when the thing mortgaged ceases to exist is imperative or

suppletive.

2. Enforcement of the Covenant as a Pact de Non Alienando

The task of distinguishing between suppletive and

imperative laws is best approached, not in an abstract inquiry into30 Garro , 41 La. L. Rev. at 1014.

3 1 Both the bankruptcy and district courts did purport to apply

Article 7's and former Article 11's implicit distinctions between

imperative and suppletive laws, but did so in connection with the

provisions of the Deed between the Debtor and the Parish

, which

attempted to recognize the continuing validity of the Mortgage,

holding that this constituted an impermissible effort to derogate

from an imperative law (public policy) because it affected the

rights of others. What those two courts failed to recognize,

though, is that the only relevant application of the impera tive/

suppletive dichotomy in this case is not to the Deed but to the

Mortgage ; specifically, its covenant that proscribes unilateral

acts of the mortgagor to th e prejudice of the Mortgage or the

mortgagee. This is so because the Mortgage is the only contractual

agreement between the Ross Group and the Debtor; the pact de non

alienando (the covenant at § 11(l)(3) of the Mortgage) sees to it

that no act of th e Debtor and the Parish subsequent to the

execution and recordation of the Mortgage and the Lease can affect

those of the mortgagee’s rights that arise fro m any stipulation

that does not contravene public policy.

28 the character of a particular provision in light of the elusive

concepts of public order or the public interest, but, as Professor

Garro i nstructs, by examining “the particular clause of the

agreement which does away with a rule of law, and . . . ask[ing]

whether the enforcement of the clause would be against pu blic

policy.” 30 When we follow this sage counsel in the instant case,

we discover that enforcement of the Mortgage’s covenant addressing

the encumbering of a leasehold interest, as stipulat ed by the

Debtor and the Ross Group, would not be violative of public policy.

To the contrary, its terms are entirely consistent with Louisiana

mortgage law and practice. 31

We recall first that § 11(l)(3) of the Mortgage specifically

provides:

Mortgagor will not sur render any of its leasehold

interests hereinabove described, nor terminate or cancel

the Lease, and will not, without the prior written3 2 See Federal Land Bank of New Orleans v. Mulhern

, 157 So. 370

(La. 1934) (enforcing mortgage covenant requiring mortgagors not to

det eriorate mortgaged property to the prejudice of the mortgage)

and discussion infra at note 42 and accompanying text.

3 3 For discussion of the pact de non a lienando ’ s Spanish and

early Louisiana origins, see Andrew Lane Plauche, Comment, The Pact

de Non Alienando in Louisiana

, 21 Tul. L. Rev. 238, 241 (1946), and

Citizens Bank of Louisiana v. Miller , 10 So. 779, 780 (La. 1892).

29 consent of the Mortgagee modify, change, supplement,

alter or amend the Leas e, either orally or in writing,

and any such termination, cancellation, modification,

change, supplement, alteration or amendment of the lease

without prior written consent of the Mortgagee shall be

void and of no force and effect. As further security to

the Mortgagee, Mortgago r does hereby deposit with the

Mortgagee the original copy o f the Lease and the

Assignment thereof to be retained by the Mortgagee until

all indebtedness secured hereby is fully paid.

By including this stipulation in the Mortga ge, the Debtor as

mortgagor expressly agreed not to take any action unilaterally that

might terminate, cancel or modify the Lease or the Debtor’s

leasehold interest. Thus the Debtor agreed, i nter alia

, not to

alienate or mod ify the property encumbered to secure the

indebtedness owed to the holder of the collateral mortgage note in

any way that would prejudice the Mortgage. 3 2 By proscribing such

prejudicial actions of the mortgagor, the parties to the Mortgage

were acknowledging between themselves —— and, through the public

reco rds, were informing the rest of the world —— that an action

taken by the mortgagor in contravention of this covenant shall be

of no effect vis-à-vis the Mortgage or the mortgage e. In this

regard, the covenant is a specialized version of the venerable pact

de non alienando

, 33 or non-alienation clause, uniquely tailored here

to fit the collateral mortgaging of a lessee’s interest in a lease.3 4 Michael D. Rubin, Notice of Seizure in Mortgage Foreclosures

and Tax Sale Proceedings: The Ramifications of Mennonite

, 48 La. L.

Rev. 535, 545 (1988).

3 5 See Citizens Bank

, 10 So. at 780; Freeman v. Ratcliff , 162

So. 783, 785 (La. 1935).

36 Rubin , 48 La. L. Rev. at 545.

3 7 Donal dson v. Maurin , 1 La. 29, 40 (1830); s ee also Nathan

v. Lee , 2 Mart. (N.S.) 32, 33 (La. 1823).

30 In its earliest form, the pact de non alienando (or “pact de

non”) simply prohibited the mortgagor from selling, alienating, or

encumbering the mortg aged property to the prejudice of the

mortgagee or the creditor’s mortgage. 34 Not an absolute contractual

prohibition against sale, 35 however, this prototype pact de non

primarily served as a procedural tool: It allowed a m ortgage

creditor to disregard a violation of the pact and proceed to

foreclose via executiva on mortgaged property that had passed into

the hands of a third part y. 36 This in turn made unnecessary the

preliminary step, in foreclosing via ordinaria

, of first obtaining

a judgment against the mortgagor and then naming the third party as

a defendant in a subsequent suit. In short, the pact de non

allowed the foreclosing mortgage creditor to ignore any transfers

and encumbrances of the mortgaged property executed after

recordation of the mortgage.

Ever since the Louisiana Supreme Court reaffirmed the validity

of the pact de non in several early 19th century challenges to the

device, reasoning that the sole basis for the effect of the clause

derives from its mutual introduct ion by the parties into the

mortgage contract, 37 Louisiana courts have consistently pointed to38 See Avengo v. Schmidt & Ziegler

, 35 La. Ann. 585, 590

(1883), aff’d

, 113 U.S. 293, 5 S.Ct. 487, 28 L.Ed .2d 976 (1885);

Shields v. Shiff

, 36 La. Ann. 644, 648 (1884), aff’d

, 124 U.S. 351,

8 S.Ct. 510, 31 L.Ed.2d 445 (1888).

39 See Slayton v. Swor

, 165 So. 85, 86 (La. 1940); Spencer v.

Collins

, 338 So.2d 148 (La. Ct. App. 2nd Ci r. 1976); S hifflet v.

Brewer , 208 So.2d 31, 34 (La. Ct. App. 1st Cir. 1968).

4 0 See W.W. Carre v. Int’l Car Co.

, 55 So. 9, 10-11 (La. 1911).

4 1 See Bourgeois v. De Soto , 280 So.2d 271, 274 (La. Ct. App.

2nd Cir. 1972).

4 2 See Federal Land Bank of New Orleans v. Mulhern

, 15 7 So.

370, 373-74 (La. 1934); Harrelson v. Hogan

, 451 So.2d 592, 596 (La.

Ct. App. 2nd Cir. 1984).

43 Former Article 3397 (1870) provides:

1. That the debtor can not sell, engage, or mortgage the

same property to other persons, to the prejudice of the

mortgage which is already made to another creditor.

2. That if the mortgaged thing goes out of the debtor’s

hands, the creditor may follow it in whatever hands it may

have passed . . .

31 the pact de non when permitting mortgagees to foreclose directly on

mortgaged property. This is permitted notwithstanding subsequent

transfers or alienation, in a wide variety of contexts, including

involuntary expropriations, 38 dissolution of marital communities, 39

insolvency, 40 and successions. 41 Some courts have also held that

when the pact de non is carefully worded, it can serve as a

contractual bar to certain activities and may even allow a

mortgagee to foreclose on mortgaged property despite the mortgage

payment s being current. 4 2 Finally, we note that the Louisiana

legislature enshrined the pact de non’s protections for mortgagees,

at least as far as sales or subsequent encumbrances of the

mortgaged property are concerned, in Article 3397 of the Louisiana

Civil Code of 1870 and in current Article 3307(2), 43 as well as inLa. Civ. Code Ann. art. 3397 (1870) (West 1972 Compiled Ed.)

Current Article 3307(2) repla ced former Article 3397 in 1993 and

provides simply: “The mortgaged property may not be transferred or encumbered to the prejudice of the mortgage.” La. Civ. Code Ann.

art. 3307(2) (West 1994).

44 La. Code Civ. Proc. art. 2701 (West 1961) (providing

statutory pact de non alienando and seeking to eliminate need for

a conventional one). We also note, however, that in recent years

const itutional due process considerations have lead courts and

commentators to suggest that actual notice to third persons,

including third possessors and holders of inferior mortgages, must

be given before the property may be seized and s old pursuant to

Louisiana’s executory process scheme. See generally Rubin, 48 La.

L. Rev. 535 (discussing ramificat ions of M ennonite Board of

Missions v. Adams , 462 U.S. 791, 103 S.Ct. 2706, 77 L.Ed.2d 180

(1983) and Bonner v. B-W Utilities, Inc.

, 452 F.Supp. 1295 (W.D.

La. 1978)); and Patrick S. Ottinger, Enforcement of Real Mortgages

by Executory Process , 51 La. L. Rev. 87, 106-08 (1990).

32 Article 2701 of the Louisiana Code of Civil Procedure. 44

This brief history of jud icial and statutory recognition of

t he pact de non in Louisiana law sets the stage for us to answer

the crucial question whether enforcement of this particular

covenant in the particular mortgage at issue under these particular

circumstances would violate public policy. We answer this question

in the negative.

Our threshold inquiry is whether the parties sought by their

own stipulations to vary the results that would other wise be

“supplie d” under Article 3411(1) if, but only if, the parties

should fail to adopt a contrary contractual provision. Here, the

covenant embodied in the Mortgage, prohibiting the Debtor f rom

unilaterally canceling, terminating, or i n any way modifying his

leasehold interest to the prejudice of the Mortgage, is undeniably

a pact de non. Moreover, this one is specifically tailored to

recognize that the thing mortgaged is the lessee’s interest in a33

lease. As such, its clear intent is to protect the mortgagee from

any transactions unilaterally undertaken by the mor tgagor with

r espect to the mortgaged leasehold interest that would prejudice

the mortgagee’s rights or the value or nature of its collateral.

Just as clearly the parties intended results different from those

that would be supplied by Article 3 411(1) in the absence of a

contractual provision. So, the Mortgage’s provision, i f not

proscribed by public p olicy , will trump Article 3411(1)’s

suppletive rule that extinction of the thing mortgaged extinguishes

the mortgage.

3. Public Policy

Even if we were to grant arguendo that the extinguishing

of a lease by confusion under Article 1903 somehow embodies public

policy, we still would discern no embodiment of public policy in

Article 3411(1)’s provision for extinguishing a mortgage when the

thing mortgaged is de stroyed or extinguished. We hold therefore

t hat under the instant circumstances enforcing the contractual

covenant in such a manner tha t the effects of the Mortgage would

continue to affect the Foundry (now, the proceeds of its sale)

cannot be a violation of public policy; to the contra ry, it is

consistent with Louisiana’s well established policy of favoring the

pact de non’s protection of a mortgagee’s interests in collateral

from the untoward effects of transactions undertaken by a mortgagor

that would otherwise prejudice the mortgage or the thing that it

encumbers.

To put it another way, our examination of the role of the pact4 5 Louisiana law has long recognized that certain contracts of

sale of immovable property containing a right of redemption and

unaccompanied by delivery of the thing sold are merely pignorative

contracts intended to secure the party borrowing funds (the vendor)

not to transfer property onerously. S ee e.g.

, Marbury v. Colbert

, 29 So. 871, 872 (La. 1901) (holding that “redeemable sales of

immovable property, unaccompanied by de livery of the thing sold,

will be considered, as between the parties, in the absence of

evidence to the contrary, as mere contracts of security”);

Latiolais v. Breaux

, 98 So. 620, 621 (La. 1923)(“[T]he one test by

which to determine whether a contract evidences a real sale with a right of redemption [capable of transferring title], or a mere

contract of security,

. . . is whether the purchaser has gone into

actual possession.”); Ruffino v. Hunt , 99 So.2d 34, 37 (La. 1958)

(applying rule in building and loan association industr y wherein

immovable property is sold to a homestead for cash and

simultaneously resold by the homestead to its owner, thus serving

to provide the homestead with the security of a vendor’s lien and

first mortgage, but not actually transferring title); Succession of

Tucker

, 449 So.2d 1020, 1022 (La. 1984) (same); Lerner Shops of

Louisiana, Inc. v. Reeves , 73 So.2d 490, 495-97 (La. Ct. App. 1st

Cir. 1954) (construin g purported sale and leaseback of immovable

property as a pignorative contract or security device when

arrangement provided (1) the vendor with an option to rep urchase

the realty from the purchaser during the term of the lease and for

the consideration paid by the purchaser and (2) the purchaser with

the right to compel the vendor to repurchase the realty during the

same period and for the same amount); Bagala v. Bagala , 110 So.2d

526, 529 (La. 1959) (finding pignorative co ntract in sale and

resale situation outside homestead context); Jackson v. Golson

, 91

So.2d 394, 399 (La. Ct. App. 2nd Cir. 1956) (same and containing

thorough review of pertinent cases); In re Chase Manhattan Leasing

Corp.

, 626 So.2d 433, 434 (La Ct. App. 4th Cir. 1993), writ denied

, 630 So.2d 797 (La. 1994) (financed sale designed in form to appear

as lease does not alter true nature of transaction).

The Ross Group has not stressed the pignorative nature of the

sale and leaseback agreement between the Debtor and the Parish.

Yet considering that the sale and leaseback was designed solely as

a financing mechanism and contained a right of redemption, and that

the Debtor never relinquished actual possession of the Foundry, the

Ross Group could argue that the Debtor never in fact transferred

ownership to the Parish to the degree necessary to extinguish the

effects of the Mortgage when the Debtor redeemed the leased

34 de non in Louisiana mortgage law in general and the subject

covenant in the Mortgage in particular

—— especially in the context

o f the financing arrangement which includes a merely pignorative

transfer of record title coupled with a right of redemption, 45 allpremises. Such an argument would lend support to the principal

argument based on the pact de non which we have developed in this

opinion.

4 6 As noted above, other contractual variations that trump the

provisions of Article 3411(1) are common place and taken for

granted, e.g., provisions that call for replacement or substitution

o f collateral, and —— especially —— after-acquired property

provisions. Were the results proscribed in Article 3411(1)

reflective of public order, provisions in the agreement that direct

substit ution or replacement of collateral or attachment of the

mortgage to property subsequently acquired by the mortgagor would

be unenforceable. Recognizing the instant covenant also comports

with Louisiana’s policy favoring freedom of contract, which also

supports the enforceability of these other provisions.

35 of which is patently obvious from the provisions of the recorded

instrument

—— convinces us that (1) Article 3411(1)’s provision for

the extinguishing of mortgages when the thing mortgaged is

extinguished or de s troyed is merely suppletive

, reflecting no

identifiable public policy, and is thus susceptible of being

subordinated by otherwise valid and non-absurd contractual

variations that are in substance pacts de non, and (2) the

particular covenant present her e is fully susceptible of being

enforced as a contractual alternative to Article 3411(1)’s

suppletive provision without reaching any absurd result. Indeed,

it is only the enforcement of this stipulation that avoids an

absurd result, i.e., giving the Government an unintended windfall

and saddling the Ross Group with an unintended “gotcha.” 46

This determination is reinforced by the realization that, in

the context of Louisiana’s public records doctrin e, (1) both the

Mortgage and the Lease were filed for record long before the

subject tax liens were filed; (2) the Mortgage contained language

expressly proscribing any prejudicial effects of unilateral47 We take additional comfort in the fact that when the

Louisiana legislature adopted Article 9 of the UCC, it recognized

that a “financed lease” of movables (personalty), as opposed to a

“true lease” of such property, would, as a pignorative contract, be

subject to Louisiana’s version of Article 9 g overning security

interests in movables. See La. Rev. Stat. Ann. §§ 9:3309-3310.1

(West 1991).

36 alienation by the lessee qua lessee; and (3) the Lease

, containing

inter alia both extension and repurchase (right of redemption)

options in favor of the Debtor as lessee, all of which puts the

world on notice that this is not a “true lease” situation but a

pignorative arrangement under which only record title (but not

ownership) is transferred. 47 It follows inescapably that no third

party, including the Government, is entitled to disregard the

reasonably anticipated legal effects of any provisions of the Lease

or the Mortgage, or their interplay with each other, once those

documents were inscribed on the public records.

By merging or consolidating into the person of the Debtor the

Parish’s underlying precarious record title as nominal lessor with

the Debtor’s existing interest as lessee coupled with its right to

redeem record title of the underlying leased premises, the

repurchase retroactively re-vested the Debtor wit h full title to

the Foundry property in the condition that such title existed when

the Lease was first registered in the Conveyance Records of the

Parish

. Thus, repurchase restored the Debtor’s interest to that of

full ownership, which it had held befor e making the pignorative

transfer of record title to the Parish as the collateral aspect of

the sale and leaseback bond financing arrangement. The only result

that would not be absurd, then, is that the Mortgage attached, ipso37

facto

, to the underlying property at the instant it was merged into

o r consolidated with the already-encumbered leasehold, i n the

person of the Debtor

, by virtue of confusion. Without questioning

that (1) the Lease was extinguished by confusion when the Deed was

executed by the Parish, or (2) the Mortgage no longer encumbered

just the leasehold rights of the Debtor as le ssee when the Lease

itself was extinguished by confusion, we nevertheless conclude that

—— at precisely the same instant

—— the Mortgage atta ched to and

encumbered the Foundry property nunc pro tunc, with its title in

the same condition as it had been when the Le ase (and thus the

repurchase option contained in the lease) was registered. In a

nutshell, the Mortgage’s expanded, particularized pact de non,

coupled with the possession and redemption rights retained in the

Lease, allowed the Mortgage to retain its rank senior to the liens

of the Government and other junior encumbrances when the Debtor’s

re-acquisition of record title to the underlying Foundry property

extinguished the Lease by con fusion i nto the person of the

mortgagor

.

We speculate that we might not be here today if the Mortgage

had coupled its pact de non with an express after-acquired property

clause. Nevertheless, the law neither insists on perfection nor

requires the uttering of talismanic words when, as here, it is gin

clear from the four corners of the duly recorded documents —— the

Lease and the Mortgage

—— that re-consolidation of all facets of

ownership, i.e., record title (th e lessor’s portion of those

rights) and p eaceable possession and enjoyment of fruits and38

revenues (the lessee’s portion of those rights), in the Debtor (the

person of the current and future owner) never divested the debtor

of those rights of possession and enjoyment. This re-consolidation

occurred by operation of law (confusion) upon execution of the Deed

in redemption of its record title by the Debtor pursuant to the repurchase option. It follows that the Mortgage, by virtue of its

covenants and provisions —— that were no more violative of public

policy than would have been an after-acquired property clause or a

replacement or substitution of collateral provision —— thereafter

encumbered all rights of ownership to the same extent as it had

always encumbered the possession, use, and enjoyment rights, via

the l easehold, from its inception. We need not and therefore do

not speculate on whether the same results would appertain had the

transaction not been a pignorative arrangem ent or had confusion

resulted in consolidation of ownership of the Foundry in a person

other than a lessee/mortgagor.

4. The Bankruptcy and District Courts’ Treatment of the

Mortgage’s Pact de Non.

Having said all this, we briefly address the bankruptcy

and district courts’ response to the Ross Group’s arguments based

on the Mortgage’s anti-alienation covenant, i.e., the pact de non.

Both courts held that this stipulation could only be given effect

by finding that the Foundry continues to be owned by the Parish and

never formed part of the Debtor’s bankruptcy est ate, making the

trustee’s sale of the Foundry a nullity. But, stated both courts,

the Ross Group should have raised this argument prior to the

trustee’s sale of the Foundry, not subsequently as a basis for4 8 As we noted above, the Ross Group did assert at the sal e

application hearing before the bankruptcy court that, inter alia,

the seniority of its Mortgage was pro tected by the p act de non

alienando

, but the court responded that at the time it was not yet

ready to rule on any arguments concerning the validity and relative

ranking of the Mortgage. Thus, the two courts’ holdings that any

argument based on the actual terms of the Mortgage was foreclosed

cannot stand.

4 9 See Freedman v. Ratcliff

, 162 So. 783, 785 (La. 1935) (“The

pact de non alienando does not prevent the mortgagor from selling

the property, subject to the mortgage, but gives the mortgagee the

right to ignore a sale of the mortgaged property and to proceed

only against the mortgagor”); Miller

, 10 So. at 780 (quoting Ducros

v. Fortin

, 8 Rob. 164 (La. 1844)) (noting that the pact de non

“does not absolutely prevent a sale of the property by the

mortgagor. The latter may transfer the property, subject to the

right which such a clause gives the mortgagee of proceeding

summarily against it, as if it still belonged to the mortgagor”).

5 0 See First National Bank of Shreveport v. Houseman

, 160 So.

618, 620 (La. 1935) (citing Maisonneuve v. Martin

, 99 So. 704 (La.

1924)) (“Th e pact de non alienando in a recorded act of mortgage

m akes a subsequent mortgage or other disposition of the prope rty

ipso jure void so far as the original mortgagee and his assigns are

39 claiming the proceeds of that sale. The district court also agreed

with the Government’s alt ernative position that even if the

Debtor’s reacquisition of the Foundry was a breach of the covenant,

it only gave rise to an action against the Debtor and did not

render the Deed void.

Both the bankruptcy and district courts’ holdings on this

issue miss the mark. 48 As the district court’s brief alternative

holding recognizes, a breach of a pact de non alienando , like the

mortgage covenant at issue here, does not invalidate a transfer. 49

What it does do, however,

—— and what those courts failed to

recognize

—— is alter the effects of the transfer: The covenant

prevents a transfer that is prohibited by the pact de non f rom

invali dating or prejudicing the creditor’s mortgage. 5 0 In thisconcerned.”) (emphasis added).

40

instance, the covenant “supplied” by the parties to the M ortgage

allows the Mortgage to (1) survive the mortgagor’s acts that would

u nilaterally extinguish the Lease by confusion to the benefit of

the mortgagor, i.e., the Debtor’s acquisition of th e underlying

property by exercise of its repurchase option, and (2) continue as

an encumbrance on the Foundry as the underlying property that gave

rise to the leasehold interest in the first place (more accurately

now, to the proceeds of the trustee’s sale of that property).

D. The Allocation Issue and the Ross Group’s Alternative Argument

On appeal the Ross Group continues to protest the way that the

proceeds of the trustee’s sales between the Foundry and the Rolling

Mill were allocated. Even though we reverse the bankruptcy and

district courts’ determinations that the Ross Group has no interest

in the procee ds of the sale of the Foundry and hold instead that

the Ross Group’s security right in the leasehold interest followed

it into the full ownership of the leased premises when those

interests were merged by confusion into ownership in the person of

the Debtor as mortgagor, we n evertheless agree with those courts

and with CPB that the Ross Group’s present challenge to the

bankruptcy court’s allocation of the proceeds of the trustee’s sale

must fail.

First, and most importantly, the Ross Group sought essentially

identical relief on these very allocation issues in its objections

at the October 1992 sale authoriz ation hearing, and in its

unsuccessful district court appeal of the bankruptcy court’s sale5 1 Eubanks v. FDIC

, 977 F.2d 166, 170 (5th Cir. 1992) (assuming

other requirements of res judicata are met, a prior judgment may

bar a subsequent action brought even by a person who was not a

party to the original litigation when the non-party’s interests are closely aligned with and adequately represented by a party to the

prior action).

5 2 Recoveredge L.P. v. Pentecost

, 44 F.3d 1284, 1290 (5th Cir.

1995).

5 3 Bankruptcy Rule 8002(a) provides a 10 day time per iod for

filing notice of appeal. As the sale allocation between the

foundry and the rolling was made in the bankruptcy court’s October

9, 1992 Sale Order, the Ross Group’s belated attempts to relitigate the allocation issue are clearly untimely.

41 order. Accordingly, its present claims on these issues are

precluded under the doctrines of res judicata 51 and collateral

estoppel. 52 Furthermore, under Bankruptcy Rule 8002, these claims

are untimely as appeals of the 1992 sale order. 5 3 Therefore, the

rulings of the bankruptcy and district courts on the allocation

issues will not be addressed here, and the Ross Group’s complaints

in that regard are dismissed.

Second, we note that the Ross Group’s alternative argument

——

that the leasehold collateral mortgage encumbered assets other than

the leasehold

—— is moot. We have already determined that the

Mortgage encumbered the Foundry itself and provides the Ross Group

with the senior lien over the proceeds of the trustee’s i n globo

sale of that property.

III

CONCLUSION

We do not disturb the bankruptcy court’s allo cation of the

sales proceeds between the Foundry and the Rollin g Mill.

Concluding, however, that the effects of the Mortgage were not42

extinguished when the Lease was extinguished by confusion upon the

Debtor’s pre-petition redemption of reco rd title to the Foundry

property, we reverse the judgment of the bankruptcy court, as

affirmed by the district court, that awarded the proceeds of the

sale of the Foundry to the Government. We therefore render

judgment in favor of the Ross Group, recognizing its entitlement to

the proceeds of the trustee’s sale of the Foundry, and remand this

matter to the bankruptcy court for further proceedings consistent

with this opinion.

AFFIRMED in part; REVERSED and RENDERED in part; and REMANDED with

instructions.